SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

(Mark One)
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
         1934


                   For the fiscal year ended December 31, 2002

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


                   For the transition period from ____________ to ____________

                         Commission file number 0-14458

                        NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
        (Exact name of small business issuer as specified in its charter)

            Maryland                                            52-1365317
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                             Identification No.)

                         55 Beattie Place, P.O. Box 1089
                        Greenville, South Carolina 29601
                    (Address of principal executive offices)

                    Issuer's telephone number (864) 239-1000

               Securities registered under Section 12(b) of the Exchange Act:

                                      None

               Securities registered under Section 12(g) of the Exchange Act:

                        18,043 Limited Partnership Units
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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___

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of the  Partnership's  knowledge  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year.  $0

State the aggregate  market value of the voting  partnership  interests  held by
non-affiliates computed by reference to the price at which the partnership units
were sold, or the average bid and asked prices of such  partnership  units as of
December 31, 2002.  No market  exists for the limited  partnership  units of the
Registrant, and, therefore, no aggregate market value can be determined.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

The matters discussed in this report contain certain forward-looking statements,
including, without limitation, statements regarding future financial performance
and the effect of government  regulations.  The discussions of the  Registrant's
business  and  results  of  operations,   including  forward-looking  statements
pertaining to such matters,  do not take into account the effects of any changes
to the  Registrant's  business  and results of  operations.  Actual  results may
differ  materially  from those described in the  forward-looking  statements and
will  be  affected  by  a  variety  of  risks  and  factors  including,  without
limitation:  national and local economic  conditions;  the terms of governmental
regulations that affect the Registrant and interpretations of those regulations;
the competitive  environment in which the Registrant operates;  financing risks,
including the risk that cash flows from  operations may be  insufficient to meet
required  payments of  principal  and  interest;  real estate  risks,  including
variations  of real  estate  values and the  general  economic  climate in local
markets and competition for tenants in such markets; and possible  environmental
liabilities.   Readers  should  carefully  review  the  Registrant's   financial
statements and the notes thereto,  as well as the risk factors  described in the
documents  the  Registrant  files  from  time to time  with the  Securities  and
Exchange Commission.

                                     PART I

Item 1.     Business

National Housing  Partnership  Realty Fund Two, a Maryland  Limited  Partnership
(the "Partnership" or the  "Registrant"),  was formed under the Maryland Revised
Uniform  Limited  Partnership Act as of January 22, 1985. On March 15, 1985, the
Partnership  commenced offering 18,300 limited  partnership units, at a price of
$1,000 per interest,  through a public  offering  registered with the Securities
and Exchange  Commission (the  "Offering").  The Offering  terminated on May 22,
1985 with subscriptions for all 18,300 limited partnership units.

On June 3,  1997,  Apartment  Investment  and  Management  Company,  a  Maryland
corporation  and a publicly  held real estate  investment  trust  ("AIMCO"  and,
together  with its  subsidiaries  and  other  controlled  entities,  the  "AIMCO
Group"),  acquired  all of the  issued  and  outstanding  capital  stock  of NHP
Partners,  Inc., a Delaware  corporation ("NHP  Partners"),  and the AIMCO Group
acquired  all  of  the  outstanding   interests  in  NHP  Partners  Two  Limited
Partnership,  a Delaware limited  partnership ("NHP Partners Two"). NHP Partners
owns all of the  outstanding  capital  stock  of the  National  Corporation  for
Housing Partnerships,  a District of Columbia corporation ("NCHP"), which is the
general  partner of The  National  Housing  Partnership,  a District of Columbia
limited  partnership ("NHP" or the "General  Partner").  Together,  NCHP and NHP
Partners Two own all of the outstanding partnership interests in NHP. NHP is the
general partner of the Registrant. As a result of these transactions,  the AIMCO
Group acquired control of the general partner of the Registrant and,  therefore,
may be deemed to have acquired control of the Registrant.

The  Partnership's  business is to hold limited  partnership  interests in three
limited  partnerships  ("Local  Limited  Partnerships"),  each of which owns and
operates a multi-family  rental housing property  ("Properties")  which receives
one or more forms of assistance from the Federal  Government.  The Partnership's
ownership interest in four additional Local Limited  Partnerships was foreclosed
upon  during  2001 and two of the  partnerships  in  which  the  Registrant  has
invested sold their properties during 2001. In each instance, NHP is the general
partner of the Local Limited  Partnership  and the  Partnership is the principal
limited  partner.  As  a  limited  partner,  the  Partnership's   liability  for
obligations of the Local Limited Partnerships is limited to its investment,  and
the  Partnership  does not  exercise  control over the  activities  of the Local
Limited Partnerships in accordance with the partnership agreements. See "Item 6.
Management's Discussion and Analysis or Plan of Operations" for information
relating  to  the  Registrant's   rights  and  obligations  to  make  additional
contributions or loans to Local Limited Partnerships.

The Partnership's investment objectives are to:

(1)   preserve and protect Partnership capital;

(2)   provide current tax benefits to Limited  Partners to the extent  permitted
      by law,  including,  but not limited to,  deductions that Limited Partners
      may use to offset otherwise taxable income from other sources;

(3)   provide   capital   appreciation   through   increase   in  value  of  the
      Partnership's   investments,   subject   to   considerations   of  capital
      preservation and tax planning; and

(4)   provide  potential cash  distributions  from sales or  refinancings of the
      Partnership's investments and, on a limited basis, from operations.

The  Partnership  does not have any  employees.  Services are  performed for the
Partnership by the General Partner and agents retained by the General Partner.

The  following  is a  schedule  of the  Properties  owned by the  Local  Limited
Partnerships in which the Partnership is a limited partner:


                 SCHEDULE OF PROPERTIES OWNED BY LOCAL LIMITED PARTNERSHIPS
         IN WHICH NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO HAS AN INVESTMENT

<TABLE>
<CAPTION>

                                                                              Occupancy
                                                        Units Authorized     Percentage
                                           Financed,       for Rental    for the Year Ended
                                           Insured
   Property Name, Location    Number of  and Subsidized Assistance Under    December 31,
     and Partnership Name       Units        Under          Section 8       2002     2001

<S>                              <C>          <C>              <C>          <C>       <C>
Anderson Gardens                 (C)          (C)              (C)          (C)       (C)
  Anderson, South Carolina
  (Hurbell II Limited
    Partnership)

Brightwaters                     (B)          (B)              (B)          (B)       (B)
  Tulsa, Oklahoma
  (West Oak Village Limited
    Partnership)

Caroline Arms (D)                204          (A)              161           91%      95%
  Jacksonville, Florida
  (Caroline Arms Limited
    Partnership)

Harold House                      80          (A)               80          100%     100%
  Jacksonville, Florida
  (Harold House Limited
    Partnership)
</TABLE>


<TABLE>
<CAPTION>

                                                                              Occupancy
                                                        Units Authorized     Percentage
                                           Financed,       for Rental    for the Year Ended
                                            Insured
   Property Name, Location    Number of  and Subsidized Assistance Under    December 31,
     and Partnership Name       Units        Under          Section 8       2002     2001


<S>                              <C>          <C>              <C>          <C>       <C>
Mayfair                          (C)          (C)              (C)          (C)       (C)
  Tucson, Arizona
  (Mayfair Manor Limited
    Partnership)

Royal Oak Gardens                (C)          (C)              (C)          (C)       (C)
  Kannapolis, North Carolina
  (Hurbell III Limited
    Partnership)

San Juan del Centro              150          (A)              150           99%      99%
  Boulder, Colorado
  (San Juan del Centro Limited
    Partnership)

Shadow Pines                     (C)          (C)              (C)          (C)       (C)
  Tuscon, Arizona
  (Esbro Limited Partnership)

Windsor Apartments               (B)          (B)              (B)          (B)       (B)
  Wilmington, Delaware
  (Windsor Apartments
   Associates Limited
   Partnership)
</TABLE>

(A)   The mortgage is insured by the Federal  Housing  Administration  under the
      provisions of Section 236 of the National Housing Act.

(B)   Property was sold in 2001.

(C)   Property was lost through foreclosure of Partnership  interests during the
      year ended December 31, 2001.

(D)   Property sold in February 2003.

Ownership Percentages

The  following  details the  Partnership's  ownership  percentages  of the Local
Limited  Partnerships  and  the  cost of  acquisition  of  such  ownership.  All
interests are limited  partner  interests.  Also included is the total  mortgage
encumbrance and notes payable and accrued  interest on each property for each of
the Local  Limited  Partnerships  as of  December  31, 2002  (dollar  amounts in
thousands):

<TABLE>
<CAPTION>

                                 NHP Realty
                                  Fund Two      Cost of                 Notes Payable
                                 Percentage    Ownership    Mortgage     and Accrued
Partnership                       Ownership     Interest      Notes      Interest (A)
<S>                                 <C>          <C>         <C>           <C>
Caroline Arms L.P.                  94.5%        $ 868       $ 1,524       $ 4,391
Harold House L.P.                   94.5%           364          588         1,686
San Juan del Centro L.P.            94.5%           799        1,263         3,824
</TABLE>

(A)   See "Item 6.  Management's  Discussion and Analysis or Plan of Operations"
      for further details.

Although each Local Limited  Partnership in which the  Partnership  has invested
owns an apartment complex which must compete with other apartment  complexes for
tenants,  government  mortgage  interest and rent  subsidies make it possible to
rent units to eligible tenants at below market rates. In general, this insulates
the Properties from market competition.

Regulation

General

Multifamily  apartment  properties  are subject to various laws,  ordinances and
regulations,  including regulations relating to recreational  facilities such as
swimming  pools,  activity  centers  and other  common  areas.  Changes  in laws
increasing  the potential  liability for  environmental  conditions  existing on
properties or increasing the restrictions on discharges or other conditions,  as
well  as  changes  in  laws  effecting  development,   construction  and  safety
requirements, may result in significant unanticipated expenditures,  which would
adversely  affect  the  properties'  cash flow  from  operating  activities.  In
addition,  future enactment of rent control or rent  stabilization laws or other
laws  regulating  multi-family  housing  may reduce  rental  revenue or increase
operating costs in particular markets.

Regulation of Affordable Housing

The  Federal  Housing  Administration  ("FHA")  has  contracted  with the  three
subsidized  rental  projects  under  Section  8 of Title II of the  Housing  and
Community  Development  Act of 1974 to make housing  assistance  payments to the
Local  Limited  Partnerships  on behalf of qualified  tenants.  The terms of the
agreements are one or five years with one year renewal options.

In 1997 and again in 1999,  Congress  enacted new ways to determine  rent levels
for properties  receiving HUD's rental  assistance under Section 8 of the United
States  Housing Act of 1937 ("Section 8") after the expiration of their original
Section 8 contracts.  This new legislation  will affect 391 units, or 90% of the
units in which the Partnership has invested.  On October 27, 1997, the President
signed into law the Multifamily Assisted Housing Reform and Affordability Act of
1997 (the "1997 Housing Act").  Under the 1997 Housing Act,  certain  properties
assisted under expiring  Section 8 contracts and which have been receiving rents
deemed to be above  comparable  market  levels for  unassisted  properties,  and
financed  with  HUD-insured  mortgage  loans,  will  have,  upon the  renewal or
extension of Section 8 contracts,  rents  marked to market  rents.  This will be
accomplished  in  various  ways,  the goal  being to  reduce  Section 8 rents to
comparable  market  levels,  thereby  reducing  the  federal  Section  8 subsidy
obligation,  and (ideally) by simultaneously lowering, or eliminating,  required
debt  service  costs  (and  decreasing  operating  costs)  as  needed  to ensure
financial  viability at the reduced rent levels. The program also incorporates a
requirement  to  perform  any  repair  or  rehabilitation  deemed  necessary  by
depositing  funds to cover the first twelve month's work, and making  sufficient
monthly reserve  deposits to ensure work required in succeeding  years. In 1999,
Congress  enacted  legislation  (the "1999  Housing  Act") that  expanded on and
clarified  the  provisions  of  the  1997  Housing  Act,  including   permitting
properties whose Section 8 rents were below comparable  market rents to increase
their Section 8 rents to market.

The 1997 and 1999  Housing  Acts  (together,  the  "Housing  Acts")  permit  the
retention of project  based  Section 8 contracts  for most  properties in rental
markets  with a limited  supply of  affordable  housing or where the tenants are
particularly  vulnerable  populations  including the elderly,  disabled or large
families.  In rental markets without a limited supply of affordable housing, the
Housing Acts provide for phasing out project  based  subsidies,  converting  the
assistance to tenant based assistance or vouchers.  Under a tenant based system,
rental  vouchers  would be issued to  qualified  tenants who then could elect to
reside at  properties  of their  choice,  including  the  property in which they
currently  reside.   Voucher  rent  levels  are  established  by  local  housing
authorities  under  guidelines set by HUD. While the Partnership does not expect
the provisions of the Housing Acts to result in a significant  number of tenants
relocating from the properties  owned by the Local Limited  Partnerships,  there
can be no  assurance  that  the  new  legislation  will  not  significantly  and
adversely  affect  the  operations  of  the  properties  of  the  Local  Limited
Partnerships.

The following  table  indicates the year within which the Section 8 rent subsidy
contracts expire:

                                      Subsidized Units       Subsidized Units
                                        Expiring as a          Expiring as a
                       Number of     Percentage of Total       Percentage of
                         Units        Subsidized Units          Total Units

2003                      391               100%                    90%

All of the  units  which  receive  rent  subsidies  from  Section  8 have  their
contracts  which expire  during the year ending  December 31, 2003.  The Housing
Acts provide for several  options  under which a Local Limited  Partnership  may
elect, as appropriate, to renew its Section 8 contracts: (1) marking rents up to
the  comparable  market rent, if current  rents are below  market;  (2) renewing
rents at the  current  level,  if the level  does not exceed  comparable  market
rents, and receiving an operating cost adjustment factor (an "OCAF") or a budget
based rent increase, as long as the rents do not exceed comparable market rents;
(3) marking rents down to comparable  market rents; (4) marking their rents down
to an "exception rent" level,  when comparable  market rents would be too low to
permit  continued  operation of the property  under the Section 8 program,  even
with full debt  restructuring;  or (5) opting out of the section 8 program.  For
properties   assisted  by  Section  8,  but  not  subject  to  these  provisions
(including,  but not limited to,  properties  which do not have  underlying  HUD
insured  mortgages,  or which have been financed  through  certain state housing
finance agency or bond-financed  mortgage programs),  rents will be continued at
current  levels,  plus  an OCAF or (in  some  instances)  a  budget  based  rent
increase.  In addition,  properties can opt out of the Section 8 program only if
very strict notice requirements have been met, including a requirement that HUD,
the tenants,  and the local  governing  body, be given twelve months notice of a
Local  Limited  Partnership's  intention  to opt  out of the  program  prior  to
contract termination.

Each of the options  requires an application to HUD, and, to a greater or lesser
extent,  the  fulfillment  of certain  procedural  submission  requirements  and
financial   requirements,   which  must  be  weighed  in  connection   with  the
determination of which option to select.

The Section 8  requirements  are separate  from the  requirements  governing the
underlying  HUD-insured  mortgage  loans,  and any  other  HUD,  state  or local
requirements, all of which must be fulfilled,  irrespective of the option chosen
with regard to the continuation of Section 8 participation.

HUD Approval and Enforcement

A  significant  number of  properties  owned by the  Partnership  are subject to
regulations by HUD. Under its regulations, HUD reserves the right to approve the
owner and the manager of HUD-insured  and  HUD-assisted  properties,  as well as
their  "principals"  (e.g.  general  partners,  stockholders with 10% or greater
interest,  officers and  directors)  in  connection  with the  acquisition  of a
property,  participation in HUD programs or the award of a management  contract.
This approval process is commonly  referred to as "2530 Clearance." HUD monitors
the performance of properties with HUD-insured mortgage loans. HUD also monitors
compliance with  applicable  regulations,  and takes  performance and compliance
into  account  in  approving  the  acquisition  of  management  of  HUD-assisted
properties.

