FORM 10-QSB--QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF
                        THE SECURITIES EXCHANGE ACT OF 1934
                        Quarterly or Transitional Report



                      U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-QSB

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                 For the quarterly period ended September 30, 2000


[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934


                For the transition period from _________to _________

                         Commission file number 0-14530


                         DAVIDSON INCOME REAL ESTATE, L.P.
         (Exact name of small business issuer as specified in its charter)



         Delaware                                           62-1242144
(State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                         Identification No.)

                          55 Beattie Place, PO Box 1089
                        Greenville, South Carolina 29602
                      (Address of principal executive offices)

                                 (864) 239-1000
                           (Issuer's telephone number)


Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act  during the  preceding  12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No___



<PAGE>



                         PART I - FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

a)

                         DAVIDSON INCOME REAL ESTATE, L.P.

                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
                          (in thousands, except unit data)

                               September 30, 2000

<TABLE>
<CAPTION>


Assets
<S>                                                                          <C>
   Cash and cash equivalents                                                 $  705
   Receivables and deposits                                                     197
   Restricted escrows                                                           195
   Other assets                                                                 246
   Investment in joint venture                                                   91
   Investment properties:
       Land                                                  $  4,120
       Buildings and related personal property                 22,008
                                                               26,128
       Less accumulated depreciation                          (12,785)       13,343
                                                                           $ 14,777
Liabilities and Partners' (Deficit) Capital
Liabilities
   Accounts payable                                                          $  124
   Tenant security deposit liabilities                                           76
   Accrued property taxes                                                       275
   Other liabilities                                                            190
   Mortgage notes payable                                                    11,683

Partners' (Deficit) Capital
   General partners                                           $ (698)
   Limited partners (26,776 units issued and
      outstanding)                                              3,127         2,429
                                                                           $ 14,777
</TABLE>


            See Accompanying Notes to Consolidated Financial Statements

<PAGE>

b)

                         DAVIDSON INCOME REAL ESTATE, L.P.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                          (in thousands, except unit data)

<TABLE>
<CAPTION>

                                       Three Months Ended        Nine Months Ended
                                         September 30,             September 30,
                                       2000          1999        2000        1999
Revenues:
<S>                                   <C>          <C>          <C>         <C>
  Rental income                       $ 1,198      $ 1,169      $ 3,604     $ 3,518
  Other income                             61           60          186         175
     Total revenues                     1,259        1,229        3,790       3,693

Expenses:
  Operating                               523          494        1,433       1,428
  General and administrative               87           77          191         175
  Depreciation                            264          233          762         688
  Interest                                244          248          736         745
  Property taxes                           98          121          289         338
     Total expenses                     1,216        1,173        3,411       3,374

Income before equity in income
  of joint venture                         43           56          379         319
Equity in income of joint venture          24           12           64          68

Net income                             $   67         $ 68        $ 443       $ 387

Net income allocated to
  general partners (3%)                 $   2          $ 2         $ 13        $ 12
Net income allocated to
  limited partners (97%)                   65           66          430         375
                                       $   67         $ 68        $ 443       $ 387
Net income per limited
  partnership unit                     $ 2.43       $ 2.47      $ 16.06     $ 14.01

Distributions per limited
  partnership unit                     $   --       $ 5.43      $ 40.41      $ 9.97
</TABLE>

            See Accompanying Notes to Consolidated Financial Statements


<PAGE>


c)

                         DAVIDSON INCOME REAL ESTATE, L.P.

          CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
                                   (Unaudited)
                          (in thousands, except unit data)

<TABLE>
<CAPTION>


                                     Limited
                                   Partnership   General      Limited
                                      Units      Partners    Partners       Total

<S>                                   <C>          <C>        <C>          <C>
Original capital contributions        26,776       $   1      $26,776      $26,777

Partners' (deficit) capital at
   December 31, 1999                  26,776      $ (678)     $ 3,779      $ 3,101

Distributions paid to partners            --         (33)      (1,082)      (1,115)

Net income for the nine months
   ended September 30, 2000               --          13          430          443

Partners' (deficit) capital
   at September 30, 2000              26,776      $ (698)     $ 3,127      $ 2,429
</TABLE>


