<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-K
                                 ANNUAL REPORT


                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                      SECURITIES AND EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 1998 ..... 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 INDIANAPOLIS,           46240
  -------------------------------------------------           -----
                       INDIANA                              (Zip Code)
                       -------
      (Address of principal executive offices)



<TABLE>
<S>                                                                 <C>
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:         18,300 LIMITED PARTNERSHIP INTERESTS
                                                                    ------------------------------------
</TABLE>

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-K 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-K or any amendment to
this Form 10-K. [X]

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>   2
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                          1998 FORM 10-K ANNUAL REPORT


                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
                                             PART I
                                             ------
<S>              <C>                                                                         <C>
Item 1.          Business                                                                    2
Item 2.          Properties                                                                  10
Item 3.          Legal Proceedings                                                           10
Item 4.          Submission of Matters to a Vote of Security Holders                         10


                                             PART II
                                             -------

Item 5.          Market for the Registrant's Partnership
                    Interests and Related Partnership Matters                                10
Item 6.          Selected Financial Data                                                     11
Item 7.          Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                                      12
Item 7a.         Quantitative and Qualitative Disclosures About
                    Market Risk                                                              18
Item 8.          Financial Statements and Supplementary Data                                 18
Item 9.          Changes in and Disagreements with Accountants
                    on Accounting and Financial Disclosure                                   41

                                             PART III
                                             --------

Item 10.         Directors and Executive Officers of the Registrant                          42
Item 11.         Executive Compensation                                                      44
Item 12.         Security Ownership of Certain Beneficial
                    Owners and Management                                                    44
Item 13.         Certain Relationships and Related Transactions                              44


                                              PART IV
                                              -------

Item 14.         Exhibits, Financial Statement Schedules and
                    Reports on Form 8-K                                                      45
</TABLE>





                                       1
<PAGE>   3
                                     PART I


         The matters discussed in this Form 10-K 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-K 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").  This matter has been disclosed in
all filings by NHP with the Securities and Exchange Commission.  Documents were
produced which may have been responsive to the HUD subpoena and submitted to
the HUD Inspector General 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.

         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





                                       2
<PAGE>   4
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
seventeen 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 holds 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. 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
7, Management's Discussion and Analysis of Financial Condition and Results 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:

    SCHEDULE OF PROPERTIES OWNED DURING 1998 BY LOCAL LIMITED PARTNERSHIPS
   IN WHICH NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO HAD AN INVESTMENT


<TABLE>
<CAPTION>
                                                                  Financed,            Units Authorized          Occupancy
                                                                 Insured and              for Rental         Percentage for the
            Property Name, Location and         Number of         Subsidized           Assistance Under          Year Ended
                   Partnership Name               Units              Under              Section 8 (C)        December 31, 1998
   -------------------------------------------   ------    ----------------------    -------------------     -----------------
 <S>                                               <C>               <C>                     <C>                    <C>
 Anderson Gardens                                  200               (A)                     200                     92%
 Anderson, South Carolina                                                                            
   (Hurbell II Limited  Partnership)                                                                 
                                                                                                     
 Caroline Arms                                     204               (A)                     161                     97%
 Jacksonville, Florida
   (Caroline Arms Limited
   Partnership)
</TABLE>





                                       3
<PAGE>   5
<TABLE>
<CAPTION>
                                                                  Financed,            Units Authorized          Occupancy
                                                                 Insured and              for Rental         Percentage for the
            Property Name, Location and         Number of         Subsidized           Assistance Under          Year Ended
                   Partnership Name               Units              Under              Section 8 (C)        December 31, 1998
   -------------------------------------------   ------    ----------------------    -------------------     ------------------
 <S>                                             <C>                 <C>                     <C>                 <C>
 Esbro                                           100                 (A)                      99                   97%
 Tucson, Arizona                                                                                   
   (Esbro Limited  Partnership)                                                                    
                                                                                                   
                                                                                                   
 Gulfway Manor                                   (E)                 (E)                      (E)                  (E)
 Corpus Christie, Texas                                                                            
   (Gulfway Limited Partnership)                                                                   
                                                                                                   
 Harold House                                    80                  (A)                      76                  100%
 Jacksonville, Florida                                                                             
   (Harold House Limited                                                                           
   Partnership)                                                                                    
                                                                                                   
                                                                                                   
 Hilltop                                         105                 (A)                      55                   91%
 Hickory, North Carolina                                                                           
   (Hilltop Limited Partnership)                                                                   
                                                                                                   
                                                                                                   
 Holly Oak                                       100                 (A)                      94                   93%
 Shelby, North Carolina                                                                            
   (Hurbell I Limited Partnership)                                                                 
                                                                                                   
 Kimberton                                       165                 (A)                      165                  95%
 Newark, Delaware                                                                                  
   (Kimberton Apartments                                                                           
   Associates Limited Partnership)                                                                 
                                                                                                   
                                                                                                   
 Mayfair                                         140                 (A)                      139                  98%
 Tucson, Arizona                                                                                   
   (Mayfair Manor Limited                                                                          
   Partnership)                                                                                    
                                                                                                   
 Meadows                                         110                 (B)                       0                   98%
 Sparks, Nevada                                                                                    
   (Meadows Apartments Limited                                                                     
   Partnership)                                                                                    
                                                                                                   
                                                                                                   
 Meadows East                                    200                 (A)                      63                   96%
 Sparks, Nevada                                                                                    
   (Meadows East Apartments                                                                        
   Limited Partnership)                                                                            
                                                                                                   
                                                                                                   
 Menlo Park                                      (E)                 (E)                      (E)                  (E)
 Tucson, Arizona                                                                                   
   (Menlo Limited Partnership)                                                                     
                                                                                                   
 Park Avenue West I                               80                 (B)                       0                   92%
 Mansfield, Ohio
   (Park Avenue West I
   Limited Partnership)
</TABLE>





                                       4
<PAGE>   6
<TABLE>
<CAPTION>
                                                                  Financed,            Units Authorized          Occupancy
                                                                 Insured and              for Rental         Percentage for the
            Property Name, Location and         Number of         Subsidized           Assistance Under          Year Ended
                   Partnership Name               Units              Under              Section 8 (C)        December 31, 1998
   -------------------------------------------   ------    ----------------------    -------------------     ------------------
 <S>                                             <C>                 <C>                     <C>               <C>
 Park Avenue West II                               80                (A)                       32                   98%
 Mansfield, Ohio                                                             
   (Park Avenue West II Limited                                              
   Partnership)                                                              
                                                                             
                                                                             
 Rockwell Manor                                   (E)                (E)                      (E)                   (E)
 Brownsville, Texas                                                          
   (Rockwell Limited Partnership)                                            
                                                                             
 Rodeo Drive                                       99                (A)                       98                   98%
 Victorville, California                                                     
   (Rodeo Drive Limited Partnership)                                         
                                                                             
                                                                             
 Royal Oak Gardens                                100                (B)                      100                   99%
 Kannapolis, North Carolina                                                  
   (Hurbell III Limited Partnership)                                         
                                                                             
                                                                             
 San Juan del Centro                              150                (A)                      150                   99%
 Boulder, Colorado                                                           
   (San Juan Del Centro Limited                                              
   Partnership)                                                              
                                                                             
 Tinker Creek                                     (D)                (D)                      (D)                   (D)
 Roanoke, Virginia                                                           
   (Tinker Creek Limited Partnership)                                        
                                                                             
                                                                             
 West Oak Village                                 200                (A)                      200                   94%
 Tulsa, Oklahoma                                                             
   (West Oak Village Limited                                                 
   Partnership)                                                              
                                                                             
 Windsor Apartments                               169                (A)                      169                   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.


         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





                                       5
<PAGE>   7
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 1,739 units, 76 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 (1,739 in total) receiving rent subsidies from
Section 8 have their contracts expiring during the year ending December 31,
1999. 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





                                       6
<PAGE>   8
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.

         AIMCO believes that the 2530 Committee will continue to apply the 2530
Clearance process to large management portfolios such as AIMCO's with
discretion and flexibility. While there can be no assurance, AIMCO believes
that the unsatisfactory reviews and the mortgage defaults will not have a
material impact on its results of operations or financial condition.

    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, 1998, the Partnership held an equity interest in 17
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.





                                       7
<PAGE>   9
         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.

Notes Payable

         As discussed in Note 7 to the Local Limited Partnerships' combined
financial statements, nineteen of the Local Limited Partnerships in which the
Partnership has invested carried notes payable due to the original owner of
each Property. With the exception of West Oak Village Limited Partnership,
these notes are either currently due or become due in 1999. These notes are
secured by both the Partnership's and NHP's interests in the 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 payable matured on
November 30, 1996. During 1997, the note holders entered into an agreement with
the West Oak Village Limited Partnership under which the maturity date of the
note was extended until November 2013. Under the terms of the agreement, the
Local Limited Partnership must pay the note holders annual interest on or
before December 31, 1997, and every year thereafter, 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%. During 1998 and 1997, the Local Limited Partnership received
partner loans to pay the required annual installment of interest $50,000, 
$51,040 and 52,265 for 1996, 1997 and 1998, respectively. At any time prior to
the note's maturity, the Local Limited Partnership has an option to pay off the
note payable at a discount equal to 70% of the property's annual scheduled rent
but no less than $700,000. At December 31, 1998, the outstanding principal and
related interest, respectively, were $2,046,695 and $2,436,281. There can be no
assurance that the Local Limited Partnership will have sufficient cash or that
the General Partner will loan additional cash to the Local Limited Partnership,
if necessary, to make the annual installment payments required under the
Agreement. The failure to make the required payments may result in a loss of
interest in this Local Limited Partnership, which may result in the investors
incurring adverse tax consequences.

         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.

         Mayfair Manor and Esbro Limited Partnerships have notes payable which
matured on October 25, 1997. Effective February 16, 1998, both Mayfair Manor
and Esbro Limited Partnerships executed Amended and Restated Promissory Notes
("ARPN") for each of their notes payable. The general terms of the ARPN's
require payment of the following upon the earlier of the sale, transfer or
refinancing of the underlying property, or October 25, 1999:

         a)      the original principal sum of the note payable, plus

         b)      interest which accrued on such principal at the rate of 9% per
                 annum from the original date to October 25, 1997, plus

         c)      interest on the foregoing sums of principal and interest from
                 October 25, 1997 at the rate of 5.54% per annum, compounded
                 annually.





                                       8
<PAGE>   10
The ARPN's are collateralized by a security interest in the general and limited
partnership interests of the Local Limited Partnerships. The note holders were
paid an extension fee of $90,000 and $70,000 for Mayfair Manor and Esbro,
respectively, which was paid from the proceeds of loans from the General
Partner.

         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.

         The note payable with respect to Rodeo Drive Limited Partnership
matured on December 6, 1997. The Local Limited Partnership does not have the
resources to pay amounts due on the note payable. The holders of the note
commenced a civil action seeking to gain control of the general and limited
partnership interests of the Rodeo Drive Limited Partnership. With the loss of
the Partnership's interest in Rodeo Drive 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, Meadows Apartments and Meadows East Apartments Local
Limited Partnerships continued existence as a going concern is dependent on the
Local Limited Partnerships' ability to pay principal and interest obligations
under their notes payable, which became due on December 12, 1997, or negotiate
further amendments of the terms of the notes. Should no agreement be reached
and absent a sale or refinancing which produces sufficient funds to repay the
notes in full, a default would occur on the notes. Such default could lead to a
foreclosure by the note holder of the security underlying the notes such that
the Partnership may lose its interest in these Local Limited Partnerships.
Should the Partnership lose its interest in a Local Limited Partnership,
partners in the Partnership may incur adverse tax consequences. The impact of
the tax consequence is dependent upon each partner's individual tax situation.

         The notes related to the other eleven Local Limited Partnerships, in
addition to the extensions to the notes relating to Mayfair Manor and Esbro
Local Limited Partnerships discussed above, will reach final maturity during
the fourth quarter of 1999. As of December 31, 1998, the Local Limited
Partnerships' have not renegotiated the terms of the notes, including the
extension of the due date. Continuation of the Local Limited Partnerships'
operations in the present form is dependent on their ability to extend the
maturity dates of these notes or to repay or refinance the notes. These notes
are secured by both the Partnership's and the General Partner's interests in
the Local Limited Partnerships. In the event of a default on the notes, the
note holders would be able to assume the General Partner's and the
Partnership's interests in the Local Limited Partnerships. Should the
Partnership lose its interest in a Local Limited Partnership, partners in the
Partnership may incur adverse tax consequences. The impact of the tax
consequence is dependent upon each partner's individual tax situation. There
can be no assurance that the General Partner will be successful in extending or
restructuring the notes payable as they mature.

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, 1998:





                                       9
<PAGE>   11
<TABLE>
<CAPTION>
                                 NHP Realty Fund Two     Cost of
                                     Percentage         Ownership     Mortgage       Notes payable and
           Partnership                Ownership          Interest      Notes          Accrued Interest    
 -----------------------------        ---------          --------      -----     -------------------------
 <S>                                    <C>             <C>           <C>              <C>
 Caroline Arms L.P.                     94.5%           $  868,269    $1,888,129        $3,765,988

 Esbro L.P.                             94.5%              569,295       909,815         2,741,740

 Harold House L.P.                      94.5%              363,546       745,373         1,446,143

 Hilltop L.P.                           94.5%              552,599     1,064,902         1,859,482

 Hurbell I L.P.                         94.5%              376,641     1,083,942         1,375,507

 Hurbell II L.P.                        94.5%              786,764     1,521,214         3,415,735

 Hurbell III L.P.                       94.5%              409,426       895,009         1,563,312

 Kimberton Apts. Assoc. L.P.            94.5%            2,077,958     1,798,729          (a)

 Mayfair Manor L.P.                     94.5%              811,879     1,278,828         3,766,705

 Meadows Apts. L.P.   (A)               94.5%              579,168       649,563         2,623,636

 Meadows East Apts. L.P. (A)            94.5%            1,095,270     2,232,444         3,604,179

 Park Avenue West I L.P.                94.5%              327,968       473,992         1,682,882

 Park Avenue West II L.P.               94.5%              418,944       546,511         1,252,998

 Rodeo Drive L.P.                       94.5%              599,734     1,068,572         2,376,420

 San Juan del Centro L.P.               94.5%              799,100     1,575,889         3,298,506

 West Oak Village L.P.                  94.5%            1,057,843     1,519,132         4,482,976

 Windsor Apts. Assoc. L.P.              94.5%            2,117,081     2,299,661          (a)
</TABLE>

         (A)     Note is currently in default.

