SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                                  ANNUAL REPORT

                     Pursuant to Section 13 or 15(d) of the

                       Securities and Exchange Act of 1934

 For the fiscal year ended December 31, 1999 .. Commission file number  0-14458

   National Housing Partnership Realty Fund Two (A Maryland Limited Partnership)
               (Exact name of registrant as specified in its charter)


              Maryland                   52-1365317
   (State or other Jurisdiction of    (I.R.S. Employer
   incorporation or organization)      Identification
                                            No.)
  9200 Keystone Crossing, Suite 500         46240
        Indianapolis, Indiana            (Zip Code)
   (Address of principal executive
              offices)

Registrant's telephone number, including area code:   (317) 817-7500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: 18,258 Limited
Partnership Interests

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding  twelve 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 ninety days.

Yes   X    No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best of registrant'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 revenue for most recent fiscal year.  $418,000

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold,  or the average bid and asked  prices of such
stock,  as of a  specified  date  within  the past 60 days  prior to the date of
filing.  No market for the Registrant's  limited  partnership  interests exists,
and, therefore, a market value for such interests cannot be determined.

                    Documents incorporated by reference. None


<PAGE>



                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                        (A MARYLAND LIMITED PARTNERSHIP)

                         1999 FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I

                                                                   Page

Item 1.     Business                                                2
Item 2.     Properties                                              8
Item 3.     Legal Proceedings                                       8
Item 4.     Submission of Matters to a Vote of Security Holders     9


                                     PART II

Item 5.     Market for the Registrant's Partnership
            Interests and Related Partnership Matters             10
Item 6.     Management's Discussion and Analysis or Plan
            of Operations                                         10
Item 7.     Financial Statements                                  14
Item 8.     Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                38

                                    PART III

Item 9.     Directors and Executive Officers of the Registrant    39
Item 10.    Executive Compensation                                40
Item 11.    Security Ownership of Certain Beneficial
            Owners and Management                                 40
Item 12.    Certain Relationships and Related Transactions        41

                                     PART IV

Item 13.    Exhibits and Reports on Form 8-K                      42



<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
interests,  at a price  of  $1,000  per  interest,  through  a  public  offering
registered  with the Securities and Exchange  Commission (the  "Offering").  The
Offering was managed by Dean Witter Reynolds, Inc. and was terminated on May 22,
1985, with subscriptions for all 18,300 limited partnership interests.

      On June 3, 1997,  Apartment  Investment and Management Company, a Maryland
corporation  ("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"). The
acquisitions were made pursuant to a Real Estate Acquisition Agreement, dated as
of May 22, 1997 (the "Agreement"), by and among AIMCO, AIMCO Properties, L.P., a
Delaware  limited  partnership (the "Operating  Partnership"),  Demeter Holdings
Corporation,  a Massachusetts  corporation  ("Demeter"),  Phemus Corporation,  a
Massachusetts  corporation  ("Phemus"),  Capricorn  Investors,  L.P., a Delaware
limited partnership ("Capricorn"),  J. Roderick Heller, III and NHP Partners Two
LLC, a Delaware limited liability company ("NHP Partners Two LLC"). 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.

Receipt of HUD Subpoena/Tolling Agreement

      In October 1997, NHP received a subpoena from the Inspector General of the
United States  Department of Housing and Urban  Development  ("HUD")  requesting
documents  relating  to any  agreement  whereby  NHP  or  any of its  affiliates
provides  or has  provided  compensation  to  owners  (or their  affiliates)  of
HUD-assisted properties in connection with management of a HUD-assisted property
(the "Transactions").  Documents were produced which may have been responsive to
the HUD subpoena and submitted to the HUD Inspector General ("HUD 16) in 1998.

      On or about  February  26, 1998,  Counsel for NHP and the U.S.  government
entered  into a Tolling  Agreement  with  respect to any  applicable  statues of
limitations  related to certain civil claims the government may have against NHP
in connection with the  Transactions.  The Tolling  Agreement  expired in August
1998.

      In July 1999,  NHP  received a grand jury  subpoena  requesting  documents
relating to the same subject matter as the HUD IG subpoenas and NHP's  operation
of a group purchasing  program created by NHP, known as Buyers Access.  To date,
neither the HUD IG nor the grand jury has  initiated  any action  against NHP or
Apartment Investment and Management Company ("AIMCO"),  the ultimate controlling
entity of NHP or, to NHP's or  AIMCO's  knowledge,  any owner of a HUD  property
managed  by NHP.  AIMCO  believes  that NHP's  operations  and  programs  are in
compliance,  in all  material  respects,  with all laws,  rules and  regulations
relating  to  HUD-assisted  or  HUD-insured   properties.   NHP  and  AIMCO  are
cooperating with  investigations and do not believe that the investigations will
result in a material  adverse  impact on its  operations.  However,  as with any
similar  investigation,  there can be no assurance that these will not result in
material fines, penalties or other costs.

      NHP believes its operations are in  compliance,  in all material  respects
with all laws,  rules,  and  regulations  related to HUD-assisted or HUD-insured
properties  and has retained  counsel in connection  with NHP's  response to the
subpoena.  Although  no action has been  initiated  against  NHP or AIMCO or, to
AIMCO's  knowledge,  any owner of a HUD property managed by NHP or AIMCO, if any
such  action  is  taken  in the  future,  it could  ultimately  affect  existing
arrangements  with respect to HUD projects or otherwise have a material  adverse
affect on the results of operations of AIMCO.

      The  Partnership's  business is to hold limited  partnership  interests in
fifteen 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.  In addition,  the
Partnership held an interest in one additional  limited  partnership  which sold
its property in 1998. The Partnership's  ownership  interest in three additional
limited  partnerships was foreclosed upon in 1998. The  Partnership's  ownership
interest in two additional limited partnerships were foreclosed upon in 1999. 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 it.

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


<PAGE>


             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
Property Name, Location    Number of  and Subsidized     Assistance Under    December 31,
and Partnership Name        Units          Under          Section 8(D)     1999      1998

<S>                           <C>           <C>             <C>            <C>      <C>
Anderson Gardens              200           (A)              200            94%      92%
Anderson, South Carolina
  (Hurbell II Limited
Partnership)

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

Esbro (H)                     100           (A)               99             97%      97%
Tuscon, Arizona
  (Esbro Limited
Partnership)

Gulfway Manor                 (E)           (E)               (E)            (E)      (E)
Corpus Christie, Texas
  (Gulfway Limited
     Partnership)

Harold House                   80           (A)               25            100%     100%
Jacksonville, Florida
  (Harold House Limited
    Partnership)

Hilltop                       105           (A)               55             91%      91%
Hickory, North Carolina
  (Hilltop Limited
   Partnership)

Holly Oak                     100           (A)               94             94%      93%
Shelby, North Carolina
  (Hurbell I Limited
Partnership)

Kimberton                     165           (A)              165             98%      95%
Newark, Delaware
  (Kimberton Apartments
    Associates Limited
     Partnership)

Mayfair (H)                   140           (A)              139             99%      98%
Tucson, Arizona
  (Mayfair Manor Limited
    Partnership)

Meadows                       (F)           (F)              (F)            (F)       98%
Sparks, Nevada
  (Meadows Apartments
   Limited Partnership)

Meadows East                  (F)           (F)             (F)             (F)       96%
Sparks, Nevada
  (Meadows East Apartments
    Limited Partnership)

Menlo Park                    (E)           (E)             (E)             (E)       (E)
Tucson, Arizona
  (Menlo Limited
    Partnership)

Park Avenue West I (G)         80           (B)              --             94%       92%
Mansfield, Ohio
  (Park Avenue West I
   Limited Partnership)

Park Avenue West II (G)        80           (A)              32             95%       98%
Mansfield, Ohio
  (Park Avenue West II
   Limited Partnership)

Rockwell Manor                (E)           (E)             (E)             (E)       (E)
Brownsville, Texas
  (Rockwell Limited
    Partnership)

Rodeo Drive (G)                99           (A)             99              96%       98%
Victorville, California
  (Rodeo Drive Limited
    Partnership)

Royal Oak Gardens             100           (B)            100              96%       99%
Kannapolis, North Carolina
  (Hurbell III Limited
    Partnership)

San Juan del Centro           150           (A)            150              98%       99%
Boulder, Colorado
  (San Juan del Centro
   Limited Partnership)

Tinker Creek                  (D)           (D)            (D)              (D)        (D)
Roanoke, Virginia
  (Tinker Creek Limited
    Partnership)

West Oak Village              200           (A)           200               94%        94%
Tulsa, Oklahoma
  (West Oak Village Limited
    Partnership)

Windsor Apartments            169           (A)           169               96%        94%
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)   The mortgage is insured by the Federal  Housing  Administration  under the
      provisions of Section 221(d)(3) of the National Housing Act.

(C) Section 8 of Title II of the Housing and Community Development Act of 1974.

(D) Property was sold during year ended December 31, 1998.

(E) Property was lost from  foreclosure  of  partnership  interests  during year
    ended December 31, 1998.

(F) Property was lost from  foreclosure of Partnership  interest during the year
    ended December 31, 1999.

(G) Partnership's interest was transferred to the noteholder in January 2000.

(H) Noteholder has initiated foreclosure proceedings.

      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.

      For the past several  years,  various  proposals have been advanced by the
United States Department of Housing and Urban Development ("HUD"),  Congress and
others  proposing the  restructuring of HUD's rental  assistance  programs under
Section 8 of the United States  Housing Act of 1937  ("Section  8"), under which
1,731 units,  88 percent of the total units owned by the properties in which the
Partnership  has invested,  receive rental  subsidies.  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 Section 8, with rents above market levels and
financed with  HUD-insured  mortgage  loans,  will be  restructured by adjusting
subsidized rents to market levels,  thereby potentially reducing rent subsidies,
and lowering required debt service costs as needed to ensure financial viability
at  the  reduced  rents  and  rent  subsidies.  The  1997  Housing  Act  retains
project-based  subsidies for most properties  (properties in rental markets with
limited supply,  properties serving the elderly,  and certain other properties).
The 1997 Housing Act phases out project-based  subsidies on selected  properties
servicing families not located in rental markets with limited supply, converting
such subsidies to a tenant-based  subsidy.  Under a  tenant-based  system,  rent
vouchers would be issued to qualified  tenants who then could elect to reside at
properties of their choice,  provided such tenants have the financial ability to
pay the difference between the selected  properties'  monthly rent and the value
of the vouchers, which would be established based on HUD's regulated fair market
rent for the relevant  geographical  areas.  With respect to Housing  Assistance
Payments Contracts ("HAP Contracts")  expiring before October 1, 1998,  Congress
has elected to renew them for one-year  terms,  generally at existing  rents, so
long as the properties  remain in compliance  with the HAP Contracts.  While the
Partnership  does not expect the provisions of the 1997 Housing Act to result in
a significant  number of tenants  relocating from properties  owned by the Local
Limited  Partnerships,  there can be no assurance that the  provisions  will not
significantly  affect the  operations  of the  properties  of the Local  Limited
Partnerships.  Furthermore,  there can be no  assurance  that  other  changes in
Federal  housing  subsidy policy will not occur.  Any such changes could have an
adverse effect on the operation of the Partnership.

      All of the units (1,731 in total)  receiving rent subsidies from Section 8
have their contracts  expiring during the year ending December 31, 2000. HUD has
issued new regulations that govern the continuance of  project-based  subsidies.
Under the new  regulations,  owners with HAP contracts  expiring after September
30, 1998 may elect to (1) renew the contract without restructuring for one year,
(2) opt out of the contract, or (3) enter into the Mark-to Market program, which
includes a potential  restructuring of the mortgage and renewal of the contract.
At this time it is not  possible  to  determine  which  option each of the Local
Limited  Partnerships  will  elect,  and  accordingly,  it is  not  possible  to
determine  the  ultimate   impact  on  the   operations  of  the  Local  Limited
Partnerships.

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  Partnership's  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.

      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  the  event  of  instances  of  unsatisfactory  performances  or
regulatory  violations,  the HUD office with  jurisdiction  over the  applicable
property  has the  authority  to  enter a  "flag"  into  the  computerized  2530
Clearance system. If one or more flags have been entered,  a decision whether to
grant  2530   Clearance  is  then   subject  to  review  by  HUD's   Multifamily
Participation Review Committee in Washington,  D.C., (the 2530 Committee).  As a
result of certain mortgage defaults and  unsatisfactory  ratings received by NHP
Incorporated in years prior to its  acquisition by AIMCO in December,  1997, HUD
believes that the 2530 Committee must review any  application for 2530 Clearance
filed by AIMCO. On December 18, 1998,  AIMCO received  approval of approximately
fifty 2530  applications  and had no  unresolved  flags in the 2530 system as of
December 31, 1998. As a result of HUD's review of 2530 applications during 1999,
two  unresolved  flags existed at December 31, 1999.  Subsequent to December 31,
1999,  one of  these  flags  was  resolved  and the  other  is  currently  being
addressed.

      Laws Benefiting Disabled Persons

      Under the Americans  with  Disabilities  Act of 1990, all places of public
accommodations  are required to meet  certain  Federal  requirements  related to
access and use by disabled persons. These requirements became effective in 1992.
A  number  of  additional  Federal,  state  and  local  laws  may  also  require
modifications to the Properties,  or restrict certain further renovations of the
Properties, with respect to access thereto by disabled persons. For example, the
Fair Housing Amendments Act of 1988 requires apartment properties first occupied
after March 13, 1990 to be accessible  to the  handicapped.  Noncompliance  with
these laws  could  result in the  imposition  of fines or an award of damages to
private litigants and also could result in an order to correct any non-complying
feature,  which could result in substantial capital  expenditures.  Although the
Partnership  believes that its properties are  substantially  in compliance with
present requirements,  it may incur unanticipated  expenses to comply with these
laws.

      Regulation of Affordable Housing

      As of December 31, 1999,  the  Partnership  held an equity  interest in 15
properties that benefit from government  programs intended to provide housing to
people  of  low  or  moderate  incomes.   These  programs,   which  are  usually
administered by the HUD or state housing  finance  agencies,  typically  provide
mortgage  insurance,  favorable financing terms or rental assistance payments to
the property  owners.  As a condition to the receipt of  assistance  under these
programs, the properties must comply with various requirements,  which typically
limit  rents to  pre-approved  amounts.  If  permitted  rents on a property  are
insufficient to cover costs, a sale of the property may become necessary,  which
could result in a loss of the Partnership's interest in the property, as well as
any benefits flowing from the property. The Partnership must obtain the approval
of HUD  in  order  to  acquire  a  significant  interest  in a  HUD-assisted  or
HUD-insured property.  The Partnership can make no assurance that it will always
receive such approval.

      Environmental

      Various Federal, state and local laws subject property owners or operators
to  liability  for the costs of removal  or  remediation  of  certain  hazardous
substances  present on a  property.  Such laws often  impart  liability  without
regard to whether the owner or operator  knew of, or was  responsible  for,  the
release of the  hazardous  substances.  The  presence of, or failure to properly
remediate,  hazardous  substances may adversely affect occupancy at contaminated
apartment  communities and the  Partnership's  ability to sell or borrow against
contaminated properties.  In addition to the costs associated with investigation
and  remediation  actions  brought by  governmental  agencies,  the  presence of
hazardous wastes on a property could result in personal injury or similar claims
by  private  plaintiffs.  Various  laws also  impose  liability  for the cost of
removal or  remediation of hazardous or toxic  substances is potentially  liable
under such laws.  These laws often  impose  liability  whether or not the person
arranging  for the disposal  ever owned or operated the  disposal  facility.  In
connection with the ownership or operation of properties,  the Partnership could
potentially be liable for environmental liabilities or costs associated with its
properties or properties it may acquire in the future.