            See Accompanying Notes to Consolidated Financial Statements


<PAGE>



d)

                         DAVIDSON INCOME REAL ESTATE, L.P.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                          (in thousands, except unit data)
<TABLE>
<CAPTION>

                                                                 Nine Months Ended
                                                                   September 30,
                                                                  2000        1999
Cash flows from operating activities:
<S>                                                              <C>           <C>
  Net income                                                     $  443        $ 387
  Adjustments to reconcile net income to net cash
   provided by operating activities:
   Depreciation                                                     762          688
   Amortization of discounts and loan costs                          58           59
   Equity in income of joint venture                                (64)         (68)
   Change in accounts:
      Receivables and deposits                                      163           79
      Other assets                                                  (40)         (48)
      Accounts payable                                              (19)         128
      Tenant security deposit liabilities                            (8)           6
      Accrued property taxes                                       (126)         (28)
      Other liabilities                                              30           --
       Net cash provided by operating activities                  1,199        1,203

Cash flows from investing activities:
  Property improvements and replacements                           (603)        (649)
  Net (deposits to) withdrawals from restricted escrows             (38)         105
  Distributions from joint venture                                   83          177
       Net cash used in investing activities                       (558)        (367)

Cash flows from financing activities:
  Payments on mortgage notes payable                               (116)        (107)
  Distributions to partners                                      (1,495)        (275)
       Net cash used in financing activities                     (1,611)        (382)

Net (decrease) increase in cash and cash equivalents               (970)         454

Cash and cash equivalents at beginning of period                  1,675          920
Cash and cash equivalents at end of period                       $  705      $ 1,374

Supplemental disclosure of cash flow information:
  Cash paid for interest                                         $  677        $ 686

At December  31,  1999,  approximately  $243,000 of  property  improvements  and
replacements were included in accounts payable.

Distributions to partners of approximately $380,000 were accrued at December 31,
1999 and paid in January 2000.
</TABLE>

            See Accompanying Notes to Consolidated Financial Statements

<PAGE>

e)

                         DAVIDSON INCOME REAL ESTATE, L.P.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Note A - Basis of Presentation

The accompanying  unaudited consolidated financial statements of Davidson Income
Real Estate,  L.P. (the  "Partnership"  or  "Registrant")  have been prepared in
accordance with generally accepted  accounting  principles for interim financial
information  and  with the  instructions  to Form  10-QSB  and  Item  310(b)  of
Regulation  S-B.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  In the opinion of Davidson Diversified  Properties,  Inc.
(the  "Managing  General  Partner"),   all  adjustments  (consisting  of  normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included. Operating results for the three and nine month periods ended September
30, 2000 and 1999,  are not  necessarily  indicative  of the results that may be
expected for the fiscal year ending December 31, 2000. For further  information,
refer to the consolidated financial statements and footnotes thereto included in
the  Partnership's  Annual  Report on Form  10-KSB  for the  fiscal  year  ended
December 31, 1999.

Principles of Consolidation

The  consolidated  financial  statements  of the  Partnership  include  its 100%
ownership  interests  in the  following  partnerships:  Bexley  House,  L.P. and
Davidson IRE  Associates,  L.P. All significant  interpartnership  balances have
been eliminated.

Note B - Transfer of Control

Pursuant  to a series  of  transactions  which  closed  on  October  1, 1998 and
February 26, 1999,  Insignia Financial Group, Inc. and Insignia Properties Trust
merged into Apartment  Investment and Management Company  ("AIMCO"),  a publicly
traded real estate investment trust, with AIMCO being the surviving  corporation
(the "Insignia Merger").  As a result, AIMCO acquired 100% ownership interest in
the Managing General Partner. The Managing General Partner does not believe that
this  transaction  has had or will have a  material  effect on the  affairs  and
operations of the Partnership.