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

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

         The Partnership is not involved in any material legal proceedings.

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

         No matters were submitted.

                                    PART II

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

         (a)     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.





                                       10
<PAGE>   12
         (b)     As of December 31, 1998, there were 1,305 registered holders
                 of 18,300 limited partnership interests (in addition to 1133
                 Fifteenth Street Two Associates - See Item 1).

         (c)     No cash dividends or distributions have been declared from the
                 inception of the Partnership through December 31, 1998.

Item 6.  Selected Financial Data

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                         -----------------------------------------------------------------
                                               1998          1997         1996          1995          1994
                                               ----          ----         ----          ----          ----
<S>                                        <C>          <C>            <C>           <C>           <C>
Share of (losses) profits from
  Local Limited Partnerships (A)           $  145,594    $  (26,948)   $   35,643    $  257,939    $ 134,558

Loss on investment in Local
  Limited Partnerships                          -             -             -             -           (6,673)

Other revenue and expenses:
   Distribution in excess of investment
     in Local Limited Partnerships
     and interest income                       26,100       104,266       148,662       217,816      113,508
   Partnership operating expenses            (505,391)     (438,003)     (432,008)     (451,515)    (457,308)
                                            ---------     ---------     ---------     ---------    ---------

(Loss) profit before extraordinary item      (333,697)     (360,685)     (247,703)       24,240     (215,915)

Extraordinary item - share of gain on
  extinguishment of debt                       33,818         -             -             -            -
                                            ---------     ---------     ---------     ---------    ---------

Net (loss) profit                          $ (299,879)   $ (360,685)   $ (247,703)   $   24,240   $ (215,915)
                                            =========     =========     =========     =========    =========

Net (loss) profit per unit of other limited
  partnership interest based on units
  outstanding during the period            $      (16)   $      (20)   $      (13)   $        1   $      (12)
                                            =========     =========     =========     =========    =========

Total assets, at December 31               $4,347,866    $4,216,613    $4,278,523    $4,257,535   $4,029,679
                                            =========     =========     =========     =========    =========

Long-term debt - notes payable
  and related accrued interest             $5,715,350    $5,473,903    $5,232,456    $4,991,009   $4,749,562
                                            =========     =========     =========     =========    =========

Cash distributions per unit of
   limited partnership interest            $      -      $      -      $      -        $    -     $      -
                                            =========     =========     =========     =========    =========
</TABLE>

(A)     The Partnership holds limited partnership interests in the Local
        Limited Partnerships, and since its liability for obligations is
        limited to its original investment, its investment account is not
        reduced below zero (creating a liability) for the investments in Local
        Limited Partnerships. As a result, during 1998, 1997, 1996, 1995 and
        1994, $1,240,069, $5,806,764, $3,251,206, $1,453,945 and $4,942,486,
        respectively, of losses from eleven, eighteen, seventeen, nineteen and
        nineteen Local Limited Partnerships, have not been recognized by the
        Partnership. During 1998, 1997 and 1996, the Partnership's share of
        profits in three, one and two Local Limited Partnerships in the amount
        of $49,163, $121,189 and $156,104, respectively, was offset against
        prior year losses not taken in the amount of $293,106. The excess
        profits of $19,281 and $14,069 during 1998 and 1997, respectively, were
        offset against distributions taken into income. As a result of the sale
        and foreclosures discussed above, during 1998, $6,114,162 in shares of
        profits resulting from the Partnerships loss of interest in





                                       11
<PAGE>   13
        three Local Limited Partnerships and extraordinary gain from the
        extinguishment of debt were offset against prior years losses not
        taken.

Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations

         The matters discussed in this Form 10-K 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-K 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.

Year 2000 Compliance

General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems

         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 Managing General Partner and its affiliates
for management and administrative services ("Managing Agent").  Any of the
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000.  This could result 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.

         Over the past two years, the Managing Agent has determined that it
will be required to modify or replace significant portions of its software and
certain hardware so that those systems will properly utilize dates beyond
December 31, 1999. The Managing Agent presently believes that with
modifications or replacements of existing software and certain hardware, the
Year 2000 issue can be mitigated.  However, if such modifications and
replacements are not made or not completed in time, the Year 2000 issue could
have a material impact on the operations of the Partnership.

         The Managing Agent's plan to resolve Year 2000 issues involves four
Phases: assessment, remediation, testing, and implementation.  To date, the
Managing Agent has fully completed its assessment of all the information
systems that could be significantly affected by the Year 2000, and has begun
the remediation, testing and implementation phases on both hardware and
software systems.  Assessments are continuing in regards to embedded systems.
The status of each is detailed below.

Status of Progress in Becoming Year 2000 Compliant, Including Timetable for
Completion of Each Remaining Phase

Computer Hardware:

         During 1997 and 1998, the Managing Agent identified all of the
computer systems at risk and formulated a plan to repair or replace each of the
affected systems.  In August 1998, the mainframe system used by the Managing
Agent became fully functional.  In addition to the mainframe, PC-based network
servers and routers and desktop PCs were analyzed for compliance. The Managing
Agent has begun to replace each of the non-compliant network connections and
desktop PCs and, as of December 31, 1998, had completed approximately 75% of
this effort.





                                       12
<PAGE>   14
         The total cost to the Managing Agent to replace the PC-based network
servers, routers and desktop PCs is expected to be approximately $1.5 million
of which $1.3 million has been incurred to date.  The remaining network
connections and desktop PCs are expected to be upgraded to Year 2000 compliant
systems by March 31, 1999.

Computer software:

         The Managing Agent utilizes a combination of off-the-shelf,
commercially available software programs as well as custom-written programs
that are designed to fit specific needs.  Both of these types of programs were
studied, and implementation plans written and executed with the intent of
repairing or replacing any non-compliant software programs.

         During 1998, the Managing Agent began converting the existing property
management and rent collection systems to its management properties Year 2000
compliant systems.  The estimated additional costs to convert such systems at
all properties, is $200,000, and the implementation and the testing process is
expected to be completed by March 31, 1999.

         The final software area is the office software and server operating
systems.  The Managing Agent has upgraded all non-compliant office software
systems on each PC and has upgraded 80% of the server operating systems.  The
remaining server operating systems are planned to be upgraded to be Year 2000
compliant by March 31, 1999.

Operating Equipment:

         The Managing Agent has operating equipment, primarily at the property
sites, which needed to be evaluated for Year 2000 compliance.  In September
1997, the Managing Agent began taking a census and inventory of embedded
systems (including those devices that use time to control systems and machines
at specific properties, for example elevators, heating, ventilating, and air
conditioning systems, security and alarm systems, etc.).

         The Managing Agent has chosen to focus its attention mainly upon
security systems, elevators, heating, ventilating and air conditioning systems,
telephone systems and switches, and sprinkler systems.  While this area is the
most difficult to fully research adequately, management has not yet found any
major non-compliance issues that put the Managing Agent at risk financially or
operationally.  The Managing Agent intends to have a third-party conduct an
audit of these systems and report their findings by March 31, 1999.

         Any of the above operating equipment that has been found to be
non-compliant to date has been replaced or repaired.  To date, these have
consisted only of security systems and phone systems. As of December 31, 1998
the Managing Agent has evaluated approximately 86% of the operating equipment
for the Year 2000 compliance.

         The total cost incurred for all properties managed by the Managing
Agent as of December 31, 1998 to replace or repair the operating equipment was
approximately $400,000.  The Managing Agent estimates the cost to replace or
repair any remaining operating equipment is approximately $325,000, which is
expected to be completed by April 30, 1999.

         The Managing Agent continues to have "awareness campaigns" throughout
the organization designed to raise awareness and report any possible compliance
issues regarding operating equipment within our enterprise.

Nature and Level of Importance of Third Parties and Their Exposure to the Year
2000

         The Managing Agent continues to conduct surveys of its banking and
other vendor relationships to assess risks regarding their Year 2000 readiness.
The Managing Agent has banking relationships with three major financial
institutions, all of which have indicated their compliance efforts will be
complete before May 1999.  The





                                       13
<PAGE>   15
Managing Agent has updated data transmission standards with two of the three
financial institutions.  The Managing Agent's contingency plan in this regard
is to move accounts from any institution that cannot be certified Year 2000
compliant by June 1, 1999.

         The Partnership does not rely heavily on any single vendor for goods
and services, and does not have significant suppliers and subcontractors who
share information systems (external agent).  To date the Partnership is not
aware of any external agent with a Year 2000 compliance issue that would
materially impact the Partnership's results of operations, liquidity, or
capital resources.  However, the Partnership has no means of ensuring that
external agents will be Year 2000 compliant.

         The Managing Agent does not believe that the inability of external
agents to complete their Year 2000 remediation process in a timely manner will
have a material impact on the financial position or results of operations of
the Partnership.  However, the effect of non-compliance by external agents is
not readily determinable.

Costs to Address Year 2000

         The total cost of the Year 2000 project to the Managing Agent is
estimated at $3.5 million and is being funded from operating cash flows.  To
date, the Managing Agent has incurred approximately $2.8 million ($0.6 million
expensed and $2.2 million capitalized for new systems and equipment) related to
all phases of the Year 2000 project.  Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized.  The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
The Partnership's portion of these costs are not material.

Risks Associated with the Year 2000

         The Managing Agent believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner.  As noted above, the Managing
Agent has not yet completed all necessary phases of the Year 2000 program.  In
the event that the Managing Agent does not complete any additional phases,
certain worst case scenarios could occur.  The worst case scenarios could
include elevators, security and heating, ventilating and air conditioning
systems that read incorrect dates and operate with incorrect schedules (e.g.,
elevators will operate on Monday as if it were Sunday).  Although such a change
would be annoying to residents, it is not business critical.

         In addition, disruptions in the economy generally resulting from Year
2000 issues could also adversely affect the Partnership.  The Partnership could
be subject to litigation for, among other things, computer system failures,
equipment shutdowns or failure to properly date business records.  The amount
of potential liability and lost revenue cannot be reasonably estimated at this
time.

Contingency Plans Associated with the Year 2000

         The Managing Agent has contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other actions, manual workarounds and selecting new
relationships for such activities as banking relationships and elevator
operating systems.

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.





                                       14
<PAGE>   16
         As discussed in Note 7 to the Local Limited Partnerships' combined
financial statements attached hereto as an Exhibit, each Local Limited
Partnerships 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 either currently due or become
due in 1999.  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 payable matured on
November 30, 1996. During 1997, the note holders entered into an agreement with
the West Oak Village Limited Partnership under which the maturity date of the
note was extended until November 2013. Under the terms of the agreement, the
Local Limited Partnership must pay the note holders annual interest on or
before December 31, 1997, and every year thereafter, 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%. During 1998 and 1997, the Local Limited Partnership received
partner loans to pay the required annual installment of interest $50,000, 
$51,040 and 52,265 for 1996, 1997 and 1998, respectively. At any time prior to
the note's maturity, the Local Limited Partnership has an option to pay off the
note payable at a discount equal to 70% of the property's annual scheduled rent
but no less than $700,000. At December 31, 1998, the outstanding principal and
related interest, respectively, were $2,046,695 and $2,436,281. There can be no
assurance that the Local Limited Partnership will have sufficient cash or that
the General Partner will loan additional cash to the Local Limited Partnership,
if necessary, to make the annual installment payments required under the
Agreement. The failure to make the required payments may result in a loss of
interest in this Local Limited Partnership, which may result in the investors
incurring adverse tax consequences.

         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.

         Mayfair Manor and Esbro Limited Partnerships have notes payable which
matured on October 25, 1997. Effective February 16, 1998, both Mayfair Manor
and Esbro Limited Partnerships executed Amended and Restated Promissory Notes
("ARPN") for each of their notes payable. The general terms of the ARPN's
require payment of the following upon the earlier of the sale, transfer or
refinancing of the underlying property, or October 25, 1999:

         a)      the original principal sum of the note payable, plus

         b)      interest which accrued on such principal at the rate of 9% per
                 annum from the original date to October 25, 1997, plus

         c)      interest on the foregoing sums of principal and interest from
                 October 25, 1997 at the rate of 5.54% per annum, compounded
                 annually.

The ARPN's are collateralized by a security interest in the general and limited
partnership interests of the Local Limited Partnerships. The note holders were
paid an extension fee of $90,000 and $70,000 for Mayfair Manor and Esbro,
respectively, which was paid from the proceeds of loans from the General
Partner.





                                       15
<PAGE>   17
         Tinker Creek Limited Partnership had a notes 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.

         The note payable with respect to Rodeo Drive Limited Partnership
matured on December 6, 1997. The Local Limited Partnership does not have the
resources to pay amounts due on the note payable. The holders of the note
commenced a civil action seeking to gain control of the general and limited
partnership interests of the Rodeo Drive Limited Partnership. With the loss of
the Partnership's interest in Rodeo Drive 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, Meadows Apartments and Meadows East Apartments Local
Limited Partnerships continued existence as a going concern is dependent on the
Local Limited Partnerships' ability to pay principal and interest obligations
under their notes payable, which became due on December 12, 1997, or negotiate
further amendments of the terms of the notes. Should no agreement be reached
and absent a sale or refinancing which produces sufficient funds to repay the
notes in full, a default would occur on the notes. Such default could lead to a
foreclosure by the note holder of the security underlying the notes such that
the Partnership may lose its interest in these Local Limited Partnerships.
Should the Partnership lose its interest in a Local Limited Partnership,
partners in the Partnership may incur adverse tax consequences. The impact of
the tax consequence is dependent upon each partner's individual tax situation.

         The notes related to the other eleven Local Limited Partnerships, in
addition to the extensions to the notes relating to Mayfair Manor and Esbro
Local Limited Partnerships discussed above, will reach final maturity during
the fourth quarter of 1999. As of December 31, 1998, the Local Limited
Partnerships' have not renegotiated the terms of the notes, including the
extension of the due date. Continuation of the Local Limited Partnerships'
operations in the present form is dependent on their ability to extend the
maturity dates of these notes or to repay or refinance the notes. These notes
are secured by both the Partnership's and the General Partner's interests in
the Local Limited Partnerships. In the event of a default on the notes, the
note holders would be able to assume the General Partner's and the
Partnership's interests in the Local Limited Partnerships. Should the
Partnership lose its interest in a Local Limited Partnership, partners in the
Partnership may incur adverse tax consequences. The impact of the tax
consequence is dependent upon each partner's individual tax situation. There
can be no assurance that the General Partner will be successful in extending or
restructuring the notes payable as they mature.

