FORM 10-KSB-ANNUAL OR TRANSITIONAL REPORT UNDER
                             SECTION 13 OR 15(d)

                                   Form 10-KSB

(Mark One)
[X]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT
      OF 1934
      [No Fee Required]

                 For the fiscal year ended December 31, 2001

[ ]   TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934
      [No Fee Required]

            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

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

                        18,138 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.  $243,000

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, 2001.  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

<PAGE>
                                     PART I

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

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  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,Insured   for Rental    for the Year Ended
<S>                                                                                  <C>
   Property Name, Location    Number of  and Subsidized Assistance Under    December 31,
     and Partnership Name       Units        Under        Section 8 (C)     2001     2000

Anderson Gardens                 (D)          (D)              (D)          (D)       (D)
  Anderson, South Carolina
  (Hurbell II Limited
    Partnership)

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

Caroline Arms                    204          (A)              161           95%      97%
  Jacksonville, Florida
  (Caroline Arms Limited
    Partnership)

Harold House                      80          (A)               80          100%     100%
  Jacksonville, Florida
  (Harold House Limited
    Partnership)

Hilltop                          (B)          (B)              (B)          (B)       (B)
  Hickory, North Carolina
  (Hilltop Limited Partnership)

Holly Oak                        (B)          (B)              (B)          (B)       (B)
  Shelby, North Carolina
  (Hurbell I Limited
    Partnership)

                                                                              Occupancy
                                                        Units Authorized     Percentage
                                        Financed,Insured  for Rental    for the Year Ended
   Property Name, Location    Number of  and Subsidized Assistance Under    December 31,
     and Partnership Name       Units        Under        Section 8 (C)     2001     2000

Kimberton                        (B)          (B)              (B)          (B)       (B)
  Newark, Delaware
  (Kimberton Apartments
    Associates Limited
    Partnership)

Mayfair                          (D)          (D)              (D)          (D)       (D)
  Tucson, Arizona
  (Mayfair Manor Limited
    Partnership)

Park Avenue West I               (B)          (B)              (B)          (B)       (B)
  Mansfield, Ohio
  (Park Avenue West I Limited
    Partnership)

Park Avenue West II              (B)          (B)              (B)          (B)       (B)
  Mansfield, Ohio
  (Park Avenue West II Limited
    Partnership)

Rodeo Drive                      (B)          (B)              (B)          (B)       (B)
  Victorville, California
  (Rodeo Drive Limited
    Partnership)

Royal Oak Gardens                (D)          (D)              (D)          (D)       (D)
  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                     (D)          (D)              (D)          (D)       (D)
  Tuscon, Arizona
  (Esbro Limited Partnership)

Windsor Apartments               (C)          (C)              (C)          (C)       (C)
  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 lost through foreclosure of Partnership  interests during the
      year ended December 31, 2000.

(C)   Property was sold in 2001.

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

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, 2001  (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       $ 1,627       $ 4,234
Harold House L.P.                   94.5%          364           634         1,625
San Juan del Centro L.P.            94.5%          799         1,351         3,692
West Oak Village Limited
  Partnership                       94.5%         (B)          (B)           1,801
</TABLE>

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

(B) Local Limited Partnership sold its property on December 28, 2001.

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

2002                      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, 2002.  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

In July 1999, NHP received a grand jury subpoena  requesting  documents relating
to NHP's  management of HUD-assisted or HUD-insured  multifamily  properties and
NHP's  operation of a group  purchasing  program created by NHP, known as Buyers
Access.  The  subpoena  related  to the same  subject  matter as  subpoenas  NHP
received in October and December  1997 from the HUD Inspector  General.  NHP has
been informed that the grand jury investigation has been terminated.

Separately,  AIMCO,  on behalf of NHP,  entered into a Settlement  Agreement and
Release  with  HUD in  July  2001,  which  finalized,  without  any  finding  of
wrongdoing, all civil matters that were the subject of the HUD Inspector General
Investigation.  A payment of $4.2  million was made by AIMCO on behalf of NHP in
connection  with the  settlement.  This  payment had been fully  reserved for by
AIMCO and,  therefore,  had no effect on the  financial  condition or results of
operations of AIMCO or NHP.

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

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

No matters were submitted.


                                     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,  2001,  there were 1,140  registered  holders of
            18,138  limited  partnership  units (in  addition to 1133  Fifteenth
            Street Two  Associates  - See "Item 7.  Financial  Statements - Note
            1"). On December 31, 2001, 120 units were abandoned.

      (c)   No cash  dividends  or  distributions  have been  declared  from the
            inception of the Partnership through December 31, 2001.

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

The Properties in which the Partnership has invested, through its investments in
the Local Limited Partnerships, 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.

Cash and cash equivalents  amounted to approximately $5,000 at December 31, 2001
compared  to  approximately  $1,000  at  December  31,  2000.  The  increase  of
approximately  $4,000 was due to  approximately  $2,264,000  of cash provided by
investing activities largely offset by approximately  $1,785,000 and $475,000 of
cash used in operating and financing activities,  respectively. Cash provided by
investing  activities  consisted primarily of distributions from the proceeds of
the sale of Windsor  Apartments.  Cash used in  operating  activities  consisted
primarily of  repayment of the accrued  interest on the note payable and payment
of operating  expenses  partially offset by distributions  received in excess of
investment  in Local  Limited  Partnerships.  Cash used in financing  activities
consisted  of  principal  payments on the note  payable and payments on advances
from the General Partner  partially offset by 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, 2001 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.

Net  cash  used  in  operations  for  the  year  ended  December  31,  2001  was
approximately  $1,785,000  compared to approximately  $39,000 for the year ended
December 31, 2000.  The increase in cash used in  operations is primarily due to
the  payment of accrued  interest  on the note  payable  from the  Partnership's
portion  of  proceeds  received  from the sale of Windsor  Apartments.  This was
partially  offset by an increase in  distributions  received  from Local Limited
Partnerships in excess of investment and a decrease in operating expenses paid.

Distributions  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  investment in Local Limited  Partnerships,
certain investments'  carrying values have been reduced to zero. For investments
in  Local  Limited   Partnerships   which  have  been  reduced  to  zero,   cash
distributions  received are recorded in revenues as  distributions  in excess of
investment  in Local  Limited  Partnerships.  For  investments  in Local Limited
Partnerships  which have not been reduced to zero, cash  distributions  received
are recorded as distributions from Local Limited  Partnerships in the statements
of cash flows and reduce the Partnership's investment on the balance sheet. Cash
distributions  totaling  approximately  $2,369,000  (approximately  $102,000  in
excess  of  investment)  and  $60,000   (approximately   $55,000  in  excess  of
investment) were received from three Local Limited Partnerships during the years
ended December 31, 2001 and 2000, respectively.  The receipt of distributions in
future years is dependent on the operations of the underlying  properties of the
Local Limited Partnerships.

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.

Caroline  Arms,  Harold House and San Juan Del Centro Limited  Partnerships  all
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,
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.