Note C - Transactions with Affiliated Parties

The  Partnership  has no employees  and is  dependent  on the  Managing  General
Partner  and  its  affiliates  for  the  management  and  administration  of all
Partnership  activities.  The Partnership Agreement provides for (i) payments to
affiliates for services and (ii)  reimbursement of certain expenses  incurred by
affiliates on behalf of the  Partnership.  The following  transactions  with the
Managing  General  Partner and/or its affiliates  were incurred  during the nine
months ended September 30, 2000 and 1999:

                                                                  2000      1999
                                                                  (in thousands)

 Property management fees (included in operating expenses)        $191      $187
 Reimbursement for services of affiliates (included in
   general and administrative and operating expenses and
   investment properties)                                          113        82

During the nine months  ended  September  30, 2000 and 1999,  affiliates  of the
Managing  General Partner were entitled to receive 5% of gross receipts from all
of  the  Partnership's   properties  as  compensation  for  providing   property
management  services.  The  Partnership  paid to such  affiliates  approximately
$191,000 and $187,000  for the nine months  ended  September  30, 2000 and 1999,
respectively.

An  affiliate  of  the  Managing  General  Partner  received  reimbursements  of
accountable  administrative  expenses  amounting to  approximately  $113,000 and
$82,000 for the nine months ended September 30, 2000 and 1999, respectively.

In addition to its  indirect  ownership of the general  partner  interest in the
Partnership,  AIMCO and its affiliates  currently own 10,849 limited partnership
units in the Partnership  representing  approximately  40.52% of the outstanding
units.  A number of these units were acquired  pursuant to tender offers made by
AIMCO or its  affiliates.  It is possible that AIMCO or its affiliates will make
one  or  more  additional  offers  to  acquire  additional  limited  partnership
interests in the  Partnership for cash or in exchange for units in the operating
partnership  of AIMCO.  In this regard,  on July 24, 2000, an affiliate of AIMCO
commenced a tender  offer to purchase any and all of the  remaining  partnership
interests for a purchase price of $409.00 per limited partnership unit. When the
tender offer  expired on September 28, 2000,  the  affiliate had acquired  915.5
limited partnership units. Under the Partnership Agreement,  unitholders holding
a majority of the Units are entitled to take action with respect to a variety of
matters, which would include without limitation, voting on certain amendments to
the Partnership  Agreement and voting to remove the Managing General Partner. As
a result of its  ownership  of 40.52% of the  outstanding  units,  AIMCO is in a
position to  significantly  influence all voting  decisions  with respect to the
Partnership.  When voting on matters,  AIMCO  would in all  likelihood  vote the
Units it acquired in a manner  favorable to the interest of the Managing General
Partner because of their affiliation with the Managing General Partner.

Note D - Investment in Joint Venture

The  Partnership  owns a 17.5% interest in the Sterling Crest Joint Venture with
Davidson  Growth  Plus,  L.P.,  an  affiliated  partnership  of  which  Davidson
Diversified  Properties,  Inc., is also the managing general partner, which owns
the remaining 82.5% of the joint venture. In connection with the joint venture's
purchase of Phase I of Brighton  Crest  Apartments  on September  30, 1987,  the
Partnership  invested  approximately  $2,727,000 in the joint venture. The joint
venture purchased Phase II of Brighton Crest Apartments on December 15, 1987.

Summary balance sheet  information for the nine months ended September 30, 2000,
of the Sterling Crest Joint Venture is as follows (in thousands):


             Total assets                              $ 7,570
             Total liabilities                          (6,098)
             Total venture's equity                    $ 1,472

Summary statements of operations information for the nine months ended September
30,  2000 and  1999 of the  Sterling  Crest  Joint  Venture  is as  follows  (in
thousands):

                                             2000                1999
        Total revenues                     $ 1,928             $ 1,939
        Total expenses                      (1,560)             (1,544)
                                           $   368             $   395

The Partnership  received  distributions of  approximately  $83,000 and $177,000
from the joint venture during the nine months ended September 30, 2000 and 1999,
respectively.  For the nine  months  ended  September  30,  2000 and  1999,  the
Partnership   recognized   equity  in  the  income  of  the  joint   venture  of
approximately $64,000 and $68,000, respectively.

The Partnership received  distributions of approximately  $98,000 from the joint
venture during the three months ended September 30, 1999. No distributions  were
received  from the joint  venture  during the three months ended  September  30,
2000. For the three months ended  September 30, 2000 and 1999,  the  Partnership
recognized  equity in the income of the joint venture of  approximately  $24,000
and $12,000, respectively.