         During 1998, the General Partner advanced the Partnership $33,650 to
pay legal expenses of the Partnership. No advances were made during 1997 and
1996. During 1996, the Partnership repaid borrowings of $27,700 and accrued
interest of $2,447 to the General Partner. No repayments were made during 1998
and 1997, Interest is charged on borrowings at the Chase Manhattan Bank prime
interest rate plus 2%. Chase Manhattan Bank prime was 7.75% at December 31,
1998. At December 31, 1998 the Partnership owed the General Partner $33,650 in
advances and $1,701 in accrued interest, while at December 31, 1997, the
Partnership had no unpaid borrowings or accrued interest due to the General
Partner.

         During 1998 and 1997, the General Partner advanced $216,357 and
$137,530 to ten and twenty-one Local Limited Partnerships, respectively, for
insurance and entity expenses, including expenses incurred relating to
potential sales or refinancing under the LIHPRHA program. No advances were made
during 1996. The Local Limited





                                       16
<PAGE>   18
Partnerships paid $184,156, $82,689 and $38,163 in loans during 1998, 1997 and
1996, respectively, and $123,236, $134,359 and $212,729 in interest on these
loans during 1998, 1997, and 1996, respectively. The balances owed to the
General Partner by fourteen and twenty-one Local Limited Partnerships at
December 31, 1998 and 1997, was $424,607 and $599,463, respectively. Interest
is charged at a rate equal to the Chase Manhattan Bank prime interest rate plus
2%. Chase Manhattan Bank prime was 7.75% at December 31, 1998.

         During 1998, 1997 and 1996 the Partnership made no advances to the
Local Limited Partnerships. Repayments of advances of $200, $200 and $3,438 and
accrued interest of $8,885, $137 and $793 were received from the Local Limited
Partnerships during 1998, 1997 and 1996, respectively. At December 31, 1998 and
1997, the Partnership's net working capital advances amounted to $398,311 and
$592,927, respectively. Interest is charged at the Chase Manhattan Bank prime
interest rate plus 2%. Chase Manhattan Bank prime was 7.75% at December 31,
1998.

         Net cash used in operations for the year ended December 31, 1998, was
$31,670 as compared to net cash used in operations of $14,187 in 1997 and net
cash provided by operations of $31,485 in 1996. The decrease in cash used in
operations from 1997 to 1998 was primarily the result of an increase in
operating expenses paid and a decrease in distribution received from Local
Limited Partnerships, partially offset by a decrease in the payment of
administrative and reporting fees to General Partner. The change in cash used
in operations from 1996 to 1997 was primarily the result of a decrease in
distributions received from the Local Limited Partnerships.

         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 $66,738, $124,970 and $164,326
were received from three, six and six Local Limited Partnerships, respectively,
during the years ended December 31, 1998, 1997 and 1996, respectively.  The
receipt of distributions in future years is dependent on the operations of the
underlying properties of the Local Limited Partnerships.

         Cash amounted to $25,589 at December 31, 1998. The ability of the
Partnership to meet its on-going cash requirements in excess of cash on hand at
December 31, 1998, is dependent on distributions received from the Local
Limited Partnerships and proceeds from sales or refinancings of the underlying
Properties. The combined underlying operations of the Local Limited
Partnerships are projected to generate sufficient excess cash in the form of
distributions to continue to fund the operations of the Partnership.  However,
should the operations of one or more Properties deteriorate, the Partnership
may not have the financial capability to support those Properties without
assistance from the General Partner. The General Partner is not required to
provide funding to the Partnership. Therefore, there can be no assurance that
the Partnership or its underlying Properties will have sufficient cash in the
future.

         As of December 31, 1998, the Partnership owes the General Partner
$1,212,079 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 invested as a limited partner in Local Limited
Partnerships which operate twenty-one rental housing properties. At December
31, 1998, the Partnership continued to hold an interest in eighteen Local
lImited Partnerships, one of which sold its only property in 1998.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, 1998 and 1997, the
Partnership had no carrying basis





                                       17
<PAGE>   19
in eighteen and nineteen of the Local Limited Partnerships and therefore
reflected no results of operations, for its share of losses for these Local
Limited Partnerships.

         The Partnership incurred a net loss of $299,879 in 1998 compared to a
net loss of $360,685 in 1997. Net loss per unit of limited partnership interest
decreased from $20 in 1997 to $16 in 1998 for the 18,300 units outstanding
throughout both years. This was primarily due to an increase in the
Partnership's share of losses/profits and share gain on extinguishment of debt
in 1998, partially offset by a decrease in distributions in excess of
investment in Local Limited Partnerships and an increase in operating expenses.
The Partnership did not recognize $1,240,069 of its allocated share of losses
from eighteen Local Limited Partnerships, as the Partnership's net book
investment in them was reduced to zero prior to 1998 (see Note 3 to the
Partnership's financial statements). During 1998 and 1997, the Partnership's
share of profits of three and one Local Limited Partnerships in the amounts of 
$49,163 and $121,189, respectively, were offset against prior year losses not 
taken. The Partnership's share of losses from the Local Limited Partnerships, 
if not limited to its investment account balance, would have decreased 
$5,819,358 between years. This decrease was the primary result of the Local 
Limited Partnerships recognizing impairment losses on their rental property in 
the amount of $347,000 in 1998 compared to $4,240,000 in 1997 (see Note 3 to the
Partnership's financial statements). In addition, Tinker Creek Limited
Partnership recognized a gain on extinguishment of debt of $1,617,778 resulting
from the sale of its rental property and the discounted payoff of notes payable
to former owner.

         The Partnership incurred a net loss of $360,685 in 1997 compared to a
net loss of $247,703 in 1996. Net loss per unit of limited partnership interest
increased from $13 in 1996 to $20 in 1997 for the 18,300 units outstanding
throughout both years. This was primarily due to an increase in the
Partnership's share of losses/profits and a decrease in distributions in excess
of investment in Local Limited Partnerships. The Partnership did not recognize
$5,806,764 of its allocated share of losses from eighteen Local Limited
Partnerships, as the Partnership's net book investment in them was reduced to
zero prior to 1997 (see Note 3 to the Partnership's financial statements).
During 1997 and 1996, the Partnership's share of profits of one Local Limited
Partnerships in the amounts of $121,189 and $156,104, respectively, were offset
against prior year losses not taken in the amount of $263,224. The excess
profits of $14,069 were offset against distributions taken into income. The
Partnership's share of losses from the Local Limited Partnerships, if not
limited to its investment account balance, would have increased $2,647,966
between years.  This increase was the primary result of five of the Local
Limited Partnerships recognizing impairment losses on their rental property in
the amount of $4,240,000 in 1997 compared to $1,625,000 in 1996 (see Note 3 to
the Partnership's financial statements).

         In December 1996, a fire occurred at the Meadows East project site.
The fire damages and lost rents of approximately $277,500 were recovered
through insurance proceeds less a $2,500 deductible.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

         The Partnership is exposed to market risks from adverse changes in
interest rates. In this regard, changes in U.S. interest rates affect the
interest earned on the Partnership's cash and cash equivalents as well as
interest paid on indebtedness. As a policy, the Partnership does not engage in
speculative or leveraged transactions, nor does it hold or issue financial
instruments for trading purposes. The Partnership is exposed to changes in
interest rates primarily as a result of its borrowing activities used to
maintain liquidity and fund business operations. Based on interest rates at
December 31, 1998, a 1% increase or decrease in market rates would not have a
material impact on the Partnership.

Item 8. Financial Statements and Supplementary Data

         The financial statements and supplemental schedule of the Partnership
are included on pages 19 through 41 of this report.





                                       18
<PAGE>   20





                          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, 1998,
and the related statements of operations, partners' deficit, and cash flows for
the year then ended, and the financial statement schedule listed in the Index
at Item 14.  These financial statements and schedule are the responsibility of
the Partnership's management.  Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.  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 and which had a $4,218,846 investment balance at December 31, 1998.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
Rodeo Drive Limited Partnership, Kimberton Apartments Associates Limited
Partnership, and Windsor Apartments Associates Limited Partnership, is based
solely on the reports of the other auditors.

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 and the reports of other
auditors provide a reasonable basis for our opinion.

In our opinion, based upon our audit 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, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.  Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.

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.  In addition, certain Local Partnerships' notes payable are due
in 1999.  These conditions raise substantial doubt about their ability to
continue as a going concern.  The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.



Ernst & Young  LLP
Indianapolis, Indiana
February 22, 1999





                                       19
<PAGE>   21





Independent Auditors' Report


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


We have audited the accompanying statement of financial position of National
Housing Partnership Realty Fund Two (the Partnership) as of December 31, 1997,
and the related statements of operations, partners' deficit, and cash flows for
each of the two years in the period ended December 31, 1997, and Schedule III
listed in the Index at Item 14 for the two years in the period ended December
31, 1997. These financial statements and Schedule III are the responsibility of 
the Partnership's management. Our responsibility is to express an opinion on 
these financial statements and Schedule III based on our audits. We did not 
audit the financial statements of Hurbell I Limited Partnership and Rodeo Drive
Limited Partnership (investees of the Partnership) for the years ended December
31, 1997 and 1996. The Partnership's investment of zero in the net assets of
these investees as of December 31, 1997, and of zero in the net profits of
these investees for the years ended December 31, 1997 and 1996, are included
in the accompanying financial statements. The financial statements of these
investees were audited by other auditors whose reports thereon have been
furnished to us, and our opinion, insofar as it relates to amounts included
for these investees, is based solely upon the reports of the other auditors.

We conducted our audits 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 audits and the reports of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, such
financial statements present fairly, in all material respects, the financial
position of National Housing Partnership Realty Fund Two as of December 31,
1997, and the results of its operations and cash flows for each of the two
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the reports of other auditors, such Schedule III for the two years in the
period ended December 31, 1997, when considered in relation to the financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.



Deloitte & Touche LLP
McLean, VA
March 3, 1998





                                       20
<PAGE>   22
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                        STATEMENTS OF FINANCIAL POSITION


<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                         ---------------------------------------
                                                                              1998                      1997
                                                                              ----                      ----
                                                                ASSETS
                                                                ------
<S>                                                                         <C>                  <C>

Cash and cash equivalents (Note 2)                                          $    25,589             $    23,409
Investments in and advances to Local Limited
  Partnerships (Note 3)                                                       4,322,277               4,193,204
                                                                             ----------               ---------

                                                                            $ 4,347,866             $ 4,216,613
                                                                             ==========              ==========

                                                  LIABILITIES AND PARTNERS' DEFICIT
                                                  ---------------------------------

Liabilities:
  Other accrued expenses                                                    $    57,831             $    40,745
  Administrative and reporting fees
    payable to General Partner (Note 4)                                       1,212,079               1,074,831
  Notes payable to General Partner (Note 5)                                   2,414,468               2,414,468
  Accrued interest on notes payable
    to General Partner (Note 5)                                               3,300,882               3,059,435
  Due to General Partner (Note 4)                                                33,650                     -
  Accrued interest on partner loans (Note 4)                                      1,701                     -
                                                                             ----------               ---------

                                                                              7,020,611               6,589,479
                                                                             ----------               ---------
Partners' deficit:
  General Partner - The National
    Housing Partnership (NHP)                                                  (181,817)               (178,818)
  Original Limited Partner - 1133
    Fifteenth Street Two Associates                                            (186,717)               (183,718)
  Other Limited Partners - 18,300
    investment units                                                         (2,304,211)             (2,010,330)
                                                                             ----------               ---------

                                                                             (2,672,745)             (2,372,866)
                                                                             ----------               ---------

                                                                            $ 4,347,866             $ 4,216,613
                                                                             ==========              ==========
</TABLE>





                      See notes to financial statements.

                                       21
<PAGE>   23
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                               --------------------------------------------
                                                                  1998             1997             1996
                                                                  ----             ----             ----
<S>                                                            <C>       <C>                    <C>
REVENUE:
   Share of profits from Local Limited
     Partnerships (Note 3)                                     $ 145,594      $       -         $   35,643
   Distribution in excess of investment in
     Local Limited Partnership                                    16,599          104,195          145,914
   Interest income                                                 9,501               71            2,748
                                                                --------        ---------        ---------

                                                                 171,694          104,266          184,305
                                                                --------        ---------        ---------
COSTS AND EXPENSES:
   Share of losses from Local Limited
     Partnerships (Note 3)                                           -             26,948              -
   Administrative and reporting fees to
     General Partner (Note 4)                                    137,248          137,248          137,248
   Interest on notes payable to
     General Partner (Note 5)                                    241,447          241,447          241,447
   Interest on partner loans (Note 4)                              1,701            -                1,587
   Other operating expenses                                      124,995           59,308           51,726
                                                                --------        ---------        ---------

                                                                 505,391          464,951          432,008
                                                                --------         --------         --------

LOSS BEFORE EXTRAORDINARY ITEM                                  (333,697)        (360,685)        (247,703)

EXTRAORDINARY ITEM - SHARE OF GAIN ON
  EXTINGUISHMENT OF DEBT (NOTE 3)                                 33,818            -                -
                                                                --------         --------         --------
NET LOSS                                                       $(299,879)       $(360,685)       $(247,703)
                                                                ========         ========         ========

ALLOCATION OF NET LOSS:
   General Partner - NHP                                       $  (2,999)       $  (3,607)       $  (2,477)
   Original Limited Partner - 1133
     Fifteenth Street Two Associates                              (2,999)          (3,607)          (2,477)
   Other Limited Partners - 18,300
     investment units                                           (293,881)        (353,471)        (242,749)
                                                                --------         --------         --------

                                                               $(299,879)       $(360,685)       $(247,703)
                                                                ========         ========         ========

NET LOSS PER OTHER LIMITED
  PARTNERSHIP INTEREST (NOTE 3)
   Before extraordinary item                                   $     (18)       $     (20)       $     (13)
   Extraordinary item                                                  2              -                -
                                                                --------         --------         --------
      Net loss                                                 $     (16)       $     (20)       $     (13)
                                                                ========         ========         ========
</TABLE>





                      See notes to financial statements.