In December  2001,  AIMCO and certain of its affiliated  partnerships  which own
properties  voluntarily  entered into an agreement  with the U.S.  Environmental
Protection Agency ("EPA") and HUD pursuant to which they agreed to pay a fine of
approximately  $130,000,  and conduct  lead-based  paint  inspections  and other
testing, if necessary, on properties initially built prior to 1978, and re-issue
lead-based paint disclosures to residents of such properties which have not been
certified as lead-based paint free. In return,  neither AIMCO nor its properties
will be subject to any  additional  fines for  inadequate  disclosures  prior to
AIMCO's execution of the agreement. The cost of the settlement,  inspections and
remediation  incurred to date had been  reserved for at the time AIMCO  acquired
the NHP and  Insignia  portfolios.  Any  remaining  costs are not expected to be
material.

Management  believes that the  Partnership's  properties are covered by adequate
fire,  flood and property  insurance  provided by reputable  companies  and with
commercially reasonable deductibles and limits.

Item 2.     Properties

See "Item 1. Business" for the real estate owned by the Partnership  through the
ownership of limited partnership interests in Local Limited Partnerships.

Item 3.     Legal Proceedings

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

Item 4.     Submission of Matters to a Vote of Security Holders

During the quarter ended December 31, 2002, no matter was submitted to a vote of
unit holders through the solicitation of proxies or otherwise.


                                     PART II

Item  5.  Market  for  the  Registrant's   Partnership   Interests  and  Related
          Partnership Matters

      (a)   Units in the Partnership were sold through a public offering.  There
            is no established market for resale of the units in the Partnership.
            Accordingly,  an investor may be unable to sell or otherwise dispose
            of his interest in the Partnership.

      (b)   As of December  31,  2002,  there were 1,124  registered  holders of
            18,043  limited  partnership  units (in  addition to 1133  Fifteenth
            Street Two  Associates  - See "Item 7.  Financial  Statements - Note
            1").  During  the year  ended  December  31,  2002,  95  units  were
            abandoned.

      (c)   No cash  dividends  or  distributions  have been  declared  from the
            inception of the Partnership through December 31, 2002.

Item 6.     Management's Discussion and Analysis or Plan of Operations

This item should be read in conjunction with the financial  statements and other
items contained elsewhere in this report.

Liquidity and Capital Resources

Effective  April  1,  2002,  the  Partnership  adopted  Statement  of  Financial
Accounting  Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44
and 64". SFAS No. 4 "Reporting  Gains and Losses from  Extinguishment  of Debt,"
required  that all gains and losses from  extinguishment  of debt be  aggregated
and, if material,  classified as an  extraordinary  item.  SFAS No. 145 rescinds
SFAS No. 4, and accordingly, gains and losses from extinguishment of debt should
only be  classified  as  extraordinary  if they are  unusual in nature and occur
infrequently. Neither of these criteria applies to the Partnership. As a result,
the accompanying statements of operations have been restated to reflect the gain
on forgiveness of the balance of the note payable  secured by the  Partnership's
interest  in Windsor  Apartments  Associates  Limited  Partnership  in 2001,  as
discussed below, in operations rather than as an extraordinary item.

As of December 31, 2002,  the  Partnership  retained an interest in three of its
original  twenty-one  Local Limited  Partnerships.  The  properties in which the
Local Limited Partnerships have invested receive one or more forms of assistance
from the  Federal  Government.  As a  result,  the Local  Limited  Partnerships'
ability to transfer funds either to the  Partnership or among  themselves in the
form of cash distributions,  loans, or advances is generally restricted by these
government-assistance    programs.   These   restrictions   could   impact   the
Partnership's  ability  to meet  its cash  obligations  given  the low  level of
reserves at the Partnership level. The General Partner monitors  developments in
the area of legal and  regulatory  compliance  and is studying new federal laws,
including  the  Sarbanes-Oxley  Act of  2002.  The  Sarbanes-Oxley  Act of  2002
mandates or suggests  additional  compliance measures with regard to governance,
disclosure,  audit and other areas.  In light of these changes,  the Partnership
expects  that it will incur higher  expenses  related to  compliance,  including
increased legal and audit fees.

Cash and cash  equivalents was less than $1,000 at December 31, 2002 compared to
approximately  $5,000 at December 31, 2001. The decrease of approximately $5,000
was due to approximately  $51,000 of cash used in operating  activities  largely
offset by  approximately  $43,000 and $3,000 of cash  provided by investing  and
financing  activities,  respectively.  Cash  provided  by  investing  activities
consisted of  distributions  from the Local Limited  Partnerships.  Cash used in
operating activities  consisted of payment of operating expenses.  Cash provided
by financing activities consisted of advances from the General Partner partially
offset by repayment of the advances from the General Partner. The ability of the
Partnership to meet its on-going cash  requirements in excess of cash on hand at
December 31, 2002 is dependent upon the future receipt of distributions from the
Local Limited  Partnerships or proceeds from sales or refinancing of one or more
of the underlying properties of the Local Limited Partnerships.  There can be no
assurance  that future  distributions  will be  adequate to fund the  operations
beyond the current  year.  The  Partnership's  only other form of  liquidity  is
advances  from the  General  Partner.  During the year ended  December  31, 2002
approximately  $41,000  of working  capital  advances  were made by the  General
Partner to the  Partnership.  The Partnership  repaid advances of  approximately
$38,000  during the year ended  December  31,  2002.  The General  Partner  will
evaluate  advancing the Partnership  additional  funds as such funds are needed,
but is in no way legally obligated to make such advances.

Net  cash  used  in  operations  for  the  year  ended  December  31,  2002  was
approximately  $51,000 compared to  approximately  $1,785,000 for the year ended
December 31, 2001.  The decrease in cash used in  operations is primarily due to
the payment in 2001 of accrued interest on the deferred acquisition note payable
from the  Partnership's  portion of proceeds  received  from the sale of Windsor
Apartments and the gain on forgiveness of debt recognized in connection with the
sale.

Distributions received in excess of investment in Local Limited Partnerships and
distributions   from  Local  Limited   Partnerships   typically   represent  the
Partnership's  proportionate share of the excess cash available for distribution
from the Local Limited Partnerships. As a result of the use of the equity method
of  accounting  for the  Partnership's  investments,  investments  in all of the
remaining  Local Limited  Partnerships  have been reduced to zero as of December
31, 2002. For these  investments,  cash  distributions  received are recorded in
income  as  distributions  received  in excess of  investment  in Local  Limited
Partnerships.  If these investments had not been reduced to zero,  distributions
received would be recorded as distributions  from Local Limited  Partnerships in
the  statements of cash flows and would reduce the  Partnership's  investment on
the balance sheet.  A distribution  of  approximately  $43,000  comprised of the
final proceeds from the sale of Windsor  Apartments was received during the year
ended December 31, 2002. A distribution of approximately $2,267,000 comprised of
initial proceeds from the sale of Windsor Apartments and distributions  received
in excess of investment in Local Limited Partnerships of approximately  $102,000
were  received  during  the  year  ended  December  31,  2001.  The  receipt  of
distributions  in the future is dependent  upon the operations of the underlying
properties of the Local Limited  Partnerships  to generate  sufficient  cash for
distribution in accordance with applicable HUD regulations.

As discussed in Note 6 to the Local  Limited  Partnerships'  combined  financial
statements  attached hereto as Exhibit 99.1,  each Local Limited  Partnership in
which the Partnership  currently holds an interest has a note payable due to the
original owner of each Property.  These notes are all past due and are currently
in default.

Harold House and San Juan Del Centro Limited  Partnerships both have notes which
were executed by the respective  Local Limited  Partnerships  with the seller as
part of the  acquisition of the property by the Local Limited  Partnership.  The
notes were nonrecourse  notes secured by a security  interest in all Partnership
interests  in  the  Local  Limited  Partnership  and  are  subordinated  to  the
respective mortgage notes on each property for as long as the mortgage notes are
insured by HUD. Any  payments  due from project  income are payable from surplus
cash,  as  defined  by  the  HUD  Regulatory  Agreement.   Neither  the  Limited
Partnership  nor any partners  thereof,  present or future,  assume any personal
liability for the payment of the notes. The notes were due November 15, 1999 and
December 20, 1999,  respectively.  Each note is in default and the Local Limited
Partnership interests are subject to potential foreclosure.  Continuation of the
Local Limited  Partnerships'  operations in the present form is dependent on its
ability to extend the maturity date of their  respective  notes,  or to repay or
refinance  their note. The financial  statements do not include any  adjustments
which might  result from the  outcome of this  uncertainty.  Each of these Local
Limited Partnerships are actively attempting to sell their net assets.

Esbro and  Mayfair  Manor  Limited  Partnerships  had notes  payable  which were
originally due on October 15, 1997.  Effective February 16, 1998, both Esbro and
Mayfair  Manor Limited  Partnerships  executed  Amended and Restated  Promissory
Notes  for each of their  respective  notes.  The  Amended  Notes  extended  the
maturity of the notes to October 25, 1999.  The Local Limited  Partnerships  did
not have the  resources to pay the amounts due. On July 20, 2001,  the holder of
these notes  exercised its remedy under the security  agreement  with respect to
such notes and was  substituted as the sole limited partner of the Local Limited
Partnerships  in place of the  Partnership  and the  noteholder's  assignee  was
substituted  as the  General  Partner.  No gain or loss has been  recorded  as a
result of the  transfer  of these  partnership  interests.  With the loss of the
Partnership's  interest in Esbro and Mayfair  Manor,  the  Partnership  will not
receive any future  benefits from these Local Limited  Partnerships  and taxable
income  through the date of  foreclosure  will be generated and allocated to the
Partnership's  investors without any distributable  cash. The specific impact of
the tax consequence is dependent upon each partners' individual tax situation.

Hurbell II and Hurbell III Limited Partnerships had notes payable which were due
on November 2, 1999. The Local Limited  Partnerships  did not have the resources
to pay the amounts due. On April 2, 2001 and March 28, 2001,  respectively,  the
holder of these notes  exercised  its remedy under the security  agreement  with
respect to such notes and was  substituted  as the sole  limited  partner of the
Local  Limited  Partnerships  in place of the  Partnership  and the  noteholders
assignee  was  substituted  as the  general  partner.  No gain or loss  has been
recorded as a result of the transfer of these  partnership  interests.  With the
loss  of  the  Partnership's  interest  in  Hurbell  II  and  Hurbell  III,  the
Partnership  will not  receive  any future  benefits  from these  Local  Limited
Partnerships  and  taxable  income  through  the  date  of  foreclosure  will be
generated and allocated to the Partnership's investors without any distributable
cash. The specific impact of the tax consequence is dependent upon each specific
partners' individual tax situation.

On January 31, 2001, Windsor Apartment  Associates Limited  Partnership sold its
investment property to an unaffiliated third party for $4,600,000.  After paying
closing costs, the net proceeds were used to repay the mortgage  encumbering the
property. During the year ended December 31, 2001, the Local Limited Partnership
distributed  approximately $2,267,000 of the net proceeds to the Partnership and
accrued  approximately  $132,000 in distributions to the other partners.  During
the year ended  December 31, 2002,  the Local  Limited  Partnership  distributed
approximately  $43,000  of  final  proceeds  to  partners.   The  Local  Limited
Partnership  recognized  a  gain  on the  sale  of the  investment  property  of
approximately  $667,000 during the year ended December 31, 2001. The Partnership
used the  distribution  funds it  received  to repay a portion  of the  deferred
acquisition  note  payable  and  accrued  interest  which  was  received  by the
Partnership's  interest in the Windsor Apartment Associates Limited Partnership.
The  remaining  unpaid  balance  of  approximately  $708,000  was  forgiven  and
recognized as a gain on debt forgiveness.

On December 28, 2001, West Oak Village Limited  Partnership  sold its investment
property to an  unaffiliated  third party for  approximately  $3,172,000.  After
paying  closing  costs,  the net  proceeds  were  used  to  repay  the  mortgage
encumbering the property. The remaining proceeds were used to repay a portion of
the deferred acquisition note and accrued interest thereon which was held by the
general partner of the Local Limited Partnership. The unpaid portion of the note
was  forgiven  and  treated  as a  capital  contribution  to the  Local  Limited
Partnership.  With the sale of its  property,  the  Partnership  will receive no
future benefits from this Local Limited Partnership.

On February 13, 2003  Caroline  Arms  Limited  Partnership  sold its  investment
property to an  unaffiliated  third party for  $4,600,000.  After paying closing
costs, the net proceeds were used to repay the mortgage encumbering the property
along with other liabilities of the property and the Local Limited  Partnership.
In  accordance  with an  agreement  reached with the note holder of the deferred
acquisition  note 60%, or  approximately  $1,393,000,  of the remainder was paid
against the  principal  of this note and 40%,  or  approximately  $928,000,  was
distributed to the Partnership. The distribution received by the Partnership was
used to pay certain of its liabilities.

The General Partner advanced the Partnership  approximately  $41,000 and $10,000
during the years ended  December  31, 2002 and 2001,  respectively.  Interest is
charged on borrowings at the Chase  Manhattan  Bank prime interest rate plus 2%.
Interest expense was  approximately  $1,000 for the year ended December 31, 2002
and was less than $1,000 for the same period of 2001.  During 2002 and 2001, the
Partnership repaid approximately $38,000 and $33,000,  respectively, of advances
from the General Partner.

As of December 31, 2002, the Partnership owes the General Partner  approximately
$1,358,000 for administrative and reporting services  performed.  The payment of
the unpaid  administrative  and reporting  fees is predicated on the  operations
and/or sale or  refinancing  of the  underlying  properties of the Local Limited
Partnerships.   Subsequent  to  December  31,  2002,  the   Partnership   repaid
approximately  $681,000 to the General  Partner from the proceeds of the sale of
the property owned by Caroline Arms Limited Partnership as discussed above.

Results of Operations

The  Partnership  originally  invested  as a limited  partner  in Local  Limited
Partnerships which operated  twenty-one rental housing  properties.  At December
31, 2002, the  Partnership  continued to hold an interest in three Local Limited
Partnerships.  To the extent  the  Partnership  still has a carrying  basis in a
respective Local Limited  Partnership,  results of operations are  significantly
impacted  by the  Partnership's  share of the  profits  or  losses  in the Local
Limited  Partnership.  These profits or losses include  depreciation and accrued
note  payable  interest  expense  which are  noncash in nature.  However,  as of
December 31, 2002,  the  Partnership  had no carrying basis in its investment in
any of the Local Limited  Partnerships and,  therefore,  reflected no results of
operations  for  its  share  of  profits  or  losses  for  these  Local  Limited
Partnerships.  The Partnership's  investment in Harold House Limited Partnership
was reduced to zero as a result of the recognition of an impairment of the Local
Limited Partnership's assets during 2001.

The  Partnership  recognized  a net loss of  approximately  $80,000 for the year
ended December 31, 2002 compared to net income of approximately $827,000 for the
year ended  December 31,  2001.  Net loss per unit of limited  partnership  unit
decreased  to $4.30,  from net  income  per unit of $44.80  for the years  ended
December  31,  2002 and 2001,  respectively.  The  decrease in net income is due
primarily to the  Partnership's  share of the gain recognized in 2001 related to
the sale of Windsor Apartments and a gain on forgiveness of debt relating to the
note  payable  secured  by  the  Partnership's  interest  in the  Local  Limited
Partnership that owned Windsor Apartments,  and, to a lesser extent, income from
distributions in excess of investment from the Local Limited  Partnerships which
have no remaining investment balance.

The  decrease in total  expenses  was due to  decreases  in  administration  and
reporting  fees  attributable  to  foreclosures  on  four  of the  Partnership's
investments  in Local  Limited  Partnerships  during 2001 and  interest on notes
payable  attributable  to the repayment and  forgiveness  of the note payable in
2001.

The Partnership did not recognize  approximately $325,000 of its allocated share
of losses from three Local Limited  Partnerships for the year ended December 31,
2002,  as  the   Partnership's   net  carrying  basis  in  these  Local  Limited
Partnerships  had been reduced to zero. The  Partnership's  share of losses from
the  Local  Limited  Partnerships,  if not  limited  to its  investment  account
balance,  would  have  decreased   approximately   $1,277,000  between  periods,
primarily due to impairment  losses  recognized at Harold House and Brightwaters
during 2001.