Note E - Distributions

The Partnership paid a cash distribution from operations, which was declared and
accrued at December 31, 1999, of approximately  $380,000 of which  approximately
$369,000 ($13.78 per limited partnership unit) was paid to the limited partners.
During the nine months ended  September 30, 2000, the  Partnership  declared and
paid distributions of approximately $1,115,000  (approximately $1,082,000 to the
limited partners or $40.41 per limited partnership unit) from operations.

Subsequent to September 30, 2000, a cash distribution was declared and paid from
operations of approximately  $254,000 of which approximately  247,000 ($9.22 per
limited partnership unit) was paid to the limited partners.

During the nine months ended  September 30, 1999,  the  Partnership  distributed
approximately $275,000 of which approximately $267,000  (approximately $9.97 per
limited partnership unit) was paid to the limited partners from operations.

Note F - Segment Information

Description  of the types of products  and  services  from which the  reportable
segment derives its revenues:

The  Partnership  has  one  reportable  segment:   residential  properties.  The
Partnership's residential property segment consists of four apartment complexes,
one each in Georgia,  North  Carolina,  Ohio and Texas.  The  Partnership  rents
apartment units to tenants for terms that are typically twelve months or less.

Measurement of segment profit or loss:

The  Partnership  evaluates  performance  based on segment  profit (loss) before
depreciation.  The accounting policies of the reportable segment are the same as
those of the Partnership as described in the Partnership's Annual Report on Form
10-KSB for the year ended December 31, 1999.

Factors management used to identify the Partnership's reportable segment:

The  Partnership's  reportable  segment  consists of investment  properties that
offer similar products and services.  Although each of the investment properties
are  managed  separately,  they have been  aggregated  into one  segment as they
provide services with similar types of products and customers.

Segment  information  for the three and nine month periods  ended  September 30,
2000 and  1999,  is shown in the  following  tables  below (in  thousands).  The
"Other" column includes Partnership  administration related items and income and
expense not allocated to the reportable segment.


  Three Months Ended September 30, 2000     Residential    Other      Totals

Rental income                                 $ 1,198       $ --      $ 1,198
Other income                                       59           2          61
Interest expense                                  244          --         244
Depreciation                                      264          --         264
General and administrative expense                 --          87          87
Equity in income of joint venture                  --          24          24
Segment profit (loss)                             128         (61)         67


  Nine Months Ended September 30, 2000     Residential     Other      Totals

Rental income                                $ 3,604        $ --      $ 3,604
Other income                                     172           14         186
Interest expense                                 736           --         736
Depreciation                                     762           --         762
General and administrative expense                --          191         191
Equity in income of joint venture                 --           64          64
Segment profit (loss)                            556         (113)        443
Total assets                                  14,573          204      14,777
Capital expenditures for investment
  properties                                     360           --         360


  Three Months Ended September 30, 1999    Residential     Other      Totals

Rental income                                $ 1,169       $  --     $ 1,169
Other income                                      57            3         60
Interest expense                                 248           --        248
Depreciation                                     233           --        233
General and administrative expense                --           77         77
Equity in income of joint venture                 --           12         12
Segment profit (loss)                            130          (62)        68


  Nine Months Ended September 30, 1999    Residential     Other      Totals

Rental income                                $ 3,518       $  --     $ 3,518
Other income                                     159           16        175
Interest expense                                 745           --        745
Depreciation                                     688           --        688
General and administrative expense                --          175        175
Equity in income of joint venture                 --           68         68
Segment profit (loss)                            478          (91)       387
Total assets                                  15,252          699     15,951
Capital expenditures for investment
  Properties                                     649           --        649

Note G - Legal Proceedings

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial  Group,  Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs  named as defendants,  among others,
the  Partnership,  its Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging the acquisition of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited  partnership units; the management of partnerships
by the  Insignia  affiliates;  and the  Insignia  Merger.  The  plaintiffs  seek
monetary damages and equitable  relief,  including  judicial  dissolution of the
Partnership.  On June 25, 1998,  the  Managing  General  Partner  filed a motion
seeking  dismissal  of the action.  In lieu of  responding  to the  motion,  the
plaintiffs have filed an amended  complaint.  The Managing General Partner filed
demurrers to the amended complaint which were heard February 1999.