                                       22
<PAGE>   24
                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                        STATEMENTS OF PARTNERS' DEFICIT



<TABLE>
<CAPTION>
                                        The National          1133
                                          Housing          Fifteenth          Other
                                        Partnership        Street Two        Limited
                                           (NHP)           Associates        Partners             Total
                                           -----           ----------        --------             -----
<S>                                      <C>                <C>           <C>                  <C>
Deficit at January 1, 1996               $(172,734)         $(177,634)    $(1,414,110)         $(1,764,478)

   Net loss                                 (2,477)            (2,477)       (242,749)            (247,703)
                                          --------           --------      ----------           ----------

Deficit at December 31, 1996              (175,211)          (180,111)     (1,656,859)          (2,012,181)

   Net loss                                 (3,607)            (3,607)       (353,471)            (360,685)
                                          --------           --------      ----------           ----------

Deficit at December 31, 1997              (178,818)          (183,718)     (2,010,330)          (2,372,866)

   Net loss                                 (2,999)            (2,999)       (293,881)            (299,879)
                                          --------           --------      ----------           ----------

Deficit at December 31, 1998             $(181,817)         $(186,717)    $(2,304,211)         $(2,672,745)
                                          ========           ========      ==========           ==========

Percentage interest at
  December 31, 1996, 1997
  and 1998                                    1%                1%              98%
                                              ==                ==              ===

                                             (A)               (B)              (C)
                                             ===               ===              ===
</TABLE>

(A)      General Partner
(B)      Original Limited Partner
(C)      Consists of 18,300 investment units





                      See notes to financial statements.

                                       23
<PAGE>   25
                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                 ------------------------------------------
                                                                     1998             1997           1996
                                                                     ----             ----           ----
<S>                                                              <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Distributions from Local Limited Partnerships                    $ 50,339       $   20,975     $   21,850
  Distributions received in excess of investment in
    Local Limited Partnership                                        16,399          103,995        142,476
  Interest received                                                   9,501               71          2,748
  Payment of administrative and reporting fees to
    General Partner                                                     -            (81,220)       (79,179)
  Operating expenses paid                                          (107,909)         (58,008)       (53,963)
  Payment of interest on partner loans                                  -                -           (2,447)
                                                                  ---------        ---------      ---------

  Net cash (used in) provided by operating activities               (31,670)         (14,187)        31,485
                                                                  ---------        ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Repayment of advances to Local Limited Partnerships                   200              200          3,438
                                                                  ---------        ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Advances from General Partner                                      33,650            -              -
  Repayment of advances from General Partner                          -                -            (27,700)
                                                                  ---------        ---------      ---------

  Net cash provided by (used in) financing activities                33,650            -            (27,700)
                                                                  ---------        ---------      ---------

NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                                                     2,180          (13,987)         7,223

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                         23,409           37,396         30,173
                                                                  ---------        ---------      ---------

CASH AND CASH EQUIVALENTS, END OF YEAR                           $   25,589       $   23,409     $   37,396
                                                                  =========        =========      =========
</TABLE>





                      See notes to financial statements.

                                       24
<PAGE>   26
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

                                  (CONTINUED)


<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                               --------------------------------------------
                                                                 1998             1997             1996
                                                                 ----             ----             ----
<S>                                                           <C>              <C>              <C>
RECONCILIATION OF NET LOSS TO NET CASH
  (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net loss                                                       $(299,879)       $(360,685)       $(247,703)
                                                                --------         --------         --------
Adjustments to reconcile net (loss) to net cash
  (used in) provided by operating activities:
Share of losses (profits) from Local Limited Partnerships       (145,594)          26,948          (35,643)
Share of gain on extinguishment of debt                          (33,818)           -                -
Repayment of advances to Local Limited Partnerships                 (200)            (200)          (3,438)
Distributions from Local Limited Partnerships                     50,339           20,975           21,850
Change in operating assets and liabilities:
  Deposits held by escrow agents                                   -                -                   28
  Administrative and reporting fees
  payable to General Partner                                     137,248           56,028           58,069
  Accrued interest on notes payable to General Partner           241,447          241,447          241,447
  Accrued expenses                                                17,086            1,300           (2,265)
  Accrued interest on partner loans                                1,701            -                 (860)
                                                                --------         --------         --------

  Total adjustments                                              268,209          346,498          279,188
                                                                --------         --------         --------

Net cash (used in) provided by operating activities            $ (31,670)       $ (14,187)       $  31,485
                                                                ========         ========         ========
</TABLE>





                      See notes to financial statements.

                                       25
<PAGE>   27
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A 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.

         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.

         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.

         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.





                                       26
<PAGE>   28
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


         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 3). 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.


2.       CASH AND CASH EQUIVALENTS

         Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                          ----------------------------------
                                                                            1998                     1997
                                                                            ----                     ----
         <S>                                                               <C>                      <C>
         Cash in demand accounts                                           $   -                    $   882
         Money Market account                                               25,589                   22,527
                                                                            ------                   ------

                                                                           $25,589                  $23,409
                                                                            ======                   ======
</TABLE>


3.       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.





                                       27
<PAGE>   29
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


         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
$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 months 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.

         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 $1,240,069, $5,806,764 and $3,251,206 of losses from eleven,
seventeen and seventeen Local Limited Partnerships during 1998, 1997 and 1996,
respectively. During 1998, 1997 and 1996, the Partnership's share of profits in
three, one and two Local Limited Partnerships in the amount of $49,163,
$121,189 and $156,104, respectively, were offset against prior year losses not
taken in the amount of $293,106. The excess profits of $19,281 and $14,069
during 1998 and 1997, respectively, were offset against distributions taken
into income. As a result of the sale and foreclosures discussed above, during
1998, $6,114,162 in shares 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, 1998 and 1997, the Partnership has not recognized $21,746,869 and
$26,650,844, respectively, of its allocated cumulative share of losses from
nineteen Local Limited Partnerships in which its investment has been reduced to
zero.





                                       28
<PAGE>   30
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


         The Partnership made no advances to the Local Limited Partnerships
during 1998, 1997 and 1996. Advances of $200, $200 and $3,438 were repaid to
the Partnership in 1998, 1997 and 1996, respectively. In addition, accrued
interest of $8,885, $137 and $793 was received in 1998, 1997 and 1996,
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, 1998 and 1997, and the combined
results of operations for each of the three years in the period ended December
31, 1998, are as follows:





                                       29
<PAGE>   31
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)




                          COMBINED FINANCIAL POSITION
                          OF THE LOCAL LIMITED PARTNERSHIPS

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                        -------------------------------------
                                                                              1998                   1997
                                                                              ----                   ----
<S>                                                                     <C>                     <C>
Assets:
  Land                                                                  $  4,911,004            $  5,836,000
  Buildings and improvements, net of accumulated
    depreciation of $24,333,103 and $27,420,131
    and impairment losses on rental property of
    $8,723,031 and $9,131,900                                             34,114,292              42,648,549
  Other                                                                    6,370,790               6,302,428
                                                                         -----------             -----------

                                                                        $ 45,396,086            $ 54,786,977
                                                                         ===========             ===========
Liabilities and Partners' Deficit
  Liabilities:
    Mortgage notes payable                                              $ 21,551,705            $ 26,655,632
    Notes payable                                                         17,235,514              21,855,789
    Accrued interest on notes payable                                     22,020,695              26,231,626
    Other liabilities                                                      4,091,538               5,166,713
                                                                         -----------             -----------

                                                                          64,899,452              79,909,760
  Partners' Deficit:
    National Housing Partnership Realty Fund Two                         (18,299,733)            (23,529,879)
    Other partners                                                        (1,203,633)             (1,592,904)
                                                                         -----------             -----------

                                                                         (19,503,366)            (25,122,783)
                                                                         -----------             -----------

                                                                        $ 45,396,086            $ 54,786,977
                                                                         ===========             ===========
</TABLE>

                         COMBINED RESULTS OF OPERATIONS
                       OF THE LOCAL LIMITED PARTNERSHIPS

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                            -----------------------------------------------
                                                                1998              1997             1996
                                                                ----              ----             ----
<S>                                                       <C>                <C>              <C>
Revenue                                                     $13,344,442       $15,202,877      $14,911,882
                                                             ----------        ----------       ----------

Expenses:
  Operating expenses                                          9,890,491        11,839,085       11,416,965
  Financial expenses - primarily interest                       272,279           294,744          375,802
  Interest on notes payable                                   2,122,963         2,270,221        2,265,895
  Depreciation and amortization                               2,218,455         2,378,144        2,342,774
  Impairment loss on rental property                            347,000         4,240,000        1,625,000
                                                             ----------        ----------       ----------
                                                             14,851,188        21,022,194       18,026,436
                                                             ----------        ----------       ----------

 Loss before extraordinary item                              (1,506,746)       (5,819,317)      (3,114,554)
 Gain on extinguishment of debt                               1,617,778               -                -
                                                             ----------        ----------       ----------

Net profit (loss)                                           $   111,032       $(5,819,317)     $(3,114,554)
                                                             ==========        ==========       ==========
</TABLE>





                                       30
<PAGE>   32
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


         The combined financial statements of the Local Limited Partnerships
are prepared on the accrual basis of accounting.  Nineteen 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.

         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 1,739 units, 76 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 (1,739 in total) receiving rent subsidies from
Section 8 have their contracts expiring during the year ending December 31,
1999. 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 seventeen 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 three Local Limited Partnerships 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 eighteen rental housing projects insured under Section 236, FHA makes
subsidy payments directly to the mortgage





                                       31
<PAGE>   33
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


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.

These notes mature as follows:

<TABLE>
<CAPTION>
                 Local Partnership               Due Date            Note Amount       Accrued Interest
                 -----------------               --------            -----------       ----------------
      <S>                                   <C>                    <C>                 <C>
      Meadows Apartments
         Limited Partnership                December 12, 1997*       $ 1,159,173         $ 1,464,463
      Meadows East Apartments
         Limited Partnership                December 12, 1997*         1,592,399           2,011,780
      Rodeo Drive Limited Partnership        December 6, 1998*         1,048,837           1,327,583
                                                                      ----------          ----------

           Total Delinquent                                            3,800,409           4,803,826
                                                                      ----------          ----------

      Esbro Limited Partnership              October 25, 1999          1,204,380           1,537,360
      Mayfair Manor Limited Partnership      October 25, 1999          1,654,220           2,112,485
      Hurbell II Limited Partnership         November 2, 1999          1,501,558           1,914,177
      Hilltop Limited Partnership            November 2, 1999            816,530           1,042,952
      Caroline Arms Limited Partnership      November 11, 1999         1,560,791           2,205,197
      Harold House Limited Partnership       November 15, 1999           599,340             846,803
      Hurbell I Limited Partnership          December 19, 1999           607,838             767,669
      Hurbell III Limited Partnership        December 19, 1999           687,787             875,525
      Park Avenue West I Limited
         Partnership                         December 20, 1999           743,800             939,082
      Park Avenue West II Limited
         Partnership                         December 20, 1999           554,400             698,598
      San Juan Del Centro Limited
         Partnership                         December 20, 1999         1,457,766           1,840,740
                                                                      ----------          ----------

               Total Due 1999                                         11,388,410          14,780,588
                                                                      ----------          ----------

      West Oak Limited Partnership           November 30, 2013         2,046,695           2,436,281
                                                                      ----------          ----------

               Total Due                                             $17,235,514         $22,020,695
                                                                      ==========          ==========
</TABLE>

           * Notes are in default.

         The West Oak Village Limited Partnership note payable matured on
November 30, 1996. During 1997, the note holders entered into an agreement with
the West Oak Village Limited Partnership under which the maturity date of





                                       32
<PAGE>   34
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


the note was extended until November 2013. Under the terms of the agreement,
the Local Limited Partnership must pay the note holders annual interest on or
before December 31, 1997, and every year thereafter, 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%. During 1998 and 1997, the Local Limited Partnership received
partner loans the required annual installment of interest $50,000, $51,040 and
52,265 for 1996, 1997 and 1998, respectively. At any time prior to the note's
maturity, the Local Limited Partnership has an option to pay off the note
payable at a discount equal to 70% of the property's annual scheduled rent but
no less than $700,000. At December 31, 1997, the outstanding principal and
related interest, respectively were $2,046,695 and $2,304,346. There can be no
assurance that the Local Limited Partnership will have sufficient cash or that
the General Partner will loan additional cash to the Local Limited Partnership,
if necessary, to make the annual installment payments required under the
Agreement. The failure to make the required payments may result in a loss of
interest in this Local Limited Partnership, which may result in the partners
incurring adverse tax consequences.

         Mayfair Manor and Esbro Limited Partnerships have notes payable which
matured on October 25, 1997. At December 31, 1997, Mayfair Manor's notes
payable principal and interest was $1,654,220 and $1,963,606, respectively, and
Esbro's notes payable principal and interest was $1,204,380 and $1,428,966,
respectively. Effective February 16, 1998, both Mayfair Manor and Esbro Limited
Partnerships executed Amended and Restated Promissory Notes ("ARPN") for each
of their notes payable. The general terms of the ARPN's require payment of the
following upon the earlier of the sale, transfer or refinancing of the
underlying property, or October 25, 1999:


         a)      the original principal sum of the note payable, plus
 
         b)      interest which accrued on such principal at the rate of 9% per
                 annum from the original date to October 25, 1997, plus

         c)      interest on the foregoing sums of principal and interest from
                 October 25, 1997 at the rate of 5.54% per annum, compounded
                 annually.

The ARPN's are collateralized by a security interest in the general and limited
partnership interests of the Local Limited Partnerships. The note holders were
paid an extension fee of $90,000 and $70,000 for Mayfair Manor and Esbro,
respectively, which was paid from the proceeds of loans from the General
Partner.

         The notes payable with respect to Rodeo Drive Limited Partnership have
matured and the holders of the notes commenced a civil action seeking to gain
control of the general and limited partnership interests of the Rodeo Drive
Limited Partnership.  Discussions which will result in a transfer of these
interests to the note holders are near completion. A default on any of the
aforementioned notes payable could lead to a foreclosure by the note holder of
the security underlying the notes such that the Partnership may lose its
interest in these Local Limited Partnerships. Should the Partnership lose its
interest in a Local Limited Partnership, partners in the Partnership may incur
adverse tax consequences. The impact of the tax consequence is dependent upon
each partner's individual tax situation.

         In March 1995, the Financial Accounting Standards Board issued
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") effective for financial statements for fiscal years beginning
after December 15, 1995. This 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 1998, Tinker Creek Limited Partnership recognized an impairment
loss (noncash) 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.