Recent Accounting Pronouncements

In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46  ("FIN46"),
Consolidation of Variable  Interest  Entities,  an Interpretation of ARB No. 51.
FIN46 requires  certain  variable  interest  entities to be  consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional subordinated financial support from other parties. FIN46 is effective
for all new variable  interest  entities  created or acquired  after January 31,
2003. For variable  interest  entities  created or acquired prior to February 1,
2003,  the  provisions  of FIN46 must be applied for the first interim or annual
period  beginning after June 15, 2003. The  Partnership is currently  evaluating
the  effect,  if any,  that the  adoption  of FIN46 will have on its  results of
operations and financial condition.



Item 7.     Financial Statements


NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

LIST OF FINANCIAL STATEMENTS

      Report of Ernst & Young LLP, Independent Auditors

      Balance Sheet - December 31, 2002

      Statements of Operations - Years ended December 31, 2002 and 2001

      Statements  of  Changes  in  Partners'  Capital  (Deficit)  - Years  ended
      December 31, 2002 and 2001

      Statements of Cash Flows - Years ended December 31, 2002 and 2001

      Notes to Financial Statements


                          Independent Auditors' Report



To The Partners of
National Housing Partnership Realty Fund Two
Indianapolis, Indiana


We have audited the accompanying  balance sheet of National Housing  Partnership
Realty Fund Two (the  Partnership)  as of  December  31,  2002,  and the related
statements of operations,  partners' capital (deficit),  and cash flows for each
of the two  years  in the  period  ended  December  31,  2002.  These  financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits. We did not audit the statement of operations,  partners' deficit and
cash flow of Windsor Apartment Associates Limited Partnership for the year ended
December 31, 2001.  The financial  statements of this Local Limited  Partnership
were audited by other  auditors  whose report has been  furnished to us, and our
opinion,  insofar as it relates to the amounts  included for this Local  Limited
Partnership, is based solely on the report of other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We  believe  that our  audits  and the  report of other  auditors
provide a reasonable basis for our opinion.

In our  opinion,  based upon our audits  and the report of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the  financial  position  of  National  Housing  Partnership  Realty Fund Two at
December 31, 2002, and the results of its operations and its cash flows for each
of the two years in the  period  ended  December  31,  2002 in  conformity  with
accounting principles generally accepted in the United States.

As discussed in Note 9 to the financial statements,  the due dates of certain of
the Local Limited  Partnership's notes payable have expired, and therefore,  the
notes are in  default.  These  conditions  raise  substantial  doubt about their
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.

As  discussed in Note 1 to the  financial  statements,  in 2002 the  Partnership
adopted Statement of Financial  Accounting Standards No. 145 "Rescission of FASB
Statements  No.  4,  44,  and  64."  As a  result,  the  accompanying  financial
statements  for 2001,  referred to above,  have been  restated to conform to the
presentation adopted in 2002 in accordance with accounting  principles generally
accepted in the United States.





                                                               Ernst & Young LLP

Indianapolis, Indiana
March 7, 2003

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                                  BALANCE SHEET

                                December 31, 2002
                        (in thousands, except unit data)



                                        ASSETS
Cash and cash equivalents                                            $ --
Investments in and advances to Local Limited
  Partnerships (Note 2)                                                 --
                                                                     $ --


                     LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities:
  Accrued expenses                                                   $ 49
  Administrative and reporting fees payable to
   General Partner (Note 3)                                          1,358
  Advances from General Partner (Note 3)                                13
  Accrued interest on advances from General Partner                      1
                                                                     1,421
Partners' capital (deficit):
  General Partner                                                      628
  Original Limited Partner                                            (182)
  Other Limited Partners - 18,043 investment units                  (1,867)
                                                                    (1,421)
                                                                     $ 0

                       See Accompanying Notes To Financial Statements



                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                            STATEMENTS OF OPERATIONS

                      (in thousands, except per unit data)


<TABLE>
<CAPTION>

                                                               Years Ended December 31,
                                                                   2002         2001
REVENUES:                                                                    (Restated)
<S>                                                      <C>       <C>         <C>
  Share of profits from Local Limited Partnerships (Note 2)        $ --        $ 140
  Distributions in excess of investment in Local Limited
   Partnerships                                                       --          102
  Interest income                                                     --            1
  Gain on forgiveness of debt                                         --          708
                                                                      --          951
COSTS AND EXPENSES:
  Administrative and reporting fees to General Partner
   (Note 3)                                                           20           42
  Interest on notes payable (Note 4)                                  --           10
  Other operating expenses                                            59           72
  Interest on advances from the General Partner                        1           --
                                                                      80          124

NET (LOSS) INCOME                                                 $ (80)       $ 827

ALLOCATION OF NET (LOSS) INCOME:
  General Partner                                                  $ (1)        $ 1
  Original Limited Partner                                            (1)           8
  Other Limited Partners                                             (78)         818

                                                                  $ (80)       $ 827
PER LIMITED PARTNERSHIP UNIT:

NET (LOSS) INCOME PER OTHER LIMITED PARTNERSHIP UNIT             $ (4.30)     $ 44.80
</TABLE>

                       See Accompanying Notes To Financial Statements


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                    STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

                        (in thousands, except unit data)

<TABLE>
<CAPTION>

                                                     1133
                                   The National   Fifteenth       Other
                                     Housing      Street Two     Limited
                                   Partnership    Associates     Partners        Total

<S>                <C>                <C>           <C>          <C>            <C>
Deficit at January 1, 2001            $ (177)       $ (181)      $(1,810)       $(2,168)

Transfer of interest                     805            (8)         (797)            --

Net income for the year ended
   December 31, 2001                       1             8           818            827

Capital (deficit) at
   December 31, 2001                     629          (181)       (1,789)        (1,341)

Net loss for the year ended
   December 31, 2002                      (1)          (1)           (78)           (80)

Capital (deficit) at                  $ 628        $ (182)       $(1,867)       $(1,421)
   December 31, 2002

Percentage interest at
   December 31, 2002 and 2001             1%             1%           98%          100%
                                          (A)           (B)           (C)

(A)   General Partner

(B)   Original Limited Partner

(C)   Consists of 18,043 and 18,138  investment  units at December  31, 2002 and
      2001, respectively. See "Note 7" for further information.

                       See Accompanying Notes To Financial Statements
</TABLE>


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                     Years Ended December 31,
                                                                        2002         2001
CASH FLOWS FROM OPERATING ACTIVITIES:
  Distributions received in excess of investment in
<S>                                                                     <C>          <C>
   Local Limited Partnership                                            $ --         $ 102
  Interest received                                                        --             1
  Operating expenses paid                                                 (51)          (66)
  Advances to Local Limited Partnership in excess of investment            --            (7)
  Payment of interest on deferred acquisition note payable                 --        (1,815)
        Net cash used in operating activities                             (51)       (1,785)

Cash flows from investing activities:
  Distributions from Local Limited Partnerships                            43         2,267
  Advances to Local Limited Partnership                                    --            (3)
        Net cash provided by investing activities                          43         2,264

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on advances from General Partner                               (38)          (33)
  Advances from General Partner                                            41            10
  Payments on deferred acquisition note payable                            --          (452)
        Net cash provided by (used in) financing activities                 3          (475)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                       (5)            4

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              5             1

CASH AND CASH EQUIVALENTS AT END OF YEAR                                $ 0           $ 5

RECONCILIATION OF NET (LOSS) INCOME TO NET CASH USED IN
  OPERATING ACTIVITIES:
   Net (loss) income                                                   $ (80)        $ 827
   Adjustments to reconcile net (loss) income to net cash used
     in operating activities:
      Share of income from Local Limited Partnerships                      --          (140)
      Decrease in accrued interest on deferred
        acquisition notes                                                  --        (1,805)
      Gain on forgiveness of debt                                          --          (708)
      Increase in administrative and reporting fees payable                20            42
      Increase (decrease) in other accrued expenses                         8            (1)
      Increase in accrued interest on advances from General
          Partner                                                           1            --
                                                                           29        (2,612)

Net cash used in operating activities                                  $ (51)       $(1,785)

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
During  2001,  the holder of the  deferred  acquisition  note related to Windsor
Apartments accepted payment of approximately  $2,267,000 in full satisfaction of
all principal and interest due under this note.  The  Partnership  wrote-off the
remaining balance of approximately $708,000 and recognized such amount as a gain
on forgiveness of debt.

                       See Accompanying Notes To Financial Statements
</TABLE>


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                          NOTES TO FINANCIAL STATEMENTS

                                December 31, 2002

(1) SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

National  Housing   Partnership  Realty  Fund  Two  (the  "Partnership"  or  the
"Registrant") is a limited partnership  organized under the laws of the State of
Maryland under the Maryland  Revised Uniform Limited  Partnership Act on January
22,  1985.  The  Partnership  was formed for the  purpose of raising  capital by
offering and selling  limited  partnership  units and then  investing in limited
partnerships ("Local Limited Partnerships"),  each of which owns and operates an
existing  rental housing  project which is financed  and/or operated with one or
more forms of rental assistance or financial assistance from the U.S. Department
of Housing and Urban Development ("HUD").

The General  Partner was  authorized  to raise  capital for the  Partnership  by
offering  and  selling  to  additional  limited  partners  not more than  18,300
interests at a price of $1,000 per interest.  During 1985, the sale of units was
closed after the sale of 18,300 units to limited partners.

During 1985, the  Partnership  acquired 94.5% (98% with respect to allocation of
losses)  of the  limited  partnership  interests  in  twenty-one  Local  Limited
Partnerships.  At December  31,  2002,  the  Partnership  retained an  ownership
interest in three of the original Local Limited Partnerships.

On June 3,  1997,  Apartment  Investment  and  Management  Company,  a  Maryland
corporation  and a publicly  held real estate  investment  trust  ("AIMCO"  and,
together  with its  subsidiaries  and  other  controlled  entities,  the  "AIMCO
Group"),  acquired  all of the  issued  and  outstanding  capital  stock  of NHP
Partners,  Inc., a Delaware  corporation ("NHP  Partners"),  and the AIMCO Group
acquired  all  of  the  outstanding   interests  in  NHP  Partners  Two  Limited
Partnership,  a Delaware limited  partnership ("NHP Partners Two"). NHP Partners
owns all of the  outstanding  capital  stock  of the  National  Corporation  for
Housing Partnerships,  a District of Columbia corporation ("NCHP"), which is the
general  partner of The  National  Housing  Partnership,  a District of Columbia
limited  partnership ("NHP" or the "General  Partner").  Together,  NCHP and NHP
Partners Two own all of the outstanding partnership interests in NHP. NHP is the
general partner of the Registrant. As a result of these transactions,  the AIMCO
Group has  acquired  control  of the  general  partner  of the  Registrant  and,
therefore, may be deemed to have acquired control of the Registrant.

The Original  Limited  Partner of the  Partnership is 1133 Fifteenth  Street Two
Associates,  whose  limited  partners were key employees of NCHP at the time the
Partnership was formed and whose general partner is NHP.

Investments  in Local  Limited  Partnerships  are accounted for using the equity
method and thus are  carried at cost less the  Partnership's  share of the Local
Limited  Partnerships'  losses and distributions plus the Partnership's share of
the Local Limited  Partnerships'  income (see Note 2). An investment  account is
maintained for each of the limited  partnership  investments  and losses are not
taken once an investment  account has been decreased to zero. Cash distributions
are limited by the Regulatory  Agreements between the Local Limited Partnerships
and HUD to the extent of surplus cash as defined by HUD.  Distributions received
from Local Limited  Partnerships in which the Partnership's  investment  account
has been decreased to zero are recorded as revenue in the year received. Once an
investment account has been reduced to zero, profits reported by a Local Limited
Partnership  are not  recognized  by the  Partnership  until such profits  equal
losses not recognized plus distributions  received and previously  recognized as
revenue. Advances to Local Limited Partnerships are included with Investments in
Local  Limited  Partnerships  to the extent that the advances are not  temporary
advances of working capital.

Cash and Cash Equivalents

The  Partnership  considers all highly liquid debt  instruments  purchased  with
original maturities of three months or less to be cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial  Instruments",  as amended by SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments",
requires  disclosure  of fair value  information  about  financial  instruments,
whether or not  recognized  in the  balance  sheet,  when it is  practicable  to
estimate that value and excessive  costs would not be incurred.  To estimate the
fair value of the  balances  due to the General  Partner  and  accrued  interest
thereon,  excessive costs would be incurred and, therefore, no estimate has been
made.  The  Partnership  believes  that the  carrying  value of other assets and
liabilities   reported  on  the  balance  sheet  that  require  such  disclosure
approximate fair value.

Segment Reporting

SFAS  No.  131,   "Disclosure  about  Segments  of  an  Enterprise  and  Related
Information"  established standards for the way that public business enterprises
report information about operating  segments in annual financial  statements and
requires that those  enterprises  report  selected  information  about operating
segments in interim financial reports. It also established standards for related
disclosures  about products and services,  geographic areas and major customers.
Under the criteria  established  by SFAS No. 131, the  Partnership  has only one
reportable segment.

Recent Accounting Pronouncements

In August 2001, the Financial  Accounting  Standards  Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived  Assets".  SFAS No. 144
provides  accounting  guidance for  financial  accounting  and reporting for the
impairment or disposal of long-lived  assets.  SFAS No. 144 supersedes  SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed Of". SFAS No. 144 is effective for fiscal years  beginning
after December 15, 2001. The Partnership  adopted SFAS No. 144 effective January
1, 2002.  The adoption of which did not have a material  effect on the financial
position or results of operations of the Partnership.

In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No. 145,
"Rescission of FASB  Statements  No. 4, 44 and 64". SFAS No. 4 "Reporting  Gains
and Losses from Extinguishment of Debt," required that all gains and losses from
extinguishment  of  debt  be  aggregated  and,  if  material,  classified  as an
extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and
losses from extinguishment of debt should only be classified as extraordinary if
they are  unusual in nature and occur  infrequently.  Neither of these  criteria
applies to the Partnership. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002 with early adoption an option.  The Partnership  adopted SFAS
No. 145 effective  April 1, 2002. As a result,  the  accompanying  statements of
operations  have been restated to reflect the gain on forgiveness of the balance
of the note payable secured by the Partnership's  interest in Windsor Apartments
Associates Limited Partnership in 2001 (see Note 2 - Investments in and Advances
to Local Limited  Partnerships)  in operations  rather than as an  extraordinary
item.

In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46  ("FIN46"),
Consolidation of Variable  Interest  Entities,  an Interpretation of ARB No. 51.
FIN46 requires  certain  variable  interest  entities to be  consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional subordinated financial support from other parties. FIN46 is effective
for all new variable  interest  entities  created or acquired  after January 31,
2003. For variable  interest  entities  created or acquired prior to February 1,
2003,  the  provisions  of FIN46 must be applied for the first interim or annual
period  beginning after June 15, 2003. The  Partnership is currently  evaluating
the  effect,  if any,  that the  adoption  of FIN46 will have on its  results of
operations and financial condition.

(2) INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS

During 1985, the Partnership  acquired a 94.5% limited partnership interest (98%
with respect to allocation of losses) in twenty-one Local Limited  Partnerships.
At December 31,  2002,  the  Partnership  continues to hold an interest in three
Local Limited  Partnerships:  San Juan del Centro Limited Partnership,  Caroline
Arms Limited Partnership and Harold House Limited  Partnership.  During the year
ended  December  31,  2002,  the  Partnership  received  its  share of the final
distribution of Windsor Apartments  Associates Limited Partnership and the Local
Limited Partnership was liquidated.  During 2001, the Partnership's interests in
Hurbell II and III, Esbro and Mayfair Manor Limited Partnerships were foreclosed
upon. Also during 2001, the properties  owned by Windsor  Apartments  Associates
and West Oak Village Limited Partnership were sold.

Notes payable were executed by the Local  Limited  Partnerships  with the former
owners  as  part of the  acquisition  of the  properties  by the  Local  Limited
Partnerships.  These notes bear simple interest at rates of 9% or 10% per annum.
The  notes  are  nonrecourse  notes  secured  by  a  security  interest  in  all
partnership  interests  in the  respective  Local  Limited  Partnership  and are
subordinated to the respective mortgage note for as long as the mortgage note is
insured by HUD.  Any  payments  due from  project  income are  payable  from the
respective  Local  Limited   Partnership's  surplus  cash,  as  defined  by  the
respective HUD Regulatory Agreement. The notes may be repaid in whole or in part
at any time without penalty.  Neither the respective  Local Limited  Partnership
nor any partner thereof,  present or future,  assumes any personal liability for
the payment of these notes.