      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.

   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, 1999  (dollar  amounts in
thousands):

                        NHP Realty Fund   Cost of
     Partnership              Two        Ownership Mortgage  Notes payable and
                          Percentage     Interest    Notes        Accrued
                           Ownership                           Interest (A)

Caroline Arms L.P.           94.5%         $ 868    $1,808        $3,922
Esbro L.P. (D)               94.5%            569       871         2,893
Harold House L.P.            94.5%            364       711         1,506
Hilltop L.P.                 94.5%            553     1,028         1,933
Hurbell I L.P.               94.5%            377     1,050         1,430
Hurbell II L.P.              94.5%            787     1,456         3,551
Hurbell III L.P.             94.5%            409       861         1,626
Kimberton Apts.              94.5%          2,078     1,733         (B)
Assoc. L.P.
Mayfair Manor L.P. (D)       94.5%            812     1,221         4,038
Park Avenue West I           94.5%            328       440         1,751
L.P. (C)
Park Avenue West II          94.5%            419       481         1,305
L.P. (C)
Rodeo Drive L.P. (C)         94.5%            600     1,025         2,470
San Juan del Centro          94.5%            799     1,507         3,430
L.P.

West Oak Village L.P.        94.5%          1,058     1,454         4,667
Windsor Apts. Assoc.         94.5%          2,117     2,219         (B)
L.P.

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

(B) Notes  payable on this property are held by the  Partnership  and not by the
Local Limited Partnership.

(C) Partnership's interest was transferred to the noteholder in January 2000.

(D) Noteholder has commenced foreclosure proceedings.

Item 2.     Properties

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

Item 3.     Legal Proceedings

      In 1997,  NHP received  subpoenas  from the HUD Inspector  General  ("IG")
requesting  documents  relating  to  arrangements  whereby  NHP  or  any  of its
affiliates  provided  compensation  to owners  of  HUD-assisted  or  HUD-insured
multi-family  projects in exchange for or in connection with property management
of a HUD project.

      In July 1999,  NHP  received a grand jury  subpoena  requesting  documents
relating to the same subject matter as the HUD IG subpoenas and NHP's  operation
of a group purchasing  program created by NHP, known as Buyers Access.  To date,
neither the HUD IG nor the grand jury has  initiated  any action  against NHP or
Apartment Investment and Management Company ("AIMCO"),  the ultimate controlling
entity of NHP or, to NHP's or  AIMCO's  knowledge,  any owner of a HUD  property
managed  by NHP.  AIMCO  believes  that NHP's  operations  and  programs  are in
compliance,  in all  material  respects,  with all laws,  rules and  regulations
relating  to  HUD-assisted  or  HUD-insured   properties.   NHP  and  AIMCO  are
cooperating  with  investigations  and does not believe that the  investigations
will result in a material adverse impact on its operations. However, as with any
similar  investigation,  there can be no assurance that these will not result in
material fines, penalties or other costs.

      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.


<PAGE>


                                     PART II

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

      (a)   Interests in the  Partnership  were sold  through a public  offering
            managed by Dean Witter Reynolds, Inc. There is no established market
            for resale of interests 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,  1999,  there were 1,156  registered  holders of
            18,258 limited partnership  interests (in addition to 1133 Fifteenth
            Street Two  Associates  - See "Item 7.  Financial  Statements - Note
            1"). In 1999, the number of Limited  Partnership  Units decreased by
            42  units  due  to  limited  partners  abandoning  their  units.  In
            abandoning his or her Limited Partnership Unit(s), a Limited Partner
            relinquishes all rights, title and interest in the Partnership as of
            the date of abandonment.

      (c)   No cash  dividends  or  distributions  have been  declared  from the
            inception of the Partnership through December 31, 1999.

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

      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.

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

Year 2000 Compliance

General Description

      The Year 2000 issue is the result of computer programs being written using
two  digits  rather  than  four  digits  to  define  the  applicable  year.  The
Partnership  is  dependent  upon the  General  Partner  and its  affiliates  for
management and administrative  services ("Managing Agent").  Any of the Managing
Agent's  computer  programs  or  hardware  that had  date-sensitive  software or
embedded  chips might have  recognized a date using "00" as the year 1900 rather
than  the  year  2000.   This  could  have  resulted  in  a  system  failure  or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, a temporary inability to process transactions,  send invoices, or engage
in similar normal business activities.

Computer Hardware, Software and Operating Equipment

      In 1999, the Managing Agent  completed all phases of its Year 2000 program
by completing the  replacement  and repair of any hardware or software system or
operating  equipment that was not yet Year 2000 compliant.  The Managing Agent's
hardware  and software  systems and its  operating  equipment  are now Year 2000
compliant.  No  material  failure or  erroneous  results  have  occurred  in the
Managing Agent's computer  applications  related to the failure to reference the
Year 2000 to date.

Third Parties

      To date,  the Managing Agent is not aware of any  significant  supplier or
subcontractor  (external agent) or financial institution of the Partnership that
has a Year 2000 issue that  would  have a material  impact on the  Partnership's
results of operations,  liquidity or capital  resources.  However,  the Managing
Agent  has no means of  ensuring  or  determining  the Year 2000  compliance  of
external  agents.  At this time, the Managing Agent does not believe that a Year
2000 issue of any  non-compliant  external agent will have a material  impact on
the Partnership's financial position or results of operations.

Costs

      The total cost of the Managing Agent's Year 2000 project was approximately
$3.2 million and was funded from operating cash flows.

Risks Associated with the Year 2000

      The Managing Agent completed all necessary phases of its Year 2000 program
in 1999, and did not experience  system or equipment  malfunctions  related to a
failure to reference the Year 2000. The Managing  Agent or Partnership  have not
been  materially  adversely  effected by  disruptions  in the economy  generally
resulting from the Year 2000 issue.

      At this time, the Managing  Agent does not believe that the  Partnership's
businesses,  results of  operations  or financial  condition  will be materially
adversely effected by the Year 2000 issue.

Contingency Plans Associated with the Year 2000

      The  Managing  Agent has not had to  implement  contingency  plans such as
manual  workarounds or selecting new  relationships  for its banking or elevator
operation activities in order to avoid the Year 2000 issue.

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.

      As  discussed  in  Note  6 to the  Local  Limited  Partnerships'  combined
financial  statements  attached  hereto  as  an  Exhibit,   each  Local  Limited
Partnership  with the  exception  of  Kimberton  Apartments  Associates  Limited
Partnership and Windsor Apartments  Associates Limited  Partnership in which the
Partnership  currently  holds an interest has a note payable due to the original
owner  of each  Property.  With  the  exception  of  West  Oak  Village  Limited
Partnership, these notes are all past due and are currently in default. West Oak
Village  Limited  Partnership  is  currently  in default due to  non-payment  of
required  annual  interest  payments for 1999 (see below).  The notes related to
Kimberton   Apartments   Associates   and  Windsor   Apartments   Associates  of
approximately $1,254,000 and $1,160,000, respectively, are collateralized by the
Partnership's  interest in these two Local Limited  Partnerships and were due on
October 24, 1999. The Partnership is currently in default on these notes and has
received  notification from the holders of the notes of their intent to initiate
foreclosure  proceedings.  These notes are secured by both the Partnership's and
NHP's interests in the applicable Local Limited Partnerships.  In the event of a
default on the notes,  the note  holders  would be able to assume  NHP's and the
Partnership's interests in the Local Limited Partnerships.

      The West Oak Village Limited  Partnership  note bears interest at the rate
of 9% per annum.  The note is nonrecourse and is secured by a security  interest
in the Partnership's interest in the Local Limited Partnership. During 1997, the
noteholders  entered into an  agreement  with the  Partnership,  under which the
maturity date of the note was extended  until  November  2013,  assuming  annual
payments  of  interest  are  made to the  noteholders.  Under  the  terms of the
agreement,  payments  are to be made equal to the annual  interest at a variable
rate based on the prior  year's  interest  rate payment  multiplied  by the most
recent Consumer Price Index rate, with any increase subject to a floor of 2% and
a ceiling of 5%. At any time prior to the note's  maturity,  the Partnership has
the option to pay off the  acquisition  note at a  discount  equal to 70% of the
property's annual scheduled rent but not less than $700,000. The required annual
installment   of  interest  for  1999,   pursuant  to  the  agreement  with  the
noteholders,  was not  made.  Accordingly,  the  Local  Limited  Partnership  is
currently  in  default  on  the  required  annual  interest   payments  and  the
Partnership  interests are subject to potential  foreclosure.  The Local Limited
Partnership is actively attempting to sell its net assets.

      Caroline Arms, Harold House,  Hilltop,  Hurbell I, Hurbell II, Hurbell III
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,  November 2,
1999,  December 19, 1999,  November 2, 1999,  December 19, 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.  Caroline  Arms,  Harold  House,
Hilltop and Hurbell I Local Limited  Partnerships are all actively attempting to
sell their respective net assets.

      Rodeo Drive Limited  Partnership note was executed by the respective Local
Limited  Partnership  with the seller as part of the acquisition of the property
by the Local Limited  Partnership.  The note was a nonrecourse note secured by a
security interest in all Partnership interests in the Local Limited Partnership.
Neither the Limited  Partnership  nor any  partners  thereof,  present or future
assume any  personal  liability  for the payment of the notes.  The note was due
December 6, 1997.  The holder of the note demanded  payment and an agreement was
reached on December 11, 1998 whereby the  interest of the  Partnership  is to be
transferred  to the  note  holder  during  January  2000.  As a  result  of this
transaction, the Local Limited Partnership will not continue as a going concern.
The financial  statements do not include any adjustments that might be necessary
as a result of this transaction.

      Esbro and Mayfair  Manor  Limited  Partnership  notes were executed by the
respective Local Limited  Partnership with the seller as part of the acquisition
of the  property by the Local  Limited  Partnership.  The notes are  nonrecourse
notes  secured  by a  security  interest  in all  Partnership  interests  in the
respective  Local Limited  Partnership.  The notes were initially 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.  Neither the Limited  Partnership  nor any  partners  thereof,
present or future  assume any personal  liability  for the payment of the notes.
Subsequent to December 31, 1999, both Local Limited Partnerships received notice
of demand for payment and the  commencement  of  foreclosure  proceedings.  Such
foreclosure is subject to HUD approval,  which is pending.  Continuation of both
of the Local Limited  Partnerships'  operations in the present form is dependent
on the outcome of these proceedings. The financial statements do not include any
adjustments  which  might  result from the  outcome of this  uncertainty.  Esbro
Limited Partnership is actively attempting to sell its net assets.

      Park Avenue West I and II Limited  Partnerships both have notes which were
executed by the respective Local Limited Partnerships with the seller as part of
the acquisition of the property by the Local Limited Partnership. The notes were
nonrecourse notes secured by a security interest in all Partnership interests in
the Local Limited  Partnership and are  subordinated to the respective  mortgage
notes on each property for as long as the mortgage notes are insured by HUD. Any
payments due from project  income are payable from surplus  cash,  as defined by
the HUD Regulatory  Agreement.  Neither the Limited Partnership nor any partners
thereof,  present or future assume any personal liability for the payment of the
notes. The notes were both due December 20, 1999. The Local Limited Partnerships
were  notified of the default and as a result of the default not being cured the
respective  noteholders  foreclosed  on  the  Partnership's  interests  in  full
satisfaction of the notes effective  January 14, 2000. The financial  statements
do not include  any  adjustments  which  might  result from the outcome of these
transactions.

      Meadows Apartments and Meadows East Apartments  Limited  Partnerships both
had notes  payable  which  were due on  December  12,  1997.  The Local  Limited
Partnerships did not have the resources to pay the amounts due. Effective August
5, 1999 and December 1, 1999,  Meadows  Apartments  and Meadows East  Apartments
Limited  Partnership  properties were foreclosed upon.  Pursuant to the security
agreement  of the note  payable,  the note  holder was  substituted  as the sole
limited partner of the Local Limited Partnership in place of the Partnership and
the note holder's  assignee was substituted as the general  partner.  No gain or
loss has been recorded as a result of the transfer of this partnership interest.
With the loss of the  Partnership's  interest in Meadows  Apartments and Meadows
East Apartments to the note holders, 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 any  distributable
cash. The specific impact of the tax consequence is dependent upon each specific
partner's individual tax situation.

     The Menlo Limited  Partnership  had a note payable which was due on October
31,  1997.  On  November  10,  1997,  the note  holder  notified  Menlo  Limited
Partnership  that the note was in default and demanded  immediate  payment.  The
Local Limited  Partnership  did not have the resources to pay amounts due on the
note payable. On January 5, 1998, pursuant to the security agreement of the note
payable,  the note holder was  substituted as sole limited  partner of the Local
Limited  Partnership in place of the Partnership and the note holder's  assignee
was  substituted  as the  general  partner.  With the loss of the  Partnership's
interest in Menlo Limited  Partnership to the note holder,  the Partnership will
not receive any future benefits from this Local Limited  Partnership and taxable
income will be generated  and flow to the  Partnership's  investors  without any
distributable cash. The specific impact of the tax consequence is dependent upon
each partner's individual tax situation.

      Additionally,  the Gulfway and  Rockwell  Limited  Partnerships  had notes
payable which were due on November 7, 1997. The Local Limited  Partnerships  did
not have the  resources  to pay  amounts due on the notes  payable.  On June 29,
1998, pursuant to the security agreements of the notes payable, the note holders
were  substituted as sole limited  partner of the Local Limited  Partnerships in
place of NHP Realty Fund Two and the note holders'  assignee was  substituted as
the  general  partner.  No gain or loss has  been  recorded  as a result  of the
transfers  of the  partnership  interest.  With  the  loss of the  Partnership's
interest in Gulfway and Rockwell Limited  Partnerships to the note holders,  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  any  distributable  cash.  The  specific  impact  of the tax
consequence is dependent upon each partner's individual tax situation.

      Tinker Creek Limited  Partnership had a note payable due on June 30, 1998.
During  February  1998,  Tinker Creek Limited  Partnership  entered into a sales
agreement  with  Artcraft  Investment,  L.L.C.  for  the  sale of  Tinker  Creek
Apartments.  The  closing  occurred  on July 2, 1998,  with a purchase  price of
approximately  $1,785,000.  Net proceeds of approximately  $750,000 were divided
between the holders of the Tinker Creek note  payable and Tinker  Creek  Limited
Partnership,  with the note  holders  receiving  80% of the net proceeds in full
satisfaction  of amounts due on their notes.  Any unpaid balances were forgiven.
Tinker Creek Limited Partnership received the remaining 20% of the net proceeds.
The  Partnership's  share of the gain  from the sale,  in  excess of  cumulative
losses not taken,  in the amount of  approximately  $34,000 has been recorded in
the accompanying  statements of operations for the year ended December 31, 1998,
as an extraordinary item - gain on extinguishment of debt.