Hilltop Apartments, Hurbell I, Park Avenue West I, Park Avenue West II and Rodeo
Drive  Limited  Partnerships  had notes payable which were due November 2, 1999,
December  19, 1999,  December 20, 1999,  December 20, 1999 and December 6, 1997,
respectively.  The Local Limited  Partnerships did not have the resources to pay
the amounts due. On the dates shown in the following  table,  the  Partnership's
interest in the Local Limited Partnerships were foreclosed upon and, pursuant to
the security  agreement of the notes,  the noteholders  were substituted as sole
limited  partners of the Local  Limited  Partnerships.  Also,  the  noteholder's
assignee was substituted as the general partner.

          Partnership                         Foreclosure Date

          Hilltop                              August 9, 2000
          Hurbell I                           October 26, 2000
          Park Avenue West I                  January 17, 2000
          Park Avenue West II                 January 17, 2000
          Rodeo Drive                          January 1, 2000

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 Hilltop,
Hurbell  I, Park  Avenue  West I & II and Rodeo  Drive to the  noteholders,  the
Partnership  will not  receive  any future  benefits  from these  Local  Limited
Partnerships and taxable income will be generated and flow to the  Partnership's
investors without distributable cash. The specific impact of the tax consequence
is dependent upon each specific partner's individual tax situation.

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.

On  July  24,  2000,  the  noteholder  foreclosed  on the  note  payable  by the
Partnership  which was  collaterized  by its  interest in  Kimberton  Apartments
Associates  Limited  Partnership.  The holder of the note was NHP,  the  general
partner  of the  Partnership  and an  affiliated  party.  As a  result  of  this
transaction, the Partnership lost its interest in the Local Limited Partnership.
No gain or loss has been recorded as a result of the transfer of this  interest.
With the loss of the Partnership's  interest in Kimberton Apartments  Associates
Limited  Partnership to the  noteholder,  the  Partnership  will not receive any
future  benefits from the Local Limited  Partnership  and taxable income will be
generated and flow to the Partnership's  investors without  distributable  cash.
The  specific  impact of the tax  consequence  is dependent  upon each  specific
partner's 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   $2,268,000   of  the  net   proceeds  and  accrued
approximately   $131,000  in  distributions  to  partners.   The  Local  Limited
Partnership  recognized  a  gain  on the  sale  of the  investment  property  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.

The General Partner advanced the Partnership  approximately  $10,000 and $33,000
during the years ended  December  31, 2001 and 2000,  respectively.  Interest is
charged on borrowings at the Chase  Manhattan  Bank prime interest rate plus 2%.
Interest  expense was less than $1,000  during 2001 and 2000.  During 2001,  the
Partnership repaid  approximately  $33,000 of advances from the General Partner.
No such repayments were made during 2000.

As of December 31, 2001, the Partnership owes the General Partner  approximately
$1,338,000 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.

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, 2001,  the  Partnership  continued to hold an interest in five Local Limited
Partnerships.  Two of these five partnerships sold their properties during 2001.
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,  2001,  the
Partnership  had no carrying  basis in its investment in any of the active 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 net income of  approximately  $827,000 for the year
ended December 31, 2001 compared to a net loss of approximately $311,000 for the
year ended  December 31, 2000. Net income per unit of limited  partnership  unit
increased  to $44.80,  from a net loss per unit of $(16.71)  for the years ended
December  31,  2001 and 2000,  respectively.  The  increase in net income is due
primarily to the Partnership's  share of the gain recognized related to the sale
of Windsor  Apartments and an extraordinary gain on forgiveness of debt relating
to 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  three  of  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 and six of the Partnership's
investments in Local Limited  Partnerships  during 2001 and 2000,  respectively,
and interest on notes payable  attributable  to the repayment and forgiveness of
the notes payable in 2001 and 2000.

The  Partnership  did not  recognize  approximately  $1,602,000 of its allocated
share of  losses  from  seven  Local  Limited  Partnerships  for the year  ended
December  31,  2001,  as the  Partnership's  net  carrying  basis in these Local
Limited  Partnerships  had been reduced to zero. In addition the Partnership did
not recognize  approximately $6,000 of its allocated share of income from one of
the Local  Limited  Partnerships  for the year ended  December 31, 2001,  as the
Partnership  had  cumulative  unrecognized  losses  with  respect  to this Local
Limited  Partnership.  The Partnership's  share of losses from the Local Limited
Partnerships,  if not  limited to its  investment  account  balance,  would have
decreased  approximately  $895,000 between periods,  primarily due to impairment
losses recognized at Harold House and Brightwaters during 2001.

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  General  Partner  does not
anticipate  that its  adoption  will have a material  effect on the  financial
position or results of operations of the Partnership.


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, 2001

      Statements of Operations - Years ended December 31, 2001 and 2000

      Statements  of  Changes  in  Partners'  Capital  (Deficit)  - Years  ended
      December 31, 2001 and 2000

      Statements of Cash Flows - Years ended December 31, 2001 and 2000

      Notes to Financial Statements



<PAGE>


                          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,  2001,  and the related
statements of operations,  partners' capital (deficit),  and cash flows for each
of the two  years  in the  period  ended  December  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 audits.

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,  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,  2001,  and the
results  of its  operations  and its cash flows for each of the two years in the
period  ended  December  31,  2001  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.



                                                               Ernst & Young LLP

Indianapolis, Indiana
February 22, 2002


<PAGE>



                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                                  BALANCE SHEET

                                December 31, 2001
                       (in thousands, except unit data)



                                        ASSETS
Cash and cash equivalents                                            $  5
Investments in and advances to Local Limited
  Partnerships (Note 2)                                                 43
                                                                      $ 48


                     LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities:
  Accrued expenses                                                   $ 41
  Administrative and reporting fees payable to
   General Partner (Note 3)                                          1,338
  Advances from General Partner (Note 3)                                10
                                                                     1,389

Partners' capital (deficit):
  General Partner                                                      629
  Original Limited Partner                                            (181)
  Other Limited Partners - 18,138 investment units                  (1,789)
                                                                    (1,341)

                                                                      $ 48


                See Accompanying Notes To Financial Statements


<PAGE>


                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                            STATEMENTS OF OPERATIONS

                     (in thousands, except per unit data)

<TABLE>
<CAPTION>

                                                              Years Ended December 31,
                                                                2001           2000
REVENUES:
<S>                                                             <C>            <C>
  Share of profits from Local Limited Partnerships              $ 140          $ --
  Distributions in excess of investment in Local Limited
   Partnerships                                                    102            55
  Interest income                                                    1            --
                                                                   243            55

COSTS AND EXPENSES:
  Share of losses from Local Limited Partnerships (Note 2)          --             2
  Administrative and reporting fees to General Partner
   (Note 3)                                                         42            77
  Interest on notes payable (Note 4)                                10           185
  Other operating expenses                                          72           102
                                                                   124           366

Income (loss) before extraordinary item                            119          (311)
Extraordinary gain on forgiveness of debt (Note 4)                 708            --

NET INCOME (LOSS)                                               $ 827         $ (311)

ALLOCATION OF NET INCOME (LOSS):
  General Partner                                                $ 1           $ (3)
  Original Limited Partner                                           8            (3)
  Other Limited Partners                                           818          (305)