These notes mature as follows (in thousands):

<TABLE>
<CAPTION>

Local Partnership                            Due Date   Note Amount  Accrued Interest

<S>                                          <C>   <C>    <C>             <C>
Caroline Arms Limited Partnership (A)        11/15/99     $ 1,561         $ 2,830
Harold House Limited Partnership             11/15/99         599           1,087
San Juan Del Centro Limited Partnership      12/20/99       1,458           2,366

      Total Due and Delinquent                              3,618           6,283
</TABLE>

(A) Property sold in February 2003.

Harold House and San Juan Del Centro Limited  Partnerships both have notes which
were executed by the respective  Local Limited  Partnerships  with the seller as
part of the  acquisition of the property by the Local Limited  Partnership.  The
notes were nonrecourse  notes secured by a security  interest in all Partnership
interests  in  the  Local  Limited  Partnership  and  are  subordinated  to  the
respective mortgage notes on each property for as long as the mortgage notes are
insured by HUD. Any  payments  due from project  income are payable from surplus
cash,  as  defined  by  the  HUD  Regulatory  Agreement.   Neither  the  Limited
Partnership  nor any partners  thereof,  present or future,  assume any personal
liability for the payment of the notes. The notes were due November 15, 1999 and
December 20, 1999,  respectively.  Each note is in default and the Local Limited
Partnership interests are subject to potential foreclosure.  Continuation of the
Local Limited  Partnerships'  operations in the present form is dependent on its
ability to extend the maturity date of their  respective  notes,  or to repay or
refinance  their note. The financial  statements do not include any  adjustments
which might  result from the  outcome of this  uncertainty.  Each of these Local
Limited Partnerships are actively attempting to sell their net assets.

Esbro and  Mayfair  Manor  Limited  Partnerships  had notes  payable  which were
originally due on October 15, 1997.  Effective February 16, 1998, both Esbro and
Mayfair  Manor Limited  Partnerships  executed  Amended and Restated  Promissory
Notes  for each of their  respective  notes.  The  Amended  Notes  extended  the
maturity of the notes to October 25, 1999.  The Local Limited  Partnerships  did
not have the  resources to pay the amounts due. On July 20, 2001,  the holder of
these notes  exercised its remedy under the security  agreement  with respect to
such notes and was  substituted as the sole limited partner of the Local Limited
Partnerships  in place of the  Partnership  and the  noteholder's  assignee  was
substituted  as the  General  Partner.  No gain or loss has been  recorded  as a
result of the  transfer  of these  partnership  interests.  With the loss of the
Partnership's  interest in Esbro and Mayfair  Manor,  the  Partnership  will not
receive any future  benefits from these Local Limited  Partnerships  and taxable
income  through the date of  foreclosure  will be generated and allocated to the
Partnership's  investors without any distributable  cash. The specific impact of
the tax consequence is dependent upon each partners' individual tax situation.

Hurbell II and Hurbell III Limited Partnerships had notes payable which were due
on November 2, 1999. The Local Limited  Partnerships  did not have the resources
to pay the amounts due. On April 2, 2001 and March 28, 2001,  respectively,  the
holder of these notes  exercised  its remedy under the security  agreement  with
respect to such notes and was  substituted  as the sole  limited  partner of the
Local  Limited  Partnerships  in place of the  Partnership  and the  noteholders
assignee  was  substituted  as the  general  partner.  No gain or loss  has been
recorded as a result of the transfer of these  partnership  interests.  With the
loss  of  the  Partnership's  interest  in  Hurbell  II  and  Hurbell  III,  the
Partnership  will not  receive  any future  benefits  from these  Local  Limited
Partnerships  and  taxable  income  through  the  date  of  foreclosure  will be
generated and allocated to the Partnership's investors without any distributable
cash. The specific impact of the tax consequence is dependent upon each specific
partners' individual tax situation.

On January 31, 2001, Windsor Apartment  Associates Limited  Partnership sold its
investment property to an unaffiliated third party for $4,600,000.  After paying
closing costs, the net proceeds were used to repay the mortgage  encumbering the
property. During the year ended December 31, 2001, the Local Limited Partnership
distributed  approximately $2,267,000 of the net proceeds to the Partnership and
accrued  approximately  $132,000 in distributions to the other partners.  During
the year ended  December 31, 2002,  the Local  Limited  Partnership  distributed
approximately $43,000 of final proceeds to the other partners. The Local Limited
Partnership  recognized  a  gain  on the  sale  of the  investment  property  of
approximately  $667,000 during the year ended December 31, 2001. The Partnership
used the  distribution  funds it  received  to repay a portion  of the  deferred
acquisition  note  payable  and  accrued  interest  which  was  secured  by  the
Partnership's  interest in the Windsor Apartment Associates Limited Partnership.
The  remaining  unpaid  balance  of  approximately  $708,000  was  forgiven  and
recognized as a gain on debt forgiveness.

On December 28, 2001, West Oak Village Limited  Partnership  sold its investment
property to an  unaffiliated  third party for  approximately  $3,172,000.  After
paying  closing  costs,  the net  proceeds  were  used  to  repay  the  mortgage
encumbering the property. The remaining proceeds were used to repay a portion of
the deferred acquisition note and accrued interest thereon which was held by the
general partner of the Local Limited Partnership. The unpaid portion of the note
was  forgiven  and  treated  as a  capital  contribution  to the  Local  Limited
Partnership.  With the sale of its  property,  the  Partnership  will receive no
future benefits from this Local Limited Partnership.

On February 13, 2003  Caroline  Arms  Limited  Partnership  sold its  investment
property to an  unaffiliated  third party for  $4,600,000.  After paying closing
costs, the net proceeds were used to repay the mortgage encumbering the property
along with other liabilities of the property and the Local Limited  Partnership.
In  accordance  with an  agreement  reached  with note  holder  of the  deferred
acquisition  note 60% or  approximately  $1,393,000  of the  remainder  was paid
against the  principal  of this note and 40%,  or  approximately  $928,000,  was
distributed to the Partnership. The distribution received by the Partnership was
used to pay certain of its liabilities.

Since the Partnership,  as a limited partner, does not exercise control over the
activities of the Local Limited  Partnerships in accordance with the partnership
agreements,  these investments are accounted for using the equity method.  Thus,
the  investments are carried at cost less the  Partnership's  share of the Local
Limited  Partnerships'  losses and distributions plus the Partnership's share of
Local  Limited  Partnerships'  income.  However,  since the  Partnership  is not
legally liable for the obligations of the Local Limited Partnerships, and is not
otherwise committed to provide additional support to them, it does not recognize
losses once its investment in each of the individual Local Limited  Partnerships
reduced for its share of losses and cash  distributions,  reaches zero.  Once an
investment  account has been reduced to zero, income reported by a Local Limited
Partnership is not recognized by the Partnership until such income equals losses
not recognized plus distributions received and previously recognized as revenue.
As a result,  the  Partnership  did not  recognize  approximately  $325,000  and
$1,602,000 of losses from three and seven Local Limited Partnerships during 2002
and 2001, respectively. During 2002 and 2001, the Partnership's share of profits
in  one  Local  Limited   Partnership  of   approximately   $1,000  and  $6,000,
respectively,  were  offset  against  prior year  losses not  recognized.  As of
December 31, 2002 and 2001, the  Partnership  has not  recognized  approximately
$3,279,000 and $2,959,000,  respectively,  of its allocated  cumulative share of
losses from three Local Limited  Partnerships  in which its  investment has been
reduced to zero.

The  Partnership  made  advances  of $10,000 to the Local  Limited  Partnerships
during 2001 and no advances in 2002.  During 1993 the  Partnership  re-evaluated
the timing of the  collectibility  of the advances and determined,  based on the
Local Limited Partnerships' operations,  that such advances are not likely to be
collected.  For accounting purposes, the Partnership treated the advance balance
as additional  investments  in the Local Limited  Partnerships.  The balance was
then reduced to zero,  with a  corresponding  charge to  operations to reflect a
portion of the previously unrecognized losses on investments.

Advances  to the  Local  Limited  Partnership  remain  due  and  payable  to the
Partnership.  Interest is calculated at the Chase Manhattan Bank prime rate plus
2%.  Payment of principal  and  interest is  contingent  upon the Local  Limited
Partnerships having available surplus cash, as defined by HUD regulations,  from
operations  or from the sale or  refinancing  of the Local  Limited  Partnership
Properties.  Any future  repayment of advances or interest  will be reflected as
Partnership income when received.

Summaries of the combined  balance  sheet of the  aforementioned  Local  Limited
Partnerships as of December 31, 2002 and the combined  results of operations for
the years ended December 31, 2002 and 2001, are as follows:

                           CONDENSED COMBINED BALANCE SHEET
                          OF THE LOCAL LIMITED PARTNERSHIPS
                                    (in thousands)
                                                              December 31, 2002
Assets:
  Land                                                               $ 1,211
  Buildings and improvements, net of accumulated
   depreciation of approximately $7,543                                7,434
  Other                                                                1,622

                                                                     $10,267
Liabilities:
  Mortgage notes payable                                             $ 3,375
  Notes payable                                                        3,618
  Accrued interest on notes payable                                    6,283
  Other liabilities                                                      696

Partners' Deficit:
  National Housing Partnership Realty Fund Two                        (3,154)
  Other partners                                                        (551)
                                                                      (3,705)

                                                                     $10,267

<TABLE>
<CAPTION>

                     CONDENSED COMBINED STATEMENTS OF OPERATIONS
                          OF THE LOCAL LIMITED PARTNERSHIPS
                                    (in thousands)
                                                         Years Ended December 31,
                                                           2002             2001

<S>                                                      <C>              <C>
Revenues                                                 $ 2,806          $ 2,742

Expenses:
  Operating expenses                                       2,044            1,824
  Financial expenses - primarily interest                     22               25
  Interest on notes payable                                  363              363
  Depreciation and amortization                              776              723
  Impairment loss                                             --              535
                                                           3,205            3,470
Loss from continuing operations                             (399)            (728)
Loss from discontinued operations                             --           (1,287)
Gain on sale of discontinued operations                       --              667
Net loss                                                  $ (399)         $(1,348)

                       See Accompanying Notes To Financial Statements
</TABLE>

The combined financial statements of the Local Limited Partnerships are prepared
on the accrual  basis of  accounting.  All Local  Limited  Partnerships  operate
rental housing projects organized under Section 236 of the National Housing Act.
Each of the Local Limited  Partnerships  receives some form of rental assistance
from HUD.  During  the year  ended  December  31,  2002 and 2001,  the  projects
received a total of approximately  $1,436,000 and $4,366,000,  respectively,  of
rental assistance from HUD.

Regulation of Affordable Housing

The  Federal  Housing  Administration  ("FHA")  has  contracted  with the  three
subsidized  rental  projects  under  Section  8 of Title II of the  Housing  and
Community  Development  Act of 1974 to make housing  assistance  payments to the
Local  Limited  Partnerships  on behalf of qualified  tenants.  The terms of the
agreements are one or five years with one year renewal options.

In 1997 and again in 1999,  Congress  enacted new ways to determine  rent levels
for properties  receiving HUD's rental  assistance under Section 8 of the United
States  Housing Act of 1937 ("Section 8") after the expiration of their original
Section 8 contracts.  This new legislation  will affect 391 units, or 90% of the
units in which the Partnership has invested.  On October 27, 1997, the President
signed into law the Multifamily Assisted Housing Reform and Affordability Act of
1997 (the "1997 Housing Act").  Under the 1997 Housing Act,  certain  properties
assisted under expiring  Section 8 contracts and which have been receiving rents
deemed to be above  comparable  market  levels for  unassisted  properties,  and
financed  with  HUD-insured  mortgage  loans,  will  have,  upon the  renewal or
extension  of  Section  8  contracts,  rents  marked  to  market.  This  will be
accomplished  in  various  ways,  the goal  being to  reduce  Section 8 rents to
comparable  market  levels,  thereby  reducing  the  federal  Section  8 subsidy
obligation,  and (ideally) by simultaneously lowering, or eliminating,  required
debt  service  costs  (and  decreasing  operating  costs)  as  needed  to ensure
financial  viability at the reduced rent levels. The program also incorporates a
requirement  to  perform  any  repair  or  rehabilitation  deemed  necessary  by
depositing  funds to cover the first twelve month's work, and making  sufficient
monthly reserve  deposits to ensure work required in succeeding  years. In 1999,
Congress  enacted  legislation  (the "1999  Housing  Act") that  expanded on and
clarified  the  provisions  of  the  1997  Housing  Act,  including   permitting
properties whose Section 8 rents were below comparable  market rents to increase
their Section 8 rents to market.

The 1997 and 1999  Housing  Acts  (together,  the  "Housing  Acts")  permit  the
retention of project  based  Section 8 contracts  for most  properties in rental
markets  with a limited  supply of  affordable  housing or where the tenants are
particularly  vulnerable  populations  including the elderly,  disabled or large
families.  In rental markets without a limited supply of affordable housing, the
Housing Acts provide for phasing out project  based  subsidies,  converting  the
assistance to tenant based assistance or vouchers.  Under a tenant based system,
rental  vouchers  would be issued to  qualified  tenants who then could elect to
reside at  properties  of their  choice,  including  the  property in which they
currently  reside.   Voucher  rent  levels  are  established  by  local  housing
authorities  under  guidelines set by HUD. While the Partnership does not expect
the provisions of the Housing Acts to result in a significant  number of tenants
relocating from the properties  owned by the Local Limited  Partnerships,  there
can be no  assurance  that  the  new  legislation  will  not  significantly  and
adversely  affect  the  operations  of  the  properties  of  the  Local  Limited
Partnerships.


The following  table  indicates the year within which the Section 8 rent subsidy
contracts expire:

                                      Subsidized Units       Subsidized Units
                                        Expiring as a          Expiring as a
                       Number of     Percentage of Total       Percentage of
                         Units        Subsidized Units          Total Units

2003                      391               100%                    90%

All of the  units  which  receive  rent  subsidies  from  Section  8 have  their
contracts  which expire  during the year ending  December 31, 2003.  The Housing
Acts provide for several  options  under which a Local Limited  Partnership  may
elect, as appropriate, to renew its Section 8 contracts: (1) marking rents up to
the  comparable  market rent, if current  rents are below  market;  (2) renewing
rents at the  current  level,  if the level  does not exceed  comparable  market
rents, and receiving an operating cost adjustment factor (an "OCAF") or a budget
based rent increase, as long as the rents do not exceed comparable market rents;
(3) marking rents down to comparable  market rents; (4) marking their rents down
to an "exception rent" level,  when comparable  market rents would be too low to
permit  continued  operation of the property  under the Section 8 program,  even
with full debt  restructuring;  or (5) opting out of the section 8 program.  For
properties   assisted  by  Section  8,  but  not  subject  to  these  provisions
(including,  but not limited to,  properties  which do not have  underlying  HUD
insured  mortgages,  or which have been financed  through  certain state housing
finance agency or bond-financed  mortgage programs),  rents will be continued at
current  levels,  plus  an OCAF or (in  some  instances)  a  budget  based  rent
increase.  In addition,  properties can opt out of the Section 8 program only if
very strict notice requirements have been met, including a requirement that HUD,
the tenants,  and the local  governing  body, be given twelve months notice of a
Local  Limited  Partnership's  intention  to opt  out of the  program  prior  to
contract termination.

Each of the options  requires an application to HUD, and, to a greater or lesser
extent,  the  fulfillment  of certain  procedural  submission  requirements  and
financial   requirements,   which  must  be  weighed  in  connection   with  the
determination of which option to select.

The Section 8  requirements  are separate  from the  requirements  governing the
underlying  HUD-insured  mortgage  loans,  and any  other  HUD,  state  or local
requirements, all of which must be fulfilled,  irrespective of the option chosen
with regard to the continuation of Section 8 participation.

Depreciation  is calculated  generally using the  straight-line  method over the
estimated useful lives of the related assets.

The mortgage  notes  payable are insured by the Federal  Housing  Administration
(FHA) and collateralized by first deeds of trust on the rental  properties.  The
notes  bear  interest  at rates  ranging  from 8.5% to 9% per  annum.  FHA makes
subsidy payments  directly to the mortgage lender reducing the monthly principal
and interest  payments of the project owner to an effective  interest rate of 1%
over the  forty-year  term of the  notes.  The  liability  of the Local  Limited
Partnerships  under the mortgage notes is limited to the underlying value of the
real estate collateral plus other amounts deposited with lenders.