Pending the ruling on such  demurrers,  settlement  negotiations  commenced.  On
November 2, 1999,  the parties  executed and filed a Stipulation  of Settlement,
settling claims,  subject to final court approval,  on behalf of the Partnership
and all limited  partners  who owned  units as of November 3, 1999.  Preliminary
approval of the settlement  was obtained on November 3, 1999 from the Court,  at
which time the Court set a final approval  hearing for December 10, 1999.  Prior
to the December 10, 1999 hearing,  the Court received various  objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has  currently  scheduled a hearing on the matter for  November  20,
2000. The Managing  General  Partner does not anticipate  that costs  associated
with this case will be material to the Partnership's overall operations.

The  Partnership is unaware of any other pending or outstanding  litigation that
is not of a routine nature arising in the ordinary course of business.


<PAGE>

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The  matters  discussed  in this Form  10-QSB  contain  certain  forward-looking
statements  and  involve  risks and  uncertainties  (including  changing  market
conditions,   competitive  and  regulatory   matters,   etc.)  detailed  in  the
disclosures  contained  in this  Form  10-QSB  and the  other  filings  with the
Securities and Exchange  Commission made by the  Partnership  from time to time.
The  discussion  of  the  Partnership's  business  and  results  of  operations,
including  forward-looking  statements pertaining to such matters, does not take
into  account  the  effects of any  changes to the  Partnership's  business  and
results of operations.  Accordingly, actual results could differ materially from
those  projected in the  forward-looking  statements  as a result of a number of
factors, including those identified herein.

The Partnership's investment properties consist of four apartment complexes. The
following table sets forth the average  occupancy of the properties for the nine
months ended September 30, 2000 and 1999:

                                                  Average Occupancy
      Property                                     2000       1999

      Northsprings Apartments                       96%        96%
         Atlanta, Georgia
      Lakeside Apartments                           92%        94%
         Charlotte, North Carolina
      Bexley House Apartments                       95%        92%
         Columbus, Ohio
      Covington Pointe Apartments                   91%        93%
         Dallas, Texas

The  Managing  General  Partner  attributes  the increase in occupancy at Bexley
House to increased marketing efforts.

Results of Operations

The  Partnership's  net income for the nine months ended September 30, 2000, was
approximately  $443,000 compared to approximately $387,000 for the corresponding
period in 1999.  The  Partnership's  net income for the three month period ended
September 30, 2000 was approximately  $67,000 compared to approximately  $68,000
for the  corresponding  period in 1999.  The increase in net income for the nine
month period ended  September 30, 2000 is primarily  attributable to an increase
in total  revenues  partially  offset by an  increase  in total  expenses  and a
decrease  in the  equity in income of the joint  venture.  The  decrease  in net
income  for the three  month  period  ending  September  30,  2000 is  primarily
attributable to an increase in total expense  partially offset by an increase in
total revenues and the equity in income of the joint venture. Total revenues for
both the three and nine month  periods  increased  as a result of  increases  in
rental and other  income.  Rental income  increased  primarily as a result of an
increase in average rental rates at all the Partnership's  investment properties
and increased  occupancy at Bexley House Apartments,  which more than offset the
decrease in occupancy at Lakeside  Apartments and Covington  Pointe  Apartments.
Other income  increased  primarily due to an increase in interest  income due to
higher average cash balances in interest bearing accounts.

The increase in total  expenses for the nine month  period ended  September  30,
2000 is primarily  attributable  to increases  in  depreciation  and general and
administrative  expenses partially offset by a decrease in property tax expense.
Total  expenses  increased  for the three month period ended  September 30, 2000
primarily   due  to   increased   operating,   depreciation,   and  general  and
administrative  expenses partially offset by a decrease in property tax expense.
Operating  expenses  increased  for the three month period  primarily  due to an
increase  in property  manager  salaries at  Northsprings  Apartments,  employee
apartment costs and commissions and bonuses at Covington Pointe Apartments,  and
periodical  advertising at Bexley House Apartments and Northsprings  Apartments.
Property  tax  expense  decreased  for both the  three  and nine  month  periods
primarily  due to the timing of the receipt of the Covington  Pointe  Apartments
tax  bills  which   affected  the  accrual  at  September  30,  2000  and  1999.
Depreciation  expense for both the three and nine month periods increased due to
an increase in depreciable assets over the past year.