                                                                $ 827         $ (311)
PER LIMITED PARTNERSHIP UNIT:
  Income (loss) before extraordinary item                      $ 6.41        $(16.71)
  Extraordinary gain on forgiveness of debt                      38.39            --

NET INCOME (LOSS) PER OTHER LIMITED PARTNERSHIP UNIT           $ 44.80       $(16.71)


                See Accompanying Notes To Financial Statements
</TABLE>

<PAGE>

                 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, 2000            $ (182)       $ (186)      $(2,302)       $(2,670)

Transfer of interest                       8             8           797            813

Net loss for the year ended
   December 31, 2000                      (3)           (3)         (305)          (311)

Deficit at December 31, 2000            (177)         (181)       (1,810)        (2,168)

Transfer of interest (Note 4)            805            (8)         (797)            --

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

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

Percentage interest at
   December 31, 2001 and 2000             1%             1%           98%          100%
                                          (A)           (B)           (C)

</TABLE>

(A)   General Partner

(B)   Original Limited Partner

(C)   Consists of 18,138 and 18,258  investment  units at December  31, 2001 and
      2000, respectively. See "Note 7" for further information.

                See Accompanying Notes To Financial Statements

<PAGE>
                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                            STATEMENTS OF CASH FLOWS

                                (in thousands)
<TABLE>
<CAPTION>

                                                                     Years Ended December 31,
                                                                        2001         2000
CASH FLOWS FROM OPERATING ACTIVITIES:
  Distributions received in excess of investment in
<S>                                                                    <C>           <C>
   Local Limited Partnership                                           $ 102         $ 55
  Interest received                                                         1            --
  Operating expenses paid                                                 (66)          (94)
  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                          (1,785)          (39)

Cash flows from investing activities:
  Distributions from Local Limited Partnerships                         2,267             5
  Advances to Local Limited Partnership                                    (3)           --
        Net cash provided by investing activities                       2,264             5

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

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        4            (1)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              1             2

CASH AND CASH EQUIVALENTS AT END OF YEAR                                $ 5           $ 1

RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN
  OPERATING ACTIVITIES:
   Net income (loss)                                                   $ 827        $ (311)
   Adjustments to reconcile net income(loss) to net cash used
     in operating activities:
      Share of (income) losses from Local Limited Partnerships           (140)            2
      (Decrease) increase in accrued interest on deferred
        acquisition notes                                              (1,805)          186
      Extraordinary gain on forgiveness of debt                          (708)           --
      Increase in administrative and reporting fees payable                42            76
      (Decrease) increase in other accrued expenses                        (1)            8
        Total adjustments                                              (2,612)          272

Net cash used in operating activities                                 $(1,785)       $ (39)
</TABLE>

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 an
extraordinary gain on forgiveness of debt.

During 2000, notes payable, accrued interest on notes payable and investments in
and  advances to Local  Limited  Partnerships  were  adjusted by a net amount of
approximately  $813,000  which was  treated as a  transfer  of  interest  in the
Statement  of Partners'  Capital  (Deficit)  to reflect the  foreclosure  on the
Partnership's interest in Kimberton Apartment Associates LP.

                See Accompanying Notes To Financial Statements

<PAGE>
                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                          NOTES TO FINANCIAL STATEMENTS

                                December 31, 2001

(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,  2001,  the  Partnership  retained an  ownership
interest in five of the original Local Limited  Partnerships.  Two of these five
Local Limited Partnerships sold their properties during 2001.

On June 3,  1997,  Apartment  Investment  and  Management  Company,  a  Maryland
corporation  and  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 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
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.

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

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  significant  financial
instruments,  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.  See "Recent  Accounting
Pronouncements" below.

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.
The Partnership has only one reportable  segment.  Due to the very nature of the
Partnership's  operations,  the  General  Partner  believes  that  segment-based
disclosures will not result in a more meaningful presentation than the financial
statements as currently presented.

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  General  Partner  does not
anticipate  that its  adoption  will have a material  effect on the  financial
position or results of operations of the Partnership.

(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,  2001,  the  Partnership  continues to hold an interest in five
Local Limited  Partnerships:  San Juan del Centro Limited Partnership,  Caroline
Arms Limited  Partnership,  Windsor Apartments  Associates  Limited  Partnership
(sold its  property in 2001),  West Oak Village  (sold its property in 2001) and
Harold House Limited  Partnership.  During 2000, the Partnership's  interests in
Hilltop,  Hurbell I, Park Avenue West I and II,  Kimberton  Apartments and Rodeo
Drive Limited  Partnerships  were foreclosed and during 2001, the  Partnership's
interests in Hurbell II and III,  Esbro and Mayfair Manor  Limited  Partnerships
were foreclosed.

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            11/15/99     $ 1,561         $ 2,673
Harold House Limited Partnership             11/15/99         599           1,026
San Juan Del Centro Limited Partnership      12/20/99       1,458           2,234

      Total Delinquent                                      3,618           5,933

West Oak Village Limited Partnership (A)     11/30/13          --           1,801

      Total due                                           $ 3,618         $ 7,734
</TABLE>

(A)   West Oak Village  Limited  Partnership  sold its  property on December 29,
      2001.  The  remaining  accrued  interest  balance  will be repaid with net
      proceeds from the sale.

Caroline  Arms,  Harold House and San Juan Del Centro Limited  Partnerships  all
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,
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.

Hilltop Apartments, Hurbell I, Park Avenue West I, Park Avenue West II and Rodeo
Drive  Limited  Partnerships  had notes payable which were due November 2, 1999,
December  19, 1999,  December 20, 1999,  December 20, 1999 and December 6, 1997,
respectively.  The Local Limited  Partnerships did not have the resources to pay
the amounts due. On the dates shown in the following  table,  the  Partnership's
interest in the Local Limited Partnerships were foreclosed upon and, pursuant to
the security  agreement of the notes,  the noteholders  were substituted as sole
limited  partners of the Local  Limited  Partnerships.  Also,  the  noteholder's
assignee was substituted as the general partner.

          Partnership                         Foreclosure Date

          Hilltop                              August 9, 2000
          Hurbell I                           October 26, 2000
          Park Avenue West I                  January 17, 2000
          Park Avenue West II                 January 17, 2000
          Rodeo Drive                          January 1, 2000

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 Hilltop,
Hurbell  I, Park  Avenue  West I & II and Rodeo  Drive to the  noteholders,  the
Partnership  will not  receive  any future  benefits  from these  Local  Limited
Partnerships and taxable income will be generated and flow to the  Partnership's
investors without distributable cash. The specific impact of the tax consequence
is dependent upon each specific partner's individual tax situation.

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.