SFAS No. 144  "Accounting  for the Impairment or Disposal of Long-Lived  Assets"
requires an impairment loss to be recognized if the sum of estimated future cash
flows  (undiscounted  and without  interest  charges) is less than the  carrying
amount of rental property.  The impairment loss would be the amount by which the
carrying  value  exceeds  the fair value of the rental  property.  If the rental
property is to be disposed  of, fair value is  calculated  net of costs to sell.
During 2001, Harold House and West Oak Village Limited  Partnerships  recognized
impairment  losses on their  rental  properties  of  approximately  $535,000 and
$634,000,  respectively.  There were no impairment  losses recognized for any of
the properties during 2002.

Additionally, regardless of whether an impairment loss of an individual property
has been  recorded or not, the carrying  value of each of the rental  properties
may still exceed their fair market value as of December 31, 2002. Should a Local
Limited  Partnership  be forced to  dispose of any of its  properties,  it could
incur a loss.

(3) TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL PARTNER

The Partnership accrued administrative and reporting fees payable to the General
Partner of approximately $20,000 and $42,000 during 2002 and 2001, respectively.
No payments  were made during 2002 or 2001 for these fees.  The balance  owed to
the General  Partner for these fees is  approximately  $1,358,000 as of December
31, 2002.

If paid at all, the accrued  administrative  and  reporting  fees payable to the
General  Partner  will be  paid  as  cash  flow  permits  or  from  the  sale or
refinancing  of one or more of the  underlying  properties  of the Local Limited
Partnerships.   Subsequent  to  December  31,  2002,  the   Partnership   repaid
approximately  $681,000 to the General  Partner from the proceeds of the sale of
the property owned by Carolina Arms Limited Partnership.

The General Partner advanced the Partnership  approximately  $41,000 and $10,000
during the years ended  December  31, 2002 and 2001,  respectively.  In 2002 and
2001, the  Partnership  repaid  advances of  approximately  $38,000 and $33,000,
respectively,  to the General Partner.  Interest is charged on borrowings at the
Chase  Manhattan Bank prime interest rate plus 2% and amounted to  approximately
$1,000 in 2002 and less than $1,000 in 2001.  Chase Manhattan  Bank's prime rate
was 4.25% at December  31,  2002.  At December 31,  2002,  the  Partnership  had
$14,000 in unpaid borrowings and accrued interest due to the General Partner.

An affiliate of the General  Partner,  NHP Management  Company  ("NHPMC") is the
project  management  agent for the projects.  NHPMC and other affiliates of NCHP
earned  approximately  $268,000  and  $381,000  for  management  fees and  other
services  provided  to the  Local  Limited  Partnerships  during  2002 and 2001,
respectively.

Personnel  working  at the  project  sites,  which are  managed  by  NHPMC,  are
employees of NHPMC.  The projects  reimbursed  NHPMC for the actual salaries and
related benefits of such employees. Total reimbursements earned for salaries and
benefits  for the years ended  December  31, 2002 and 2001,  were  approximately
$333,000 and $713,000, respectively.

(4) NOTE PAYABLE

On January 31, 2001, Windsor Apartment  Associates Limited  Partnership sold its
investment property to an unaffiliated third party for $4,600,000.  After paying
closing costs, the net proceeds were used to repay the mortgage  encumbering the
property.  The  Partnership  received  approximately  $2,267,000  from the Local
Limited  Partnership as its portion of the sales proceeds  during the year ended
December 31, 2001.  The  Partnership  used these funds to repay a portion of the
note  payable  and  accrued  interest  which was  secured  by the  Partnership's
interest in the Windsor Apartments Associates Limited Partnership. The remaining
unpaid balance of  approximately  $708,000 was forgiven and recognized as a gain
on forgiveness of debt.

(5) INCOME TAXES

The  Partnership  is not taxed on its income.  The  partners  are taxed in their
individual  capacities based upon their  distributive share of the Partnership's
taxable income and are allowed the benefits to be derived from off-setting their
distributive  share of the tax losses against  taxable income from other sources
subject to passive  loss rule  limitations.  The taxable  income or loss differs
from  amounts  included in the  statements  of  operations  because of different
methods used in  determining  the losses of the Local  Limited  Partnerships  as
discussed  below. The tax loss is allocated to partner groups in accordance with
Section  704(b) of the Internal  Revenue Code and  therefore is not  necessarily
proportionate to the interest percentage owned.

A reconciliation follows (in thousands):

                                                  Years Ended December 31,
                                                     2002            2001

Net (loss) income per financial statements          $ (80)          $ 827

Add (deduct):
  Interest on notes payable                             --             (49)
  Gain on foreclosure                                   --           9,605
  Partnership's share of Local Limited
   Partnerships' income                                798           4,214
  Other                                                 23             533

Income per tax return                               $ 741          $15,130


The following is a reconciliation between the Partnership's reported amounts and
the Federal tax basis of net liabilities at December 31, 2002 (in thousands):

Net deficit as reported                                        $(1,421)

Add (deduct):
  Investment in Partnerships                                    (4,618)
  Other                                                            483

Net deficit - Federal tax basis                                $(5,556)

(6)   ALLOCATION  OF RESULTS OF  OPERATIONS,  CASH  DISTRIBUTIONS  AND GAINS AND
      LOSSES FROM SALE OR REFINANCING

Cash received from the sale or  refinancing  of any  underlying  property of the
Local Limited  Partnerships,  after payment of the applicable  mortgage debt and
the payment of all expenses related to the transaction,  is to be distributed in
the following manner:

      First,  to the General  Partner for any unrepaid loans to the  Partnership
      and any unpaid fees (other than disposition and refinancing fees);

      Second,  to the  establishment  of any reserves which the General  Partner
      deems  reasonably  necessary  for  contingent,   unmatured  or  unforeseen
      liabilities or obligations of the Partnership.

      Third, to the Limited Partners, until the Limited Partners have received a
      return of their  capital  contributions,  after  deduction  for prior cash
      distributions  from sales or refinancing,  but without deduction for prior
      cash distribution from operations;

      Fourth, to the Limited  Partners,  until each Limited Partner has received
      an amount equal to a  cumulative  noncompounded  12% annual  return on its
      capital contribution, after deduction of (a) an amount equal to 50% of the
      tax  losses   allocated  to  the  Limited   Partner  and  (b)  prior  cash
      distributions  from operations and prior cash  distributions from sales or
      refinancing;

      Fifth,  to the General  Partner  until the General  Partner has received a
      return of its  capital  contributions,  after  deduction  for  prior  cash
      distributions  from sales or refinancing,  but without deduction for prior
      cash distributions from operations;

      Sixth,  to the  General  Partner for  disposition  and  refinancing  fees,
      including prior  disposition and refinancing  fees which have been accrued
      but are unpaid;

      Seventh,  to the partners  with  negative  capital  accounts to bring such
      accounts to zero; and

      Finally,  85% of the remaining sales proceeds to the Limited  Partners and
      15% to the General Partner.

Net income or loss from  operations of the  Partnership  is allocated 98% to the
Limited  Partners,  1% to the  General  Partner and 1% to the  Original  Limited
Partner.   Cash  distributions   from  operations,   after  payment  of  certain
obligations  (including  reimbursement  on a cumulative basis of direct expenses
incurred by the General  Partner or its  affiliates in managing the  properties)
and  payment  of  annual  cumulative   administrative  and  reporting  fees,  is
distributed 98% to the Limited Partners, 1% to the General Partner and 1% to the
Original Limited Partner.

Gain for Federal income tax purposes realized in the event of dissolution of the
Partnership  or  upon  sale  of  interests  in a Local  Limited  Partnership  or
underlying property will be allocated in the following manner:

      First, to the Limited Partners in an amount up to the negative balances of
      the capital  accounts of Limited  Partners in the same  proportion as each
      Limited  Partner's  negative  capital  account  bears  to  such  aggregate
      negative capital accounts;

      Second,  to the General  Partner in an amount up to the General  Partner's
      negative capital account, if any;

      Third,  to the Limited  Partners,  up to the  aggregate  amount of capital
      contributions  of the Limited  Partners,  after  deduction  for prior cash
      distributions  from sales or refinancing,  but without deduction for prior
      cash  distributions  from  operations,  in the same  proportion  that such
      Limited  Partner's  capital  contribution  bears to the  aggregate  of all
      Limited Partners' capital contributions;

      Fourth,  to the  Limited  Partners,  until each  Limited  Partner has been
      allocated  such an amount equal to a cumulative  noncompounded  12% annual
      return on their  capital  contribution,  after  deduction of (a) an amount
      equal to 50% of the tax losses  allocated  to the Limited  Partner and (b)
      prior cash distributions from operations and prior cash distributions from
      sales or refinancing;

      Fifth,  to the  General  Partner,  up to the  aggregate  amount of capital
      contributions made by the General Partner,  after deduction for prior cash
      distributions  from sales or refinancing,  but without deduction for prior
      cash distributions from operations; and

      Finally,  85% of the remaining gain to the Limited Partners and 15% to the
      General Partner.

Losses for Federal  income tax purposes  realized in the event of dissolution of
the  Partnership  or upon sale of interest  in a Local  Limited  Partnership  or
underlying property will be allocated 85% to the Limited Partners and 15% to the
General Partner.


(7) ABANDONMENT OF LIMITED PARTNERSHIP UNITS

In December 2002, the number of limited  partnership units decreased by 95 units
due to limited partners abandoning their units. In abandoning his or her Limited
Partnership  Unit(s),  a limited  partner  relinquishes  all right,  title,  and
interest in the partnership as of the date of abandonment.  However, the limited
partner is allocated  his or her share of net income or loss for that year.  The
income or loss per other limited partnership unit in the accompanying statements
of operations is calculated based on the number of units outstanding  during the
year or 18,138 units. There were 120 units abandoned during 2001.

(8) LEGAL PROCEEDINGS

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

(9) GOING CONCERN

All of the Local Limited  Partnership's notes payable are past due (see Note 2).
Therefore, there is the possibility that the Partnership will lose its ownership
interest  in  the  Local  Limited   Partnerships   through  foreclosure  by  the
noteholder.  Continuation of the Local Limited  Partnerships'  operations in the
present form is dependent on their  ability to extend the maturity date of these
notes or to repay or  refinance  the  notes.  The  financial  statements  do not
include any adjustments which might result from the outcome of this uncertainty.


(10)  REAL ESTATE AND ACCUMULATED  DEPRECIATION OF LOCAL LIMITED PARTNERSHIPS IN
      WHICH NHP REALTY FUND TWO HAS INVESTED

<TABLE>
<CAPTION>

                                                                            Cost
                                                                       Capitalized
                                       Initial Cost                     (Removed)
                                     To Local Limited                   Subsequent
                                        Partnership                   to Acquisition
                                      (in thousands)                  (in thousands)

                                                    Buildings
                                                   and Related
                                                     Personal                Carrying Cost
        Description         Encumbrances   Land      Property   Improvements  Adjustments

Caroline Arms Limited
<S>                             <C>       <C>        <C>          <C>            <C>
  Partnership                   (1)       $ 260      $ 4,497      $ 2,855        $ --
Harold House Limited
  Partnership                   (1)           80       1,782        1,798          (535)
San Juan Del Centro
  Limited Partnership           (1)          725       3,360        1,366            --

  Totals                                 $ 1,065     $ 9,639      $ 6,019       $ (535)
</TABLE>


<TABLE>
<CAPTION>

                              Gross Amount At Which
                                    Carried
                              At December 31, 2002
                                 (in thousands)

                               Buildings
                                  And
                                Related
                               Personal            Accumulated    Date of     Date   Depreciable
     Description        Land   Property  Total(2) Depreciation  ConstructionAcquired Life-Years
                                           (3)         (3)
                                                 (in thousands)
Caroline Arms Limited
<S>                    <C>      <C>      <C>         <C>           <C>       <C>        <C>
  Partnership          $ 325    $ 7,287  $ 7,612     $(3,549)      1972      04/85      5-50
Harold House Limited
  Partnership             151     2,974    3,125      (1,578)      1973      05/85      5-50
San Juan Del Centro
  Limited Partnership     735     4,716    5,451      (2,416)      1970      04/85      5-50

  Totals              $ 1,211   $14,977  $16,188     $(7,543)
</TABLE>

(1)   Schedule of Encumbrances (in thousands)

<TABLE>
<CAPTION>

                                                               Notes
                                                            Payable and
                                               Mortgage       Accrued
Partnership Name                                Notes         Interest       Total

<S>                                            <C>            <C>           <C>
Caroline Arms Limited Partnership              $ 1,524        $ 4,391       $ 5,915
Harold House Limited Partnership                   588          1,686         2,274
San Juan del Centro Limited Partnership          1,263          3,824         5,087

  Total                                        $ 3,375        $ 9,901       $13,276
</TABLE>

(2)   The  aggregate  cost of real  estate for  Federal  income tax  purposes at
      December  31,  2002  is   approximately   $15,798,000,   and   accumulated
      depreciation  for Federal  income tax  purposes  at  December  31, 2002 is
      approximately $12,516,000.

(3)   Reconciliation of real estate (in thousands)


                                                 Years Ended December 31,
                                                   2002           2001

Balance at beginning of period                   $ 15,643       $ 44,459
Improvements during the period                        545          1,146
Disposals of rental properties                         --        (28,793)
Impairment losses on rental property                   --         (1,169)
Balance at end of period                         $ 16,188       $ 15,643


      Reconciliation of accumulated depreciation (in thousands)

                                                   2002           2001

Balance at beginning of period                    $ 6,767       $ 18,314
Depreciation expense for the period                   776          1,262
Disposals of rental properties                         --        (12,809)
Balance at end of period                          $ 7,543       $ 6,767


Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

None.

                                    PART III

Item 9.     Directors and Executive Officers of the Registrant

The Partnership has no directors, executive officers or significant employees of
its own.

The names, ages, business experience and involvement in legal proceedings of the
directors  and   executive   officers  of  National   Corporation   for  Housing
Partnerships   (NCHP),   the  sole  general  partner  of  The  National  Housing
Partnership,  the sole general  partner of the  Partnership,  and certain of its
affiliates, are as follows:

Directors of NCHP

Two individuals comprise the Board of Directors of NCHP.

Ronald D.  Monson  (age  46),  has been  Executive  Vice  President  and Head of
Property Operations of NCHP and AIMCO since February 2001. Previously, he served
as Regional Vice President from March 1997 to May 1998,  when he was promoted to
Senior Vice President of the Midwest Division.  Mr. Monson served as Senior Vice
President of the Midwest  Division  until  January  1999,  when he was appointed
Senior  Vice  President  of the Far West  Division.  From April 1994 to February
1997,  Mr. Monson was a Regional  Vice  President  for Great  Atlantic  Property
Management.

Patrick J. Foye (age 45) has been Executive Vice President of NCHP since October
1, 1998 and was appointed  President in September  1999. Mr. Foye is responsible
for   continuous   improvement,    acquisitions   of   partnership   securities,
consolidation of minority  interests and corporate and other  acquisitions.  Mr.
Foye has served as Executive  Vice  President of AIMCO since May 1998.  Prior to
joining AIMCO, Mr. Foye was a Merger and Acquisitions Partner in the law firm of
Skadden, Arps, Slate, Meagher & Flom LLP from 1989 to 1998.

Executive Officers

The current  executive  officers of NCHP and a  description  of their  principal
occupations in recent years are listed below.

Ronald D. Monson (age 46).  See "Directors of NCHP."

Patrick J. Foye  (age 45). See "Directors of NCHP."

Paul J.  McAuliffe  (age 46) has been Executive Vice President of NCHP and AIMCO
since February 1999 and was appointed Chief  Financial  Officer in October 1999.
Prior to joining AIMCO,  Mr.  McAuliffe was Senior Managing  Director of Secured
Capital Corp from May 1996 until February 1999.