                                       33
<PAGE>   35
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


         During 1997, Esbro, Gulfway, Meadows Apartments, Meadows East
Apartments and Menlo Limited Partnerships recognized impairment losses
(noncash) on their rental property in the amounts of $500,000, $740,000,
$700,000, $1,450,000 and $850,000, respectively. Since each of the Local
Limited Partnerships is in default of its note payable, the Local Limited
Partnership's estimate of cash flow includes only its estimate of the fair
value of the rental property. As a result of not including cash flow from
operations during any anticipated holding period, the estimated cash flow was
less than the carrying amount at December 31, 1997. The amount of the
impairment loss is the amount by which the carrying value exceeds the fair
value of the property. The Local Limited Partnerships used the Direct
Capitalization Method to estimate the fair value of the rental property. Using
this Method, estimated annual cash flow generated by the property is divided by
an overall capitalization rate to estimate the rental property's fair value.

         During 1996, Park Avenue West II and Hilltop Limited Partnerships
recognized impairment losses (noncash) on their rental property in the amounts
of $600,000 and $1,025,000, respectively. The Local Limited Partnerships also
used the Direct Capitalization Method to estimate the fair value of the rental
property.

         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,
1997. Should a Local Limited Partnership be forced to dispose of any of its
properties, it could incur a loss.

4.       TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES OF THE GENERAL
PARTNER

         The Partnership accrued administrative and reporting fees payable to
the General Partner of $137,248 during 1998, 1997 and 1996. During 1997 and
1996, the Partnership paid the General Partner $81,220 and $79,179 for these
fees. No payments were made during 1998 for these fees. The balances owed to
NHP for these fees were $1,212,079 and $1,074,831 as of December 31, 1998 and
1997, respectively.

         During 1998, the General Partner advanced the Partnership $33,650 to
pay legal expenses of the Partnership. No advances were made during 1997 and
1996. During 1996, the Partnership repaid borrowings of $27,700 and accrued
interest of $2,447 to the General Partner. No repayments were made during 1998
and 1997. Interest is charged on borrowings at the Chase Manhattan Bank prime
interest rate plus 2%. Chase Manhattan Bank prime was 7.75% at December 31,
1998. At December 31, 1998 the Partnership owed the General Partner $33,650 in
advances and $1,701 in accrued interest, while at December 31, 1997, the
Partnership had no unpaid borrowings or accrued interest due to the General
Partner.

         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 fifteen of the Local Limited
Partnerships.  During May 1997, AIMCO acquired approximately 51% of the voting
stock of NHPI. An additional 3% of the voting stock was acquired by AIMCO in
August 1997. On December 8, 1997, the NHPI stockholders elected to merge with
AIMCO.  After the merger, NHPMC became a preferred stock subsidiary of AIMCO.
NHPMC and other affiliates of NCHP earned $945,717, $1,505,742 and $1,356,728
for management fees and other services provided to the Local Limited
Partnerships during 1998, 1997 and 1996, respectively. As of December 31, 1998
and 1997, amounts due NHPMC and unpaid by the Local Limited Partnerships
amounted to $13,298 and $65,662, 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. At December 31, 1997, trade payables include $78,052 to 
NHPMC. Total reimbursements earned for salaries and benefits for the years ended
December 31, 1998, 1997 and 1996, were approximately $1,492,000, $1,766,000 and
$1,609,000, respectively.





                                       34
<PAGE>   36
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


5.       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.
Neither principal nor interest are payable currently; all principal and accrued
interest is payable upon the earlier of the sale, transfer or refinancing of
Windsor Apartments or Kimberton Apartments, or October 24, 1999. The notes may
be prepaid in part or in whole at any time without penalty.

6.       INCOME TAXES

         The Partnership is not taxed on its income. The partners are taxed in
their individual capacities 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:

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,                    
                                                              ----------------------------------------------
                                                                 1998             1997              1996
                                                                 ----             ----              ----
  <S>                                                         <C>             <C>              <C>
  Net (loss) profit per financial statements                  $ (299,879)     $  (360,685)     $  (247,703)

  Add (deduct):
    Interest on notes payable                                    241,447            -                -
    Other                                                        148,974            -                -

  Partnership's share of limited local
      partnership's (loss) profit                              9,626,302       (1,612,795)      (4,013,698)
                                                               ---------       ----------       ----------


  Profit (loss) per tax return                                $9,716,844      $(1,973,480)     $(4,261,401)
                                                               =========       ==========       ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                              December 31, 1998
                                                              -----------------
  <S>                                                         <C>
  Net deficit as reported                                        $ (2,672,745)
  Add (deduct):
    Investment In Partnerships                                    (37,061,336)
    Accrued Interest                                                 (267,874)
    Other                                                             148,947
                                                              -----------------
  Net Deficit - federal tax basis                                $(39,853,008)
                                                              =================
</TABLE>

7.       ALLOCATION OF RESULTS OF OPERATIONS, CASH DISTRIBUTIONS AND GAINS AND
         LOSSES FROM SALE OR REFINANCING



                                       35
<PAGE>   37
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


         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;





                                       36
<PAGE>   38
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                         NOTES TO FINANCIAL STATEMENTS

                                  (CONTINUED)


         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.

8.       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 and excessive cost
would not be incurred. A reasonable estimate of fair value of the notes payable
and related accrued interest 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.

9.       GOING CONCERN

         Certain of the Local Partnership's notes payable are past due or are
due in 1999 (see Note 3). 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.





                                       37
<PAGE>   39
                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                             A LIMITED PARTNERSHIP
           SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION OF
     LOCAL LIMITED PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED
                               DECEMBER 31, 1998



<TABLE>
<CAPTION>
                                            Initial Cost to Local       Cost Capitalized Subsequent to
                                             Limited Partnership                 Acquisition
                                           -----------------------------------------------------------


                                                        Buildings
                                                            and                        Carrying Cost
 Partnership Name        Encumbrances         Land     Improvements    Improvements     Adjustments

------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>          <C>            <C>            <C>
Caroline Arms
  Limited
  Partnership                 (1)          $  260,000   $  4,497,252   $ 1,319,733    $        -

Esbro Limited
  Partnership                 (1)             360,000      2,566,446       568,368        (500,000)

Harold House Limited
  Partnership                 (1)              80,000      1,782,230       874,377             - 

Hilltop Limited
  Partnership                 (1)             210,000      2,291,867       448,270      (1,699,227)

Hurbell I Limited
  Partnership (Holly
  Oak)                        (1)             100,000      2,043,334       427,282             -

Hurbell II Limited
  Partnership
 (Anderson)                   (1)             240,000      3,940,646     1,459,750             -

Hurbell III Limited
  Partnership (Royal
  Oaks)                       (1)             150,000      1,894,472       662,891             -

Kimberton Apartments
  Associates  Limited
  Partnership                 (1)             250,000      5,265,177     1,028,063             -

Mayfair Manor
  Limited Partnership         (1)             450,000      3,720,460       903,545      (1,467,900)


Meadows Apartments
  Limited Partnership         (1)             385,000      2,353,256       306,781      (1,329,000)

Meadows East
  Apartments Limited
  Partnership                 (1)             700,000      4,464,615       658,657      (1,450,000)

Park Avenue West I
  Limited Partnership         (1)              96,000      1,798,619       272,066      (1,100,000)



<CAPTION>
                         Gross Amount at which Carried at Close of       
                                      Period                             
                         -------------------------------------------
                                                                                                                   Life upon which
                                                                                                                   depreciation in
                                                                       Accumulated                                latest statement
                                       Buildings and                   Depreciation     Date of        Date       of operations is
 Partnership Name            Land       Improvements   Total (2) (3)       (3)        Construction     Acquired       computed
                                                                                                                      (years)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>           <C>            <C>              <C>               <C>           <C>            <C>
Caroline Arms
  Limited
  Partnership            $  269,217    $  5,807,768   $  6,076,985     $  2,281,874      1972          4/85            5-50

Esbro Limited
  Partnership               361,193       2,633,621      2,994,814        1,141,640      1972          4/85            5-50

Harold House Limited
  Partnership                80,000       2,656,607      2,736,607          954,874      1973          5/85            5-50

Hilltop Limited
  Partnership               215,862       1,035,048      1,250,910          300,741      1974          4/85            5-50

Hurbell I Limited
  Partnership (Holly
  Oak)                      100,000       2,470,616      2,570,616          844,168      1975          4/85            5-40

Hurbell II Limited
  Partnership
 (Anderson)                 272,682       5,367,714      5,640,396        1,879,959      1972          4/85            5-50

Hurbell III Limited
  Partnership (Royal
  Oaks)                     182,489       2,524,874      2,707,363          931,889      1973          4/85            5-50

Kimberton Apartments
  Associates  Limited
  Partnership               250,000       6,293,240      6,543,240        2,937,415      1972          4/85            5-30

Mayfair Manor
  Limited Partnership       450,000       3,156,105      3,606,105        1,472,443      1971          4/85            5-50

Meadows Apartments
  Limited Partnership       385,000       1,331,037      1,716,037          990,956      1970          5/85            5-50

Meadows East
  Apartments Limited
  Partnership               700,000       3,673,272      4,373,272        2,016,334      1975          5/85            5-50

Park Avenue West I
  Limited Partnership        96,000         970,685      1,066,685          599,246      1969          5/85            5-50
</TABLE>




                                       38
<PAGE>   40
                 NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                            A LIMITED PARTNERSHIP
           SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION OF
     LOCAL LIMITED PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED
                              DECEMBER 31, 1998



<TABLE>
<CAPTION>
                                            Initial Cost to Local       Cost Capitalized Subsequent to
                                             Limited Partnership                 Acquisition
                                           -----------------------------------------------------------
                                                        Buildings
                                                            and                        Carrying Cost
 Partnership Name        Encumbrances         Land     Improvements    Improvements     Adjustments

------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>          <C>            <C>           <C>
Park Avenue West II
  Limited Partnership         (1)              96,000      1,784,594       247,189      (1,176,904)

Rodeo Drive Limited
  Partnership                 (1)             150,000      2,731,817       485,794          -

San Juan Del Centro
  Limited Partnership         (1)             725,000      3,359,588     1,071,503          -

West Oak Village
  Limited Partnership         (1)             400,000      4,667,340       957,714          -

Windsor Apartments
  Associates Limited
  Partnership                 (1)             169,000      5,925,950       480,784          -

                                      ----------------------------------------------------------------
TOTAL,
December 31, 1998                          $4,821,000   $ 55,087,663  $ 12,172,767   $  (8,723,031)
                                      =================================================================
<CAPTION>
                         Gross Amount at which Carried at Close of       
                                      Period                             
                         -------------------------------------------
                                                                                                                   Life upon which
                                                                                                                   depreciation in
                                                                       Accumulated                                latest statement
                                       Buildings and                   Depreciation     Date of        Date       of operations is
 Partnership Name            Land       Improvements   Total (2) (3)       (3)        Construction     Acquired       computed
                                                                                                                      (years)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>           <C>            <C>              <C>               <C>           <C>            <C>
Park Avenue West II
  Limited Partnership        96,000         854,879        950,879          132,008      1970          5/85            5-50

Rodeo Drive Limited
  Partnership               150,000       3,217,611      3,367,611        1,108,039      1973          4/85            5-30

San Juan Del Centro
  Limited Partnership       725,000       4,431,091      5,156,091        1,699,423      1970          4/85            5-50

West Oak Village
  Limited Partnership       408,561       5,616,493      6,025,054        2,142,100      1972          4/85            5-50

Windsor Apartments
  Associates Limited
  Partnership               169,000       6,406,734      6,575,734        2,899,994      1972          4/85            5-30

                       ------------------------------------------------------------
TOTAL,
December 31, 1998       $ 4,911,004   $  58,447,395  $  63,358,399    $  24,333,103
                       =============================================================
</TABLE>


                           See notes to Schedule III.





                                       39
<PAGE>   41



                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                    NOTES TO SCHEDULE III - REAL ESTATE AND

                   ACCUMULATED DEPRECIATION OF LOCAL LIMITED

             PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED

                               DECEMBER 31, 1998


(1)      Schedule of Encumbrances


<TABLE>
<CAPTION>
                                                                               Notes
                                                                            Payable and
                                                        Mortgage              Accrued
         Partnership Name                                Notes                Interest               Total
         ----------------                                -----                --------               -----
         <S>                                        <C>                     <C>                  <C>
         Caroline Arms Limited Partnership          $  1,888,129            $ 3,765,988          $ 5,654,117
         Esbro Limited Partnership                       909,815              2,741,740            3,651,555
         Harold House Limited Partnership                745,373              1,446,143            2,191,516
         Hilltop Limited Partnership                   1,064,902              1,859,482            2,924,384
         Hurbell I Limited Partnership                 1,083,942              1,375,507            2,459,449
         Hurbell II Limited Partnership                1,521,214              3,415,735            4,936,949
         Hurbell III Limited Partnership                 895,009              1,563,312            2,458,321
         Kimberton Apartments Associates
          Limited Partnership                          1,798,729                  (a)              1,798,729
         Mayfair Manor Limited Partnership             1,278,828              3,766,705            5,045,533
         Meadows Apartments Limited Partnership          649,563              2,623,636            3,273,199
         Meadows East Apartments
          Limited Partnership                          2,232,444              3,604,179            5,836,623
         Park Ave West I Limited Partnership             473,992              1,682,882            2,156,874
         Park Ave West II Limited Partnership            546,511              1,252,998            1,799,509
         Rodeo Drive Limited Partnership               1,068,572              2,376,420            3,444,992
         San Juan del Centro Limited Partnership       1,575,889              3,298,506            4,874,395
         West Oak Village Limited Partnership          1,519,132              4,482,976            6,002,108
         Windsor Apartments Associates
          Limited Partnership                          2,299,661                  (a)              2,299,661
                                                      ----------             ----------           ----------

           Total                                     $21,551,705            $39,256,209          $60,807,914
                                                      ==========             ==========           ==========
</TABLE>


(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
         $4,821,000, and the aggregate costs of buildings and improvements for
         Federal income tax purposes is $66,936,565. The total of the
         above-mentioned is $71,757,565.