On  July  24,  2000,  the  noteholder  foreclosed  on the  note  payable  by the
Partnership  which was  collaterized  by its  interest in  Kimberton  Apartments
Associates  Limited  Partnership.  The holder of the note was NHP,  the  general
partner  of the  Partnership  and an  affiliated  party.  As a  result  of  this
transaction, the Partnership lost its interest in the Local Limited Partnership.
No gain or loss has been recorded as a result of the transfer of this  interest.
With the loss of the Partnership's  interest in Kimberton Apartments  Associates
Limited  Partnership to the  noteholder,  the  Partnership  will not receive any
future  benefits from the Local Limited  Partnership  and taxable income will be
generated and flow to the Partnership's  investors without  distributable  cash.
The  specific  impact of the tax  consequence  is dependent  upon each  specific
partner's 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   $2,268,000   of  the  net   proceeds  and  accrued
approximately   $131,000  in  distributions  to  partners.   The  Local  Limited
Partnership  recognized  a  gain  on the  sale  of the  investment  property  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.

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  $1,602,000 and
$707,000 of losses from seven and ten Local Limited Partnerships during 2001 and
2000, respectively.  During 2001 and 2000, the Partnership's share of profits in
one  Local   Limited   Partnerships   of   approximately   $6,000  and  $27,000,
respectively,  were  offset  against  prior year  losses not  recognized.  As of
December 31, 2001 and 2000, the  Partnership  has not  recognized  approximately
$2,959,000 and $12,009,000,  respectively,  of its allocated cumulative share of
losses from seven and twelve Local Limited  Partnerships in which its investment
has been reduced to zero. The Partnership's allocated cumulative share of losses
in the four Local Limited  Partnerships with a zero investment balance that were
sold or foreclosed  during the year ended December 31, 2001,  was  approximately
$10,646,000.

The  Partnership  made  advances  of $10,000 to the Local  Limited  Partnerships
during 2001 and no advances in 2000.  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, 2001 and the combined  results of operations for
the years ended December 31, 2001 and 2000, are as follows:

                           CONDENSED COMBINED BALANCE SHEET
                          OF THE LOCAL LIMITED PARTNERSHIPS
                                    (in thousands)
                                                               December 31, 2001
Assets:
  Land                                                               $ 1,203
  Buildings and improvements, net of accumulated
   depreciation of approximately $6,767                                7,673
  Other                                                                4,151

                                                                      $13,027
Liabilities:
  Mortgage notes payable                                             $ 3,612
  Notes payable                                                        3,618
  Accrued interest on notes payable                                    7,734
  Other liabilities                                                    1,326

Partners' Deficit:
  National Housing Partnership Realty Fund Two                        (2,720)
  Other partners                                                        (543)
                                                                      (3,263)

                                                                     $13,027


                     CONDENSED COMBINED STATEMENTS OF OPERATIONS
                          OF THE LOCAL LIMITED PARTNERSHIPS
                                    (in thousands)
                                                        Years Ended December 31,
                                                          2001             2000

Revenues                                                $ 5,744          $ 8,978

Expenses:
  Operating expenses                                      3,661            6,331
  Financial expenses - primarily interest                   146              226
  Interest on notes payable                                 854            1,353
  Depreciation and amortization                           1,262            1,760
  Impairment loss                                         1,169               --
                                                          7,092            9,670

Net loss                                               $(1,348)          $ (692)

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,  2001 and 2000,  the  projects
received a total of approximately  $4,366,000 and $5,759,000,  respectively,  of
rental assistance from HUD.

Regulation of Affordable Housing

The  Federal  Housing   Administration  ("FHA")  has  contracted  with  the  six
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 693 units, or 80% 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

2002                      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, 2002.  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.  121  "Accounting  for the  Impairment  of  Long-Lived  Assets  and for
Long-Lived  Assets  to  be  Disposed  Of"  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.

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, 2001. 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 $42,000 and $77,000 during 2001 and 2000, respectively.
No payments  were made during 2001 or 2000 for these fees.  The balance  owed to
the General  Partner for these fees is  approximately  $1,338,000 as of December
31, 2001.

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.

The General Partner advanced the Partnership  approximately  $10,000 and $33,000
during the years ended  December 31, 2001 and 2000,  respectively.  In 2001, the
Partnership  repaid advances of  approximately  $33,000 to the General  Partner.
Interest is charged on borrowings  at the Chase  Manhattan  Bank prime  interest
rate plus 2% and amounted to less than $1,000 in 2001 and 2000.  Chase Manhattan
Bank's  prime  was 5.00% at  December  31,  2001.  At  December  31,  2001,  the
Partnership had $10,000 in unpaid borrowings 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  $381,000  and  $579,000  for  management  fees and  other
services  provided  to the  Local  Limited  Partnerships  during  2001 and 2000,
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, 2001 and 2000,  were  approximately
$713,000 and $973,000, respectively.

Beginning  in  2001,  the  Local  Limited   Partnerships  began  insuring  their
properties  up to certain  limits  through  coverage  provided by AIMCO which is
generally  self-insured  for a portion  of losses  and  liabilities  related  to
workers compensation, property casualty and vehicle liability. The Local Limited
Partnerships  insure their properties  above the AIMCO limits through  insurance
policies obtained by AIMCO from insurers  unaffiliated with the General Partner.
During the year ended  December 31, 2001,  the Local Limited  Partnerships  paid
AIMCO and its affiliates  approximately  $93,000 for insurance coverage and fees
associated with policy claims administration.

(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 an
extraordinary gain.

On  July  24,  2000,  the  noteholder  foreclosed  on the  note  payable  by the
Partnership  which was  collaterized  by its  interest in  Kimberton  Apartments
Associates  Limited  Partnership.  The holder of the note was NHP,  the  general
partner  of the  Partnership  and an  affiliated  party.  As a  result  of  this
transaction, the Partnership lost its interest in the Local Limited Partnership.
No gain or loss has been recorded as a result of the transfer of this  interest.
With the loss of the Partnership's  interest in Kimberton Apartments  Associates
Limited  Partnership to the  noteholder,  the  Partnership  will not receive any
future  benefits from the Local Limited  Partnership  and taxable income will be
generated and flow to the Partnership's  investors without  distributable  cash.
The  specific  impact of the tax  consequence  is dependent  upon each  specific
partner's individual tax situation.

(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,
                                                     2001            2000

Net income (loss) per financial statements          $ 827           $ (311)

Add (deduct):
  Interest on notes payable                           (49)              75
  Gain on foreclosure                               9,605              813
  Partnership's share of Local Limited
   Partnerships' income                             4,214           11,272
  Other                                               533               32

Income per tax return                             $15,130          $11,881

The following is a reconciliation between the Partnership's reported amounts and
the Federal tax basis of net liabilities at December 31, 2001 (in thousands):

Net deficit as reported                                        $ (1,341)

Add (deduct):
  Investment in Partnerships                                     (5,591)
  Other                                                             678

Net deficit - Federal tax basis                                $ (6,254)

(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 positive  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 2001, the number of limited partnership units decreased by 120 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 18,258 units. There were no such abandonments in 2000.

(8)   LEGAL PROCEEDINGS

In July 1999, NHP received a grand jury subpoena  requesting  documents relating
to NHP's  management of HUD-assisted or HUD-insured  multifamily  properties and
NHP's  operation of a group  purchasing  program created by NHP, known as Buyers
Access.  The  subpoena  related  to the same  subject  matter as  subpoenas  NHP
received in October and December  1997 from the HUD Inspector  General.  NHP has
been informed that the grand jury investigation has been terminated.