      During 1998, the General Partner  advanced the  Partnership  approximately
$34,000 to pay legal expenses of the  Partnership.  No advances were made during
1999. During 1999, the Partnership  repaid  borrowings of approximately  $34,000
and accrued interest of approximately $3,000 to the General Partner. Interest is
charged on borrowings at the Chase  Manhattan  Bank prime interest rate plus 2%.
Chase  Manhattan Bank prime was 8.25% at December 31, 1999. At December 31, 1999
the Partnership had no unpaid  borrowings or accrued interest due to the General
Partner.

      During 1999 and 1998, the General Partner  advanced  approximately  $1,000
and  $214,000  to one and ten  Local  Limited  Partnerships,  respectively,  for
insurance and entity expenses, including expenses incurred relating to potential
sales or refinancing under the LIHPRHA program.  The Local Limited  Partnerships
paid approximately  $184,000 in loans during 1998 and approximately  $123,000 in
interest  on these loans  during  1998.  No  payments  were made on the loans or
interest during 1999. Interest is charged at a rate equal to the Chase Manhattan
Bank  prime  interest  rate plus 2%.  Chase  Manhattan  Bank  prime was 8.25% at
December 31, 1999.

      Net cash provided by operations  for the year ended  December 31, 1999 was
approximately   $11,000  as  compared  to  net  cash  used  in   operations   of
approximately $33,000 for the year ended December 31, 1998. The decrease in cash
used in operations is primarily due to the increase in interest  income received
from one of the Local Limited  Partnerships  partially  offset by an increase in
payment of administrative reporting fees to the General Partner.

      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  statement  of
financial  position.  Cash  distributions  totaling  approximately  $77,000  and
$66,000  were  received   from  one  and  three  Local   Limited   Partnerships,
respectively,  during the years ended December 31, 1999 and 1998,  respectively.
The receipt of  distributions  in future years is dependent on the operations of
the underlying properties of the Local Limited Partnerships.

      Cash and cash equivalents amounted to approximately $2,000 at December 31,
1999 as compared to approximately $25,000 at December .31, 1998. The decrease of
approximately  $23,000 was due to approximately $34,000 of repayment of advances
from the General  Partner  which more than offset the  approximately  $11,000 of
cash provided by operating  activities.  The ability of the  Partnership to meet
its on-going cash  requirements  in excess of cash on hand at December 31, 1999,
is dependent on distributions  received from the Local Limited  Partnerships and
proceeds  from  sales  or  refinancings  of  the  underlying   Properties.   The
Partnership's  only other form of liquidity is from General  Partner loans.  The
General Partner will evaluate  lending the Partnership  additional funds as such
funds are needed, but is in no way legally obligated to make such loans.

      As of  December  31,  1999,  the  Partnership  owes  the  General  Partner
approximately  $1,219,000 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  has  invested  as a  limited  partner  in Local  Limited
Partnerships which operated  twenty-one rental housing  properties.  At December
31, 1999, the Partnership continued to hold an interest in fifteen Local Limited
Partnerships.  To the extent  the  Partnership  still has a carrying  basis in a
respective Local Limited  Partnership,  results of operations are  significantly
impacted  by the  Partnership's  share of the  profits  or  losses  in the Local
Limited  Partnership.  These profits or losses include  depreciation and accrued
note payable  interest  expense which are noncash in nature.  As of December 31,
1999 and 1998, the  Partnership  had no carrying basis in twelve and fourteen of
the Local Limited Partnerships and therefore reflected no results of operations,
for its share of losses for these Local Limited Partnerships.

      The  Partnership  had a net  profit of  approximately  $2,000 for the year
ended December 31, 1999,  compared to a net loss of  approximately  $300,000 for
the year ended  December  31, 1998.  Net profit per unit of limited  partnership
increased  to $0 from  $(16) for the  18,258 and  18,300  units  outstanding  at
December  31,  1999 and 1998,  respectively.  The  increase  in net  profit  was
primarily attributable to an increase in the Partnership's share of profits from
Local Limited Partnerships,  an increase in interest income from a Local Limited
Partnership and a decrease in other operating  expense.  The Partnership did not
recognize approximately  $1,572,000 of its allocated share of losses from eleven
Local  Limited  Partnerships  for the  year  ended  December  31,  1999,  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
$61,000  of its  allocated  share of  profits  from  three of the Local  Limited
Partnerships  for the year ended  December  31,  1999,  as the  Partnership  had
cumulative  unrecognized  losses  with  respect  to these  three  Local  Limited
Partnerships.   The  Partnership's  share  of  losses  from  the  Local  Limited
Partnerships,  if not  limited to its  investment  account  balance,  would have
increased approximately $332,000 between periods, primarily due to a decrease in
total revenue,  which is offset  partially by a decrease in total expenses.  The
decrease in total  expenses and rental  income are  primarily  the result of the
loss of the Partnership's  interests in the Menlo,  Gulfway and Rockwell Limited
Partnerships in 1998 and Meadows  Apartments and Meadows East Apartments Limited
Partnerships  in 1999 due to  foreclosures  and the sale of the sole property in
Tinker Creek Limited Partnership in 1998.

Item 7. Financial Statements

      The  financial  statements  of the  Partnership  are  included on pages 15
through 37 of this report.

                          Independent Auditors' Report

To The Partners of

National Housing Partnership Realty Fund Two
Indianapolis, Indiana

We have audited the  accompanying  statement  of financial  position of National
Housing  Partnership  Realty Fund Two (the Partnership) as of December 31, 1999,
and the related statements of operations,  partners' deficit, and cash flows for
each of the two years in the period ended  December 31,  1999.  These  financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our  audits.  We did not audit the  financial  statements  of  Hurbell I Limited
Partnership,  Rodeo Drive Limited Partnership,  Kimberton Apartments  Associates
Limited   Partnership  or  Windsor  Apartment   Associates  Limited  Partnership
(investees of the  Partnership) for the year ended December 31, 1999. We did not
audit the financial  statements of Rodeo Drive  Limited  Partnership,  Kimberton
Apartments  Associates Limited  Partnership,  and Windsor Apartments  Associates
Limited  Partnership  (investees of the Partnership) for the year ended December
31, 1998.  The  financial  statements of these  investees  were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to amounts included for these investees,  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 financial  position of National  Housing  Partnership  Realty Fund Two as of
December 31, 1999, and the results of its operations and its cash flows for each
of the two years in the  period  ended  December  31,  1999 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 Partnership's notes payable have expired, and therefore, the notes are
in default.  Subsequent to December 31, 1999, the noteholders for certain of the
Local  Limited  Partnerships  foreclosed  on the  Partnership  interests and the
noteholders  for certain  other Local  Limited  Partnerships  began  foreclosure
proceedings  (Notes 2 and 4). 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
March 6, 2000


<PAGE>





                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                        (A MARYLAND LIMITED PARTNERSHIP)

                        STATEMENTS OF FINANCIAL POSITION

                                December 31, 1999

                          (in thousands, except unit data)

                                     ASSETS

Cash and cash equivalents                          $        2
Investments in and advances to Local Limited
 Partnerships (Note 2)                                  4,538

                                                    $   4,540

                        LIABILITIES AND PARTNERS' DEFICIT

Liabilities:
  Accrued expenses                                 $       35
  Administrative and reporting fees
   payable to General Partner (Note 3)                 1,219
  Notes payable to General Partner (Note 4)            2,414
  Accrued interest on notes payable
   to General Partner (Note 4)                         3,542
                                                       7,210

Partners' deficit:
  General Partner - The National Housing

   Partnership (NHP)                                    (182)
  Original Limited Partner - 1133 Fifteenth
   Street Two Associates                                (186)
  Other Limited Partners - 18,258 investment
   units                                              (2,302)

                                                      (2,670)

                                                    $  4,540

                       See notes to financial statements.

<PAGE>


                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                        (A MARYLAND LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS

                          (in thousands, except unit data)



                                          Years Ended December 31,
                                              1999        1998
REVENUE:

   Share of profits from Local Limited
    Partnerships(Note 3)                   $   293   $     146
   Distribution in excess of investment
    in Local Limited Partnership                --          17
   Interest income                               1           9
   Interest income from Local Limited
     Partnership                               124          --
                                               418         172
COSTS AND EXPENSES:
   Administrative and reporting fees to
     General Partner (Note 4)                  114         137
   Interest on notes payable to General
    Partner (Note 5)                           242         242
   Interest on partner loans (Note 4)            1           2
   Other operating expenses                     59         125

                                               416         506

PROFIT (LOSS) BEFORE EXTRAORDINARY ITEM          2        (334)

EXTRAORDINARY ITEM - SHARE OF GAIN ON
  EXTINGUISHMENT OF DEBT (NOTE 3)               --          34

NET PROFIT (LOSS)                          $     2    $   (300)

ALLOCATION OF NET PROFIT (LOSS):
   General Partner - NHP                   $    --    $     (3)
   Original Limited Partner - 1133
    Fifteenth Street Two Associates             --          (3)
   Other Limited Partners                        2        (294)

                                           $     2    $   (300)
NET PROFIT (LOSS) PER OTHER LIMITED
  PARTNERSHIP INTEREST (NOTE 3)
   Before extraordinary item               $    --    $    (18)
   Extraordinary item                           --           2

      Net profit (loss)                    $    --    $    (16)

                       See notes to financial statements

<PAGE>


                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                        (A MARYLAND LIMITED PARTNERSHIP)

                         STATEMENTS OF PARTNERS' DEFICIT

                          (in thousands, except unit data)



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

Deficit at January 1, 1998   $  (179)    $   (183)   $ (2,010)      $ (2,372)

Net loss for the year ended
   December 31, 1998              (3)          (3)       (294)         (300)

Deficit at December 31, 1998    (182)        (186)     (2,304)       (2,672)

Net profit for year ended
   December 31, 1999              --           --           2             2

Deficit at December 31, 1999 $  (182)    $   (186)   $ (2,302)     $ (2,670)

Percentage interest at
  December 31, 1998
  and 1999                         1%           1%        98%
                                  (A)          (B)        (C)

(A)   General Partner

(B)   Original Limited Partner

(C)   Consists of 18,258 and 18,300  investment  units at December  31, 1999 and
      1998, respectively. During 1999, 42 units were abandoned (Note 7).

                       See notes to financial statements

<PAGE>


                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                        (A MARYLAND LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS

                                   (in thousands)


                                                   Years Ended December 31,
                                                       1999        1998
CASH FLOWS FROM OPERATING ACTIVITIES:
  Distributions from Local Limited Partnerships      $   77      $    50
  Distributions received in excess of investment in
   Local Limited Partnership                             --           16
  Interest received                                       1            9
  Payment of administrative and reporting fees to
   General Partner                                     (107)          --
  Operating expenses paid                               (81)        (108)
  Interest income received from Local Limited
     Partnership                                        124           --
  Payment of interest on partner loans                   (3)          --

  Net cash provided by (used in) operating activities    11          (33)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Repayment of advances to Local Limited Partnerships    --            1

  Net cash provided by investing activities              --            1

CASH FLOWS FROM FINANCING ACTIVITIES
  Advances from General Partner                          --           34
  Repayment of advances from General Partner            (34)          --

  Net cash (used in) provided by financing activities   (34)          34

NET (DECREASE) INCREASE IN CASH AND
 CASH EQUIVALENTS                                       (23)           2

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR             25           23

CASH AND CASH EQUIVALENTS, END OF YEAR             $      2     $     25

                       See notes to financial statements

<PAGE>


                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                        (A MARYLAND LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS

                                   (in thousands)

                                   (Continued)

                                                      Years Ended December 31,
                                                          1999        1998

RECONCILIATION  OF NET PROFIT (LOSS) TO NET CASH
 PROVIDED BY (USED IN) OPERATING  ACTIVITIES:

Net profit (loss)                                      $    2      $  (300)
Adjustments to reconcile net profit (loss) to net cash
  provided by (used in) operating activities:
Share of profits from Local Limited Partnerships         (293)        (146)
Share of gain on extinguishment of debt                    --          (34)
Repayment of advances to Local Limited Partnerships        --           (1)
Distributions from Local Limited Partnerships              77           50
Change in operating assets and liabilities:
  Administrative and reporting fees payable to
    General Partner                                         7          137
  Accrued interest on notes payable to General Partner    242          242
  Accrued expenses                                        (22)          17
  Accrued interest on partner loans                        (2)           2
  Total adjustments                                         9          267

Net cash provided by (used in) operating activities   $    11      $   (33)



<PAGE>



                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                        (A MARYLAND LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

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 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). On April 30, 1985, the Partnership began
raising capital and acquiring interests in Local Limited Partnerships.

      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 interests
was closed after the sale of 18,300 interests to limited partners.

      During 1985, the Partnership  acquired  limited  partnership  interests of
94.5% (98% with respect to  allocation  of losses) in  twenty-one  Local Limited
Partnerships,  nineteen of which were  organized  in 1984 to acquire and operate
existing rental housing projects.  The remaining two Local Limited  Partnerships
were formed in 1972 and 1973 to construct and operate rental  housing  projects.
At December 31, 1999, the Partnership  retained an ownership interest in fifteen
of the original Local Limited Partnerships.

      On June 3, 1997,  Apartment  Investment and Management Company, a Maryland
corporation  ("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"). The
acquisitions were made pursuant to a Real Estate Acquisition Agreement, dated as
of May 22, 1997 (the "Agreement"), by and among AIMCO, AIMCO Properties, L.P., a
Delaware  limited  partnership (the "Operating  Partnership"),  Demeter Holdings
Corporation,  a Massachusetts  corporation  ("Demeter"),  Phemus Corporation,  a
Massachusetts  corporation  ("Phemus"),  Capricorn  Investors,  L.P., a Delaware
limited partnership ("Capricorn"),  J. Roderick Heller, III and NHP Partners Two
LLC, a Delaware limited liability company ("NHP Partners Two LLC"). 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.

      Significant Accounting Policies

      The financial  statements of the  Partnership  are prepared on the accrual
basis of accounting. Direct costs of acquisition, including acquisition fees and
reimbursable  acquisition  expenses  paid  to the  General  Partner,  have  been
capitalized  as investments  in the Local Limited  Partnerships.  Other fees and
expenditures  of the  Partnership  are  recognized as expenses in the period the
related services are performed.

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  effect 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.

      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'  profits (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.

      For purposes of the Statement of Cash Flows, the Partnership considers all
highly  liquid debt  instruments  purchased  with  original  maturities of three
months or less to be cash equivalents.

      Certain  reclassifications  of prior  years'  amounts  have  been  made to
conform with the current year's presentation.

      Fair Value of Financial Instruments

      FASB  Statement  No.  107,  "Disclosures  About  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  statement of financial  position  that require such  disclosure
approximates fair value.

      Segment Reporting

       Statement of Financial  Accounting  Standards 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 establishes  standards for related disclosures about products and services,
geographic  areas, and major customers.  The Partnership has only one reportable
segment.