                                       40
<PAGE>   42


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                             A LIMITED PARTNERSHIP

                    NOTES TO SCHEDULE III - REAL ESTATE AND

                   ACCUMULATED DEPRECIATION OF LOCAL LIMITED

             PARTNERSHIPS IN WHICH NHP REALTY FUND TWO HAS INVESTED

                               DECEMBER 31, 1998

                                  (CONTINUED)

(3)      Reconciliation of real estate

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                            -----------------------------------------------
                                                                 1998             1997              1996
                                                                 ----             ----              ----
         <S>                                                <C>              <C>              <C>
         Balance at beginning of period                     $ 75,904,680     $ 79,634,323     $ 80,002,379

         Improvements during the period                        1,072,080        1,761,488        1,256,944

         Disposals of rental properties                      (13,271,361)           -                -

         Decrease due to prior year impairment
              losses on rental property                            -           (1,251,131)           -

         Impairment losses on rental property                   (347,000)      (4,240,000)      (1,625,000)
                                                             -----------      -----------      -----------

         Balance at end of period                           $ 63,358,399     $ 75,904,680     $ 79,634,323
                                                             ===========      ===========      ===========
</TABLE>


         Reconciliation of accumulated depreciation
<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                            -----------------------------------------------
                                                                 1998             1997              1996
                                                                 ----             ----              ----
         <S>                                                <C>              <C>              <C>
         Balance at beginning of period                     $ 27,420,131     $ 26,297,619     $ 23,959,345

         Depreciation expense for the period                   2,213,955        2,373,643        2,338,274

         Disposals of rental properties                       (5,300,983)             -                -

         Decrease due to prior year impairment
            losses on rental property                                -         (1,251,131)             -
                                                             -----------      -----------      -----------

         Balance at end of period                           $ 24,333,103     $ 27,420,131     $ 26,297,619
                                                             ===========      ===========      ===========
</TABLE>


Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

         None.





                                       41
<PAGE>   43



                                    PART III


Item 10. 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

         Four 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 38) 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 since January 1996
and was promoted to Executive Vice President--Finance and Administration in
March 1997. 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. From 1981 to
1983, Mr.  Toomey was on the audit staff of Kenneth Leventhal & Company. Mr.
Toomey received a B.S. in Business Administration/Finance from Oregon State
University and is a Certified Public Accountant.

         Susan R. Baron (age 47) is an attorney specializing in conventional
and government-assisted real estate development and finance in the residential
and commercial markets. From 1978 to 1993 she was with the Washington, D.C. law
firm of Dunnells, Duvall & Porter. Ms. Baron serves on the of Seeds of Peace
Advisory Board and is a past president of the National Leased Housing
Association. She was appointed to the Board of Directors by the President of
the United States in September 1994 to complete a term expiring in October 1994
and continues to serve until the appointment of a successor.

         Joel F. Bonder (age 50) was elected as a Director of NCHP in 1998 and
was appointed Executive Vice President, General Counsel and Secretary of NCHP
and AIMCO effective with the NHP merger. Prior to joining AIMCO, Mr. Bonder
served as Senior Vice President and General Counsel of NCHP since April 1994.
Mr. Bonder also served as Vice President and Deputy General Counsel from June
1991 to March 1994, as Associate General Counsel from 1986 to 1991, and as
Assistant General Counsel from 1985 to 1986. From 1983 to 1985, he was with the
Washington, D.C. law firm of Lane & Edson, P.C. From 1979 to 1983, Mr. Bonder
practiced with the Chicago law firm of Ross and Hardies.

         Roberta Ujakovich (age 46) was elected President and a Director of
NCHP in 1998. Ms. Ujakovich has served as Senior Vice President of AIMCO since
July, 1997. Prior to joining AIMCO, Ms. Ujakovich was Vice President of NHP
serving as the Director of Transactions in NHP's Asset Management Department.
Previously, Ms. Ujakovich worked as a developer for three successive,
affiliated real estate development companies: The Cafritz / Freeman Group, The
Investment Group and Rosenberg, Freeman and Associates. She holds a B.A. from
Allegheny College and a Masters in Public Policy from John F. Kennedy School of
Government at Harvard university.





                                       42
<PAGE>   44


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 38). See "Directors of NCHP."

         Joel F. Bonder  (age 50). See "Directors of NCHP."

         Roberta Ujakovich (age 46). See "Directors of NCHP."

         Steven D. Ira (age 47) 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 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.

         Leeann Morein (age 44) was elected Senior Vice President Investor
Services of NCHP in 1997. Ms Morein has served as Senior Vice President
Investor Services AIMCO since November 1997. Ms. Morein has served as Secretary
of AIMCO since July 1994 and from July 1994 until October 1997 also served as
Chief Financial Officer. From September 1990 to March 1994, Ms. Morein served
as Chief Financial Officer of the real estate subsidiaries of California
Federal Bank, including the general partner of CF Income Partners, L.P., a
publicly-traded master limited partnership. Ms. Morein joined California
Federal in September 1988 as Director of Real Estate Syndications Accounting
and became Vice President--Financial Administration in January 1990. From 1983
to 1988, Ms. Morein was Controller of Storage Equities, Inc., a real estate
investment trust, and from 1981 to 1983, she was Director of Corporate
Accounting for Angeles Corporation, a real estate syndication firm. Ms. Morein
worked on the audit staff of Price Waterhouse from 1979 to 1981. Ms. Morein
received a B.A. from Pomona College and is a Certified Public Accountant.

        Patrick J. Foye (Age 41) has been Executive Vice President of NCHP
since October 1, 1998.  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.

        Troy D. Butts (age 34) has served as Senior Vice President and Chief
Financial Officer of NCHP and AIMCO since November 1997. Prior to joining
AIMCO, Mr. Butts served as a Senior Manager in the audit practice of the Real
Estate Services Group for Arthur Andersen LLP in Dallas, Texas. Mr. Butts was
employed by Arthur Andersen LLP for ten years and his clients were primarily
publicly-held real estate companies, including office and multi-family real
estate investment trusts. Mr. Butts holds a Bachelor of Business Administration
degree in Accounting from Angelo State University and is a Certified Public
Accountant.

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





                                       43
<PAGE>   45


Item 11. 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 12. 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, 1998.

<TABLE>
<CAPTION>
                        Name of
                   Beneficial Owner                     Number of Units      % of Class
          <S>                                                <C>                <C>
                 AIMCO and affiliates                        1,626              8.89
          (affiliates of the General Partner)
</TABLE>

The business address of AIMCO is 3410 South Galena Street, Suite 200, Denver,
CO 80231

Item 13. Certain Relationships and Related Transactions

         The Partnership accrued administrative and reporting fees payable to
the General Partner of $137,248 during 1998, 1997 and 1996. During 1997 and
1996, the Partnership paid the General Partner $81,220 and $79,179 for these
fees. No payments were made during 1998 for these fees. The balances owed to
NHP for these fees were $1,212,079 and $1,074,831 as of December 31, 1998 and
1997, respectively.

         During 1998, the General Partner advanced the Partnership $33,650 to
pay legal expenses of the Partnership. No advances were made during 1997 and
1996. During 1996, the Partnership repaid borrowings of $27,700 and accrued
interest of $2,447 to the General Partner. No repayments were made during 1998
and 1997, Interest is charged on borrowings at the Chase Manhattan Bank prime
interest rate plus 2%. Chase Manhattan Bank prime was 7.75% at December 31,
1998. At December 31, 1998 the Partnership owed the General Partner $33,650 in
advances and $1,701 in accrued interest, while at December 31, 1997, the
Partnership had no unpaid borrowings or accrued interest due to the General
Partner.

         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 fifteen of the





                                       44
<PAGE>   46


Local Limited Partnerships. During May 1997, AIMCO acquired approximately 51%
of the voting stock of NHPI. An additional 3% of the voting stock was acquired
by AIMCO in August 1997. On December 8, 1997, the NHPI stockholders elected to
merge with AIMCO.  After the merger, NHPMC became a preferred stock subsidiary
of AIMCO. NHPMC and other affiliates of NCHP earned $945,717, $1,505,742 and
$1,356,728 for management fees and other services provided to the Local Limited
Partnerships during 1998, 1997 and 1996, respectively. As of December 31, 1998
and 1997, amounts due NHPMC and unpaid by the Local Limited Partnerships
amounted to $13,298 and $65,662, 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. At December 31, 1997, trade payables include $78,052 to 
NHPMC. Total reimbursements earned for salaries and benefits for the years ended
December 31, 1998, 1997 and 1996, were approximately $1,492,000, $1,766,000 and
$1,609,000, respectively.

                                    PART IV


Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

        (a)  Documents filed as part of this report:

             1.  Financial statements

                 The financial statements, notes and reports listed below are
included herein:

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                   ----
                          <S>                                                       <C>
                          Independent Auditors' Report                              19

                          Statements of Financial Position,
                          December 31, 1998 and 1997                                21

                          Statements of Operations for the Years
                          Ended December 31, 1998, 1997 and 1996                    22

                          Statements of Partners' Deficit
                          for the Years Ended December 31, 1998
                          1997, and 1996                                            23

                          Statements of Cash Flows for the Years Ended
                          December 31, 1998, 1997 and 1996                          24

                          Notes to Financial Statements                             26

                          Schedule III - Real Estate and Accumulated
                          Depreciation of Local Limited Partnerships
                          in which NHP Realty Fund Two has invested,
                          December 31, 1998                                         38
</TABLE>





                                       45
<PAGE>   47


             2.  Financial statement schedules

                          Financial statement schedules for the Registrant:

                          Schedule III is included in the financial statements
                          listed under Item 14(a)(1). All other schedules have
                          been omitted as the required information is
                          inapplicable or the information is presented in the
                          financial statements or notes thereto.

                          Financial statements required by Regulation S-X which
                          are excluded from the annual report to shareholders
                          by Rule 14a-3(b):  See 3 below.

             3.  Exhibits

                          The following combined financial statements of the
                          Local Limited Partnerships in which the Partnership
                          has invested are included as an exhibit to this
                          report and are incorporated herein:

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                   ----
                          <S>                                                      <C>
                          Independent Auditors' Reports                            49

                          Combined Statements of Financial
                          Position, December 31, 1998
                          and 1997                                                 62

                          Combined Statements of Operations for
                          the Years Ended December 31, 1998,
                          1997 and 1996                                            63

                          Combined Statements of Partners'
                          Deficit for the Years Ended
                          December 31, 1998, 1997 and 1996                         64

                          Combined Statements of Cash Flows for the
                          Years Ended December 31, 1998, 1997 and 1996             65

                          Notes to Combined Financial Statements                   67

                          Exhibit  (24)  Power of Attorney
</TABLE>


         (b)     Reports on Form 8-K

                 The Partnership filed form 8-K on October 30, 1998 and form
                 8-Ka on November 12, 1998 in connection with a change in
                 independent auditors from Deloitte & Touche LLP to Ernst &
                 Young LLP effective for the year ended December 31, 1998.





                                       46
<PAGE>   48





                                   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




March 31, 1999                                   /s/ Troy D. Butts
--------------                                   -------------------------------
Date                                             Troy D. Butts
                                                 Senior Vice President and Chief
                                                 Financial Officer


         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:




March 31, 1999                                   /s/ Troy D. Butts
--------------                                   -------------------------------
Date                                             Troy D. Butts
                                                 Senior Vice President and Chief
                                                 Financial Officer





                                       47
<PAGE>   49





March 31, 1999                                                   *
--------------                               -----------------------------------
Date                                         Thomas W. Toomey, Director



March 31, 1999                                                   *
--------------                               -----------------------------------
Date                                         Susan R. Baron, Director



March 31, 1999                                                   *
--------------                               -----------------------------------
Date                                         Joel F. Bonder, Director



March 31, 1999                                                   *
--------------                               -----------------------------------
Date                                         Roberta Ujakovich, Director




         This registrant is a limited partnership whose sole general partner,
The National Housing Partnership, is also a limited partnership. The sole
general partner of The National Housing Partnership is National Corporation for
Housing Partnerships. The persons indicated are Directors of National
Corporation for Housing Partnerships. Powers of Attorney are on file in
Registration Statement No. 33-1141 and as Exhibit 24 to the Partnership's Form
10-K for the fiscal year ended December 31, 1998. Other than the Form 10-K
report, no annual report or proxy materials have been sent to security holders.


                *By Troy D. Butts pursuant to Power of Attorney.



                               /s/ Troy D. Butts
                               -----------------




                                       48
<PAGE>   50





                          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, 1998, and the related combined statements of operations, partners' deficit,
and cash flows for the year then ended.  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 audit.  We did
not audit the financial statements of Rodeo Drive Limited Partnership,
Kimberton Apartments Associates Limited Partnership, and Windsor Apartments
Associates Limited Partnership for the year ended December 31, 1998.  These
investees' statements of financial position represent total assets which
reflect $11,145,381 of combined total assets as of December 31, 1998 and a net
income in the amount of $18,875 for the year then ended.  These financial
statements of this investee were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for this investee, is based solely on the report of the other
auditors.

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 and the report of other
auditors provide a reasonable basis for our opinion.

In our opinion, based upon our audit 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, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.

As discussed in Note 14 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.  In addition, certain Local Partnerships' notes payable are due
in 1999.  These conditions raise substantial doubt about their ability to
continue as a going concern.  The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.


Ernst & Young  LLP
Indianapolis, Indiana
February 22, 1999





                                       49
<PAGE>   51





Independent Auditors' Report


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

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, 1997 and the related combined statements of operations, partners' deficit,
and cash flows for each of the two years in the period ended December 31, 1997.
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, Kimberton Apartments Associates Limited
Partnership, Rodeo Drive Limited Partnership and Windsor Apartments Associates
Limited Partnership for the years ended December 31, 1997 and 1996, which
statements represent total assets constituting $13,161,880 of combined total    
assets at December 31, 1997, and net losses of $112,844 and $32,625 of the
combined net loss for the two years ended December 31, 1997 and 1996,
respectively. 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 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 audits and the reports of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, such
financial statements 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, 1997 and the combined results of their operations and cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that nine
Local Limited Partnerships will continue as going concerns.  As discussed in
Note 14, conditions exist which raise substantial doubt about the ability of
six of the Local Limited Partnerships to continue as going concerns unless they
are able to repay, refinance, or restructure their notes payable which became
due in 1997 or will become due in 1998. Also, conditions exist which raise
substantial doubt about the ability of one Local Limited Partnership to
continue as a going concern unless it is able to maintain positive cash flow
and obtain additional fundings from the partners. Management's plans in regard
to these matters are described in Note 14.  The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.



Deloitte & Touche LLP
McLean, VA
March 3, 1998





                                       50
<PAGE>   52





Independent Auditor's Report


Partners
Hurbell I Limited Partnership -
  Holly Oak Park Apartments
Vienna, VA

We have audited the accompanying statement of financial position of Hurbell I
Limited Partnership (Holly Oak Park Apartments), A Limited Partnership. FHA
Project No. 053-44202-LDP-SUP, as of December 31, 1997, and the related
statements of profit and loss (on HUD Form No. 92410), changes in 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 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 Hurbell I Limited Partnership
(Holly Oak Park Apartments), A Limited Partnership, at December 31, 1997, and
the results of its operations 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 issued by the U.S.  Department of Housing and
Urban Development, we have also issued reports dated January 16, 1998 on our
consideration of the partnership's internal control structure, on its
compliance with laws and regulations applicable to the basic financial
statements, the major HUD programs, and Affirmative Fair Housing.