Thomas C. Novosel (age 44) has been Senior Vice  President and Chief  Accounting
Officer  of NCHP since  April 1, 2002.  Mr.  Novosel  has served as Senior  Vice
President and Chief  Accounting  Officer of AIMCO since April 2000. From October
1993  until he joined  AIMCO,  Mr.  Novosel  was a partner at Ernst & Young LLP,
where he  served  as the  director  of real  estate  advisory  services  for the
southern Ohio Valley area offices but did not work on any assignments related to
AIMCO or the Partnership.

There is no family  relationship  between  any of the  foregoing  directors  and
executive officers.

The  executive  officers  and  directors  of the  General  Partner  fulfill  the
obligations  of the Audit  Committee  and  oversee the  Partnership's  financial
reporting  process on behalf of the General Partner.  Management has the primary
responsibility for the financial  statements and the reporting process including
the systems of internal controls. In fulfilling its oversight  responsibilities,
the executive  officers and director of the General Partner reviewed the audited
financial  statements with management including a discussion of the quality, not
just the  acceptability,  of the accounting  principles,  the  reasonableness of
significant  judgments,   and  the  clarity  of  disclosures  in  the  financial
statements.

The executive  officers and directors of the General  Partner  reviewed with the
independent  auditors,  who are  responsible  for  expressing  an opinion on the
conformity of those audited  financial  statements  with  accounting  principles
generally accepted in the United States,  their judgments as to the quality, not
just the  acceptability,  of the  Partnership's  accounting  principles and such
other  matters as are required to be discussed  with the Audit  Committee or its
equivalent under auditing standards  generally accepted in the United States. In
addition,  the  Partnership  has  discussed  with the  independent  auditors the
auditors' independence from management and the Partnership including the matters
in the written  disclosures  required by the  Independence  Standards  Board and
considered  the   compatibility   of  non-audit   services  with  the  auditors'
independence.

The executive  officers and directors of the General Partner  discussed with the
Partnership's  independent auditors the overall scope and plans for their audit.
In  reliance on the reviews and  discussions  referred to above,  the  executive
officers and directors of the General Partner have approved the inclusion of the
audited financial  statements in the Form 10-KSB for the year ended December 31,
2002 for filing with the Securities and Exchange Commission.

The General Partner has reappointed Ernst & Young LLP as independent auditors to
audit the financial  statements of the  Partnership for 2003. Fees for 2002 were
annual audit of $41,000 and  non-audit  services  (principally  tax-related)  of
$8,000.

Item 10.    Executive Compensation

National Housing  Partnership  Realty Fund Two has no officers or directors.  No
direct form of compensation  or remuneration  was paid by the Partnership to any
officer or director of the General Partner.  However,  reimbursements  and other
payments have been made to the Partnership's General Partner and its affiliates,
as described in "Item 12. Certain Relationships and Related Transactions."

Item 11.    Security Ownership of Certain Beneficial Owners and Management

1133 Fifteenth  Street Two Associates,  a Maryland  Limited  Partnership,  whose
general partner is NHP and whose limited  partners were employees of NCHP at the
time the partnership was formed, owns a 1% interest in the Partnership.

NHP is also  the sole  general  partner  of NHP  Investment  Partners  I and NHP
Investment Partners III. NHP Investment Partners I, a limited partnership, holds
a 4.5%  limited  partnership  interest  (1% for  allocation  of  losses)  in the
remaining  three Local  Limited  Partnerships.  Prior to the  admittance  of the
Partnership into the Local Limited  Partnerships,  NHP Investment Partners I and
NHP  Investment  Partners  III held a 1% general  partnership  interest  and 98%
limited partnership interest in the Local Limited Partnerships.

The following table sets forth certain information regarding limited partnership
units of the  Registrant  owned by each person or entity known by the Registrant
to own beneficially or exercise voting or dispositive  control over more than 5%
of the Registrant's limited partnership units as of December 31, 2002.

         Name of Beneficial Owner              Number of Units        % of Class

AIMCO and affiliates                                1,949                10.80%
  (affiliates of the General Partner)

The business  address of AIMCO is Stanford Place 3, 4582 S. Ulster St.  Parkway,
Suite 1100, Denver, Colorado 80237.

Item 12.    Certain Relationships and Related Transactions

The Partnership accrued administrative and reporting fees payable to the General
Partner of approximately $20,000 and $42,000 during 2002 and 2001, respectively.
No payments  were made during 2002 or 2001 for these fees.  The balance  owed to
the General  Partner for these fees is  approximately  $1,358,000 as of December
31, 2002.

If paid at all, the accrued  administrative  and  reporting  fees payable to the
General  Partner  will be  paid  as  cash  flow  permits  or  from  the  sale or
refinancing  of one or more of the  underlying  properties  of the Local Limited
Partnerships.   Subsequent   to  December  31,   2002,the   Partnership   repaid
approximately  $681,000 to the General  Partner from the proceeds of the sale of
the property owned by Caroline Arms Limited Partnership.

The General Partner advanced the Partnership  approximately  $41,000 and $10,000
during the years ended  December  31, 2002 and 2001,  respectively.  In 2002 and
2001, the  Partnership  repaid  advances of  approximately  $38,000 and $33,000,
respectively,  to the General Partner.  Interest is charged on borrowings at the
Chase  Manhattan Bank prime interest rate plus 2% and amounted to  approximately
$1,000 in 2002 and less than $1,000 in 2001.  Chase Manhattan  Bank's prime rate
was 4.25% at December  31,  2002.  At December 31,  2002,  the  Partnership  had
$14,000 in unpaid borrowings and accrued interest due to the General Partner.

An affiliate of the General  Partner,  NHP Management  Company  ("NHPMC") is the
project  management  agent for the projects.  NHPMC and other affiliates of NCHP
earned  approximately  $268,000  and  $381,000  for  management  fees and  other
services  provided  to the  Local  Limited  Partnerships  during  2002 and 2001,
respectively.

Personnel  working  at the  project  sites,  which are  managed  by  NHPMC,  are
employees of NHPMC.  The projects  reimbursed  NHPMC for the actual salaries and
related benefits of such employees. Total reimbursements earned for salaries and
benefits  for the years ended  December  31, 2002 and 2001,  were  approximately
$333,000 and $713,000, respectively.

Item 13.    Exhibits and Reports on Form 8-K

      (a)   Exhibits

Exhibit  99,  Certification  of Chief  Executive  Officer  and  Chief  Financial
Officer.

            Exhibit 99.1,  Audited  Combined  Financial  Statements of the Local
            Limited  Partnerships  in which the  Partnership  has  invested  are
            included as an exhibit to this report

      (b) Reports on Form 8-K filed during the fourth quarter of 2002:

            None.

Item 14.    Controls and Procedures

The principal  executive officer and principal  financial officer of the General
Partner, who are the equivalent of the Partnership's principal executive officer
and  principal  financial  officer,  respectively,  have,  within 90 days of the
filing  date  of  this  annual  report,   evaluated  the  effectiveness  of  the
Partnership's  disclosure  controls and  procedures  (as defined in Exchange Act
Rules 13a-14(c) and 15d-14(c)) and have determined that such disclosure controls
and  procedures  are  adequate.  There have been no  significant  changes in the
Partnership's  internal  controls or in other  factors that could  significantly
affect the  Partnership's  internal  controls since the date of evaluation.  The
Partnership does not believe any significant deficiencies or material weaknesses
exist in the Partnership's internal controls. Accordingly, no corrective actions
have been taken.


                                   SIGNATURES



In accordance  with Section 13 or 15(d) of the Exchange Act, the  Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                                    (Registrant)


                                    By:   The National Housing Partnership,
                                          Its sole General Partner

                                    By:   National Corporation for Housing
                                          Partnerships, its sole General Partner

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

                                    By:   /s/Thomas C. Novosel
                                          Thomas C. Novosel
                                          Senior Vice President
                                          and Chief Accounting Officer


                                    Date: March 28, 2003


In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Registrant and in the capacities and on the
dates indicated:


/s/Patrick J. Foye                        Date: March 28, 2003
Patrick J. Foye
President and Director


/s/Thomas C. Novosel                Date: March 28, 2003
Thomas C. Novosel
Senior Vice President and
Chief Accounting Officer


                                  CERTIFICATION


I, Patrick J. Foye, certify that:


1. I have  reviewed  this  annual  report  on Form  10-KSB of  National  Housing
Partnership Realty Fund Two;


2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;


3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;


4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


      a)  Designed  such  disclosure  controls  and  procedures  to ensure  that
      material   information   relating  to  the   registrant,   including   its
      consolidated  subsidiaries,  is made  known to us by others  within  those
      entities,  particularly  during the period in which this annual  report is
      being prepared;


      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures  as of a date  within 90 days prior to the filing  date of this
      annual report (the "Evaluation Date"); and


      c) Presented in this annual report our conclusions about the effectiveness
      of the disclosure  controls and  procedures  based on our evaluation as of
      the Evaluation Date;


5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):


      a) All  significant  deficiencies  in the design or  operation of internal
      controls which could adversely affect the registrant's  ability to record,
      process,  summarize and report  financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and


      b) Any fraud,  whether or not material,  that involves management or other
      employees  who  have  a  significant  role  in the  registrant's  internal
      controls; and


6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:  March 28, 2003

                                    /s/Patrick J. Foye
                                    Patrick J. Foye
                                    President   of   National    Corporation
                                    for Housing Partnerships, equivalent of the
                                    chief executive officer of the Partnership

                                  CERTIFICATION


I, Paul J. McAuliffe, certify that:


1. I have  reviewed  this  annual  report  on Form  10-KSB of  National  Housing
Partnership Realty Fund Two;


2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;


3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;


4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


      a)  Designed  such  disclosure  controls  and  procedures  to ensure  that
      material   information   relating  to  the   registrant,   including   its
      consolidated  subsidiaries,  is made  known to us by others  within  those
      entities,  particularly  during the period in which this annual  report is
      being prepared;


      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures  as of a date  within 90 days prior to the filing  date of this
      annual report (the "Evaluation Date"); and


      c) Presented in this annual report our conclusions about the effectiveness
      of the disclosure  controls and  procedures  based on our evaluation as of
      the Evaluation Date;


5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's   board  of  directors  (or  persons   performing   the  equivalent
functions):


      a) All  significant  deficiencies  in the design or  operation of internal
      controls which could adversely affect the registrant's  ability to record,
      process,  summarize and report  financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and


      b) Any fraud,  whether or not material,  that involves management or other
      employees  who  have  a  significant  role  in the  registrant's  internal
      controls; and


6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:  March 28, 2003

                                    /s/Paul J. McAuliffe
                                    Paul J. McAuliffe
                                    Executive Vice President and Chief Financial
                                    Officer of National  Corporation for Housing
                                    Partnerships,   equivalent   of  the   chief
                                    financial officer of the Partnership

Exhibit 99


                          Certification of CEO and CFO
                       Pursuant to 18 U.S.C. Section 1350,
                             As Adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002



In  connection  with the  Annual  Report  on Form  10-KSB  of  National  Housing
Partnership Realty Fund Two (the "Partnership"), for the year ended December 31,
2002 as filed with the  Securities  and Exchange  Commission  on the date hereof
(the  "Report"),  Patrick  J. Foye,  as the  equivalent  of the Chief  Executive
Officer of the  Partnership,  and Paul J.  McAuliffe,  as the  equivalent of the
Chief Financial Officer of the Partnership,  each hereby certifies,  pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of his knowledge:

(1)  The Report fully complies with the  requirements  of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects,  the  financial  condition  and  results  of  operations  of  the
     Partnership.


                                    /s/Patrick J. Foye
                              Name: Patrick J. Foye
                              Date: March 28, 2003


                                    /s/Paul J. McAuliffe
                              Name: Paul J. McAuliffe
                              Date: March 28, 2003


This  certification  accompanies  the  Report  pursuant  to  Section  906 of the
Sarbanes-Oxley  Act of 2002 and shall not,  except to the extent required by the
Sarbanes-Oxley  Act of 2002, be deemed filed by the  Partnership for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.


                                  EXHIBIT 99.1

                    NATIONAL HOUSING PARTNERS REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                          COMBINED FINANCIAL STATEMENTS

                  FOR THE YEARS ENDED DECEMBER 31, 2002 and 2001


                          Independent Auditors' Report

To The Partners of
National Housing Partnership Realty Fund Two
Indianapolis, Indiana

We have audited the  accompanying  combined  balance  sheet of the Local Limited
Partnerships  in  which  National  Housing  Partnership  Realty  Fund  Two  (the
"Partnership") holds a limited partnership interest as of December 31, 2002, and
the related combined statements of operations, partners' deficit, and cash flows
for each of the two years in the period ended December 31, 2002.  These combined
financial statements are the responsibility of the Partnership's management. Our
responsibility  is to express an opinion on these financial  statements based on
our audits. We did not audit the statements of operations, partners' deficit and
cash flows of Windsor Apartment  Associates Limited Partnership (one of the nine
Local Limited  Partnerships)  for the year ended December 31, 2001 which reflect
33% of combined net loss for the year then ended.  The  financial  statements of
this Local Limited  Partnership  were audited by other auditors whose report has
been  furnished  to us, and our  opinion,  insofar as it relates to the  amounts
included for this Local  Limited  Partnership,  is based solely on the report of
the other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We  believe  that our audits  and the  reports of other  auditors
provide a reasonable basis for our opinion.

In our  opinion,  based upon our audits and the reports of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the  combined  financial  position of the Local  Limited  Partnerships  in which
National  Housing  Partnership  Realty  Fund  Two  holds a  limited  partnership
interest as of December 31, 2002, and the combined  results of their  operations
and their cash flows for each of the two years in the period ended  December 31,
2002 in conformity with accounting  principles  generally accepted in the United
States.

As discussed in Note 6 to the combined  financial  statements,  the due dates of
certain of the Local  Partnership's  notes payable have expired,  and therefore,
the notes are in default.  These conditions raise  substantial doubt about their
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.

As discussed in Note 14 to the financial  statements,  in 2002 the Local Limited
Partnerships  adopted  Statement  of  Financial  Accounting  Standards  No.  144
"Accounting  for the Impairment or Disposal of Long-Lived  Assets." As a result,
the accompanying combined financial statements for 2001, referred to above, have
been restated to conform to the presentation  adopted in 2002 in accordance with
accounting principles generally accepted in the United States.

                                                            /s/Ernst & Young LLP


Indianapolis, Indiana
March 7, 2003

                          Independent Auditor's Report


Partners
Windsor Apartments Associates
Indianapolis, IN

We have audited the accompanying balance sheet of Windsor Apartments Associates,
FHA Project No.  032-44012-LD-WAH-SUP,  A Limited Partnership, as of January 31,
2001, and the related statements of profit and loss, partners' equity (deficit),
and cash flows for the period  January 1 to January 31,  2001.  These  financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Windsor Apartments  Associates
at January 31,  2001,  and the results of its  operations,  changes in partners'
equity (deficit) and its cash flows for the period January 1 to January 31, 2001
in  conformity  with  accounting  principles  generally  accepted  in the United
States.

The  financial  statements  have been  prepared  as if the  Partnership  were to
continue  as a  going  concern.  As  discussed  in  Note  11  to  the  financial
statements, the assets of the Partnership were sold on January 31, 2001.