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: Meadows Apartments Limited Partnership, Esbro Limited Partnership,
Rodeo Drive  Limited  Partnership,  Menlo  Limited  Partnership,  Mayfair  Manor
Limited  Partnership,   Hurbell  I  Limited  Partnership,   Hurbell  II  Limited
Partnership,  Hurbell III Limited Partnership, Tinker Creek Limited Partnership,
Rockwell  Limited  Partnership,  Meadows East  Apartments  Limited  Partnership,
Kimberton Apartments Associates Limited Partnership, San Juan del Centro Limited
Partnership,  Gulfway Limited  Partnership,  Caroline Arms Limited  Partnership,
Hilltop Limited Partnership,  Harold House Limited Partnership, Park Avenue West
I Limited Partnership, West Oak Village Limited Partnership, Park Avenue West II
Limited  Partnership,  and Windsor Apartments  Associates  Limited  Partnership.
During 1998, the Partnership's  interest in Gulfway Limited  Partnership,  Menlo
Limited  Partnership and Rockwell  Limited  Partnership were foreclosed upon and
Tinker  Creek  Limited   Partnership   sold  its  property.   During  1999,  the
Partnership's  interest  in Meadows  East  Apartments  Limited  Partnership  and
Meadows Apartments Limited Partnership were foreclosed upon.

      The Menlo Limited  Partnership had a note payable which was due on October
31,  1997.  On  November  10,  1997,  the note  holder  notified  Menlo  Limited
Partnership  that the note was in default and demanded  immediate  payment.  The
Local Limited  Partnership  did not have the resources to pay amounts due on the
note payable. On January 5, 1998, pursuant to the security agreement of the note
payable,  the note holder was  substituted as sole limited  partner of the Local
Limited  Partnership in place of the Partnership and the note holder's  assignee
was substituted as the general  partner.  No gain or loss has been recorded as a
result  of the  transfer  of this  partnership  interest.  With  the loss of the
Partnership's  interest in Menlo  Limited  Partnership  to the note holder,  the
Partnership  will not  receive  any  future  benefits  from this  Local  Limited
Partnership  and taxable income will be generated and flow to the  Partnership's
investors  without  any  distributable  cash.  The  specific  impact  of the tax
consequence is dependent upon each partner's individual tax situation.

      Additionally,  the Gulfway and  Rockwell  Limited  Partnerships  had notes
payable which were due on November 7, 1997. The Local Limited  Partnerships  did
not have the  resources  to pay  amounts due on the notes  payable.  On June 29,
1998, pursuant to the security agreements of the notes payable, the note holders
were  substituted as sole limited  partner of the Local Limited  Partnerships in
place of NHP Realty Fund Two and the note holders'  assignee was  substituted as
the  general  partner.  No gain or loss has  been  recorded  as a result  of the
transfers  of the  partnership  interest.  With  the  loss of the  Partnership's
interest in Gulfway and Rockwell Limited  Partnerships to the note holders,  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  any  distributable  cash.  The  specific  impact  of the tax
consequence is dependent upon each partner's individual tax situation.

       Tinker Creek Limited Partnership had a note payable due on June 30, 1998.
During  February  1998,  Tinker Creek Limited  Partnership  entered into a sales
agreement  with  Artcraft  Investment,  L.L.C.  for  the  sale of  Tinker  Creek
Apartments.  The  closing  occurred  on July 2, 1998,  with a purchase  price of
$785,000.  Net  proceeds of  approximately  $750,000  were  divided  between the
holders of the Tinker Creek note payable and Tinker Creek  Limited  Partnership,
with the note holders  receiving 80% of the net proceeds in full satisfaction of
amounts due on their notes.  Any unpaid  balances  were  forgiven.  Tinker Creek
Limited  Partnership  received  the  remaining  20% of  the  net  proceeds.  The
Partnership's  share of the gain from the sale, in excess of  cumulative  losses
not taken,  in the amount of  approximately  $34,000  has been  recorded  in the
accompanying  statements of operations  for the year ended December 31, 1998, as
an extraordinary  item - gain on  extinguishment  of debt. The sale may generate
taxable income to the  Partnership's  investors.  The specific impact of the tax
consequences is dependent upon each specific partner's individual tax situation.

      Meadows Apartments and Meadows East Apartments  Limited  Partnerships both
had notes  payable  which  were due on  December  12,  1997.  The Local  Limited
Partnerships did not have the resources to pay the amounts due. Effective August
5, 1999 and December 1, 1999,  Meadows  Apartments  and Meadows East  Apartments
Limited  Partnership  notes  were  foreclosed  upon.  Pursuant  to the  security
agreement  of the note  payable,  the note  holder was  substituted  as the sole
limited partner of the Local Limited Partnership in place of the Partnership and
the note holder's  assignee was substituted as the general  partner.  No gain or
loss has been recorded as a result of the transfer of this partnership interest.
With the loss of the  Partnership's  interest in Meadows  Apartments and Meadows
East Apartments to the note holders, 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 any  distributable
cash. The specific impact of the tax consequence is dependent upon each specific
partner's individual tax situation.

       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'  profits.  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, 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. As a result, the Partnership did
not  recognize  approximately  $1,572,000  and  $1,240,000 of losses from eleven
Local Limited Partnerships during 1999 and 1998,  respectively.  During 1999 and
1998 the Partnership's  share of profits in three Local Limited  Partnerships in
the amount of  approximately  $61,000  and  $49,000,  respectively,  were offset
against prior year losses not taken. The excess profit of approximately  $19,000
during 1998 was offset against  distributions  taken into income.  There were no
excess profits  received  during 1999. As a result of the sale and  foreclosures
discussed above, during 1998 approximately  $6,114,000 of profits resulting from
the  Partnerships  loss of  interest  in three Local  Limited  Partnerships  and
extraordinary  gain from the  extinguishment  of debt were offset  against prior
years losses not taken.  As of December 31, 1999 and 1998, the  Partnership  has
not recognized approximately $17,904,000 and $21,747,000,  respectively,  of its
allocated  cumulative  share of losses from twelve and  fourteen  Local  Limited
Partnerships in which its investment has been reduced to zero.

       The Partnership made no advances to the Local Limited Partnerships during
1999 and 1998. Accrued interest of approximately  $1,000 and $9,000 was received
during 1999 and 1998, respectively. 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 financial position of the aforementioned  Local
Limited  Partnerships  as of December  31,  1999,  and the  combined  results of
operations for the years ended December 31, 1999 and 1998, are as follows:

                      CONDENSED COMBINED FINANCIAL POSITION

                        OF THE LOCAL LIMITED PARTNERSHIPS

                                   (in thousands)


                                                        December 31, 1999
Assets:
  Land                                                     $   3,901
  Buildings and improvements, net of accumulated
   depreciation of approximately $23,145
   and impairment losses on rental property of
   approximately $16,679                                      31,110
  Other                                                        6,208

                                                           $  41,219
Liabilities and Partners' Deficit
  Liabilities:

   Mortgage notes payable                                  $  17,865
   Notes payable                                              15,906
   Accrued interest on notes payable                          18,616
   Other liabilities                                           3,837

                                                              56,224

  Partners' Deficit:
   National Housing Partnership Realty Fund Two              (14,104)
   Other partners                                               (901)
                                                             (15,005)

                                                           $  41,219



<PAGE>


                    CONDENSED COMBINED RESULTS OF OPERATIONS

                        OF THE LOCAL LIMITED PARTNERSHIPS

                                   (in thousands)

                                          Years Ended December 31,
                                              1999        1998

Revenue                                     $12,262     $13,344

Expenses:
  Operating expenses                          8,648       9,891
  Financial expenses - primarily interest       327         272
  Interest on notes payable                   1,882       2,123
  Depreciation and amortization               1,899       2,218
  Impairment loss on rental property            736         347
                                             13,492      14,851

Loss before extraordinary item               (1,230)     (1,507)
Gain on extinguishment of debt                   --       1,618

Net (loss) profit                           $(1,230)   $    111

      The combined  financial  statements of the Local Limited  Partnerships are
prepared on the accrual basis of accounting. Thirteen Local Limited Partnerships
operate  rental  housing  projects  organized  under Section 236 of the National
Housing Act. The  remaining  two Local  Limited  Partnerships  operate  projects
organized under Section 221(d)(3) 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, 1999 and 1998,  the  projects  received a total of
approximately $6,616,000 and $7,265,000, respectively, of rental assistance from
HUD.

      For the past several  years,  various  proposals have been advanced by the
United States Department of Housing and Urban Development ("HUD"),  Congress and
others  proposing the  restructuring of HUD's rental  assistance  programs under
Section 8 of the United States  Housing Act of 1937  ("Section  8"), under which
1,731 units,  88 percent of the total units owned by the properties in which the
Partnership  has invested,  receive rental  subsidies.  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 Section 8, with rents above market levels and
financed with  HUD-insured  mortgage  loans,  will be  restructured by adjusting
subsidized rents to market levels,  thereby potentially reducing rent subsidies,
and lowering required debt service costs as needed to ensure financial viability
at  the  reduced  rents  and  rent  subsidies.  The  1997  Housing  Act  retains
project-based  subsidies for most properties  (properties in rental markets with
limited supply,  properties serving the elderly,  and certain other properties).
The 1997 Housing Act phases out project-based  subsidies on selected  properties
servicing families not located in rental markets with limited supply, converting
such subsidies to a tenant-based  subsidy.  Under a  tenant-based  system,  rent
vouchers would be issued to qualified  tenants who then could elect to reside at
properties of their choice,  provided such tenants have the financial ability to
pay the difference between the selected  properties'  monthly rent and the value
of the vouchers, which would be established based on HUD's regulated fair market
rent for the relevant  geographical  areas.  With respect to Housing  Assistance
Payments Contracts ("HAP Contracts")  expiring before October 1, 1998,  Congress
elected to renew them for one-year  terms,  generally at existing rents, so long
as the  properties  remain  in  compliance  with the HAP  Contracts.  While  the
Partnership  does not expect the provisions of the 1997 Housing Act to result in
a significant  number of tenants  relocating from properties  owned by the Local
Limited  Partnerships,  there can be no assurance that the  provisions  will not
significantly  affect the  operations  of the  properties  of the Local  Limited
Partnerships.  Furthermore,  there can be no  assurance  that  other  changes in
Federal  housing  subsidy policy will not occur.  Any such changes could have an
adverse effect on the operation of the Partnership.

      All of the units (1,731 in total)  receiving rent subsidies from Section 8
have their contracts  expiring during the year ending December 31, 2000. HUD has
issued new regulations that govern the continuance of  project-based  subsidies.
Under the new  regulations,  owners with HAP contracts  expiring after September
30, 1998 may elect to (1) renew the contract without restructuring for one year,
(2) opt out of the contract, or (3) enter into the Mark-to Market program, which
includes a potential  restructuring of the mortgage and renewal of the contract.
At this time it is not  possible  to  determine  which  option each of the Local
Limited  Partnerships  will  elect,  and  accordingly,  it is  not  possible  to
determine  the  ultimate   impact  on  the   operations  of  the  Local  Limited
Partnerships.

      Depreciation  of the buildings and  improvements  for fifteen of the Local
Limited  Partnerships is computed on a  straight-line  method assuming a 50-year
life from the date of initial  occupancy  at the time of  construction  or after
substantial  rehabilitation,  whereas  the  depreciation  of the  buildings  and
improvements   for  one  Local  Limited   Partnership   is  computed  using  the
straight-line   method  assuming  a  30-year  life  and  a  30%  salvage  value.
Depreciation   for  one  Local  Limited   Partnership   is  computed  using  the
straight-line  method,  assuming a 40-year  life.  Depreciation  of equipment is
calculated using  accelerated  methods over estimated useful lives of five to 27
years.

      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 3% to 8.5% per annum.
For the remaining  thirteen rental housing  projects  insured under Section 236,
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.

      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 prepaid 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.


<PAGE>


These notes mature as follows:

          Local Partnership       Due Date      Note Amount   Accrued Interest
                                                        (in thousands)

     Rodeo Drive Limited
         Partnership          December 6, 1997*    $2,470        $   --
     Esbro Limited
         Partnership          October 25, 1999*     1,204         1,689
     Mayfair Manor Limited
         Partnership          October 25, 1999*     1,654         2,384
     Hurbell II Limited
         Partnership          November 2, 1999*     1,502         2,049
     Hilltop Limited
         Partnership          November 2, 1999*       817         1,116
     Caroline Arms Limited
         Partnership          November 15, 1999*    1,561         2,361
     Harold House Limited
         Partnership          November 15, 1999*      599           907
     Hurbell I Limited
         Partnership          December 19, 1999*      608           822
     Hurbell III Limited
         Partnership          December 19, 1999*      688           938
     Park Avenue West I
       Limited Partnership    December 20, 1999*      744         1,007
     Park Avenue West II
      Limited Partnership     December 20, 1999*      554           751
     San Juan Del Centro
      Limited Partnership     December 20, 1999*    1,458         1,972

           Total Delinquent                        13,859        15,996

     West Oak Limited
       Partnership            November 30, 2013*    2,047         2,620

           Total Due                              $15,906       $18,616

        * Notes are in default.

      The West Oak Village Limited  Partnership  note bears interest at the rate
of 9% per annum.  The note is nonrecourse and is secured by a security  interest
in the Partnership's interest in the Local Limited Partnership. During 1997, the
noteholders  entered into an  agreement  with the  Partnership,  under which the
maturity date of the note was extended  until  November  2013,  assuming  annual
payments  of  interest  are  made to the  noteholders.  Under  the  terms of the
agreement,  payments  are to be made equal to the annual  interest at a variable
rate based on the prior  year's  interest  rate payment  multiplied  by the most
recent Consumer Price Index rate, with any increase subject to a floor of 2% and
a ceiling of 5%. At any time prior to the note's  maturity,  the Partnership has
the option to pay off the  acquisition  note at a  discount  equal to 70% of the
property's annual scheduled rent but not less than $700,000. The required annual
installment   of  interest  for  1999,   pursuant  to  the  agreement  with  the
noteholders,  was not  made.  Accordingly,  the  Local  Limited  Partnership  is
currently  in  default  on  the  required  annual  interest   payments  and  the
Partnership  interests are subject to potential  foreclosure.  The Local Limited
Partnership is actively attempting to sell its net assets.

     Caroline Arms,  Harold House,  Hilltop,  Hurbell I, Hurbell II, Hurbell III
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,  November 2,
1999,  December 19, 1999,  November 2, 1999,  December 19, 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.  Caroline  Arms,  Harold  House,
Hilltop and Hurbell I Local Limited  Partnerships are all actively attempting to
sell their respective net assets.

      Rodeo Drive Limited  Partnership note was executed by the respective Local
Limited  Partnership  with the seller as part of the acquisition of the property
by the Local Limited  Partnership.  The note was a nonrecourse note secured by a
security interest in all Partnership interests in the Local Limited Partnership.
Neither the Limited  Partnership  nor any  partners  thereof,  present or future
assume any  personal  liability  for the payment of the notes.  The note was due
December 6, 1997.  The holder of the note demanded  payment and an agreement was
reached on December 11, 1998 whereby the  interest of the  Partnership  is to be
transferred  to the  note  holder  during  January  2000.  As a  result  of this
transaction, the Local Limited Partnership will not continue as a going concern.
The financial  statements do not include any adjustments that might be necessary
as a result of this transaction.