Separately,  AIMCO,  on behalf of NHP,  entered into a Settlement  Agreement and
Release  with  HUD in  July  2001,  which  finalized,  without  any  finding  of
wrongdoing, all civil matters that were the subject of the HUD Inspector General
Investigation.  A payment of $4.2  million was made by AIMCO on behalf of NHP in
connection  with the  settlement.  This  payment had been fully  reserved for by
AIMCO and,  therefore,  had no effect on the  financial  condition or results of
operations of AIMCO or NHP.

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

(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      $ 2,529        $   --
Harold House Limited
  Partnership                   (1)           80       1,782        1,657          (535)
San Juan Del Centro
  Limited Partnership           (1)          725       3,360        1,288            --

  Totals                                 $ 1,065     $ 9,639      $ 5,474       $ (535)
</TABLE>

<TABLE>
<CAPTION>

                     Gross Amount At Which Carried
                         At December 31, 2001
                            (in thousands)

                               Buildings
                                  And
                               Related
                               Personal            Accumulated    Date of     Date   Depreciable
     Description        Land   Property  Total(2) Depreciation  Construction Acquired Life-Years
                                           (3)         (3)
                                                 (in thousands)
Caroline Arms Limited
<S>                    <C>      <C>      <C>         <C>           <C>       <C>        <C>
  Partnership          $  317   $ 6,969  $ 7,286     $(3,159)      1972      04/85      5-50
Harold House Limited
  Partnership             151     2,833    2,984      (1,386)      1973      05/85      5-50
San Juan Del Centro
  Limited Partnership     735     4,638    5,373      (2,222)      1970      04/85      5-50

  Totals              $ 1,203   $14,440  $15,643     $(6,767)
</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              $ 1,627        $ 4,234       $ 5,861
Harold House Limited Partnership                   634          1,625         2,258
San Juan del Centro Limited Partnership          1,351          3,692         5,043

  Total                                        $ 3,612        $ 9,551       $13,162
</TABLE>

(2)   The  aggregate  cost of real  estate for  Federal  income tax  purposes at
      December  31,  2001  is   approximately   $16,170,000,   and   accumulated
      depreciation  for Federal  income tax  purposes  at  December  31, 2001 is
      approximately $12,758,000.

(3)   Reconciliation of real estate (in thousands)


                                                 Years Ended December 31,
                                                   2001           2000

Balance at beginning of period                   $ 44,459       $ 58,156
Improvements during the period                      1,146          1,319
Disposals of rental properties                    (28,793)       (15,016)
Impairment losses on rental property               (1,169)            --
Balance at end of period                         $ 15,643       $ 44,459


      Reconciliation of accumulated depreciation (in thousands)

                                                   2001           2000

Balance at beginning of period                   $ 18,314       $ 23,145
Depreciation expense for the period                 1,262          1,756
Disposals of rental properties                    (12,809)        (6,587)
Balance at end of period                          $ 6,767       $ 18,314



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.

Lance J.  Graber  (40) was  appointed  Executive  Vice  President  -  Affordable
Transactions of NCHP and AIMCO in October 1999. His principal  business function
is affordable  housing  transactions.  Prior to joining AIMCO,  Mr. Graber was a
Director at Credit Suisse First Boston from 1994 to May 1999,  during which time
he supervised a staff of seven in the making of principal  investments in hotel,
multi-family and assisted living properties.

Patrick J. Foye (age 44) 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.

Lance J. Graber (age 40).  See "Directors of NCHP."

Patrick J. Foye  (age 44). See "Directors of NCHP."

David  Robertson  (age 36) was appointed  Executive  Vice President - Affordable
Properties of NCHP and AIMCO in February 2002. He is responsible  for affordable
property  operations,  refinancing  and  other  value  creation  within  AIMCO's
affordable portfolio.  Prior to joining AIMCO, Mr. Robertson was a member of the
investment-banking group at Smith Barney from 1991 to 1996, during which time he
was responsible for real estate investment  banking  transactions in the western
United  States,  and was part of the  Smith  Barney  team that  managed  AIMCO's
initial public offering in 1994.

Joel F.  Bonder  (age 53) was  appointed  Executive  Vice  President  Legal  and
Regulatory  Affairs  in August  2001 and  previously  served as  Executive  Vice
President,  General Counsel and Secretary of NCHP and AIMCO  effective  December
1997 to August 2001.  Prior to joining  AIMCO,  Mr. Bonder served as Senior Vice
President  and General  Counsel of NHP from April 1994 until it was  acquired by
AIMCO in December 1997.

Paul J.  McAuliffe  (age 45) 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.

Martha L. Long (age 42) has been Senior Vice  President  and  Controller  of the
General  Partner since October 1998 as a result of the  acquisition  of Insignia
Financial  Group,  Inc. As of February 2001, Ms. Long was also appointed head of
the service  business for AIMCO.  From June 1994 until January 1997, she was the
Controller for Insignia, and was promoted to Senior Vice President - Finance and
Controller in January 1997,  retaining that title until October 1998.  From 1988
to June 1994,  Ms. Long was Senior Vice  President and  Controller for The First
Savings Bank, FSB in Greenville, South Carolina.

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,
2001 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 the current fiscal year.
Fees for the last  fiscal  year  were  annual  audit of  $38,000  and  non-audit
services (principally tax-related) of $12,000.

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 13. 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  is  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,
2001.

         Name of Beneficial Owner              Number of Units       % of Class

AIMCO and affiliates                                1,935              10.67%
  (affiliates of the General Partner)

The business address of AIMCO is 2000 South Colorado Boulevard, Denver, Colorado
80222.

Item 12.    Certain Relationships and Related Transactions

The Partnership accrued administrative and reporting fees payable to the General
Partner of approximately $42,000 and $77,000 during 2001 and 2000, respectively.
No payments  were made during 2001 or 2000 for these fees.  The balance  owed to
the General  Partner for these fees is  approximately  $1,338,000 as of December
31, 2001.

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.

The General Partner advanced the Partnership  approximately  $10,000 and $33,000
during the years ended  December 31, 2001 and 2000,  respectively.  In 2001, the
Partnership  repaid advances of  approximately  $33,000 to the General  Partner.
Interest is charged on borrowings  at the Chase  Manhattan  Bank prime  interest
rate plus 2% and amounted to less than $1,000 in 2001 and 2000.  Chase Manhattan
Bank's  prime  was 5.00% at  December  31,  2001.  At  December  31,  2001,  the
Partnership had $10,000 in unpaid borrowings 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  $381,000  and  $579,000  for  management  fees and  other
services  provided  to the  Local  Limited  Partnerships  during  2001 and 2000,
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, 2001 and 2000,  were  approximately
$713,000 and $973,000, respectively.