Armacost & Orsborne LLP
Bethesda, Maryland
February 13, 2002



                                  EXHIBIT 99.1

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                             COMBINED BALANCE SHEET

                                 (in thousands)

                                December 31, 2002


                                        ASSETS
Cash and cash equivalents                                           $ 132
Accounts receivable, net (Note 2)                                        36
Tenants' security deposits held in trust funds                           82
Prepaid expenses and other assets                                        28
Mortgage escrow deposits                                              1,318
Other assets                                                             26
Rental property, net (Notes 4, 5, 10 and 11)                          8,645

                                                                   $ 10,267

                          LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
  Accounts payable and accrued expenses                             $ 350
  Accrued real estate taxes                                              42
  Partner loans and accrued interest (Note 7)                           218
  Tenants' security deposits payable                                     81
  Notes payable (Note 6)                                              3,618
  Accrued interest on notes payable (Note 6)                          6,283
  Mortgage notes payable (Note 5)                                     3,375
  Other liabilities                                                       5
                                                                     13,972

  Partners' deficit                                                  (3,705)

                                                                   $ 10,267

                       See Accompanying Notes To Financial Statements


                                  EXHIBIT 99.1

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                        COMBINED STATEMENTS OF OPERATIONS

                                 (in thousands)

<TABLE>
<CAPTION>


                                                              Years Ended December 31,
                                                                  2002         2001
                                                                            (Restated)
REVENUE:
<S>                   <C>                                       <C>          <C>
  Rental income (Note 3)                                        $ 2,530      $ 2,515
  Interest income                                                    19           57
  Other income                                                      257          170
                                                                  2,806        2,742

EXPENSES:
  Administrative expenses                                           121          167
  Utilities and operating expenses                                1,012          753
  Management and other services from related party (Note 9)         268          230
  Salaries and related benefits to related party (Note 9)           333          382
  Depreciation and amortization                                     776          723
  Impairment loss (Note 10)                                          --          535
  Taxes and insurance                                               287          270
  Financial expenses - primarily interest                            22           25
  Interest on notes payable (Notes 6 and 7)                         363          363
  Annual partnership administrative fees to General Partner
    (Note 7)                                                         23           22
                                                                  3,205        3,470

Loss from continuing operations                                    (399)        (728)
Loss from discontinued operations                                    --       (1,287)
Gain on sale of discontinued operations (Note 11)                    --          667

NET LOSS                                                         $ (399)     $(1,348)

                       See Accompanying Notes To Financial Statements
</TABLE>


                                  EXHIBIT 99.1

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                    COMBINED STATEMENTS OF PARTNERS' DEFICIT

                                 (in thousands)

<TABLE>
<CAPTION>

                                  National
                                Housing The
                                Partnership     National       NHP          NHP
                                Realty Fund     Housing    Investment   Investment
                                    Two       Partnership  Partners I  Partners III     Total

<S>                <C>            <C>            <C>         <C>           <C>        <C>
Deficit at January 1, 2001        $(10,256)      $ (298)     $ (566)       $ (38)     $(11,158)

Contribution                         3,233           --           --           --        3,233

Distributions                       (2,267)         (24)        (108)          --
                                                                                       (2,399)

Net (loss) profit                   (1,341)         (13)           6           --       (1,348)

Transfer of interest
  (Note 11)                          7,911          109          351           38        8,409

Deficit at December 31, 2001        (2,720)        (226)        (317)          --       (3,263)

Net loss                              (391)          (4)          (4)          --         (399)

Distributions                          (43)          --           --           --          (43)

Deficit at December 31, 2002      $ (3,154)      $ (230)     $ (321)       $ --       $ (3,705)

Percentage interest at
  December 31, 2002 and 2001          (A)            (B)         (C)          (D)

(A)  Holds a 94.5% limited partnership  interest (98% with respect to allocation
     of losses).

(B)   Holds a 1% general partnership interest in Local Limited Partnerships.

(C)   Holds a 4.5% limited  partnership  interest (1% with respect to allocation
      of losses) in certain Local Limited Partnerships.

(D)   Holds a 4.5% limited  partnership  interest (1% with respect to allocation
      of losses) in certain Local Limited  Partnerships,  all of which were sold
      and foreclosed as of December 31, 2001.

                       See Accompanying Notes To Financial Statements
</TABLE>


                                  EXHIBIT 99.1

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                        COMBINED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                Years Ended December 31,
                                                                   2002           2001
CASH FLOWS FROM OPERATING ACTIVITIES:
  Receipts:
<S>                                                              <C>            <C>
   Rental receipts                                               $ 2,524        $ 4,698
   Interest receipts                                                  15             92
   Other operating receipts                                          894            399
   Tenant security deposits                                           15             57
   Entity receipts                                                     5            137
            Total receipts                                         3,453          5,383

  Disbursements:
   Administrative                                                   (149)          (335)
   Management fees                                                  (246)          (320)
   Utilities                                                        (346)          (841)
   Salaries and wages                                               (367)          (838)
   Operating and maintenance                                        (897)          (960)
   Real estate taxes                                                (130)          (102)
   Property insurance                                               (107)          (105)
   Miscellaneous taxes and insurance                                 (93)          (143)
   Tenant security deposits                                          (15)           (35)
   Other operating disbursements                                      --             (1)
   Interest on mortgage                                               --            (79)
   Mortgage insurance premium                                        (18)           (17)
   Miscellaneous financial expenses                                   (4)            (4)
   Transfer of operating cash to new owner                            --           (508)
   Entity disbursements:
     Interest on notes payable                                    (1,857)          (137)
     Miscellaneous disbursements                                     (44)          (142)
            Total disbursements                                   (4,273)        (4,567)

Net cash (used in) provided by operating activities                 (820)           816

Cash flows from investing activities:
  Change in mortgage escrow accounts                                (140)           153
  Net sales proceeds                                                  --          7,448
  Net purchase of fixed assets                                      (545)        (1,146)
  Other investing                                                    (21)            40

Net cash (used in) provided by investing activities                 (706)         6,495

CASH FLOWS FROM FINANCING ACTIVITIES:
  Mortgage principal payments                                       (236)          (394)
  Repayment of mortgage notes payable                                 --         (3,443)
  Proceeds from loans or notes payable                                --             98
  Principal payments on loans or notes payable                      (230)            --
  Distributions                                                      (43)        (2,268)

Net cash used in financing activities                               (509)        (6,007)

                       See Accompanying Notes To Financial Statements
</TABLE>


                                  EXHIBIT 99.1

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                  COMBINED STATEMENTS OF CASH FLOWS (continued)

                                 (in thousands)
<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                                                                   2002            2001
<S>                                                                <C>             <C>
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS             $ (2,035)      $  1,304

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                      2,167            863

CASH AND CASH EQUIVALENTS AT END OF YEAR                           $ 132         $ 2,167

RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY
  OPERATING ACTIVITIES:
   Net loss                                                       $ (399)        $(1,348)
   Adjustments to reconcile net loss to net cash provided
     by operating activities:
      Gain on sale of discontinued operations                          --           (667)
      Depreciation and amortization                                   776          1,262
      Impairment loss on rental properties                             --          1,169
      Changes in operating assets and liabilities:
        Net tenant receivables                                         --             18
        Accounts receivable - other                                   636            186
        Accrued receivables                                             1             (2)
        Prepaid expenses and other assets                             (15)            94
        Cash restricted for tenants' security deposits                 12             76
        Accounts payable trade                                         37           (268)
        Accrued liabilities                                          (420)           118
        Accrued interest - notes payable                           (1,493)           747
        Tenant security deposits held in trust                        (13)           (34)
        Accrued property taxes                                        (24)            --
        Prepaid revenue                                                (1)            (5)
        Transfer of operating cash to new owner                        --           (508)
        Entity liability accounts                                      83            (22)
            Total adjustments                                        (421)         2,164

Net cash (used in) provided by operating activities               $ (820)         $ 816

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Net write-off of assets and liabilities to reflect
   sales and foreclosures and treated as a transfer
   of partnership interests                                        $ --          $ 8,409
  Note payable and accrued interest forgiven by NHP and
   treated as a capital contribution                               $ --          $ 3,233
  Distributions payable                                            $ --           $ 131

                       See Accompanying Notes To Financial Statements
</TABLE>


                                  EXHIBIT 99.1

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                December 31, 2002


(1)   SUMMARY OF PARTNERSHIP ORGANIZATION,  BASIS OF COMBINATION AND SIGNIFICANT
      ACCOUNTING POLICIES

Organization

National  Housing   Partnership  Realty  Fund  Two  (the  "Partnership"  or  the
"Registrant") is a limited partnership  organized under the laws of the State of
Maryland under the Maryland  Revised Uniform Limited  Partnership Act on January
22,  1985.  The  Partnership  was formed for the  purpose of raising  capital by
offering and selling limited partnership interests and then investing in limited
partnerships  (Local Limited  Partnerships),  each of which owns and operates an
existing  rental housing  project which is financed  and/or operated with one or
more forms of rental assistance or financial assistance from the U.S. Department
of Housing and Urban Development ("HUD").

During 1985, the Partnership  acquired 94.5% (98% with respect to losses) of the
limited  partnership  interests in twenty-one Local Limited  Partnerships.  As a
limited partner in these Local Limited  Partnerships,  the Partnership  does not
exercise  control  or  influence  over  the  activities  of  the  Local  Limited
Partnerships in accordance with the partnership  agreements.  As of December 31,
2002,  the  Partnership  continues  to hold  interests  in three  Local  Limited
Partnerships.

On June 3,  1997,  Apartment  Investment  and  Management  Company,  a  Maryland
corporation  and a publicly  held real estate  investment  trust  ("AIMCO"  and,
together  with its  subsidiaries  and  other  controlled  entities,  the  "AIMCO
Group"),  acquired  all of the  issued  and  outstanding  capital  stock  of NHP
Partners,  Inc., a Delaware  corporation ("NHP  Partners"),  and the AIMCO Group
acquired  all  of  the  outstanding   interests  in  NHP  Partners  Two  Limited
Partnership,  a Delaware limited  partnership ("NHP Partners Two"). NHP Partners
owns all of the  outstanding  capital  stock  of the  National  Corporation  for
Housing Partnerships,  a District of Columbia corporation ("NCHP"), which is the
general  partner of The  National  Housing  Partnership,  a District of Columbia
limited  partnership ("NHP" or the "General  Partner").  Together,  NCHP and NHP
Partners Two own all of the outstanding partnership interests in NHP. NHP is the
general partner of the Registrant. As a result of these transactions,  the AIMCO
Group has  acquired  control  of the  general  partner  of the  Registrant  and,
therefore, may be deemed to have acquired control of the Registrant.

NHP is also  the sole  general  partner  of NHP  Investment  Partners  I and NHP
Investment  Partners III. NHP  Investment  Partners III, a limited  partnership,
held a 4.5% limited partnership  interest (1% with respect to losses) in Hurbell
I Limited  Partnership  (foreclosed  in 2000),  Hurbell III Limited  Partnership
(foreclosed in 2001) and Hilltop Limited Partnerships  (foreclosed in 2000). NHP
Investment Partners I, a limited  partnership,  holds a 4.5% limited partnership
interest  (1%  for  allocation  of  losses)  in  the  remaining   Local  Limited
Partnerships.  Prior to the admittance of the Partnership into the Local Limited
Partnerships,  NHP Investment  Partners I and NHP Investment Partners III held a
1% general  partnership  interest  and 98% limited  partnership  interest in the
Local Limited Partnerships.

Basis of Combination

The combined  financial  statements  include the accounts of the following three
and nine Local  Limited  Partnerships  in which the  Partnership  held a limited
partnership interest during 2002 and 2001, respectively:

  Caroline Arms Limited Partnership
  Esbro Limited  Partnership  (interest lost July 20, 2001)
  Harold House Limited
  Partnership  Hurbell  II  Limited  Partnership  (interest  lost April 2, 2001)
  Hurbell III Limited  Partnership  (interest lost March 28, 2001)
  Mayfair Manor Limited Partnership  (interest lost July 20, 2001) San Juan del
  Centro Limited Partnership
  West Oak Village Limited  Partnership (sold property December 28, 2001)
  Windsor Apartments Associates Limited Partnership (sold property January 31,
  2001)

Significant Accounting Policies

The combined financial statements of the Local Limited Partnerships are prepared
on the accrual basis of accounting.  Depreciation of buildings and  improvements
is computed using the  straight-line  method over the estimated  useful lives of
the related assets.

Cash  distributions  are  limited  by  the  Regulatory  Agreements  between  the
partnerships  and  HUD  to the  extent  of  surplus  cash  as  defined  by  HUD.
Undistributed  amounts are cumulative and may be distributed in subsequent years
if future operations provide surplus cash in excess of current requirements.

Deferred  financing  costs are amortized over the  appropriate  loan period on a
straight-line basis.

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

The Local  Limited  Partnerships  consider  all highly  liquid debt  instruments
purchased  with  initial   maturities  of  three  months  or  less  to  be  cash
equivalents.

(2) ACCOUNTS RECEIVABLE

At  December  31,  2002,  accounts  receivable  consist  of  the  following  (in
thousands):

Tenant receivables, net                                $ 7
Housing assistance receivable (see Note 3)               12
Other receivables                                        17

Accounts receivable, net                              $ 36

(3) HOUSING ASSISTANCE AGREEMENTS

The combined financial statements of the Local Limited Partnerships are prepared
on the accrual  basis of  accounting.  All Local  Limited  Partnerships  operate
rental housing projects organized under Section 236 of the National Housing Act.
Each of the Local Limited  Partnerships  receives some form of rental assistance
from HUD.  During  the year  ended  December  31,  2002 and 2001,  the  projects
received a total of approximately  $1,436,000 and $4,366,000,  respectively,  of
rental assistance from HUD.

Regulation of Affordable Housing

The  Federal  Housing  Administration  ("FHA")  has  contracted  with the  three
subsidized  rental  projects  under  Section  8 of Title II of the  Housing  and
Community  Development  Act of 1974 to make housing  assistance  payments to the
Local  Limited  Partnerships  on behalf of qualified  tenants.  The terms of the
agreements are one or five years with one year renewal options.

In 1997 and again in 1999,  Congress  enacted new ways to determine  rent levels
for properties  receiving HUD's rental  assistance under Section 8 of the United
States  Housing Act of 1937 ("Section 8") after the expiration of their original
Section 8 contracts.  This new legislation  will affect 391 units, or 90% of the
units in which the Partnership has invested.  On October 27, 1997, the President
signed into law the Multifamily Assisted Housing Reform and Affordability Act of
1997 (the "1997 Housing Act").  Under the 1997 Housing Act,  certain  properties
assisted under expiring  Section 8 contracts and which have been receiving rents
deemed to be above  comparable  market  levels for  unassisted  properties,  and
financed  with  HUD-insured  mortgage  loans,  will  have,  upon the  renewal or
extension  of  Section  8  contracts,  rents  marked  to  market.  This  will be
accomplished  in  various  ways,  the goal  being to  reduce  Section 8 rents to
comparable  market  levels,  thereby  reducing  the  federal  Section  8 subsidy
obligation,  and (ideally) by simultaneously lowering, or eliminating,  required
debt  service  costs  (and  decreasing  operating  costs)  as  needed  to ensure
financial  viability at the reduced rent levels. The program also incorporates a
requirement  to  perform  any  repair  or  rehabilitation  deemed  necessary  by
depositing  funds to cover the first twelve month's work, and making  sufficient
monthly reserve  deposits to ensure work required in succeeding  years. In 1999,
Congress  enacted  legislation  (the "1999  Housing  Act") that  expanded on and
clarified  the  provisions  of  the  1997  Housing  Act,  including   permitting
properties whose Section 8 rents were below comparable  market rents to increase
their Section 8 rents to market.

The 1997 and 1999  Housing  Acts  (together,  the  "Housing  Acts")  permit  the
retention of project  based  Section 8 contracts  for most  properties in rental
markets  with a limited  supply of  affordable  housing or where the tenants are
particularly  vulnerable  populations  including the elderly,  disabled or large
families.  In rental markets without a limited supply of affordable housing, the
Housing Acts provide for phasing out project  based  subsidies,  converting  the
assistance to tenant based assistance or vouchers.  Under a tenant based system,
rental  vouchers  would be issued to  qualified  tenants who then could elect to
reside at  properties  of their  choice,  including  the  property in which they
currently  reside.   Voucher  rent  levels  are  established  by  local  housing
authorities  under  guidelines set by HUD. While the Partnership does not expect
the provisions of the Housing Acts to result in a significant  number of tenants
relocating from the properties  owned by the Local Limited  Partnerships,  there
can be no  assurance  that  the  new  legislation  will  not  significantly  and
adversely  affect  the  operations  of  the  properties  of  the  Local  Limited
Partnerships.