      Esbro and Mayfair  Manor  Limited  Partnership  notes were executed by the
respective Local Limited  Partnership with the seller as part of the acquisition
of the  property by the Local  Limited  Partnership.  The notes are  nonrecourse
notes  secured  by a  security  interest  in all  Partnership  interests  in the
respective  Local Limited  Partnership.  The notes were initially 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.  Neither the Limited  Partnership  nor any  partners  thereof,
present or future  assume any personal  liability  for the payment of the notes.
Subsequent to December 31, 1999, both Local Limited Partnerships received notice
of demand for payment and the  commencement  of  foreclosure  proceedings.  Such
foreclosure is subject to HUD approval,  which is pending.  Continuation of both
of the Local Limited  Partnerships'  operations in the present form is dependent
on the outcome of these proceedings. The financial statements do not include any
adjustments  which  might  result from the  outcome of this  uncertainty.  Esbro
Limited Partnership is actively attempting to sell its net assets.

      Park Avenue West I and II Limited  Partnerships both have notes which were
executed by the respective Local Limited Partnerships with the seller as part of
the acquisition of the property by the Local Limited Partnership. The notes were
nonrecourse notes secured by a security interest in all Partnership interests in
the Local Limited  Partnership and are  subordinated to the respective  mortgage
notes on each property for as long as the mortgage notes are insured by HUD. Any
payments due from project  income are payable from surplus  cash,  as defined by
the HUD Regulatory  Agreement.  Neither the Limited Partnership nor any partners
thereof,  present or future assume any personal liability for the payment of the
notes. The notes were both due December 20, 1999. The Local Limited Partnerships
were  notified of the default and as a result of the default not being cured the
respective  noteholders  foreclosed  on  the  Partnership's  interests  in  full
satisfaction of the notes effective  January 14, 2000. The financial  statements
do not include  any  adjustments  which  might  result from the outcome of these
transactions.

      The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 121  "Accounting  for the Impairment of Long-Lived  Assets and for
Long-Lived  Assets to be Disposed Of" (the  "Statement")  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 1999, Hurbell I Limited  Partnership  recognized an impairment loss
on its rental  property  in the amount of  approximately  $736,000.  The Limited
Partner is actively  attempting to sell its net assets. This impairment loss was
the result of the net carrying  value of the assets  exceeding the estimated net
sales value.

      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, 1999.
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  $114,000 and $137,000  during 1999 and 1998,
respectively.   During  1999,   the   Partnership   paid  the  General   Partner
approximately  $107,000  of these fees.  No  payments  were made during 1998 for
these  fees.  The  balance  owed  to the  General  Partner  for  these  fees  is
approximately $1,219,000 as of December 31, 1999.

      During 1998, the General Partner  advanced the  Partnership  approximately
$34,000 to pay legal expenses of the  Partnership.  No advances were made during
1999. During 1999, the Partnership repaid advances of approximately  $34,000 and
accrued interest of approximately  $3,000 to the General Partner.  No repayments
were made during 1998.  Interest is charged on borrowings at the Chase Manhattan
Bank  prime  interest  rate plus 2%.  Chase  Manhattan  Bank  prime was 8.25% at
December  31,  1999.  At  December  31,  1999,  the  Partnership  had no  unpaid
borrowings or accrued interest due to the General Partner.

      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.

      An affiliate of the General  Partner,  NHP Management  Company  ("NHPMC"),
formerly a wholly owned subsidiary of NHP Incorporated  ("NHPI"), is the project
management  agent for the  projects  operated by eleven and fifteen of the Local
Limited  Partnerships  during  1999 and  1998,  respectively.  NHPMC  and  other
affiliates  of NCHP earned  approximately  $768,000 and $946,000 for  management
fees and other services provided to the Local Limited  Partnerships  during 1999
and 1998, respectively.  As of December 31, 1999 and 1998, amounts due NHPMC and
unpaid by the Local Limited Partnerships  amounted to approximately  $45,000 and
$13,000, respectively.

      Personnel  working at the project sites,  which are managed by NHPMC, were
employees of NHPI during the period January 1, 1996 through December 8, 1997 and
became employees of NHPMC (as a successor  employer) as of December 8, 1997 and,
therefore,  the projects  reimbursed  NHPI and NHPMC for the actual salaries and
related benefits.  Prior to January 1, 1996, project employees were employees of
NCHP. Total reimbursements  earned for salaries and benefits for the years ended
December  31,  1999 and 1998,  were  approximately  $1,335,000  and  $1,492,000,
respectively.

4.    NOTES PAYABLE

      The notes payable by the Partnership bear simple interest at a rate of 10%
per annum.  The notes are  payable  to NHP in the same  amount and same terms as
notes  executed  by NHP to  former  project  owners,  are  nonrecourse,  and are
collateralized by the Partnership's  interests in Windsor Apartments  Associates
Limited Partnership and Kimberton Apartments Associates Limited Partnership. The
notes were both due on October 24, 1999. The Partnership is currently in default
of these notes and has  received  notification  from the holders of the notes of
their intent to initiate foreclosure proceedings.

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,
                                               1999        1998

  Net profit (loss) per financial statements  $   2     $  (300)

  Add (deduct):
   Interest on notes payable                    241         241
   Other                                      (293)         149
  Partnership's share of limited local
     partnership's (loss) profit              6,510       9,626


  Profit per tax return                      $6,460      $9,716


      The  following  is a  reconciliation  between the  Partnership's  reported
amounts and the federal tax basis of net assets (in thousands):

                                           December 31, 1999

  Net deficit as reported                     $ (2,670)
  Add (deduct):
   Investment in Partnerships                  (30,577)
     Other                                        (146)
  Net Deficit - federal tax basis             $(33,393)

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 1999, the number of Limited Partnership Units decreased by 42 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 abandonments. However, the limited
partner is allocated  his or her share of net income or loss for that year.  The
income or loss per Limited  Partnership Unit in the  accompanying  statements of
operations is calculated based on the number of units  outstanding at the end of
the year. There were no such abandonments in 1998.

8.    LEGAL PROCEEDINGS

      In 1997,  NHP received  subpoenas  from the HUD Inspector  General  ("IG")
requesting  documents  relating  to  arrangements  whereby  NHP  or  any  of its
affiliates  provided  compensation  to owners  of  HUD-assisted  or  HUD-insured
multi-family  projects in exchange for or in connection with property management
of a HUD project.  In July 1999,  NHP received a grand jury subpoena  requesting
documents  relating to the same subject matter as the HUD IG subpoenas and NHP's
operation of a group purchasing  program created by NHP, known as Buyers Access.
To date,  neither the HUD IG nor the grand jury has initiated any action against
NHP or Apartment  Investment  and  Management  Company  ("AIMCO"),  the ultimate
controlling entity of NHP or, to NHP's or AIMCO's knowledge,  any owner of a HUD
property  managed by NHP. AIMCO believes that NHP's  operations and programs are
in compliance,  in all material  respects,  with all laws, rules and regulations
relating  to  HUD-assisted  or  HUD-insured   properties.   NHP  and  AIMCO  are
cooperating with  investigations and do not believe that the investigations will
result in a material adverse impact on their  operations.  However,  as with any
similar  investigation,  there can be no assurance that these will not result in
material fines, penalties or other costs.

9.    GOING CONCERN

      Certain of the Local  Partnership's  notes  payable are past due (see Note
3).  Subsequent to December 31, 1999, the  noteholders  for certain of the Local
Limited Partnerships foreclosed on the Partnership interests and the noteholders
for certain  other Local  Limited  Partnerships  began  foreclosure  proceedings
(Notes 2 and 4).  Continuation  of the  Local  Partnerships'  operations  in the
present form is dependent on their  ability to extend the maturity date of these
notes,  or to repay or to 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>

                                        Initial Cost                  Cost
                                      To Local Limited             Capitalized
                                        Partnership                 (Removed)
                                       (in thousands)              Subsequent
                                                                 to Acquisition
                                                                 (in thousands)
                                               Buildings
                                              and Related
                                               Personal                    Carrying Cost
    Description      Encumbrances    Land      Property     Improvements    Adjustments

<S>                  <C>           <C>          <C>         <C>              <C>
Caroline Arms
   Limited             $ (1)        $ 260      $ 4,497        $1,579          $    --
Partnership

Esbro Limited
   Partnership           (1)          360        2,566           683             (500)

Harold House
   Limited
Partnership              (1)           80        1,782         1,037               --

Hilltop Limited
   Partnership           (1)          210        2,292           470            (1,699)

Hurbell I Limited
  Partnership
(Holly Oak)              (1)          100        2,043           428              (736)

Hurbell II Limited
  Partnership
(Anderson)               (1)          240        3,941         1,613                --

Hurbell III Limited
  Partnership            (1)          150        1,894           740                --

Kimberton Apartments
  Associates Limited
   Partnership           (1)          250        5,265         1,111                --

Mayfair Manor
   Limited
Partnership              (1)          450       3,720          1,141            (1,468)

Park Avenue West I
  Limited
Partnership              (1)           96       1,799            294            (1,100)

Park Avenue West II
  Limited
Partnership              (1)           96       1,785            276            (1,177)

Rodeo Drive Limited
  Partnership            (1)          150       2,732            494                --

San Juan Del Centro
 Limited                 (1)          725       3,360          1,169                --
  Partnership

West Oak Village
  Limited
Partnership              (1)         400        4,667         1,026                 --

Windsor Apartments
  Associated Limited
    Partnership          (1)         169        5,926           770                 --

  Totals                         $ 3,736      $48,269       $12,831            $(6,680)

</TABLE>

<TABLE>
<CAPTION>

                           Gross Amount At Which
                                  Carried
                           At December 31, 1999
                              (in thousands)

                                 Buildings
                                    And
                                 Buildings
                                    And
                                  Related
                                 Personal                  Accumulated        Date of        Date     Depreciable
      Description        Land    Property   Total(2)(3)  Depreciation(3)   Construction    Acquired    Life-Years

<S>                     <C>      <C>         <C>           <C>                 <C>           <C>          <C>
Caroline Arms           $  271   $  6,065    $  6,336      $  2,520            1972          4/85         5-50
  Limited  Partnership

Esbro Limited
Partnership                375      2,734       3,109         1,230            1972          4/85         5-50

Harold House
  Limited  Partnership      96      2,803       2,899         1,063            1973          5/85         5-50

Hilltop Limited
Partnership                218      1,055       1,273           342            1974          4/85         5-50

Hurbell I Limited
  Partnership
  (Holly Oaks)             100      1,735       1,835           921            1975          4/85         5-40


Hurbell II Limited
   Partnership              294     5,500       5,794         2,105            1972          4/85         5-50
(Anderson)

Hurbell III Limited
  Partnership (Royal
Oaks)                       184     2,600       2,784         1,018            1973          4/85         5-50

Kimberton Apartments
  Associates Limited        250     6,376       6,626         3,127            1972          4/85         5-30
    Partnership

Mayfair Manor Limited
   Partnership              463     3,380       3,843         1,604            1971          4/85         5-50

Park Avenue West I
  Limited  Partnership       96       993       1,089           637            1969          5/85         5-50


Park Avenue West II
  Limited  Partnership       96       884         980           168            1970          5/85         5-50

Rodeo Drive Limited
   Partnership              150     3,226       3,376         1,190            1973          4/85         5-30

San Juan Del Centro
  Limited  Partnership      731     4,523       5,254         1,863            1970          4/85         5-50

West Oak Village
Limited Partnership         408     5,685       6,093         2,319            1972          4/85         5-50

Windsor Apartments
  Associates Limited
    Partnership             169     6,696       6,865         3,038            1972          4/85         5-30

  Totals                 $3,901   $54,255     $58,156       $23,145

</TABLE>

<PAGE>




(1)   Schedule of Encumbrances (in thousands)


                                                          Notes
                                                       Payable and
                                       Mortgage          Accrued
      Partnership Name                   Notes          Interest         Total

      Caroline Arms Limited
         Partnership                  $ 1,808          $ 3,922        $ 5,730
      Esbro Limited Partnership           871            2,893          3,764
      Harold House Limited Partnership    711            1,506          2,217
      Hilltop Limited Partnership       1,028            1,933          2,961
      Hurbell I Limited Partnership     1,050            1,430          2,480
      Hurbell II Limited Partnership    1,456            3,551          5,007
      Hurbell III Limited Partnership     861            1,626          2,487
      Kimberton Apartments Associates
       Limited Partnership              1,733              (A)          1,733
      Mayfair Manor Limited
       Partnership                      1,221            4,038          5,259
      Park Ave West I Limited
       Partnership                        440            1,751          2,191
      Park Ave West II Limited
       Partnership                        481            1,305          1,786
      Rodeo Drive Limited Partnership   1,025            2,470          3,495
      San Juan del Centro Limited
       Partnership                      1,507            3,430          4,937
      West Oak Village Limited
       Partnership                      1,454            4,667          6,121
      Windsor Apartments Associates
       Limited Partnership              2,219              (A)          2,219

        Total                         $17,865          $34,522        $52,387


(A) Notes  payable on this property are held by the  Partnership  and not by the
Local Limited Partnership.

(2)   The   aggregate   cost  of  land  for  Federal   income  tax  purposes  is
      approximately  $3,720,000,  and  the  aggregate  costs  of  buildings  and
      improvements for Federal income tax purposes is approximately $60,731,000.
      The total of the above-mentioned is $64,433,000.


<PAGE>




(3)   Reconciliation of real estate (in thousands)

                                                 Years Ended December 31,

                                                   1999           1998

Balance at beginning of period                  $ 63,358        $75,904

Improvements during the period                     1,721          1,072

Disposals of rental properties                                  (13,271)
                                                  (6,187)

Impairment losses on rental property                               (347)
                                                    (736)

Balance at end of period                        $ 58,156        $63,358


Reconciliation of accumulated depreciation (in thousands)
                                                   1999           1998

Balance at beginning of period                  $ 24,333       $ 27,420

Depreciation expense for the period                1,894          2,214

Disposals of rental properties                   (3,082)        (5,301)

Balance at end of period                        $ 23,145       $ 24,333





<PAGE>



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

      None.


<PAGE>


                                    PART III

Item 9. Directors and Executive Officers of the Registrant

      (a),(b) and (c). The Partnership has no directors,  executive  officers or
      significant employees of its own.

      (a),  (b),  (c), (e) and (f). 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. One director was
appointed  by the  President  of the United  States,  by and with the advice and
consent of the Senate.

      Thomas W. Toomey (age 39) was elected Executive Vice President Finance and
Administration  and a Director of NCHP in 1997.  Mr. Toomey has served as Senior
Vice  President--Finance  and Administration of AIMCO from January 1996 to March
1997,   when  he  was  promoted  to  Executive   Vice   President--Finance   and
Administration  until  December  1999,  when he was  appointed  Chief  Operating
Officer.  From 1990 until 1995,  Mr.  Toomey  served in a similar  capacity with
Lincoln  Property  Company  ("LPC")  as  Vice  President/Senior  Controller  and
Director of  Administrative  Services of Lincoln Property  Services where he was
responsible for LPC's computer systems,  accounting,  tax, treasury services and
benefits administration.  From 1984 to 1990, he was an audit manager with Arthur
Andersen & Co.  where he served  real  estate and banking  clients.  Mr.  Toomey
received a B.S. in Business Administration/Finance from Oregon State University.