General and administrative  expenses increased for both the three and nine month
periods due to an increase  in the cost of services  included in the  management
reimbursements  to the Managing General Partner as allowed under the Partnership
Agreement  partially  offset by a  decrease  in legal fees  associated  with the
settlement  of the Everest  Lawsuit  settled  during  1999.  In  addition, costs
associated with the quarterly and annual  communications  with the investors and
regulatory  agencies and the annual audit required by the Partnership  Agreement
are also included in general and administrative expense.

Partially  offsetting  the  decrease in overall net income for the three  months
ended  September  30,  2000,  was an  increase  in equity in income of the joint
venture  property  from   approximately   $12,000  at  September  30,  1999,  to
approximately  $24,000 at  September  30,  2000.  The  Partnership  owns a 17.5%
interest in Sterling Crest Joint Venture (the "Joint Venture"). Equity in income
from the joint  venture  increased  primarily  due to an increase in the average
rental  rates at the  investment  property  and a decrease  in  maintenance  and
repairs expense.

As part of the ongoing  business plan of the  Partnership,  the Managing General
Partner  monitors  the  rental  market  environment  of each  of its  investment
properties  to assess  the  feasibility  of  increasing  rents,  maintaining  or
increasing  occupancy  levels and protecting the  Partnership  from increases in
expenses. As part of this plan, the Managing General Partner attempts to protect
the Partnership  from the burden of  inflation-related  increases in expenses by
increasing rents and maintaining a high overall occupancy level. However, due to
changing market  conditions,  which can result in the use of rental  concessions
and  rental  reductions  to  offset  softening  market  conditions,  there is no
guarantee that the Managing General Partner will be able to sustain such a plan.

Liquidity and Capital Resources

At  September  30,  2000,  the  Partnership  had cash and  cash  equivalents  of
approximately  $705,000  compared to  approximately  $1,374,000 at September 30,
1999.  The  decrease  in cash and cash  equivalents  for the nine  months  ended
September  30, 2000 from the  Partnership's  year ended  December 31, 1999,  was
approximately $970,000. This decrease is due to approximately $1,611,000 of cash
used  in  financing  activities  and  approximately  $558,000  of  cash  used by
investing  activities  partially  offset  by  approximately  $1,199,000  of cash
provided by operating activities. Cash used in financing activities consisted of
distributions  paid  to the  partners  and,  to a  lesser  extent,  payments  of
principal  made  on  the  mortgages  encumbering  the  Partnership's  investment
properties. Cash used in investing activities consisted of property improvements
and  replacements  and, to a lesser extent,  net deposits to restricted  escrows
maintained by the mortgage lenders  partially  offset by distributions  received
from the  Partnership's  joint  venture.  The  Partnership  invests  its working
capital reserves in money market accounts.

The sufficiency of existing  liquid assets to meet future  liquidity and capital
expenditure   requirements   is  directly   related  to  the  level  of  capital
expenditures  required at the investment  properties to adequately  maintain the
physical  assets and other operating needs of the Partnership and to comply with
Federal,   state,   and  local  legal  and  regulatory   requirements.   Capital
improvements planned for the Partnership's properties are detailed below.

Northsprings Apartments

Approximately  $53,000 is budgeted for capital improvements for the year 2000 at
Northsprings  Apartments  consisting  primarily of carpet and vinyl replacement,
wall covering replacement,  and appliance  replacements.  During the nine months
ended September 30, 2000, the  Partnership  completed  approximately  $55,000 of
budgeted  and  unbudgeted  capital  improvements  at  Northsprings   Apartments,
consisting  primarily  of  sewer  replacements,  appliance  and  floor  covering
replacements,  and  water  heater  and  air  conditioning  replacements.   These
improvements were funded from operating cash flow.