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. 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.


Russell, Thompson, Butler & Houston
Mobile, Alabama
January 16, 1998





                                       51
<PAGE>   53





Independent Auditor's Report



Partners
Hurbell I Limited Partnership -
  Holly Oak Park Apartments
Vienna, VA

We have audited the accompanying statement of financial position of Hurbell I
Limited Partnership (Holly Oak Park Apartments), A Limited Partnership. FHA
Project No. 053-44202-LDP-SUP, as of December 31, 1996, and the related
statements of profit and loss (on HUD Form No. 92410), changes in 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 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 Hurbell I Limited Partnership
(Holly Oak Park Apartments), A Limited Partnership, at December 31, 1996, and
the results of its operations 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 issued by the U.S.  Department of Housing and
Urban Development, we have also issued reports dated January 25, 1997 on our
consideration of the partnership's internal control structure, on its
compliance with laws and regulations applicable to the basic financial
statements, the major HUD programs, and Affirmative Fair Housing.

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. 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.



Russell, Thompson, Butler & Houston
Mobile, Alabama
January 25, 1997





                                       52
<PAGE>   54





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 & Orsborne LLP
Bethesda, Maryland
February 12, 1999





                                       53
<PAGE>   55





Independent Auditor's Report


Partners
Kimberton Apartments Associates
Washington, D.C.

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, 1997, 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, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.

In accordance with Government Auditing Standards, we have also issued reports
dated January 22, 1998 on our consideration of Kimberton Apartments Associates'
internal control structure and a report dated January 22, 1998 on its
compliance with laws and regulations.

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.



J. A. Plumer & Co., P.A.
Bethesda, Maryland
January 22, 1998





                                       54
<PAGE>   56





Independent Auditors' Report


Partners
Kimberton Apartments Associates
Washington, D.C.

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, 1996, 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, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.

In accordance with Government Auditing Standards, we have also issued reports
dated February 12, 1997 on our consideration of Kimberton Apartments
Associates' internal control structure and a report dated February 12, 1997 on
its compliance with laws and regulations.

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. 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.


J. A. Plumer & Co., P.A.
Bethesda, Maryland
February 12, 1997





                                       55
<PAGE>   57





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, 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





                                       56
<PAGE>   58





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, 1997, 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, 1997, 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 H to the
financial statements, the Partnership is in default on its loan agreement at
December 31, 1997, as a result of nonpayment. The lenders have demanded
repayment of the loan. Currently, there are no negotiations under way. 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, we have also issued a report
dated January 14, 1998 on our consideration of Rodeo Drive Limited
Partnership's internal control structure.

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 14, 1998





                                       57
<PAGE>   59





Independent Auditor's Report



Partners
Rodeo Drive
  Limited Partnership
Vienna, VA

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, 1996, 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, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 15, 1997 on our consideration of Rodeo Drive Limited
Partnership's internal control structure.

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. 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 15, 1997





                                       58
<PAGE>   60





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



Armacost & Orsborne LLP
Bethesda, Maryland
February 12, 1999





                                       59
<PAGE>   61





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, 1997, 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, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.

In accordance with Government Auditing Standards, we have also issued a report
dated January 22, 1998 on our consideration of Windsor Apartments Associates'
internal control structure and a report dated January 22, 1998 on its
compliance with laws and regulations.

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.



J. A. Plumer & Co., P.A.
Bethesda, Maryland
January 22, 1998





                                       60
<PAGE>   62



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, 1996, 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, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.

In accordance with Government Auditing Standards, we have also issued a report
dated February 12, 1997 on our consideration of Windsor Apartments Associates'
internal control structure and a report dated February 12, 1997 on its
compliance with laws and regulations.

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. 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.


J. A. Plumer & Co., P.A.
Bethesda, Maryland
February 16, 1997





                                       61
<PAGE>   63


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                   COMBINED STATEMENTS OF FINANCIAL POSITION

<TABLE>
<CAPTION>
                                                                                        December 31,                      
                                                                       ------------------------------------------
                                                                               1998                    1997
                                                                               ----                    ----
                                                                ASSETS
                                                                ------
<S>                                                                    <C>                       <C>

Cash and cash equivalents                                                $    822,160             $  1,021,398
Accounts receivable, net (Note 3)                                             602,236                  353,027
Tenants' security deposits held in trust funds                                431,180                  478,987
Prepaid expenses and other assets                                             183,542                  204,612
Deferred finance costs                                                         66,287                   70,787
Mortgage escrow deposits (Note 6)                                           4,265,385                4,173,617
Rental property, net (Notes 2, 5 and 11)                                   39,025,296               48,484,549
                                                                          -----------              -----------

                                                                         $ 45,396,086             $ 54,786,977
                                                                          ===========              ===========

                                                  LIABILITIES AND PARTNERS' DEFICIT
                                                  ---------------------------------

Liabilities:
  Accounts payable and accrued expenses                                 $     999,023             $     996,859
  Due to management agent - NHPMC (Note 10)                                    13,298                    65,662
  Accrued real estate taxes                                                   169,996                   255,842
  Due to partners (Note 8)                                                  1,491,862                 1,941,113
  Accrued interest on partner loans (Note 8)                                  995,389                 1,431,790
                                                                         ------------              ------------

                                                                            3,669,568                 4,691,266

Tenants' security deposits payable                                            421,970                   475,447

Notes payable (Note 7)                                                     17,235,514                21,855,789

Accrued interest on notes payable (Note 7)                                 22,020,695                26,231,626

Mortgage notes payable (Note 6)                                            21,551,705                26,655,632

Partners' deficit                                                         (19,503,366)              (25,122,783)
                                                                          -----------               -----------

                                                                         $ 45,396,086              $ 54,786,977
                                                                          ===========               ===========
</TABLE>





                  See notes to combined financial statements.

                                       62
<PAGE>   64


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                       COMBINED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                             ---------------------------------------------
                                                                 1998             1997              1996
                                                                 ----             ----              ----
<S>                                                          <C>               <C>              <C>
REVENUE:
  Rental income (Note 4)                                     $12,788,792      $14,575,762      $14,382,351
  Interest income                                                154,283          159,616          164,594
  Other income                                                   401,367          467,499          364,937
                                                              ----------       ----------       ----------

                                                              13,344,442       15,202,877       14,911,882
                                                              ----------       ----------       ----------

EXPENSES:
  Administrative expenses                                      1,267,716          975,114        1,114,080
  Utilities and operating expenses                             4,499,363        5,557,397        5,473,039
  Management and other services
    from related party (Note 10)                                 945,717        1,505,742        1,356,728
  Salaries and related benefits
    to related party (Note 10)                                 1,491,976        1,766,028        1,608,803
  Depreciation and amortization                                2,218,455        2,378,144        2,342,774
  Taxes and insurance                                          1,512,603        1,844,999        1,708,750
  Financial expense - primarily
    interest (Note 6)                                            272,279          294,744          375,802
  Interest on note payable (Note 7 and 8)                      2,122,963        2,270,221        2,265,895
  Annual partnership administrative
    fees to General Partner (Note 8)                             138,750          157,500          157,500
  Impairment loss on rental property (Note 11)                   347,000        4,240,000        1,625,000
  Other entity expenses (income)                                  34,366           32,305           (1,935)
                                                              ----------       ----------       ----------

                                                              14,851,188       21,022,194       18,026,436
                                                              ----------       ----------       ----------

LOSS BEFORE EXTRAORDINARY ITEM                                (1,506,746)      (5,819,317)      (3,114,554)

EXTRAORDINARY ITEM - GAIN ON
  EXTINGUISHMENT OF DEBT                                       1,617,778            -                -
                                                             -----------      -----------      -----------

NET PROFIT (LOSS)                                           $    111,032     $ (5,819,317)    $ (3,114,554)
                                                             ===========      ===========      ===========
</TABLE>





                  See notes to combined financial statements.

                                       63
<PAGE>   65



                  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 III      Total
                             -----------      -----------      ----------      ------------      -----
<S>                        <C>               <C>             <C>                <C>          <C>
Deficit at
 January 1, 1996           $(14,473,696)     $(375,724)      $  (983,706)        $(49,654)   $(15,882,780)

   Distributions               (164,327)        (1,739)           (7,824)             -          (173,890)

   Net loss                  (3,059,460)       (31,145)          (10,581)         (13,368)     (3,114,554)
                            -----------       --------        ----------          -------     -----------

Deficit at
 December 31, 1996          (17,697,483)      (408,608)       (1,002,111)         (63,022)    (19,171,224)

   Distributions               (124,970)        (1,322)           (5,950)           -            (132,242)

     Net loss                (5,707,426)       (58,193)          (52,281)          (1,417)     (5,819,317)
                            -----------       --------       -----------          -------     -----------

Deficit at
 December 31, 1997          (23,529,879)      (468,123)       (1,060,342)         (64,439)    (25,122,783)

   Distributions                (66,738)          (706)           (3,178)           -             (70,622)

   Net profit (loss)             45,814          7,736            57,928             (446)        111,032

   Transfer of interest       5,251,070         78,101           249,836            -           5,579,007
                            -----------       --------       -----------          -------     -----------

Deficit at
 December 31, 1998         $(18,299,733)     $(382,992)     $   (755,756)        $(64,885)   $(19,503,366)
                            ===========       ========       ===========          =======     ===========

Percentage interest at
 December 31, 1996,
 1997 and 1998                  (A)                (B)             (C)               (D)
</TABLE>


(A)      Holds a 94.5% limited partnership interest (98% with respect to
         allocation of losses)  in twenty-one Local Limited Partnerships.
(B)      Holds a 1% general partnership interest in twenty-one Local Limited
         Partnerships.
(C)      Holds a 4.5% limited partnership interest (1% with respect to
         allocation of losses) in eighteen 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.

                                       64
<PAGE>   66



                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                           LOCAL LIMITED PARTNERSHIPS
                       COMBINED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                        Years Ended December 31,                 
                                                               --------------------------------------------
                                                                     1998           1997           1996
                                                                     ----           ----           ----
<S>                                                            <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Receipts:
     Rental receipts                                           $ 12,764,707    $ 14,208,685   $ 14,218,798
     Interest receipts                                              157,948         126,799        167,466
     Other operating receipts                                       443,563         450,728        340,624
     Tenant security deposits                                         2,525           8,047          6,406
     Entity receipts                                                  1,211           4,613         10,537
                                                                -----------     -----------    -----------
     Total receipts                                              13,369,954      14,798,872     14,743,831

   Disbursements:
     Administrative                                                (865,048)       (782,465)      (819,844)
     Management fees                                             (1,147,217)     (1,333,768)    (1,202,495)
     Utilities                                                   (1,850,114)     (2,337,446)    (2,350,943)
     Salaries and wages                                          (1,933,232)     (2,169,149)    (1,995,844)
     Operating and maintenance                                   (2,364,891)     (3,075,546)    (2,835,883)
     Real estate taxes                                             (673,746)       (674,708)      (827,580)
     Property insurance                                            (400,612)       (549,321)      (414,744)
     Miscellaneous taxes and insurance                             (457,873)       (557,875)      (550,779)
     Tenant security deposits                                        (8,266)         (4,518)        (8,631)
     Other operating disbursements                                 (261,699)          -              -
     Interest on mortgage                                          (150,093)       (164,039)      (232,287)
     Mortgage insurance premium                                    (114,258)       (127,704)      (132,025)
     Miscellaneous financial                                        (13,251)         (2,723)        (2,911)
     Transfer of operating cash to new owner                       (128,181)          -              -
     Entity disbursements
       Interest on notes payable                                   (321,230)       (184,498)      (213,522)
       Miscellaneous disbursements                                 (217,320)       (103,191)      (324,809)
                                                                -----------     -----------    -----------
     Total disbursements                                        (10,907,031)    (12,066,951)   (11,912,297)
                                                                -----------     -----------    -----------

    Net cash provided by operating activities                     2,462,923       2,731,921      2,831,534
                                                                -----------     -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Change in mortgage escrow accounts                             (710,110)       (103,985)      (674,880)
    Proceeds from disposal of rental property                       762,027           -              -
    Net purchase of fixed assets                                 (1,110,243)     (1,719,328)    (1,272,472)
    Other investing                                                 (30,634)         56,178         27,945
                                                                -----------     -----------    -----------

    Net cash used in investing activities                        (1,088,960)     (1,767,135)    (1,919,407)
                                                                -----------     -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Mortgage principal payments                                    (949,270)     (1,012,163)      (940,247)
    Proceeds from loans or notes payable                            213,904          54,809          -
    Principal payments on loans or notes payable                   (167,122)        (82,889)       (41,864)
    Distributions                                                   (70,622)       (132,242)      (173,890)
    Payment in satisfaction of note payable
     and accrued interest                                          (600,065)          -              -
    Other financing                                                     (26)          -              2,525
                                                                -----------     -----------    -----------

    Net cash used in financing activities                        (1,573,201)     (1,172,485)    (1,153,476)
                                                                -----------     -----------    -----------
</TABLE>





                  See notes to combined financial statements.

                                       65
<PAGE>   67



                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                           LOCAL LIMITED PARTNERSHIPS
                       COMBINED STATEMENTS OF CASH FLOWS

                                  (Continued)

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                              ---------------------------------------------
                                                                     1998           1997           1996
                                                                     ----           ----           ----
<S>                                                           <C>             <C>            <C>
NET DECREASE IN CASH AND CASH EQUIVALENTS                          (199,238)       (207,699)      (241,349)

CASH AND CASH EQUIVALENTS, BEGINNING
  OF YEAR                                                         1,021,398       1,229,097      1,470,446
                                                                -----------    ------------   ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                         $    822,160   $   1,021,398  $   1,229,097
                                                                ===========    ============   ============

RECONCILIATION OF NET LOSS TO NET CASH
  PROVIDED BY OPERATING ACTIVITIES:

  Net profit (loss)                                            $    111,032   $  (5,819,317) $  (3,114,554)
                                                                -----------    ------------   ------------
  Adjustments to reconcile net profit (loss) to net
    cash provided by operating activities:
      Depreciation and amortization                               2,218,455       2,378,144      2,342,774
      Extraordinary gain on extinguishment of debt               (1,617,778)          -              -
      Impairment loss on rental properties                          347,000       4,240,000      1,625,000
      Changes in operating assets and liabilities:
       Net tenant receivables                                       (38,458)        (11,622)       (13,930)
       Accounts receivable - other                                 (249,877)       (161,080)         8,227
       Accrued receivables                                            8,392           -              -
       Prepaid expenses and other assets                              6,560         (12,484)         7,711
       Cash restricted for tenants security deposits                (15,307)        (18,152)       (28,582)
       Accounts payable trade                                       (48,202)        (97,889)       175,238
       Accrued liabilities                                           58,799          35,690        (90,315)
       Accrued interest - notes payable                           1,807,781       2,085,723      2,052,373
       Tenant security deposits held in trust                         9,566          21,681         26,357
       Prepaid revenue                                               45,423           -              -
       Transfer of operating cash to new owner                     (128,181)          -              -
       Entity liability accounts                                    (52,282)         91,227       (158,765)
                                                                -----------    ------------   ------------

      Total adjustments                                           2,351,891       8,551,238      5,946,088
                                                                -----------    ------------   ------------

NET CASH PROVIDED BY OPERATING ACTIVITIES                      $  2,462,923   $   2,731,921  $   2,831,534
                                                                ===========    ============   ============
</TABLE>





                  See notes to combined financial statements.