Beginning  in  2001,  the  Local  Limited   Partnerships  began  insuring  their
properties  up to certain  limits  through  coverage  provided by AIMCO which is
generally  self-insured  for a portion  of losses  and  liabilities  related  to
workers compensation, property casualty and vehicle liability. The Local Limited
Partnerships  insure their properties  above the AIMCO limits through  insurance
policies obtained by AIMCO from insurers  unaffiliated with the General Partner.
During the year ended  December 31, 2001,  the Local Limited  Partnerships  paid
AIMCO and its affiliates  approximately  $93,000 for insurance coverage and fees
associated with policy claims administration.

Item 13.    Exhibits and Reports on Form 8-K

      (a)   Exhibits

            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 2001:

            None.

<PAGE>

                                   SIGNATURES



Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Registrant  has duly 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/Martha L. Long
                                          Martha L. Long
                                          Senior Vice President and
                                          Controller


                                    Date:


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the Registrant and in the
capacities and on the dates indicated:


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


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

<PAGE>

                                  EXHIBIT 99.1

                  NATIONAL HOUSING PARTNERS REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                          COMBINED FINANCIAL STATEMENTS

                FOR THE YEAR ENDED DECEMBER 31, 2001 AND 2000



<PAGE>



                          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, 2001, and
the related combined statements of operations, partners' deficit, and cash flows
for each of the two years in the period ended December 31, 2001.  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 Esbro Limited  Partnership,  Mayfair Manor Limited  Partnership or
Windsor Apartment  Associates  Limited  Partnership  (three of the fifteen Local
Limited  Partnerships) for the year ended December 31, 2000 which reflect 53% of
combined net loss for the year then ended.  The  financial  statements  of these
Local Limited  Partnerships  were audited by other  auditors  whose reports have
been  furnished  to us, and our  opinion,  insofar as it relates to the  amounts
included for these Local Limited Partnerships, is based solely on the reports 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, 2001, and the combined  results of their  operations
and their cash flows for each of the two years in the period ended  December 31,
2001 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.


                                                          /s/Ernst & Young LLP
Indianapolis, Indiana
February 22, 2002


<PAGE>


                          Independent Auditor's Report


Partners
Windsor Apartments Associates
Indianapolis, IN

We have audited the  accompanying  statement  of  financial  position of Windsor
Apartments  Associates,   FHA  Project  No.   032-44012-LD-WAH-SUP,   A  Limited
Partnership,  as of December 31, 2000, and the related  statements of profit and
loss, partners' equity (deficit),  and cash flows for the year then ended. 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 generally accepted auditing standards.
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 December 31, 2000,  and the results of its  operations,  changes in partners'
equity  (deficit) and its cash flows for the year then ended in conformity  with
generally accepted accounting principles.

As  discussed  in  Note  11 to  the  financial  statements,  the  assets  of the
Partnership were sold January 31, 2001.

Our audit was  conducted  for the  purpose  of  forming  an opinion on the basic
financial statements taken as a whole. The additional  information,  as referred
to in the Table of Contents,  is presented for purposes of  additional  analysis
and is not a required part of the basic financial statements of the Partnership.
Such  information has been subjected to the auditing  procedures  applied in the
audit of the basic financial  statements and, in our opinion,  is fairly stated,
in all material respects, in relation to the basic financial statements taken as
a whole.


Armacost & Orsborne LLP
Bethesda, Maryland
February 13, 2001

<PAGE>

                          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

<PAGE>


                          Independent Auditors' Report



To the Partners
Esbro Limited Partnership
Tucson, Arizona

We have audited the accompanying balance sheet of Esbro Limited Partnership, FHA
Project  Number  123-44038-LDP,  as  of  December  31,  2000,  and  the  related
statements of operations,  changes in partners' capital,  and cash flows for the
year then  ended.  These  financial  statements  are the  responsibility  of the
Project's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally  accepted auditing standards
and  Government  Auditing  Standards  issued by the  Comptroller  General of 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 Esbro Limited Partnership,  FHA
Project  Number  123-44038-LDP,  as of  December  31, 2000,  and the  results of
operations, changes in partners' capital, and cash flows for the year then ended
in conformity with generally accepted accounting principles.

In accordance  with Government  Auditing  Standards and the  Consolidated  Audit
Guide for Audits of HUD Programs  issued by the U.S.  Department  of Housing and
Urban  Development,  we have  also  issued a report  dated  March 7, 2001 on our
consideration of Esbro Limited Partnership's  internal control and reports dated
March 7, 2001, on its compliance with specific requirements  applicable to major
HUD programs,  and specific requirements  applicable to major HUD programs,  and
specific requirements applicable to Affirmative Fair Housing.

As discussed in Note 6 in the financial statements, certain of the Partnership's
notes  payable were due October 25, 1999;  therefore,  the notes are in default.
During 2000, the noteholder commenced foreclosure proceedings on the Partnership
interests of the Partnership.  This condition raises substantial doubt about its
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Our audit was  conducted  for the  purpose  of  forming  an opinion on the basic
financial   statements  taken  as  a  whole.   The  accompanying   supplementary
information  shown on pages 14 to 18 is  presented  for  purposes of  additional
analysis and is not a required  part of the basic  financial  statements  of the
Esbro Limited  Partnership.  Such information has been subjected to the auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  is fairly stated, in all material  respects,  in relation to the basic
financial statements taken as a whole.

Jon R. Young Company, P.C.
March 7, 2001

<PAGE>

                          Independent Auditors' Report


To the Partners
Mayfair Manor Limited Partnership
Tucson, Arizona

We have  audited  the  accompanying  balance  sheet  of  Mayfair  Manor  Limited
Partnership, FHA Project Number 123-44022-LDP,  as of December 31, 2000, and the
related statements of operations,  changes in partners' capital,  and cash flows
for the year then ended.  These financial  statements are the  responsibility of
the Project's  management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally  accepted auditing standards
and  Government  Auditing  Standards  issued by the  Comptroller  General of 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  Mayfair  Manor  Limited
Partnership, FHA Project Number 123-44022-LDP,  as of December 31, 2000, and the
results of operations, changes in partners' capital, and cash flows for the year
then ended in conformity with generally accepted accounting principles.

In accordance  with Government  Auditing  Standards and the  Consolidated  Audit
Guide for Audits of HUD Programs  issued by the U.S.  Department  of Housing and
Urban  Development,  we have  also  issued a report  dated  March 7, 2001 on our
consideration  of Mayfair  Manor  Limited  Partnership's  internal  control  and
reports  dated  March 7, 2001,  on its  compliance  with  specific  requirements
applicable to major HUD programs, and specific requirements  applicable to major
HUD programs, and specific requirements applicable to Affirmative Fair Housing.

As discussed in Note 6 in the financial statements, certain of the Partnership's
notes  payable were due October 25, 1999;  therefore,  the notes are in default.
During 2000, the noteholder commenced foreclosure proceedings on the Partnership
interests of the Partnership.  This condition raises substantial doubt about its
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Our audit was  conducted  for the  purpose  of  forming  an opinion on the basic
financial   statements  taken  as  a  whole.   The  accompanying   supplementary
information  shown on pages 14 to 18 is  presented  for  purposes of  additional
analysis and is not a required  part of the basic  financial  statements  of the
Mayfair Manor Limited  Partnership.  Such  information has been subjected to the
auditing procedures applied in the audit of the basic financial  statements and,
in our opinion,  is fairly stated, in all material respects,  in relation to the
basic financial statements taken as a whole.