     Patrick J. Foye (age 42) has been  Executive  Vice  President of NCHP since
October 1, 1998 and was  appointed  President  in September  1999.  Mr. Foye has
served as Executive  Vice  President  of AIMCO since May 1998.  Prior to joining
AIMCO, Mr. Foye was a partner in the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP from 1989 to 1998 and was  Managing  Partner  of the  firm's  Brussels,
Budapest  and Moscow  offices from 1992  through  1994.  Mr. Foye is also Deputy
Chairman of the Long Island  Power  Authority  and serves as a member of the New
York State Privatization  Council. He received a B.A. from Fordham College and a
J.D. from Fordham University Law School.

Executive Officers

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

      Thomas W. Toomey (age 39). See "Directors of NCHP."

      Patrick J. Foye  (age 42). See "Directors of NCHP."

      Steven D. Ira (age 48) has  served as  Executive  Vice  President  of NCHP
since 1997 and of AIMCO  since  1994.  From 1987  until July 1994,  he served as
President of Property Asset Management  ("PAM").  Prior to merging his firm with
PAM in 1987,  Mr. Ira  acquired  extensive  experience  in property  management.
Between  1977 and 1981 he  supervised  the  property  management  of over  3,000
apartment and mobile home units in Colorado, Michigan, Pennsylvania and Florida,
and in 1981 he  joined  with  others  to form the  property  management  firm of
McDermott,  Stein and Ira.  Mr.  Ira served for  several  years on the  National
Apartment Manager  Accreditation Board and is a former president of the National
Apartment  Association and the Colorado  Apartment  Association.  Mr. Ira is the
sixth  individual  elected  to  the  Hall  of  Fame  of the  National  Apartment
Association  in its 54-year  history.  He holds a Certified  Apartment  Property
Supervisor  (CAPS)  and a  Certified  Apartment  Manager  designation  from  the
National Apartment  Association,  a Certified Property Manager (CPM) designation
from the National  Institute of Real Estate Management (IREM) and he is a member
of the Boards of Directors of the National  Multi-Housing  Council, the National
Apartment  Association  and the Apartment  Association of Metro Denver.  Mr. Ira
received a B.S. from Metropolitan State College in 1975.

     Joel F. Bonder (age 57) was appointed  Executive  Vice  President,  General
Counsel  and  Secretary  of NCHP and AIMCO  effective  December  1997.  Prior to
jointing the Company,  Mr.  Bonder  served as Senior Vice  President and General
Counsel of NHP from April 1994 until  December  1997.  Mr. Bonder served as Vice
President and Deputy General  Counsel of NHP from June 1991 to March 1994 and as
Associate  General Counsel of NHP  Incorporated  from 1986 to 1991. From 1983 to
1985, Mr. Bonder practiced with the Washing, D.C. law firm of Lane & Edson, P.C.
and from 1979 to 1983  practiced with the Chicago law firm of Ross and Hardines.
Mr.  Bonder  received a B.A.  from the  University  of Rochester and a J.D. from
Washington University School of Law.

     Paul J.  McAuliffe  (age 43) has been  Executive Vice President of NCHP and
AIMCO since February 1999 and was appointed Chief  Financial  Officer in October
1999. Prior to joining the Company,  Mr. McAuliffe was Senior Managing  Director
of Secured  Capital Corp and prior to that time had been a Managing  Director of
Smith  Barney,  Inc.  from  1993 to 1996,  where  he was  senior  member  of the
underwriting  team  that lead  AIMCO's  initial  public  offering  in 1994.  Mr.
McAuliffe  was also a Managing  Director and head of the real estate group at CS
First  Boston from 1990 to 1993 and he was a Principal  in the real estate group
at Morgan Stanley & Co., Inc.  where he worked from 1983 to 1990. Mr.  McAuliffe
received a B.A. from Columbia College and an M.B.A. from University of Virginia,
Darden School.

      Martha L. Long (age 40) has been Senior Vice  President and  Controller of
NCHP and AIMCO since October 1998,  as a result of the  acquisition  of Insignia
Financial Group,  Inc. 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.

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

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 III, a limited  partnership,
holds a 4.5% limited partnership interest (1% with respect to losses) in Hurbell
I Limited  Partnership,  Hurbell III Limited  Partnership,  and Hilltop  Limited
Partnerships.  NHP Investment  Partners I, a limited  partnership,  holds a 4.5%
limited  partnership  interest (1% for  allocation  of losses) in the  remaining
eighteen 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, 1999.

                     Name of
                Beneficial Owner           Number of Units% of Class

              AIMCO and affiliates             1,809.0       9.91%
           (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  $114,000 and $137,000  during 1999 and 1998,
respectively.   During  1999,   the   Partnership   paid  the  General   Partner
approximately  $107,000  of these fees.  No  payments  were made during 1998 for
these  fees.  The  balance  owed  to the  General  Partner  for  these  fees  is
approximately $1,219,000 as of December 31, 1999.

      During 1998, the General Partner  advanced the  Partnership  approximately
$34,000 to pay legal expenses of the  Partnership.  No advances were made during
1999. During 1999, the Partnership repaid advances of approximately  $34,000 and
accrued interest of approximately  $3,000 to the General Partner.  No repayments
were made during 1998.  Interest is charged on borrowings at the Chase Manhattan
Bank  prime  interest  rate plus 2%.  Chase  Manhattan  Bank  prime was 8.25% at
December  31,  1999.  At  December  31,  1999,  the  Partnership  had no  unpaid
borrowings or accrued interest due to the General Partner.

      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.

      An affiliate of the General  Partner,  NHP Management  Company  ("NHPMC"),
formerly a wholly owned subsidiary of NHP Incorporated  ("NHPI"), is the project
management  agent for the  projects  operated by eleven and fifteen of the Local
Limited  Partnerships  during  1999 and  1998,  respectively.  NHPMC  and  other
affiliates  of NCHP earned  approximately  $768,000 and $946,000 for  management
fees and other services provided to the Local Limited  Partnerships  during 1999
and 1998, respectively.  As of December 31, 1999 and 1998, amounts due NHPMC and
unpaid by the Local Limited Partnerships  amounted to approximately  $45,000 and
$13,000, respectively.

      Personnel  working at the project sites,  which are managed by NHPMC, were
employees of NHPI during the period January 1, 1996 through December 8, 1997 and
became employees of NHPMC (as a successor  employer) as of December 8, 1997 and,
therefore,  the projects  reimbursed  NHPI and NHPMC for the actual salaries and
related benefits.  Prior to January 1, 1996, project employees were employees of
NCHP. Total reimbursements  earned for salaries and benefits for the years ended
December  31,  1999 and 1998,  were  approximately  $1,335,000  and  $1,492,000,
respectively.


<PAGE>


                                     PART IV

Item 13.   Exhibits and Reports on Form 8-K

      (a)   Exhibits

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

            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 1999:

            None.

                                   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
                By:  The National Housing Partnership, its sole general partner
                By:  National  Corporation  for  Housing   Partnerships,   its
                     sole general partner


April 14, 2000                            /s/ Patrick J. Foye
Date                                      Patrick J. Foye
                                          President

April 14, 2000                            /s/Martha L. Long
Date                                      Martha L. Long
                                          Senior Vice President and
                                          Controller

      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:

April 14, 2000                            /s/ Patrick J. Foye
Date                                      Patrick J. Foye
                                          President

April 14, 2000                            /s/Martha L. Long
Date                                      Martha L. Long
                                          Senior Vice President and
                                          Controller


<PAGE>




                                  EXHIBIT 99.1

                    NATIONAL HOUSING PARTNERS REALTY FUND TWO

                              FINANCIAL STATEMENTS

                   FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998



<PAGE>


                          Independent Auditors' Report

To The Partners of

National Housing Partnership Realty Fund Two
Indianapolis, Indiana

We have audited the accompanying combined statement of financial position of the
Local Limited Partnerships in which National Housing Partnership Realty Fund Two
(the Partnership) holds a limited partnership  interest as of December 31, 1999,
and the related combined statements of operations,  partners' deficit,  and cash
flows for each of the two years in the period ended  December  31,  1999.  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  financial  statements of
Hurbell  I Limited  Partnership,  Rodeo  Drive  Limited  Partnership,  Kimberton
Apartments  Associates  Limited  Partnership  or  Windsor  Apartment  Associates
Limited  Partnership (four of the seventeen Local Limited  Partnerships) for the
year ended December 31, 1999 which reflect total assets of 30% of combined total
assets as of December 31, 1999, and net losses which reflect 57% of combined net
loss for the year then ended. We did not audit the financial statements of Rodeo
Drive Limited Partnership,  Kimberton Apartments  Associates Limited Partnership
or Windsor Apartment  Associates Limited Partnership for the year ended December
31,  1998 which  reflect  total  assets of 24% of  combined  total  assets as of
December 31, 1998, and net profits which reflect 17% of combined net profits 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  report of other  auditors
provide a reasonable basis for our opinion.

In our  opinion,  based upon our audits  and the report of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the  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, 1999, and the combined  results of their  operations
and their cash flows for each of the two years in the period ended  December 31,
1999 in conformity with accounting  principles  generally accepted in the United
States.

As discussed in Notes 6, 11 and 13 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.  Subsequent  to  December  31,  1999,  the
noteholders  for certain of the Local  Limited  Partnerships  foreclosed  on the
Partnership  interests  and the  noteholders  for certain  other  Local  Limited
Partnerships  began  foreclosure  proceedings  (Note 6). 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
March 6, 2000


<PAGE>


REPORT OF FINCH, HAMILTON & CO., LLC.
INDEPENDENT AUDITORS AND CERTIFIED PUBLIC ACCOUNTANTS
LICENSED BY THE SOUTH CAROLINA BOARD OF ACCOUNTANCY


To the Partners
Hurbell I Limited Partnership
Shelby, North Carolina

      We have  audited  the  accompanying  balance  sheet of  Hurbell  I Limited
Partnership,   (the  Project)  FHA  Project  No.  053-44202-LDP-SUP  (A  Limited
Partnership)  as of December 31,  1999,  and the related  statements  of income,
changes in  partners'  deficit,  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.

      As  described  in Note A, these  financial  statements  were  prepared  in
conformity  with the  accounting  practices  prescribed or permitted by the U.S.
Department of Housing and Urban Development,  which is a comprehensive  basis of
accounting other than generally accepted accounting principles.

      In our opinion, the financial statements referred to above present fairly,
in  all  material  respects,   the  financial  position  of  Hurbell  I  Limited
Partnership at December 31, 1999, and the results of its operations,  changes in
partners'  deficit  and cash  flows  for the  years  then  ended on the basis of
accounting described in Note A.

      As discussed in Note G to the financial  statements,  the  Partnership has
notes  payable  that  matured  on  December  19,  1999.  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.

      In accordance with Government  Auditing  Standards,  we have also issued a
report  dated  February  1,  2000 on our  consideration  of  Hurbell  I  Limited
Partnership's  internal  controls  and a report  dated  February  1, 2000 on its
compliance  with  laws  and  regulations   applicable  to  the  basic  financial
statements.

      Our audit was made for the  purpose  of  forming  an  opinion on the basic
financial statements taken as a whole. The supplemental  information included in
this report  (shown on pages 19-23) is presented  for the purposes of additional
analysis and is not a required part of the basic financial statements of Hurbell
I 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 presented in all material  respects in relation to the basic
financial statements taken as a whole.

February 1, 2000




<PAGE>


                          Independent Auditor's Report

Partners

Kimberton Apartments Associates
Indianapolis, IN

We have audited the  accompanying  statement of financial  position of Kimberton
Apartments Associates, FHA Project No.032-44013-LD, A Limited Partnership, as of
December  31, 1999,  and the related  statements  of profit and loss,  partners'
equity, 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 Kimberton Apartments Associates
at December 31, 1999,  and the results of its  operations,  changes in partners'
equity and its cash flows for the year then ended in conformity  with  generally
accepted accounting principles.

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 & Osborne LLP
Bethesda, Maryland
February 10, 2000


<PAGE>


                          Independent Auditor's Report

Partners

Kimberton Apartments Associates
Indianapolis, IN

We have audited the  accompanying  statement of financial  position of Kimberton
Apartments Associates, FHA Project No.032-44013-LD, A Limited Partnership, as of
December 31, 1998,  and the related  statements  of profit and loss (on HUD Form
No.  92410),  partners'  equity,  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
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 Kimberton Apartments Associates
at December 31, 1998,  and the results of its  operations,  changes in partners'
equity and its 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,  we have also issued a report dated  February
12, 1999 on our  consideration  of  Kimberton  Apartments  Associates'  internal
control and reports  dated  February 12, 1999 on its  compliance  with  specific
requirements   applicable  to  major  HUD  programs  and  specific  requirements
applicable to Fair Housing and Non-Discrimination.

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 & Osborne LLP
Bethesda, Maryland
February 12, 1999


<PAGE>


                          Independent Auditors' Report

To the Partners
Rodeo Drive Limited Partnership
Indianapolis, Indiana

We have audited the accompanying  statement of financial position of Rodeo Drive
Limited  Partnership  (a  California  limited  partnership),   FHA  Project  No.
122-44452-LDP, as of December 31, 1999, and the related statements of profit and
loss, partners' 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
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 Rodeo Drive Limited Partnership
as of December 31, 1999,  and the results of its  operations  and its cash flows
for the year  then  ended  in  conformity  with  generally  accepted  accounting
principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Partnership  will  continue as a going  concern.  As  discussed in Note 3 to the
financial  statements,  the  Partnership  is in default on its loan agreement at
December 31, 1999, as a result of  nonpayment.  The  Partnership  has reached an
agreement with the lender, where as in satisfaction of the outstanding loan, the
assets of the Partnership will be transferred to the lender in 2000. As a result
of this transaction,  the Partnership will not continue as a going concern.  The
financial  statements do not include any adjustments  that might result from the
transfer of all assets to the lender in 2000.

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 9, 2000 on our
consideration of Rodeo Drive Limited Partnership's  internal control and reports
dated March 9, 2000 on its compliance with specific  requirements  applicable to
major HUD  programs  and specific  requirements  applicable  to Fair Housing and
Non-Discrimination.

Our audit was made 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.  This additional information is
the  responsibility of the Partnership's  management.  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.

Hansen, Hunter & Company, P.C.
Portland, Oregon
March 9, 2000


<PAGE>


                          Independent Auditor's Report

To the Partners
Rodeo Drive Limited Partnership
Washington, D.C.

We have audited the accompanying  statement of financial position of Rodeo Drive
Limited  Partnership  (a  California  limited  partnership),   FHA  Project  No.
122-44452-LDP, as of December 31, 1998, and the related statements of profit and
loss (on HUD Form No.  92410),  partners'  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
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 Rodeo Drive Limited Partnership
as of December 31, 1998,  and the results of its  operations  and its cash flows
for the year  then  ended  in  conformity  with  generally  accepted  accounting
principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Partnership  will  continue as a going  concern.  As  discussed in Note 3 to the
financial  statements,  the  Partnership  is in default on its loan agreement at
December  31,  1998,  as a result  of  nonpayment.  The  lenders  have  demanded
repayment of the loan. A lawsuit has been filed. The Partnership  cannot predict
what the outcome will be. These  conditions  raise  substantial  doubt about the
Partnership's  ability to continue as a going concern.  The financial statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

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  January 20, 1999 on our
consideration of Rodeo Drive Limited Partnership's  internal control and reports
dated January 20, 1999 on its compliance with specific  requirements  applicable
to major HUD programs and specific  requirements  applicable to Fair Housing and
Non-Discrimination.