                                       66
<PAGE>   68



                  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.

         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 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.





                                       67
<PAGE>   69
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)



         Basis of Combination

         The combined financial statements include the accounts of the
following twenty-one Local Limited Partnerships in which the Partnership holds
a limited partnership interest:

         Caroline Arms Limited Partnership
         Esbro Limited Partnership
         Gulfway Limited Partnership
         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
         Meadows East Apartments Limited Partnership
         Menlo Limited Partnership
         Park Avenue West I Limited Partnership
         Park Avenue West II Limited Partnership
         Rockwell Limited Partnership
         Rodeo Drive Limited Partnership
         San Juan del Centro Limited Partnership
         Tinker Creek Limited Partnership
         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 seventeen 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
three Local Limited Partnerships. 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.





                                       68
<PAGE>   70
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)



2.       CHANGE IN ESTIMATE

         Depreciation of the building owned by Hurbell I Limited Partnership
has been computed using the straight-line method assuming a 40-year life from
the date of initial occupancy at the time of construction or after substantial
rehabilitation of the building. Depreciation of the building prior to 1996 was
computed using the straight-line method, assuming a 50-year life. This change
in estimate did not have a significant impact on the accompanying combined
statement of operations.

3.       ACCOUNTS RECEIVABLE

         Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                        ---------------------------------
                                                                           1998                     1997
                                                                           ----                     ----
         <S>                                                            <C>                     <C>
         Net tenant receivables                                          $ 74,173                $ 40,705
         Housing assistance receivable (see Note 4)                       289,189                 221,984
         Accrued interest receivable                                       22,072                  26,302
         Reserve releases receivable                                       28,045                  58,542
         Other receivables                                                188,757                   5,494
                                                                          -------                 -------

         Accounts receivable, net                                        $602,236                $353,027
                                                                          =======                 =======
</TABLE>

4.       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 has an agreement in effect during 1999.
Section 8 contracts are scheduled to expire during 1999. The Local Limited
Partnerships received a total of $7,264,740, $8,864,364 and $9,131,418 in the
form of housing assistance payments during 1998, 1997 and 1996, 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 1,735 units, 76 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





                                       69
<PAGE>   71
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)



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 (1,735 in total) receiving rent subsidies from
Section 8 have their contracts expiring during the year ending December 31,
1999. 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.

5.       RENTAL PROPERTY

         Rental property consists of the following:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                       ------------------------------------
                                                                             1998                   1997
                                                                             ----                   ----
         <S>                                                           <C>                     <C>
         Land                                                          $  4,911,004            $  5,836,000
         Buildings and improvements                                      53,032,669              58,339,200
         Equipment and furniture                                          5,414,726              11,729,480
                                                                        -----------             -----------

                                                                         63,358,399              75,904,680
         Less accumulated depreciation                                  (24,333,103)            (27,420,131)
                                                                        -----------             -----------

         Rental property, net                                          $ 39,025,296            $ 48,484,549
                                                                        ===========             ===========
</TABLE>


6.       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 nineteen 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.





                                       70
<PAGE>   72
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)



         Approximate maturities of mortgage notes payable for the next five
years and, therefore, are as follows:

<TABLE>
                        <S>                                 <C>
                              1999                          $     931,000
                              2000                                999,000
                              2001                              1,073,000
                              2002                              1,153,000
                              2003                              1,239,000
                        Thereafter                             16,157,000
                                                               ----------

                                                              $21,552,000
                                                               ==========
</TABLE>


7.       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:

<TABLE>
<CAPTION>
                 Local Partnership               Due Date            Note Amount       Accrued Interest
                 -----------------               --------            -----------       ----------------
      <S>                                   <C>                    <C>                 <C>
      Meadows Apartments
         Limited Partnership                December 12, 1997*     $   1,159,173       $   1,464,463
      Meadows East Apartments
         Limited Partnership                December 12, 1997*         1,592,399           2,011,780
      Rodeo Drive Limited Partnership        December 6, 1998*         1,048,837           1,327,583
                                                                    ------------        ------------

           Total Delinquent                                            3,800,409           4,803,826
                                                                    ------------        ------------

      Esbro Limited Partnership              October 25, 1999          1,204,380           1,537,360
      Mayfair Manor Limited Partnership      October 25, 1999          1,654,220           2,112,485
      Hurbell II Limited Partnership         November 2, 1999          1,501,558           1,914,177
      Hilltop Limited Partnership            November 2, 1999            816,530           1,042,952
      Caroline Arms Limited Partnership      November 11, 1999         1,560,791           2,205,197
      Harold House Limited Partnership       November 15, 1999           599,340             846,803
      Hurbell I Limited Partnership          December 19, 1999           607,838             767,669
      Hurbell III Limited Partnership        December 19, 1999           687,787             875,525
      Park Avenue West I Limited
         Partnership                         December 20, 1999           743,800             939,082
      Park Avenue West II Limited
         Partnership                         December 20, 1999           554,400             698,598
      San Juan Del Centro Limited
         Partnership                         December 20, 1999         1,457,766           1,840,740
                                                                    ------------        ------------
</TABLE>





                                       71
<PAGE>   73
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)




<TABLE>
      <S>                                    <C>                    <C>                 <C>
               Total Due 1999                                         11,388,410          14,780,588
                                                                      ----------          ----------

      West Oak Limited Partnership           November 30, 2013         2,046,695           2,436,281
                                                                      ----------          ----------

               Total Due                                             $17,235,514         $22,020,695
                                                                      ==========          ==========
</TABLE>

         * Notes are in default.

         The West Oak Village Limited Partnership note payable matured on
November 30, 1996. During 1997, the note holders entered into an agreement with
the West Oak Village Limited Partnership under which the maturity date of the
note was extended until November 2013. Under the terms of the agreement, the
Local Limited Partnership must pay the note holders annual interest on or
before December 31, 1997, and every year thereafter, 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%. During 1998 and 1997, the Local Limited Partnership received
partner loans to pay the required annual installment of interest $50,000, 
$51,040 and 52,265 for 1996, 1997 and 1998, respectively. At any time prior to
the note's maturity, the Local Limited Partnership has an option to pay off the
note payable at a discount equal to 70% of the property's annual scheduled rent
but no less than $700,000. At December 31, 1997, the outstanding principal and
related interest, respectively were $2,046,695 and $2,304,346. There can be no
assurance that the Local Limited Partnership will have sufficient cash or that
the General Partner will loan additional cash to the Local Limited Partnership,
if necessary, to make the annual installment payments required under the
Agreement. The failure to make the required payments may result in a loss of
interest in this Local Limited Partnership, which may result in the partners
incurring adverse tax consequences.

         Mayfair Manor and Esbro Limited Partnerships have notes payable which
matured on October 25, 1997. At December 31, 1997, Mayfair Manor's notes
payable principal and interest was $1,654,220 and $1,963,606, respectively, and
Esbro's notes payable principal and interest was $1,204,380 and $1,428,966,
respectively. Effective February 16, 1998, both Mayfair Manor and Esbro Limited
Partnerships executed Amended and Restated Promissory Notes ("ARPN") for each
of their notes payable. The general terms of the ARPN's require payment of the
following upon the earlier of the sale, transfer or refinancing of the
underlying property, or October 25, 1999:


         a)      the original principal sum of the note payable, plus

         b)      interest which accrued on such principal at the rate of 9% per
                 annum from the original date to October 25, 1997, plus

         c)      interest on the foregoing sums of principal and interest from
                 October 25, 1997 at the rate of 5.54% per annum, compounded
                 annually.

The ARPN's are collateralized by a security interest in the general and limited
partnership interests of the Local Limited Partnerships. The note holders were
paid an extension fee of $90,000 and $70,000 for Mayfair Manor and Esbro,
respectively, which was paid from the proceeds of loans from the General
Partner.

         The notes payable with respect to Rodeo Drive Limited Partnership have
matured and the holders of the notes commenced a civil action seeking to gain
control of the general and limited partnership interests of the Rodeo Drive
Limited Partnership.  Discussions which will result in a transfer of these
interests to the note holders are near completion. A default on any of the
aforementioned notes payable could lead to a foreclosure by the note holder of
the security underlying the notes such that the Partnership may lose its
interest in these Local Limited Partnerships. Should the Partnership lose its
interest in a Local Limited Partnership, partners in the Partnership may incur
adverse tax consequences. The impact of the tax consequence is dependent upon
each partner's individual tax situation.





                                       72
<PAGE>   74
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)



8.       DUE TO PARTNERS

         The Local Limited Partnerships accrued annual partnership
administration fees payable to the General Partner, of $138,750 during 1998 and
$157,500 during 1997 and 1996. Payments of these fees are made to General
Partner without interest from surplus cash available for distribution to
partners pursuant to HUD regulations. During 1998, 1997 and 1996, the Local
Limited Partnerships paid $200,140, $97,955 and $317,094, respectively. During
1996, the General Partner returned to one Local Limited Partnership $7,485
representing an overdistribution in 1994. The overdistribution was previously
treated as a payment of partnership administration fees. The balances owed to
NHP for these fees were $675,329 and $748,923 at December 31, 1998 and 1997,
respectively.

         During 1998 and 1997, the General Partner advanced $216,357 and
$137,530 to ten and twenty-one Local Limited Partnerships for insurance and
entity expenses, including expenses incurred relating to potential sales or
refinancing under the LIHPRHA program.  No advances were made during 1996. The
Local Limited Partnerships paid $184,156, $82,689 and $38,163 in loans during
1998, 1997 and 1996, respectively, and $123,040, $134,359 and $212,729 in
interest on these loans during 1998, 1997, and 1996, respectively. The balances
owed to the General Partner by fourteen and twenty-one Local Limited
Partnerships at December 31, 1998 and 1997, was $417,107 and $599,463. Interest
is charged at a rate equal to the Chase Manhattan Bank prime interest rate plus
2%. Chase Manhattan Bank prime was 7.75% at December 31, 1998.

         During 1998, 1997 and 1996 the Partnership made no advances to the
Local Limited Partnerships. Repayments of advances of $200, $200 and $3,701 and
accrued interest of $8,885, $137 and $793 were received from the Local Limited
Partnerships during 1998, 1997 and 1996, respectively. At December 31, 1998 and
1997, the Partnership's net working capital advances amounted to $398,311 and
$592,927, respectively. Interest is charged at the Chase Manhattan Bank prime
interest rate plus 2%. Chase Manhattan Bank prime was 7.75% at December 31,
1998.

         Interest of $ 229,437, $260,489 and $248,931 was accrued in 1998, 1997
and 1996, respectively, on the above. All advances and accumulated interest
will be paid in conformity with HUD and/or other regulatory requirements and
applicable partnership agreements.

9.       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.

10.      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 fifteen of the Local Limited
Partnerships.  During May 1997, AIMCO acquired approximately 51% of the voting
stock of NHPI. An additional 3% of the voting stock was acquired by AIMCO in
August 1997. On December 8, 1997, the NHPI stockholders elected to merge with
AIMCO.  After the merger, NHPMC became a preferred stock subsidiary of AIMCO.
NHPMC and other affiliates of NCHP earned $945,717, $1,505,742 and $1,356,728
for management fees and other services provided to the Local Limited
Partnerships during 1998, 1997 and 1996, respectively. As of December





                                       73
<PAGE>   75
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)



31, 1998 and 1997, amounts due NHPMC and unpaid by the Local Limited
Partnerships amounted to $13,298 and $65,662, 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. At December 31, 1997, trade payables include $78,052 to 
NHPMC. Total reimbursements earned for salaries and benefits for the years ended
December 31, 1998, 1997 and 1996, were approximately $1,492,000, $1,766,000 and
$1,609,000, respectively.

11.      IMPAIRMENT LOSS ON RENTAL PROPERTY

         In March 1995, the Financial Accounting Standards Board issued
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") effective for financial statements for fiscal years beginning
after December 15, 1995. This 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 1998, Tinker Creek Limited Partnership recognized an impairment
loss (noncash) 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.

         During 1997, Esbro, Gulfway, Meadows Apartments, Meadows East
Apartments and Menlo Limited Partnerships recognized impairment losses
(noncash) on their rental property in the amounts of $500,000, $740,000,
$700,000, $1,450,000 and $850,000, respectively. Since each of the Local
Limited Partnerships is in default of its note payable, the Local Limited
Partnership's estimate of cash flow includes only its estimate of the fair
value of the rental property. As a result of not including cash flow from
operations during any anticipated holding period, the estimated cash flow was
less than the carrying amount at December 31, 1997. The amount of the
impairment loss is the amount by which the carrying value exceeds the fair
value of the property. The Local Limited Partnerships used the Direct
Capitalization Method to estimate the fair value of the rental property. Using
this Method, estimated annual cash flow generated by the property is divided by
an overall capitalization rate to estimate the rental property's fair value.

         During 1996, Park Avenue West II and Hilltop Limited Partnerships
recognized impairment losses (noncash) on their rental property in the amounts
of $600,000 and $1,025,000, respectively. The Local Limited Partnerships also
used the Direct Capitalization Method to estimate the fair value of the rental
property.

         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,
1997. Should a Local Limited Partnership be forced to dispose of any of its
properties, it could incur a loss.

12.      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





                                       74
<PAGE>   76
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO

                           LOCAL LIMITED PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS

                                  (CONTINUED)



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 notes 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 months 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.

13.      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.

14.      GOING CONCERN

         Certain of the Local Partnership's notes payable are past due or are
due in 1999 (see Note 7). 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.





                                       75