The following  table  indicates the year within which the Section 8 rent subsidy
contracts expire:

                                      Subsidized Units       Subsidized Units
                                        Expiring as a          Expiring as a
                       Number of     Percentage of Total       Percentage of
                         Units        Subsidized Units          Total Units

2003                      391               100%                    90%

All of the  units  which  receive  rent  subsidies  from  Section  8 have  their
contracts  which expire  during the year ending  December 31, 2003.  The Housing
Acts provide for several  options  under which a Local Limited  Partnership  may
elect, as appropriate, to renew its Section 8 contracts: (1) marking rents up to
the  comparable  market rent, if current  rents are below  market;  (2) renewing
rents at the  current  level,  if the level  does not exceed  comparable  market
rents, and receiving an operating cost adjustment factor (an "OCAF") or a budget
based rent increase, as long as the rents do not exceed comparable market rents;
(3) marking rents down to comparable  market rents; (4) marking their rents down
to an "exception rent" level,  when comparable  market rents would be too low to
permit  continued  operation of the property  under the Section 8 program,  even
with full debt  restructuring;  or (5) opting out of the section 8 program.  For
properties   assisted  by  Section  8,  but  not  subject  to  these  provisions
(including,  but not limited to,  properties  which do not have  underlying  HUD
insured  mortgages,  or which have been financed  through  certain state housing
finance agency or bond-financed  mortgage programs),  rents will be continued at
current  levels,  plus  an OCAF or (in  some  instances)  a  budget  based  rent
increase.  In addition,  properties can opt out of the Section 8 program only if
very strict notice requirements have been met, including a requirement that HUD,
the tenants,  and the local  governing  body, be given twelve months notice of a
Local  Limited  Partnership's  intention  to opt  out of the  program  prior  to
contract termination.

Each of the options  requires an application to HUD, and, to a greater or lesser
extent,  the  fulfillment  of certain  procedural  submission  requirements  and
financial   requirements,   which  must  be  weighed  in  connection   with  the
determination of which option to select.

The Section 8  requirements  are separate  from the  requirements  governing the
underlying  HUD-insured  mortgage  loans,  and any  other  HUD,  state  or local
requirements, all of which must be fulfilled,  irrespective of the option chosen
with regard to the continuation of Section 8 participation.

(4) RENTAL PROPERTY

At December 31, 2002 rental property consists of the following (in thousands):

Land                                             $ 1,211
Buildings and improvements                        14,977
                                                  16,188
Less accumulated depreciation                     (7,543)

Rental property, net                             $ 8,645

(5) MORTGAGE NOTES PAYABLE

The mortgage  notes  payable are insured by the Federal  Housing  Administration
(FHA) and collateralized by first deeds of trust on the rental  properties.  The
notes  bear  interest  at rates  ranging  from 8.5% to 9% per  annum.  FHA makes
subsidy payments  directly to the mortgage lender reducing the monthly principal
and interest  payments of the project owner to an effective  interest rate of 1%
over the  forty-year  term of the  notes.  The  liability  of the Local  Limited
Partnerships  under the mortgage notes is limited to the underlying value of the
real estate collateral plus other amounts deposited with lenders.

Under   agreements  with  the  mortgage  lenders  and  FHA,  the  Local  Limited
Partnerships are required to make monthly escrow deposits for taxes,  insurance,
and  reserves  for  the  replacement  of  project  assets  and  are  subject  to
restrictions as to operating policies,  rental charges,  operating  expenditures
and distributions to partners.

Approximate  maturities  of mortgage  notes payable for the next five years and,
thereafter, are as follows (in thousands):

          2003                 $ 256
          2004                    279
          2005                    304
          2006                    330
          2007                    360
       Thereafter               1,846

                              $ 3,375


(6) NOTES PAYABLE

During 1985, the Partnership  acquired a 94.5% limited partnership interest (98%
with respect to allocation of losses) in twenty-one Local Limited  Partnerships.
At December 31,  2002,  the  Partnership  continues to hold an interest in three
Local Limited  Partnerships:  San Juan del Centro Limited Partnership,  Caroline
Arms Limited Partnership, and Harold House Limited Partnership. During 2001, the
Partnership's  interests in Hurbell II and III,  Esbro and Mayfair Manor Limited
Partnerships  were  foreclosed  and Windsor  Apartments  Associates and West Oak
Village both sold their respective investment properties.

Notes payable were executed by the Local  Limited  Partnerships  with the former
owners  as  part of the  acquisition  of the  properties  by the  Local  Limited
Partnerships.  These notes bear simple interest at rates of 9% or 10% per annum.
The  notes  are  nonrecourse  notes  secured  by  a  security  interest  in  all
partnership  interests  in the  respective  Local  Limited  Partnership  and are
subordinated to the respective mortgage note for as long as the mortgage note is
insured by HUD.  Any  payments  due from  project  income are  payable  from the
respective  Local  Limited   Partnership's  surplus  cash,  as  defined  by  the
respective HUD Regulatory Agreement. The notes may be repaid in whole or in part
at any time without penalty.  Neither the respective  Local Limited  Partnership
nor any partner thereof,  present or future,  assumes any personal liability for
the payment of these notes.

These notes mature as follows:

<TABLE>
<CAPTION>

Local Partnership                            Due Date   Note Amount  Accrued Interest

<S>                                          <C>   <C>    <C>             <C>
Caroline Arms Limited Partnership (A)        11/15/99     $ 1,561         $ 2,830
Harold House Limited Partnership             11/15/99         599           1,087
San Juan Del Centro Limited Partnership      12/20/99       1,458           2,366

      Total Due and Delinquent                            $ 3,618         $ 6,283
</TABLE>


Subsequent  to December 31, 2002,  Caroline  Arms Limited  Partnership  sold its
investment   property  to  an  unaffiliated   third  party.  The  Local  Limited
Partnership  paid  approximately  $1,393,000 as an initial payment in March 2003
toward the note payable from the proceeds of the sale.

Harold House and San Juan Del Centro Limited  Partnerships both have notes which
were executed by the respective  Local Limited  Partnerships  with the seller as
part of the  acquisition of the property by the Local Limited  Partnership.  The
notes were nonrecourse  notes secured by a security  interest in all Partnership
interests  in  the  Local  Limited  Partnership  and  are  subordinated  to  the
respective mortgage notes on each property for as long as the mortgage notes are
insured by HUD. Any  payments  due from project  income are payable from surplus
cash,  as  defined  by  the  HUD  Regulatory  Agreement.   Neither  the  Limited
Partnership  nor any partners  thereof,  present or future,  assume any personal
liability for the payment of the notes. The notes were due November 15, 1999 and
December 20, 1999,  respectively.  Each note is in default and the Local Limited
Partnership interests are subject to potential foreclosure.  Continuation of the
Local Limited  Partnerships'  operations in the present form is dependent on its
ability to extend the maturity date of their  respective  notes,  or to repay or
refinance  their note. The financial  statements do not include any  adjustments
which might  result from the  outcome of this  uncertainty.  Each of these Local
Limited Partnerships are actively attempting to sell their net assets.

(7) DUE TO PARTNERS

The Local Limited  Partnerships  accrued annual partnership  administration fees
payable to the General  Partner,  of  approximately  $23,000 and $30,000 for the
years ended December 31, 2002 and 2001,  respectively.  Payment of these fees is
made to the General  Partner  without  interest from surplus cash  available for
distribution to partners pursuant to HUD regulations.  During 2002 and 2001, the
Local Limited Partnerships paid approximately $90,000 and $17,000, respectively,
of these fees to the General Partner. The balance owed to NHP for these fees was
approximately  $76,000 at  December  31,  2002 which are  included  in  accounts
payable and accrued expenses in the combined balance sheet.

During 2001, the General  Partner  advanced  approximately  $98,000 to one Local
Limited  Partnership.  There were no advances made by the General Partner during
2002.  During  2002  approximately  $230,000  was  paid  by  one  Local  Limited
Partnership.  No payments were made on these  advances  during 2001. At December
31, 2002,  approximately $218,000 of loans and accrued interest were owed to the
General Partner.  Interest is charged at the Chase Manhattan prime interest rate
plus 2%.

(8) FEDERAL AND STATE INCOME TAXES

The Local Limited  Partnerships are not taxed on their income.  The partners are
taxed in their individual  capacities upon their distributive share of the Local
Limited  Partnerships' taxable income and are allowed the benefits to be derived
from  offsetting  their  distributive  share of the tax losses  against  taxable
income from other sources subject to passive loss rule limitations.  The taxable
income or loss  differs  from amounts  included in the  statement of  operations
primarily because of different methods used in determining  depreciation expense
for tax purposes. The tax loss is allocated to partner groups in accordance with
Section  704(b) of the Internal  Revenue Code and  therefore is not  necessarily
proportionate to the interest percentage owned.

(9) RELATED PARTY TRANSACTIONS

An affiliate of the General  Partner,  NHP Management  Company  ("NHPMC") is the
project  management  agent for the projects.  NHPMC and other affiliates of NCHP
earned  approximately  $268,000  and  $381,000  for  management  fees and  other
services  provided  to the  Local  Limited  Partnerships  during  2002 and 2001,
respectively.

Personnel  working  at the  project  sites,  which are  managed  by  NHPMC,  are
employees of NHPMC.  The projects  reimbursed  NHPMC for the actual salaries and
related benefits of such employees. Total reimbursements earned for salaries and
benefits  for the years ended  December  31, 2002 and 2001,  were  approximately
$333,000 and $713,000, respectively.

(10) IMPAIRMENT LOSS ON RENTAL PROPERTY

SFAS No. 144  "Accounting  for the Impairment or Disposal of Long-Lived  Assets"
requires an impairment loss to be recognized if the sum of estimated future cash
flows  (undiscounted  and without  interest  charges) is less than the  carrying
amount of rental property.  The impairment loss would be the amount by which the
carrying  value  exceeds  the fair value of the rental  property.  If the rental
property is to be disposed  of, fair value is  calculated  net of costs to sell.
During 2001, Harold House and West Oak Village Limited  Partnerships  recognized
impairment  losses on their  rental  properties  of  approximately  $535,000 and
$634,000,  respectively.  The  impairment  loss  recognized  at West Oak Village
Limited  Partnership  is included in loss from  discontinued  operations  on the
accompanying combined statements of operations.  There were no impairment losses
recognized for any of the properties during 2002.

Additionally, regardless of whether an impairment loss of an individual property
has been  recorded or not, the carrying  value of each of the rental  properties
may still exceed their fair market value as of December 31, 2002. Should a Local
Limited  Partnership  be forced to  dispose of any of its  properties,  it could
incur a loss.

(11) DISPOSALS OF RENTAL PROPERTIES

Esbro and  Mayfair  Manor  Limited  Partnerships  had notes  payable  which were
originally due on October 15, 1997.  Effective February 16, 1998, both Esbro and
Mayfair  Manor Limited  Partnerships  executed  Amended and Restated  Promissory
Notes  for each of their  respective  notes.  The  Amended  Notes  extended  the
maturity of the notes to October 25, 1999.  The Local Limited  Partnerships  did
not have the  resources to pay the amounts due. On July 20, 2001,  the holder of
these notes  exercised its remedy under the security  agreement  with respect to
such notes and was  substituted as the sole limited partner of the Local Limited
Partnerships  in place of the  Partnership  and the  noteholder's  assignee  was
substituted  as the  General  Partner.  No gain or loss has been  recorded  as a
result of the  transfer  of these  partnership  interests.  With the loss of the
Partnership's  interest in Esbro and Mayfair  Manor,  the  Partnership  will not
receive any future  benefits from these Local Limited  Partnerships  and taxable
income  through the date of  foreclosure  will be generated and allocated to the
Partnership's  investors without any distributable  cash. The specific impact of
the tax consequence is dependent upon each partners' individual tax situation.

Hurbell II and Hurbell III Limited Partnerships had notes payable which were due
on November 2, 1999. The Local Limited  Partnerships  did not have the resources
to pay the amounts due. On April 2, 2001 and March 28, 2001,  respectively,  the
holder of these notes  exercised  its remedy under the security  agreement  with
respect to such notes and was  substituted  as the sole  limited  partner of the
Local  Limited  Partnerships  in place of the  Partnership  and the  noteholders
assignee  was  substituted  as the  general  partner.  No gain or loss  has been
recorded as a result of the transfer of these  partnership  interests.  With the
loss  of  the  Partnership's  interest  in  Hurbell  II  and  Hurbell  III,  the
Partnership  will not  receive  any future  benefits  from these  Local  Limited
Partnerships  and  taxable  income  through  the  date  of  foreclosure  will be
generated and allocated to the Partnership's investors without any distributable
cash. The specific impact of the tax consequence is dependent upon each specific
partners' individual tax situation.

On January 31, 2001, Windsor Apartment  Associates Limited  Partnership sold its
investment property to an unaffiliated third party for $4,600,000.  After paying
closing costs, the net proceeds were used to repay the mortgage  encumbering the
property. During the year ended December 31, 2001, the Local Limited Partnership
distributed  approximately $2,267,000 of the net proceeds to the Partnership and
accrued  approximately  $132,000 in distributions to the other partners.  During
the year ended  December 31, 2002,  the Local  Limited  Partnership  distributed
approximately  $43,000  of  final  proceeds  to  partners.   The  Local  Limited
Partnership  recognized  a gain  on  the  sale  of  discontinued  operations  of
approximately $667,000.

On December 28, 2001, West Oak Village Limited  Partnership  sold its investment
property to an  unaffiliated  third party for  approximately  $3,172,000.  After
paying  closing  costs,  the net  proceeds  were  used  to  repay  the  mortgage
encumbering the property. The remaining proceeds were used to repay a portion of
the deferred acquisition note and accrued interest thereon which was held by the
general partner of the Local Limited Partnership. The unpaid portion of the note
was  forgiven  and  treated  as a  capital  contribution  to the  Local  Limited
Partnership.  With the sale of its  property,  the  Partnership  will receive no
future benefits from this Local Limited Partnership.

On February 13, 2003  Caroline  Arms  Limited  Partnership  sold its  investment
property to an  unaffiliated  third party for  $4,600,000.  After paying closing
costs, the net proceeds were used to repay the mortgage encumbering the property
along with other liabilities of the property and the Local Limited  Partnership.
In  accordance  with an  agreement  reached  with note  holder  of the  deferred
acquisition  note 60% or  approximately  $1,393,000  of the  remainder  was paid
against  the  interest  and  principal  of this note and 40%,  or  approximately
$928,000,   was  distributed  to  the  Partnership.   The  distribution  to  the
Partnership was used to pay its liabilities.

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About
Fair Value of Financial  Instruments",  as amended by SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments",
requires  disclosure  of fair value  information  about  financial  instruments,
whether or not  recognized  in the  balance  sheet,  when it is  practicable  to
estimate that value and excessive  costs would not be incurred.  To estimate the
fair value of the  balances  due to the General  Partner  and  accrued  interest
thereon,  excessive costs would be incurred and, therefore, no estimate has been
made.  The  Partnership  believes  that the  carrying  value of other assets and
liabilities   reported  on  the  balance  sheet  that  require  such  disclosure
approximate fair value.

(13) GOING CONCERN

All of the Local Limited  Partnership's notes payable are past due (see Note 6).
Therefore, there is the possibility that the Partnership will lose its ownership
interest  in  the  Local  Limited   Partnerships   through  foreclosure  by  the
noteholder.  Continuation of the Local Limited  Partnerships'  operations in the
present form is dependent on their  ability to extend the maturity date of these
notes or to repay or  refinance  the  notes.  The  financial  statements  do not
include any adjustments which might result from the outcome of this uncertainty.

(14) RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial  Accounting  Standards  Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived  Assets".  SFAS No. 144
provides  accounting  guidance for  financial  accounting  and reporting for the
impairment or disposal of long-lived  assets.  SFAS No. 144 supersedes  SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed Of". SFAS No. 144 is effective for fiscal years  beginning
after December 15, 2001. As a result,  the accompanying  combined  statements of
operations of the Local Limited  Partnerships  have been restated to reflect the
operations of the six Local Limited  Partnerships that were either foreclosed on
or sold during 2001 as discontinued operations.

In April 2002,  the Financial  Accounting  Standards  Board issued SFAS No. 145,
"Rescission of FASB  Statements  No. 4, 44 and 64". SFAS No. 4 "Reporting  Gains
and Losses from Extinguishment of Debt," required that all gains and losses from
extinguishment  of  debt  be  aggregated  and,  if  material,  classified  as an
extraordinary item. SFAS No. 145 rescinds SFAS No. 4, and accordingly, gains and
losses from extinguishment of debt should only be classified as extraordinary if
they are  unusual in nature and occur  infrequently.  Neither of these  criteria
applies to the Partnership. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002.  The  Partnership  adopted SFAS No. 145  effective  April 1,
2002.  The  adoption  of which did not have a  material  effect on the  combined
financial  position  or  combined  results of  operations  of the Local  Limited
Partnerships.