Our audit was made 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.  This additional information is
the  responsibility of the Partnership's  management.  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.

Hansen, Hunter & Kibbee, P.C.
Portland, Oregon
January 20, 1999



<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, 1999, 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, 1999,  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.

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 & Osborne LLP
Bethesda, Maryland
February 10, 2000


<PAGE>


                          Independent Auditors' Report

Partners

Windsor Apartments Associates
Washington, D.C.

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, 1998, and the related  statements of profit and
loss (on HUD Form No. 92410), 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
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 Windsor Apartments  Associates
as of December 31, 1998, and the results of its operations, changes in partners'
equity and its 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,  we have also issued a report dated  February
12, 1999 on our consideration of Windsor Apartments Associates' internal control
and reports dated February 12, 1999 on its compliance with specific requirements
applicable  to major HUD programs and specific  requirements  applicable to Fair
Housing and Non-Discrimination.

Our audit was made 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.  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 & Osborne LLP
Bethesda, Maryland
February 12, 1999


<PAGE>








                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                    COMBINED STATEMENT OF FINANCIAL POSITION

                                   (in thousands)

                                December 31, 1999

                                     ASSETS

Cash and cash equivalents                       $       1,043
Accounts receivable, net (Note 2)                         824
Tenants' security deposits held in trust funds            335
Prepaid expenses and other assets                         156
Deferred finance costs                                     62
Mortgage escrow deposits                                3,788
Rental property, net (Notes 4, 5 and 10)               35,011

                                                $      41,219

                        LIABILITIES AND PARTNERS' DEFICIT

Liabilities:
  Accounts payable and accrued expenses          $      1,385
  Due to management agent - NHPMC (Note 9)                 45
  Accrued real estate taxes                               177
  Partner loans and accrued interest (Note 7)           1,863

                                                        3,470

Distributions payable                                      45

Tenants' security deposits payable                        322

Notes payable (Note 6)                                 15,906

Accrued interest on notes payable (Note 6)             18,616

Mortgage notes payable (Note 5)                        17,865

Partners' deficit                                     (15,005)

                                                 $     41,219

                   See notes to combined financial statements

<PAGE>


                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                        COMBINED STATEMENTS OF OPERATIONS

                                   (in thousands)



                                                    Years Ended December 31,
                                                      1999            1998

REVENUE:

Rental income (Note 3)                              $ 11,556        $  12,789
Interest income                                          184              154
Other income                                             522              401
                                                      12,262           13,344
EXPENSES:

Administrative expenses                                1,045            1,268
Utilities and operating expenses                       4,066            4,499
Management   and  other  services  from  related         768              946
party (Note 9)
Salaries and related  benefits to related  party       1,335            1,492
(Note 9)
Depreciation and amortization                          1,899            2,218
Taxes and insurance                                    1,301            1,513
Financial expense - primarily interest (Note 5)          327              272
Interest on notes payable (Note 6 and 7)               1,882            2,123
Annual   partnership   administrative   fees  to         128              139
General Partner (Note 7)
Impairment loss on rental property (Note 10)             736              347
Other entity expenses                                      5               34
                                                      13,492           14,851

LOSS BEFORE EXTRAORDINARY ITEM                        (1,230)          (1,507)

EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT
   OF DEBT                                                --            1,618

NET (LOSS) PROFIT                                   $ (1,230)       $     111

                   See notes to combined financial statements




                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                    COMBINED STATEMENTS OF PARTNERS' DEFICIT

<TABLE>
<CAPTION>

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

<S>                       <C>        <C>         <C>           <C>         <C>
Deficit  at  January 1,
1998                    $(23,530)    $  (468)    $ (1,060)     $  (64)     $(25,122)

Distributions                (67)         (1)          (3)         --           (71)

Net profit (loss)             46           8           58          (1)          111

Transfer of interest       5,251          78          250          --         5,579

Deficit at
 December 31, 1998       (18,300)       (383)        (755)        (65)      (19,503)

Distributions                (77)         (1)          (4)         --           (82)

Cumulative unpaid
  distributions              (43)         --           (2)         --           (45)

Net profit (loss)         (1,218)        (12)           8          (8)       (1,230)

Transfer of interest       5,533          59          263          --         5,855

Deficit at December
   31, 1999             $(14,105)    $  (337)     $ (490)       $ (73)     $ (15,005)

Percentage interest at
  December   31,  1998,
    and 1999                  (A)         (B)         (C)          (D)

</TABLE>

(A)   Holds a 94.5% limited partnership interest (98% with respect to allocation
      of losses) in seventeen Local Limited Partnerships.

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

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

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

                   See notes to combined financial statements




                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                        COMBINED STATEMENTS OF CASH FLOWS

                                   (in thousands)


                                            Years Ended December 31,
                                                 1999      1998

CASH FLOWS FROM OPERATING ACTIVITIES:
   Receipts:
    Rental receipts                           $ 11,473   $ 12,764
    Interest receipts                              245        158
    Other operating receipts                       481        444
    Tenant security deposits                        11          3
    Transfer of operating liability to new owner    14         --
    Entity receipts                                  1          1
    Total receipts                              12,225     13,370

   Disbursements:
    Administrative                                (943)      (865)
    Management fees                               (973)    (1,147)
    Utilities                                   (1,670)    (1,850)
    Salaries and wages                          (1,810)    (1,933)
    Operating and maintenance                   (1,848)    (2,365)
    Real estate taxes                             (591)      (674)
    Property insurance                            (295)      (401)
    Miscellaneous taxes and insurance             (428)      (458)
    Tenant security deposits                       (11)        (8)
    Other operating disbursements                 (151)      (262)
    Interest on mortgage                          (224)      (150)
    Mortgage insurance premium                     (79)      (114)
    Miscellaneous financial                        (13)       (13)
    Transfer of operating cash to new owner        (36)      (128)
    Entity disbursements
      Interest on notes payable                   (124)      (321)
      Miscellaneous disbursements                  (92)      (218)
    Total disbursements                         (9,288)   (10,907)

   Net cash provided by operating activities       2,937    2,463

CASH FLOWS FROM INVESTING ACTIVITIES:
   Change in mortgage escrow accounts               49       (710)
   Proceeds from disposal of rental property        --        762
   Net purchase of fixed assets                 (1,712)    (1,110)
   Other investing                                 (76)       (31)

   Net cash used in investing activities        (1,739)     (1,089)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Mortgage principal payments                    (903)       (949)
   Proceeds from loans or notes payable              1         214
   Principal payments on loans or notes payable     --        (167)
   Distributions                                   (82)        (71)
   Payment in satisfaction of note payable
    and accrued interest                            --        (600)
   Other financing                                   7          --

   Net cash used in financing activities          (977)     (1,573)

                   See notes to combined financial statements

<PAGE>


                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                        COMBINED STATEMENTS OF CASH FLOWS

                                   (Continued)

                                                Years Ended December 31,
                                                     1999      1998

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                     $   221   $   (199)

CASH AND CASH EQUIVALENTS, BEGINNING
  OF YEAR                                             822      1,021

CASH AND CASH EQUIVALENTS, END OF YEAR            $ 1,043   $    822

RECONCILIATION OF NET (LOSS) PROFIT TO NET
  CASH PROVIDED BY OPERATING ACTIVITIES:

  Net (loss) profit                             $ (1,230)   $    111
  Adjustments to reconcile net (loss) profit
   to net cash provided by operating activities:

    Depreciation and amortization                  1,899       2,218
    Extraordinary gain on extinguishment of debt      --      (1,618)
    Impairment loss on rental properties             736         347
     Changes in operating assets and liabilities:
      Net tenant receivables                        (139)        (38)
      Accounts receivable - other                   (100)       (250)
      Accrued receivables                              7           8
      Prepaid expenses and other assets              (19)          6
      Cash restricted for tenants security
         deposits                                    (17)        (15)
      Accounts payable trade                         (68)        (48)
      Accrued liabilities                             54          59
      Accrued interest - notes payable             1,663       1,808
      Tenant security deposits held in trust          17          10
      Prepaid revenue                                 32          45
      Transfer of operating cash to new owner        (22)       (128)
      Entity liability accounts                      124         (52)

    Total adjustments                              4,167       2,352

NET CASH PROVIDED BY OPERATING ACTIVITIES       $  2,937    $  2,463


                   See notes to combined financial statements

<PAGE>




                    NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

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). On April 30, 1985, the Partnership began
raising capital and acquiring interests in Local Limited Partnerships.

      During 1985, the Partnership  acquired  limited  partnership  interests of
94.5% (98% with respect to losses) in  twenty-one  Local  Limited  Partnerships,
nineteen of which were organized in 1984 to acquire and operate  existing rental
housing  projects.  The remaining two Local Limited  Partnerships were formed in
1972 and 1973 to construct and operate rental housing projects.  Eighteen of the
Local Limited  Partnerships  were originally  organized under Section 236 of the
National  Housing  Act  and  three  were  originally   organized  under  Section
221(d)(3)of the Act. 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, 1999 and 1998,  the  Partnership  continues to hold interests in
fifteen and seventeen Local Limited Partnerships, respectively.

      On June 3, 1997,  Apartment  Investment and Management Company, a Maryland
corporation  ("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"). The
acquisitions were made pursuant to a Real Estate Acquisition Agreement, dated as
of May 22, 1997 (the "Agreement"), by and among AIMCO, AIMCO Properties, L.P., a
Delaware  limited  partnership (the "Operating  Partnership"),  Demeter Holdings
Corporation,  a Massachusetts  corporation  ("Demeter"),  Phemus Corporation,  a
Massachusetts  corporation  ("Phemus"),  Capricorn  Investors,  L.P., a Delaware
limited partnership ("Capricorn"),  J. Roderick Heller, III and NHP Partners Two
LLC, a Delaware limited liability company ("NHP Partners Two LLC"). 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.

      NHP is also the sole general partner of NHP Investment  Partners I and NHP
Investment  Partners III. NHP  Investment  Partners III, a limited  partnership,
holds a 4.5% limited partnership interest (1% with respect to losses) in Hurbell
I Limited  Partnership,  Hurbell III Limited  Partnership,  and Hilltop  Limited
Partnerships.  NHP Investment  Partners I, a limited  partnership,  holds a 4.5%
limited  partnership  interest (1% for  allocation  of losses) in the  remaining
fourteen  Local  Limited  Partnerships  (two of which were  foreclosed on during
1999).  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
seventeen and twenty-one  Local Limited  Partnerships  in which the  Partnership
holds a limited partnership interest during 1999 and 1998, respectively:

      Caroline Arms Limited Partnership
      Esbro Limited Partnership

      Gulfway  Limited  Partnership  (interest  lost June 29, 1998) Harold House
      Limited   Partnership   Hilltop  Limited  Partnership  Hurbell  I  Limited
      Partnership Hurbell II Limited Partnership Hurbell III Limited Partnership
      Kimberton Apartments  Associates Limited Partnership Mayfair Manor Limited
      Partnership Meadows Apartments Limited Partnership (interest lost December
      1, 1999) Meadows East Apartments Limited Partnership (interest lost August
      5, 1999) Menlo Limited  Partnership  (interest  lost January 5, 1998) Park
      Avenue West I Limited  Partnership Park Avenue West II Limited Partnership
      Rockwell  Limited  Partnership  (interest  lost June 29, 1998) Rodeo Drive
      Limited  Partnership San Juan del Centro Limited  Partnership Tinker Creek
      Limited Partnership  (interest sold July 2, 1998) West Oak Village Limited
      Partnership Windsor Apartments Associates Limited Partnership

      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 for fifteen of the Local Limited Partnerships is computed using the
straight-line method assuming a 50-year life from the date of initial occupancy,
whereas  depreciation  of  buildings  and  improvements  is  computed  using the
straight-line  method,  assuming a 30-year  life and 30%  salvage  value for one
Local Limited  Partnership.  Depreciation  for one Local Limited  Partnership is
computed using the straight-line method,  assuming a 40-year life.  Depreciation
of equipment is calculated using accelerated methods over estimated useful lives
of five to 27 years. 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  finance costs are amortized over the  appropriate  loan
period on a straight-line basis.

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  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.

      For  purposes  of  the  statements  of  cash  flows,   the  Local  Limited
Partnerships  consider all highly liquid debt instruments purchased with initial
maturities of three months or less to be cash equivalents.

      Certain  reclassifications  of prior  years'  amounts  have  been  made to
conform with the current year's presentation.

2.    ACCOUNTS RECEIVABLE

      At December 31, 1999,  accounts  receivable  consist of the  following (in
thousands):

       Net tenant receivables                    $     75
       Housing assistance receivable (see Note 3)     502
       Accrued interest receivable                     11
       Reserve releases receivable                    189
       Other receivables                               47

       Accounts receivable, net                   $   824

3.    HOUSING ASSISTANCE AGREEMENTS

      The Federal  Housing  Administration  (FHA) has  contracted  with fourteen
rental  projects  under  Section  8 of Title  II of the  Housing  and  Community
Development Act of 1974, to make housing  assistance  payments to the respective
Local  Limited  Partnerships  on behalf of  qualified  tenants.  Fourteen of the
remaining Local Limited Partnership have an agreement in effect during 2000. The
Local Limited  Partnerships  received a total of  approximately  $6,616,000  and
$7,265,000  in the form of housing  assistance  payments  during  1999 and 1998,
respectively, which is included in "Rental Income" on the combined statements of
operations.

      For the past several  years,  various  proposals have been advanced by the
United States Department of Housing and Urban Development ("HUD"),  Congress and
others  proposing the  restructuring of HUD's rental  assistance  programs under
Section 8 of the United States  Housing Act of 1937  ("Section  8"), under which
1,731 units,  88 percent of the total units owned by the properties in which the
Partnership  has invested,  receive rental  subsidies.  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 Section 8, with rents above market levels and
financed with  HUD-insured  mortgage  loans,  will be  restructured by adjusting
subsidized rents to market levels,  thereby potentially reducing rent subsidies,
and lowering required debt service costs as needed to ensure financial viability
at  the  reduced  rents  and  rent  subsidies.  The  1997  Housing  Act  retains
project-based  subsidies for most properties  (properties in rental markets with
limited supply,  properties serving the elderly,  and certain other properties).
The 1997 Housing Act phases out project-based  subsidies on selected  properties
servicing families not located in rental markets with limited supply, converting
such subsidies to a tenant-based  subsidy.  Under a  tenant-based  system,  rent
vouchers would be issued to qualified  tenants who then could elect to reside at
properties of their choice,  provided such tenants have the financial ability to
pay the difference between the selected  properties'  monthly rent and the value
of the vouchers, which would be established based on HUD's regulated fair market
rent for the relevant  geographical  areas.  With respect to Housing  Assistance
Payments Contracts ("HAP Contracts")  expiring before October 1, 1998,  Congress
elected to renew them for one-year  terms,  generally at existing rents, so long
as the  properties  remain  in  compliance  with the HAP  Contracts.  While  the
Partnership  does not expect the provisions of the 1997 Housing Act to result in
a significant  number of tenants  relocating from properties  owned by the Local
Limited  Partnerships,  there can be no assurance that the  provisions  will not
significantly  affect the  operations  of the  properties  of the Local  Limited
Partnerships.  Furthermore,  there can be no  assurance  that  other  changes in
Federal  housing  subsidy policy will not occur.  Any such changes could have an
adverse effect on the operation of the Partnership.