Jon R. Young Company, P.C.
March 7, 2001

<PAGE>

                                  EXHIBIT 99.1

                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                             COMBINED BALANCE SHEET

                                (in thousands)

                                December 31, 2001


                                        ASSETS
Cash and cash equivalents                                          $  2,167
Accounts receivable, net (Note 2)                                       670
Tenants' security deposits held in trust funds                           94
Prepaid expenses and other assets                                        16
Mortgage escrow deposits                                              1,178
Other assets                                                             26
Rental property, net (Notes 4, 5, 10 and 11)                          8,876

                                                                   $ 13,027

                          LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
  Accounts payable and accrued expenses                            $    535
  Accrued real estate taxes                                              70
  Partner loans and accrued interest (Note 7)                           489
  Tenants' security deposits payable                                     94
  Notes payable (Note 6)                                              3,618
  Accrued interest on notes payable (Note 6)                          7,734
  Mortgage notes payable (Note 5)                                     3,612
  Other liabilities                                                     138
                                                                     16,290

  Partners' deficit                                                  (3,263)

                                                                   $ 13,027

                See Accompanying Notes To Financial Statements


<PAGE>


                                  EXHIBIT 99.1

                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                        COMBINED STATEMENTS OF OPERATIONS

                                (in thousands)

<TABLE>
<CAPTION>

                                                              Years Ended December 31,
                                                                  2001         2000
REVENUE:
<S>                   <C>                                       <C>          <C>
  Rental income (Note 3)                                        $ 4,748      $ 8,511
  Interest income                                                   105          153
  Other income                                                      224          314
  Gain on sale of investment properties (Note 11)                   667           --
                                                                  5,744        8,978
EXPENSES:
  Administrative expenses                                           390          958
  Utilities and operating expenses                                1,638        2,847
  Management and other services from related party (Note 9)         381          579
  Salaries and related benefits to related party (Note 9)           713          973
  Depreciation and amortization                                   1,262        1,760
  Impairment loss (Note 10)                                       1,169           --
  Taxes and insurance                                               509          909
  Financial expenses - primarily interest                           146          226
  Interest on notes payable (Notes 6 and 7)                         854        1,353
  Annual partnership administrative fees to General Partner
    (Note 7)                                                         30           65
                                                                  7,092        9,670

NET LOSS                                                        $(1,348)      $ (692)

                See Accompanying Notes To Financial Statements

</TABLE>
<PAGE>

                                  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, 2000        $(14,105)      $ (337)     $ (490)       $ (73)     $(15,005)

Distributions                          (60)          --           --           --          (60)

Net (loss) profit                     (681)          (7)          (5)           1         (692)

Transfer of interest
  (Note 11)                          4,590           46          (71)          34        4,599

Deficit at December 31, 2000       (10,256)        (298)        (566)         (38)     (11,158)

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

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

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

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

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

Percentage interest at
  December 31, 2001 and 2000          (A)            (B)         (C)          (D)
</TABLE>

(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.

                See Accompanying Notes To Financial Statements

<PAGE>

                                  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,
                                                                   2001           2000
CASH FLOWS FROM OPERATING ACTIVITIES:
  Receipts:
<S>                                                              <C>            <C>
   Rental receipts                                               $ 4,698        $ 8,876
   Interest receipts                                                  92            173
   Other operating receipts                                          399            274
   Tenant security deposits                                           57             41
   Entity receipts                                                   137             --
            Total receipts                                         5,383          9,364

  Disbursements:
   Administrative                                                   (335)          (629)
   Management fees                                                  (320)          (755)
   Utilities                                                        (841)        (1,476)
   Salaries and wages                                               (838)        (1,325)
   Operating and maintenance                                        (960)          (995)
   Real estate taxes                                                (102)          (429)
   Property insurance                                               (105)          (219)
   Miscellaneous taxes and insurance                                (143)          (284)
   Tenant security deposits                                          (35)            --
   Other operating disbursements                                      (1)            --
   Interest on mortgage                                              (79)           (73)
   Mortgage insurance premium                                        (17)           (64)
   Miscellaneous financial expenses                                   (4)            (6)
   Transfer of operating cash to new owner                          (508)          (224)
   Entity disbursements:
     Interest on notes payable                                      (137)            --
     Miscellaneous disbursements                                    (142)          (147)
            Total disbursements                                   (4,567)        (6,626)

Net cash provided by operating activities                            816          2,738

Cash flows from investing activities:
  Change in mortgage escrow accounts                                 153           (864)
  Net sales proceeds                                               7,448             --
  Net purchase of fixed assets                                    (1,146)        (1,319)
  Other investing                                                     40            (61)

Net cash provided by (used in) investing activities                6,495         (2,244)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Mortgage principal payments                                       (394)          (659)
  Repayment of mortgage notes payable                             (3,443)            --
  Proceeds from loans or notes payable                                98              8
  Principal payments on loans or notes payable                        --             (8)
  Distributions                                                   (2,268)           (60)
  Other financing                                                     --             45

Net cash used in financing activities                             (6,007)          (674)

                See Accompanying Notes To Financial Statements
</TABLE>
<PAGE>

                                  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,
                                                                   2001            2000
<S>                                                                 <C>             <C>
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                1,304           (180)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                        863          1,043

CASH AND CASH EQUIVALENTS AT END OF YEAR                          $ 2,167         $ 863

RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY
  OPERATING ACTIVITIES:
   Net loss                                                       $(1,348)        $ (692)
   Adjustments to reconcile net loss to net cash provided
     by operating activities:
      Gain on sale of investment property                            (667)            --
      Depreciation and amortization                                 1,262          1,760
      Impairment loss on rental properties                          1,169             --
      Changes in operating assets and liabilities:
        Net tenant receivables                                         18            205
        Accounts receivable - other                                   186            244
        Accrued receivables                                            (2)            (1)
        Prepaid expenses and other assets                              94             --
        Cash restricted for tenants' security deposits                 76             25
        Accounts payable trade                                       (268)            34
        Accrued liabilities                                           118           (103)
        Accrued interest - notes payable                              747          1,431
        Tenant security deposits held in trust                        (34)            16
        Prepaid revenue                                                (5)            (8)
        Transfer of operating cash to new owner                      (508)          (224)
        Entity liability accounts                                     (22)            53
            Total adjustments                                       2,164          3,432

Net cash provided by operating activities                          $ 816         $ 2,738

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
  Net write-off of assets and liabilities to reflect
   foreclosures and treated as a transfer of partnership
   interests                                                      $ 8,409        $ 4,599
  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>
<PAGE>

                                  EXHIBIT 99.1

                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                December 31, 2001


(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,
2001,  the  Partnership  continues  to  hold  interests  in five  Local  Limited
Partnerships. Two of these five Local Limited Partnerships sold their properties
during 2001.