Lakeside Apartments

Approximately  $60,000 is budgeted for capital improvements for the year 2000 at
Lakeside Apartments  consisting primarily of floor covering  replacement,  major
landscaping,  wall covering  replacement,  air conditioning  unit  replacements,
appliance  replacements,  and other  structural  improvements.  During  the nine
months  ended  September  30,  2000,  the  Partnership  completed  approximately
$128,000 of budgeted and unbudgeted capital improvements at Lakeside Apartments,
consisting primarily of appliance  replacements,  carpet and vinyl replacements,
and  structural  and  building  upgrades.  These  improvements  were funded from
replacement reserves and operating cash flow.

Bexley House Apartments

Approximately  $52,000 is budgeted for capital improvements for the year 2000 at
Bexley House Apartments  consisting  primarily of carpet and vinyl  replacement,
heating upgrades, and light fixture and plumbing  replacements.  During the nine
months ended September 30, 2000, the Partnership completed approximately $51,000
of budgeted and  unbudgeted  capital  improvements  at Bexley House  Apartments,
consisting  primarily  of  heating  system  replacements,  appliance  and  floor
covering replacement,  air conditioning  replacements,  electrical improvements,
and cabinet  replacements.  These  improvements  were funded from operating cash
flow.

Covington Pointe Apartments

Approximately $154,000 is budgeted for capital improvements for the year 2000 at
Covington   Pointe   Apartments   consisting   primarily  of  carpet  and  vinyl
replacement,  interior decoration, air conditioning unit replacements,  plumbing
replacement, and appliance replacements.  During the nine months ended September
30,  2000,  the  Partnership   completed   approximately   $126,000  of  capital
improvements  at  Covington  Pointe  Apartments,  consisting  primarily  of  air
conditioning replacements,  carpet and vinyl replacement,  appliance replacement
and plumbing fixture replacements. These improvements were funded primarily from
operating cash flow.

The additional  capital  expenditures will be incurred only if cash is available
from operations or from Partnership  reserves.  To the extent that such budgeted
capital improvements are completed,  the Partnership's  distributable cash flow,
if any, may be adversely affected at least in the short term.

The Partnership's  current assets are thought to be sufficient for any near-term
needs  (exclusive  of capital  improvements)  of the  Partnership.  The mortgage
indebtedness of approximately  $11,683,000,  net of discounts, is amortized over
varying periods with balloon payments of  approximately  $1,097,000 due November
2002 and  approximately  $10,181,000 due October and November 2003. The Managing
General  Partner  will attempt to refinance  such  indebtedness  and/or sell the
properties prior to such maturity dates. If the properties  cannot be refinanced
or sold for a sufficient amount, the Partnership may risk losing such properties
through foreclosure.

The Partnership paid a cash distribution from operations, which was declared and
accrued at December 31, 1999, of approximately  $380,000 of which  approximately
$369,000 ($13.78 per limited partnership unit) was paid to the limited partners.
During the nine months ended  September 30, 2000, the  Partnership  declared and
paid distributions of approximately $1,115,000  (approximately $1,082,000 to the
limited  partners  or $40.41 per  limited  partnership  unit)  from  operations.
Subsequent to September 30, 2000, a cash distribution was declared and paid from
operations of approximately  $254,000 of which approximately  247,000 ($9.22 per
limited  partnership  unit) was paid to the  limited  partners.  During the nine
months ended  September  30, 1999,  the  Partnership  distributed  approximately
$275,000  of which  approximately  $267,000  (approximately  $9.97  per  limited
partnership  unit)  was  paid  to the  limited  partners  from  operations.  The
Partnership's  distribution policy is reviewed on a quarterly basis. Future cash
distributions  will depend on the levels of net cash generated from  operations,
the  availability  of  cash  reserves,   and  the  timing  of  debt  maturities,
refinancings  and/or  property  sales.  Distributions  may be  restricted by the
requirement  to deposit net operating  income (as defined in the mortgage  note)
into a reserve  account until the reserve  account is funded for each respective
property  as  follows:  a minimum of $400 and a maximum of $1,000 per  apartment
unit at Bexley House Apartments for a total of approximately $26,000 to $64,000;
a  minimum  of $200 and a maximum  of $400 per  apartment  unit at  Northsprings
Apartments and Covington Pointe Apartments for a total of approximately  $60,000
to  $120,000.  The  reserve  account at  September  30,  2000 was  approximately
$188,000. There can be no assurance, however, that the Partnership will generate
sufficient funds from operations  after required capital  improvements to permit
further distributions to its partners during the remainder of 2000 or subsequent
periods.   In  addition,   the   Partnership   may  be  restricted  from  making
distributions if the amount in the reserve account for each property  maintained
by the  mortgage  lender is less than $400 per  apartment  unit at  Northsprings
Apartments, Covington Pointe Apartments, and Bexley House Apartments for a total
of $145,600. At September 30, 2000, the minimum balance was attained.