     All of the units (1,731 in total)  receiving  rent subsidies from Section 8
have their contracts  expiring during the year ending December 31, 2000. HUD has
issued new regulations that govern the continuance of  project-based  subsidies.
Under the new  regulations,  owners with HAP contracts  expiring after September
30, 1998 may elect to (1) renew the contract without restructuring for one year,
(2) opt out of the contract, or (3) enter into the Mark-to Market program, which
includes a potential  restructuring of the mortgage and renewal of the contract.
At this time it is not  possible  to  determine  which  option each of the Local
Limited  Partnerships  will  elect,  and  accordingly,  it is  not  possible  to
determine  the  ultimate   impact  on  the   operations  of  the  Local  Limited
Partnerships.

4.    RENTAL PROPERTY

      At December  31,  1999  rental  property  consists  of the  following  (in
      thousands):

       Land                                    $      3,901
       Buildings and improvements                    54,255

                                                     58,156

       Less accumulated depreciation                (23,145)

       Rental property, net                     $    35,011

5.    MORTGAGE NOTES PAYABLE

      The mortgage notes payable are insured by FHA and  collateralized by first
deeds of trust on the  rental  properties.  The  notes  bear  interest  at rates
ranging from 3% to 8.5% per annum.  However,  FHA,  under an interest  reduction
contract  with the  fourteen  Section 236  properties,  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 terms 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 the 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):

                    2000                  $      866
                    2001                         932
                    2002                       1,004
                    2003                       1,081
                    2004                       1,164
              Thereafter                      12,818
                                           $  17,865

6.    NOTES PAYABLE

      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 prepaid 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:

         Local Partnership        Due Date       Note Amount   Accrued Interest

     Rodeo Drive Limited
       Partnership           December 6, 1997*    $  2,470        $     --
     Esbro Limited
       Partnership           October 25, 1999*       1,204           1,689
     Mayfair Manor Limited
       Partnership           October 25, 1999*       1,654           2,384
     Hurbell II Limited
       Partnership           November 2, 1999*       1,502           2,049
     Hilltop Limited
       Partnership           November 2, 1999*         817           1,116
     Caroline Arms Limited
       Partnership           November 15, 1999*      1,561           2,361
     Harold House Limited
       Partnership           November 15, 1999*        599             907
     Hurbell I Limited
       Partnership           December 19, 1999*        608             822
     Hurbell III Limited
       Partnership           December 19, 1999*        688             938
     Park Avenue West I
        Limited Partnership  December 20, 1999*        744           1,007
     Park Avenue West II
        Limited Partnership  December 20, 1999*        554             751
     San Juan Del Centro
        Limited Partnership  December 20, 1999*      1,458           1,972
           Total Delinquent                         13,859          15,996

     West Oak Limited
        Partnership          November 30, 2013*      2,047           2,620

           Total Due                               $15,906         $18,616

        * Notes are in default.

      The West Oak Village Limited  Partnership  note bears interest at the rate
of 9% per annum.  The note is nonrecourse and is secured by a security  interest
in the Partnership's interest in the Local Limited Partnership. During 1997, the
noteholders  entered into an  agreement  with the  Partnership,  under which the
maturity date of the note was extended  until  November  2013,  assuming  annual
payments  of  interest  are  made to the  noteholders.  Under  the  terms of the
agreement,  payments  are to be made equal to the annual  interest at a variable
rate based on the prior  year's  interest  rate payment  multiplied  by the most
recent Consumer Price Index rate, with any increase subject to a floor of 2% and
a ceiling of 5%. At any time prior to the note's  maturity,  the Partnership has
the option to pay off the  acquisition  note at a  discount  equal to 70% of the
property's annual scheduled rent but not less than $700,000. The required annual
installment   of  interest  for  1999,   pursuant  to  the  agreement  with  the
noteholders,  was not  made.  Accordingly,  the  Local  Limited  Partnership  is
currently  in  default  on  the  required  annual  interest   payments  and  the
Partnership  interests are subject to potential  foreclosure.  The Local Limited
Partnership is actively attempting to sell its net assets.

Caroline Arms, Harold House, Hilltop, Hurbell I, Hurbell II, Hurbell III 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,  November 2, 1999,
December  19, 1999,  November 2, 1999,  December 19, 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.  Caroline  Arms,  Harold  House,
Hilltop and Hurbell I Local Limited  Partnerships are all actively attempting to
sell their respective net assets.

Rodeo  Drive  Limited  Partnership  note was  executed by the  respective  Local
Limited  Partnership  with the seller as part of the acquisition of the property
by the Local Limited  Partnership.  The note was a nonrecourse note secured by a
security interest in all Partnership interests in the Local Limited Partnership.
Neither the Limited  Partnership  nor any  partners  thereof,  present or future
assume any  personal  liability  for the payment of the notes.  The note was due
December 6, 1997.  The holder of the note demanded  payment and an agreement was
reached on December 11, 1998 whereby the  interest of the  Partnership  is to be
transferred  to the  note  holder  during  January  2000.  As a  result  of this
transaction, the Local Limited Partnership will not continue as a going concern.
The financial  statements do not include any adjustments that might be necessary
as a result of this transaction.

Esbro  and  Mayfair  Manor  Limited  Partnership  notes  were  executed  by  the
respective Local Limited  Partnership with the seller as part of the acquisition
of the  property by the Local  Limited  Partnership.  The notes are  nonrecourse
notes  secured  by a  security  interest  in all  Partnership  interests  in the
respective  Local Limited  Partnership.  The notes were initially 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.  Neither the Limited  Partnership  nor any  partners  thereof,
present or future  assume any personal  liability  for the payment of the notes.
Subsequent to December 31, 1999, both Local Limited Partnerships received notice
of demand for payment and the  commencement  of  foreclosure  proceedings.  Such
foreclosure is subject to HUD approval,  which is pending.  Continuation of both
of the Local Limited  Partnerships'  operations in the present form is dependent
on the outcome of these proceedings. The financial statements do not include any
adjustments  which  might  result from the  outcome of this  uncertainty.  Esbro
Limited Partnership is actively attempting to sell its net assets.

Park  Avenue  West I and II  Limited  Partnerships  both have  notes  which were
executed by the respective Local Limited Partnerships with the seller as part of
the acquisition of the property by the Local Limited Partnership. The notes were
nonrecourse notes secured by a security interest in all Partnership interests in
the Local Limited  Partnership and are  subordinated to the respective  mortgage
notes on each property for as long as the mortgage notes are insured by HUD. Any
payments due from project  income are payable from surplus  cash,  as defined by
the HUD Regulatory  Agreement.  Neither the Limited Partnership nor any partners
thereof,  present or future assume any personal liability for the payment of the
notes. The notes were both due December 20, 1999. The Local Limited Partnerships
were  notified of the default and as a result of the default not being cured the
respective  noteholders  foreclosed  on  the  Partnership's  interests  in  full
satisfaction of the notes effective  January 14, 2000. The financial  statements
do not include  any  adjustments  which  might  result from the outcome of these
transactions.

7.    DUE TO PARTNERS

      The Local Limited Partnerships  accrued annual partnership  administration
fees payable to the General Partner, of approximately  $128,000 and $139,000 for
the year ended December 31, 1999 and 1998, respectively.  Payments of these fees
are made to the General Partner without interest from surplus cash available for
distribution to partners pursuant to HUD regulations.  During 1999 and 1998, the
Local   Limited   Partnerships   paid   approximately   $145,000  and  $200,000,
respectively.  The  balances  owed  to NHP for  these  fees  were  approximately
$657,000 at December 31, 1999.

     During 1999 and 1998, the General Partner advanced approximately $1,000 and
$214,000 to one and ten Local  Limited  Partnerships  for  insurance  and entity
expenses, including expenses incurred relating to potential sales or refinancing
under the LIHPRHA program.  The Local Limited  Partnerships  paid  approximately
$184,000 in loans  during 1998 and  approximately  $123,000 in interest on these
loans during 1998. No payments  were made on the loans or interest  during 1999.
At December 31, 1999,  approximately  $1,863,000  of loans and accrued  interest
were owed to the  General  Partner.  Interest  is charged at a rate equal to the
Chase Manhattan Bank prime interest rate plus 2%. Chase Manhattan Bank prime was
8.25% at December 31, 1999.

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"),
formerly a wholly owned subsidiary of NHP Incorporated  ("NHPI"), is the project
management  agent for the  projects  operated by eleven and fifteen of the Local
Limited  Partnerships  during  1999 and  1998,  respectively.  NHPMC  and  other
affiliates  of NCHP earned  approximately  $768,000 and $946,000 for  management
fees and other services provided to the Local Limited  Partnerships  during 1999
and 1998, respectively.  As of December 31, 1999 and 1998, amounts due NHPMC and
unpaid by the Local Limited Partnerships  amounted to approximately  $45,000 and
$13,000, respectively.

      Personnel  working at the project sites,  which are managed by NHPMC, were
employees of NHPI during the period January 1, 1996 through December 8, 1997 and
became employees of NHPMC (as a successor  employer) as of December 8, 1997 and,
therefore,  the projects  reimbursed  NHPI and NHPMC for the actual salaries and
related benefits.  Prior to January 1, 1996, project employees were employees of
NCHP. Total reimbursements  earned for salaries and benefits for the years ended
December  31,  1999 and 1998,  were  approximately  $1,335,000  and  $1,492,000,
respectively.

10.   IMPAIRMENT LOSS ON RENTAL PROPERTY

      The Financial Accounting Standards Board Statement of Financial Accounting
Standards 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.

      The net  assets  of  Hurbell  I Limited  Partnership  are  being  actively
marketed for sale.  During 1999,  Hurbell I Limited  Partnership  recognized  an
impairment loss on its rental property in the amount of  approximately  $736,000
based on the General  Partner's  estimated  net sales value  (estimated  selling
price of the net assets,  less an estimated cost of  disposition).  The ultimate
sales value or the success of a completed  transaction to sell the Partnership's
net assets cannot presently be determined.

      During 1998,  Tinker Creek  Limited  Partnership  recognized an impairment
loss on its  rental  property  in the  amount  of  $347,000.  The  amount of the
impairment loss is the amount by which the carrying value exceeds the fair value
of the  property.  The fair value of the rental  property was  determined by the
amount of the June 30, 1998 sale of approximately $1,785,000.

      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, 1999.
Should  a  Local  Limited  Partnership  be  forced  to  dispose  of  any  of its
properties, it could incur a loss.

11.   DISPOSALS OF RENTAL PROPERTIES

      The Menlo Limited  Partnership had a note payable which was due on October
31,  1997.  On  November  10,  1997,  the note  holder  notified  Menlo  Limited
Partnership  that the note was in default and demanded  immediate  payment.  The
Local Limited  Partnership  did not have the resources to pay amounts due on the
note payable. On January 5, 1998, pursuant to the security agreement of the note
payable,  the note holder was  substituted as sole limited  partner of the Local
Limited  Partnership in place of the Partnership and the note holder's  assignee
was  substituted  as the  general  partner.  With the loss of the  Partnership's
interest in Menlo Limited  Partnership to the note holder,  the Partnership will
not receive any future benefits from this Local Limited  Partnership and taxable
income will be generated  and flow to the  Partnership's  investors  without any
distributable cash. The specific impact of the tax consequence is dependent upon
each partner's individual tax situation.

      Additionally,  the Gulfway and  Rockwell  Limited  Partnerships  had notes
payable which were due on November 7, 1997. The Local Limited  Partnerships  did
not have the  resources  to pay  amounts due on the notes  payable.  On June 29,
1998, pursuant to the security agreements of the notes payable, the note holders
were  substituted as sole limited  partner of the Local Limited  Partnerships in
place of NHP Realty Fund Two and the note holders'  assignee was  substituted as
the general partner. With the loss of the Partnership's  interest in Gulfway and
Rockwell  Limited  Partnerships to the note holders,  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 any
distributable cash. The specific impact of the tax consequence is dependent upon
each partner's individual tax situation.

      Tinker Creek Limited  Partnership had a note payable due on June 30, 1998.
During  February  1998,  Tinker Creek Limited  Partnership  entered into a sales
agreement  with  Artcraft  Investment,  L.L.C.  for  the  sale of  Tinker  Creek
Apartments.  The  closing  occurred  on July 2, 1998,  with a purchase  price of
$1,785,000.  Net proceeds of $750,081  were  divided  between the holders of the
Tinker Creek note payable and Tinker Creek  Limited  Partnership,  with the note
holders receiving 80% of the net proceeds in full satisfaction of amounts due on
their notes. Any unpaid balances were forgiven. Tinker Creek Limited Partnership
received the remaining 20% of the net proceeds.  The Partnership's  share of the
gain from the sale, in excess of cumulative  losses not taken,  in the amount of
$33,818 has been recorded in the  accompanying  statements of operations for the
year ended December 31, 1998, as an extraordinary  item - gain on extinguishment
of debt. The sale may generate  taxable income to the  Partnership's  investors.
The specific  impact of the tax  consequences  is dependent  upon each  specific
partner's individual tax situation.

      Meadows Apartments and Meadows East Apartments  Limited  Partnerships both
had notes  payable  which  were due on  December  12,  1997.  The Local  Limited
Partnerships did not have the resources to pay the amounts due. Effective August
5, 1999 and December 1, 1999,  Meadows  Apartments  and Meadows East  Apartments
Limited  Partnership  notes  were  foreclosed  upon.  Pursuant  to the  security
agreement  of the note  payable,  the note  holder was  substituted  as the sole
limited partner of the Local Limited Partnership in place of the Partnership and
the note holder's  assignee was substituted as the general  partner.  No gain or
loss has been recorded as a result of the transfer of this partnership interest.
With the loss of the  Partnership's  interest in Meadows  Apartments and Meadows
East Apartments to the note holders, 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 any  distributable
cash. The specific impact of the tax consequence is dependent upon each specific
partner's individual tax situation.

12.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      FASB  Statement  No.  107,  "Disclosures  About  Fair  Value of  Financial
Instruments,"  requires  disclosure of fair value  information  about  financial
instruments,  when it is  practicable  to  estimate  that  value.  For the notes
payable and related accrued interest,  a reasonable estimate of fair value could
not be made without  incurring  excessive  costs.  The carrying  amount of other
assets and  liabilities  reported on the  statement of financial  position  that
require such disclosure approximates fair value.

13.   GOING CONCERN

     Certain of the Local Partnership's notes payable are past due (see Note 6).
Subsequent  to  December  31,  1999,  the  noteholders  for certain of the Local
Limited Partnerships foreclosed on the Partnership interests and the noteholders
for certain other Local Limited Partnerships began foreclosure proceedings (Note
6).  Continuation of the Local  Partnerships'  operations in the present form is
dependent on its ability to extend the maturity date of these notes, or to repay
or to  refinance  the  notes.  The  financial  statements  do  not  include  any
adjustments which might result from the outcome of this uncertainty.