On June 3,  1997,  Apartment  Investment  and  Management  Company,  a  Maryland
corporation  and  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 nine and
fifteen  Local Limited  Partnerships  in which the  Partnership  holds a limited
partnership interest during 2001 and 2000, respectively:
<TABLE>
<CAPTION>

  Caroline Arms Limited Partnership
  Esbro Limited  Partnership (interest lost July 20, 2001)
  Harold House Limited Partnership
  Hilltop Limited Partnership (interest lost August 9, 2000)
  Hurbell I Limited  Partnership (interest  lost October 26,  2000)
  Hurbell II Limited Partnership (interest  lost April 2, 2001)
  Hurbell III  Limited  Partnership (interest lost March 28, 2001)
<S>                                                                       <C> <C>
  Kimberton Apartments Associates Limited Partnership (interest lost July 24, 2000)
  Mayfair Manor Limited  Partnership  (interest  lost July 20, 2001)
  Park Avenue West I Limited Partnership (interest lost January 17, 2000)
  Park Avenue West II Limited  Partnership (interest  lost  January  17,  2000)
  Rodeo Drive Limited Partnership  (interest  lost  January  1,  2000)
  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)
</TABLE>

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,  2001,  accounts  receivable  consist  of  the  following  (in
thousands):

Tenant receivables, net                               $  10
Housing assistance receivable (see Note 3)               16
Other receivables                                       644

Accounts receivable, net                              $ 670

(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,  2001 and 2000,  the  projects
received a total of approximately  $4,366,000 and $5,759,000,  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 693 units, or 80% 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

2002                      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, 2002.  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, 2001 rental property consists of the following (in thousands):

Land                                             $ 1,203
Buildings and improvements                        14,440
                                                  15,643
Less accumulated depreciation                     (6,767)

Rental property, net                             $ 8,876

(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):

          2002                 $  235
          2003                    256
          2004                    279
          2005                    304
          2006                    330
       Thereafter               2,208

                              $ 3,612

(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,  2001,  the  Partnership  continues to hold an interest in five
Local Limited  Partnerships:  San Juan del Centro Limited Partnership,  Caroline
Arms Limited  Partnership,  Windsor Apartments  Associates  Limited  Partnership
(sold its  property in 2001),  West Oak Village  (sold its property in 2001) and
Harold House Limited  Partnership.  During 2000, the Partnership's  interests in
Hilltop,  Hurbell I, Park Avenue West I and II,  Kimberton  Apartments and Rodeo
Drive Limited  Partnerships  were foreclosed and during 2001, the  Partnership's
interests in Hurbell II and III,  Esbro and Mayfair Manor  Limited  Partnerships
were foreclosed.

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            11/15/99     $ 1,561         $ 2,673
Harold House Limited Partnership             11/15/99         599           1,026
San Juan Del Centro Limited Partnership      12/20/99       1,458           2,234

      Total Delinquent                                      3,618           5,933

West Oak Village Limited Partnership (A)     11/30/13          --           1,801

      Total due                                           $ 3,618         $ 7,734
</TABLE>

(A)   West Oak Village  Limited  Partnership  sold its  property on December 28,
      2001.  The  remaining  accrued  interest  balance  will be repaid with net
      proceeds from the sale.

Caroline  Arms,  Harold House and San Juan Del Centro Limited  Partnerships  all
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,
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  $30,000 and $65,000 for the
years ended December 31, 2001 and 2000,  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 2001 and 2000, the
Local   Limited   Partnerships   paid   approximately   $17,000  and   $267,000,
respectively.  The balance owed to NHP for these fees was approximately $468,000
at December 31, 2001 which are included in accounts payable and accrued expenses
in the combined balance sheet.

During 2001 and 2000, the General  Partner  advanced  approximately  $98,000 and
$8,000 to one Local Limited  Partnership.  During 2000 approximately  $8,000 was
paid by the Local  Limited  Partnerships.  No payments were made during 2001. At
December 31, 2001,  approximately  $489,000 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  operated by seven and eleven of the
Local Limited Partnerships during 2001 and 2000,  respectively.  NHPMC and other
affiliates  of NCHP earned  approximately  $381,000 and $579,000 for  management
fees and other services provided to the Local Limited  Partnerships  during 2001
and 2000, 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, 2001 and 2000,  were  approximately
$713,000 and $973,000, respectively.

(10)  IMPAIRMENT LOSS ON RENTAL PROPERTY

Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets To Be Disposed Of"
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  in the amount of  approximately
$535,000 and $634,000, respectively.

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, 2001. Should a Local
Limited  Partnership  be forced to  dispose of any of its  properties,  it could
incur a loss.

(11)  DISPOSALS OF RENTAL PROPERTIES

Hilltop Apartments, Hurbell I, Park Avenue West I, Park Avenue West II and Rodeo
Drive  Limited  Partnerships  had notes payable which were due November 2, 1999,
December  19, 1999,  December 20, 1999,  December 20, 1999 and December 6, 1997,
respectively.  The Local Limited  Partnerships did not have the resources to pay
the amounts due. On the dates shown in the following  table,  the  Partnership's
interest in the Local Limited Partnerships were foreclosed upon and, pursuant to
the security  agreement of the notes,  the noteholders  were substituted as sole
limited  partners of the Local  Limited  Partnerships.  Also,  the  noteholder's
assignee was substituted as the general partner.

          Partnership                         Foreclosure Date

          Hilltop                              August 9, 2000
          Hurbell I                           October 26, 2000
          Park Avenue West I                  January 17, 2000
          Park Avenue West II                 January 17, 2000
          Rodeo Drive                          January 1, 2000

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 Hilltop,
Hurbell  I, Park  Avenue  West I & II and Rodeo  Drive to the  noteholders,  the
Partnership  will not  receive  any future  benefits  from these  Local  Limited
Partnerships and taxable income will be generated and flow to the  Partnership's
investors without distributable cash. The specific impact of the tax consequence
is dependent upon each specific partner's individual tax situation.

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.

On  July  24,  2000,  the  noteholder  foreclosed  on the  note  payable  by the
Partnership  which was  collaterized  by its  interest in  Kimberton  Apartments
Associates  Limited  Partnership.  The holder of the note was NHP,  the  general
partner  of the  Partnership  and an  affiliated  party.  As a  result  of  this
transaction, the Partnership lost its interest in the Local Limited Partnership.
No gain or loss has been recorded as a result of the transfer of this  interest.
With the loss of the Partnership's  interest in Kimberton Apartments  Associates
Limited  Partnership to the  noteholder,  the  Partnership  will not receive any
future  benefits from the Local Limited  Partnership  and taxable income will be
generated and flow to the Partnership's  investors without  distributable  cash.
The  specific  impact of the tax  consequence  is dependent  upon each  specific
partner's 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   $2,268,000   of  the  net   proceeds  and  accrued
approximately   $131,000  in  distributions  to  partners.   The  Local  Limited
Partnership  recognized  a  gain  on the  sale  of the  investment  property  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.

(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  significant  financial
instruments,  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.  See "Recent  Accounting
Pronouncements" below.

(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.  The  General  Partner  does not
anticipate  that its  adoption  will have a material  effect on the  financial
position or results of operations of the Partnership.