<PAGE>


                           PART II - OTHER INFORMATION


ITEM 1.     LEGAL PROCEEDINGS

In March 1998, several putative unit holders of limited partnership units of the
Partnership  commenced an action  entitled  Rosalie  Nuanes,  et al. v. Insignia
Financial  Group,  Inc., et al. in the Superior Court of the State of California
for the County of San Mateo. The plaintiffs  named as defendants,  among others,
the  Partnership,  its Managing  General Partner and several of their affiliated
partnerships  and corporate  entities.  The action  purports to assert claims on
behalf of a class of limited  partners and derivatively on behalf of a number of
limited  partnerships  (including  the  Partnership)  which are named as nominal
defendants,  challenging the acquisition of interests in certain general partner
entities by Insignia Financial Group, Inc. ("Insignia") and entities which were,
at one  time,  affiliates  of  Insignia;  past  tender  offers  by the  Insignia
affiliates to acquire limited  partnership units; the management of partnerships
by the  Insignia  affiliates;  and the  Insignia  Merger.  The  plaintiffs  seek
monetary damages and equitable  relief,  including  judicial  dissolution of the
Partnership.  On June 25, 1998,  the  Managing  General  Partner  filed a motion
seeking  dismissal  of the action.  In lieu of  responding  to the  motion,  the
plaintiffs have filed an amended  complaint.  The Managing General Partner filed
demurrers to the amended complaint which were heard February 1999.

Pending the ruling on such  demurrers,  settlement  negotiations  commenced.  On
November 2, 1999,  the parties  executed and filed a Stipulation  of Settlement,
settling claims,  subject to final court approval,  on behalf of the Partnership
and all limited  partners  who owned  units as of November 3, 1999.  Preliminary
approval of the settlement  was obtained on November 3, 1999 from the Court,  at
which time the Court set a final approval  hearing for December 10, 1999.  Prior
to the December 10, 1999 hearing,  the Court received various  objections to the
settlement, including a challenge to the Court's preliminary approval based upon
the alleged lack of authority of prior lead counsel to enter the settlement.  On
December 14, 1999, the Managing  General  Partner and its affiliates  terminated
the  proposed  settlement.  In  February  2000,  counsel  for some of the  named
plaintiffs filed a motion to disqualify plaintiff's lead and liaison counsel who
negotiated  the  settlement.  On June  27,  2000,  the  Court  entered  an order
disqualifying them from the case. The Court is considering applications for lead
counsel and has  currently  scheduled a hearing on the matter for  November  20,
2000. The Managing  General  Partner does not anticipate  that costs  associated
with this case will be material to the Partnership's overall operations.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

            a)    Exhibits:

                  Exhibit 27, Financial Data Schedule, is filed as an exhibit to
                  this report.

            b)    Reports on Form 8-K:

                  None filed during the quarter ended September 30, 2000.

<PAGE>


                                   SIGNATURES



In accordance with the  requirements of the Exchange Act, the Registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.



                                    DAVIDSON INCOME REAL ESTATE, L.P.


                                    By:   DAVIDSON DIVERSIFIED PROPERTIES, INC.
                                          Managing General Partner


                                    By:   /s/Patrick J. Foye
                                          Patrick J. Foye
                                          Executive Vice President


                                    By:   /s/Martha L. Long
                                          Martha L. Long
                                          Senior Vice President
                                          and Controller


                                    Date: