<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 Exchange Act of 1934
                  For the Fiscal Year Ended DECEMBER 31, 1997

                             Commission File Number
                                    0-09782

                       REAL ESTATE ASSOCIATES LIMITED II
                        A CALIFORNIA LIMITED PARTNERSHIP

                 I.R.S. Employer Identification No. 95-3547609

        9090 WILSHIRE BLVD., SUITE 201, BEVERLY HILLS, CALIFORNIA 90211

       Registrant's Telephone Number, Including Area Code (310) 278-2191

      Securities Registered Pursuant to Section 12(b) or 12(g) of the Act:

                                      NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed with the Commission by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.

                                  Yes [X] No[ ]

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]


<PAGE>   2




PART I.

ITEM 1.     BUSINESS:

Real Estate Associates Limited II ("REAL II" or the "Partnership") is a limited
partnership which was formed under the laws of the State of California on
December 4, 1979. On March 17, 1980, REAL II offered 3,000 units consisting of
6,000 Limited Partnership Interests and Warrants to purchase a maximum of 6,000
Additional Limited Partnership Interests through a public offering managed by
E.F. Hutton Inc.

The general partners of REAL II are National Partnership Investments Corp.
("NAPICO"), a California Corporation (the "Corporate General Partner") and
National Partnership Investment Associates ("NAPIA"). NAPIA is a California
limited partnership and consists of Messrs. Nicholas G. Ciriello, an unrelated
individual, as general partner and Charles H. Boxenbaum as limited partner. The
business of REAL II is conducted primarily by Napico.


NAPICO is a wholly owned subsidiary of Casden Investment Corporation ("CIC"),
which is wholly owned by Alan I. Casden. The current members of NAPICO's Board
of Directors are Charles H. Boxenbaum, Bruce E. Nelson, Alan I. Casden and Henry
C. Casden.

REAL II holds limited partnership interests in twenty local limited partnerships
as of December 31, 1997. Each of the local partnerships own one or two low
income housing projects which are subsidized and/or have a mortgage note payable
to or insured by agencies of the federal or local government.

In order to stimulate private investment in low income housing, the federal
government and certain state and local agencies have provided significant
ownership incentives, including among others, interest subsidies, rent
supplements, and mortgage insurance, with the intent of reducing certain market
risks and providing investors with certain tax benefits, plus limited cash
distributions and the possibility of long-term capital gains. There remain,
however, significant risks. The long-term nature of investments in government
assisted housing limits the ability of REAL II to vary its portfolio in response
to changing economic, financial and investment conditions. Such investments are
also subject to changes in local economic circumstances and housing patterns, as
well as rising operating costs, vacancies, rent collection difficulties, energy
shortages and other factors which have an impact on real estate values. These
projects also require greater management expertise and may have higher operating
expenses than conventional housing projects.

Under recent adopted law and policy, HUD has determined not to renew HAP
contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by
the FHA with respect to properties subject to HAP Contracts that have been
renewed under the new policy. The restructured loans will be held by the
current lender or another lender. Under MAHRAA, an FHA-insured mortgage loan
can be restructured to reduce the annual debt service on such loan. There can
be no assurance that the Partnership will be permitted to restructure its
mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or that
the Partnership would choose to restructure such mortgage indebtedness if it
were eligible to participate in the MAHRAA program. It should be noted that
there are uncertainties as to the economic 
<PAGE>   3
impact on the Partnership of the combination of the reduced payments under the
HAP Contracts and the restructuring of the existing FHA-insured mortgage loans
under MAHRAA. Accordingly, the General Partners are unable to predict with
certainty their impact on the Partnership's future cash flow.


The partnerships in which REAL II has invested were, at least initially,
organized by private developers who acquired the sites, or options thereon, and
applied for applicable mortgage insurance and subsidies. REAL II became the
principal limited partner in these local limited partnerships pursuant to
arm's-length negotiations with these developers, or others, who act as general
partners. As a limited partner, REAL II's liability for obligations of the local
limited partnership is limited to its investment. The local general partner of
the local limited partnership retains responsibility for developing,
constructing, maintaining, operating and managing the Project. Under certain
circumstances of default, REAL II has the right to replace the general partner
of the local limited partnerships but otherwise does not have control of sale,
refinancing, etc.

Although each of the partnerships in which REAL II has invested owns a project
which must compete in the market place for tenants, interest subsidies and rent
supplements from governmental agencies make it possible to offer these dwelling
units to eligible "low income" tenants at a cost significantly below the market
rate for comparable conventionally financed dwelling units in the area.

<PAGE>   4
During 1997, the projects in which REAL II had invested were substantially
rented. The following is a schedule of the status as of December 31, 1997, of
the projects owned by local limited partnerships in which REAL II is a limited
partner.

            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL II HAS AN INVESTMENT
                                DECEMBER 31, 1997
<TABLE>
<CAPTION>

                                                Units Authorized
                                                   For Rental
                                                Assistance Under
                                                  Section 8 or
                                                   Other Rent
                                   No. of          Supplement      Units        Percentage of
Name & Location                    Units             Program     Occupied        Total Units
---------------                    -----             -------     --------        -----------
<S>                                <C>          <C>              <C>            <C>
Azalea Court                         48               4/ 19           46             96%
Theodore, AL

Berger Apts.                        144             144/  0          144            100%
New Haven, CT

Biltmore                            231             231/  0          224             97%
Dayton, OH

Branford Elderly                     38              38/  0           38            100%
Branford, CT

Castlewood Apts.                     96              96/  0           91             95%
Davenport, IA

Cherrywood Apts.                     40              40/  0           39             98%
Twin Falls, ID

Clearfield Manor                     40              40/  0           38             95%
Clearfield, KY

Crystal Springs                      28               0/ 28           28            100%
Crystal Springs, MS

East Farm Vlg.                      240             240/  0          240            100%
East Haven, CT

Grant Park and                      188             188/  0          188            100%
Ormewood Park
Atlanta, GA

Lakeside Apts.                       48              48/  0           47             98%
Mishawaka, IN

Landmark Towers                      40              40/  0           40            100%
Nampa, ID
</TABLE>


<PAGE>   5


            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL II HAS AN INVESTMENT
                                DECEMBER 31, 1997
                                   (CONTINUED)
<TABLE>
<CAPTION>

                                                Units Authorized
                                                   For Rental
                                                Assistance Under
                                                  Section 8 or
                                                   Other Rent
                                      No. of       Supplement          Units      Percentage of
Name & Location                       Units          Program         Occupied      Total Units
---------------                       -----          -------         --------      -----------
<S>                                   <C>       <C>                  <C>          <C>
Magnolia State                         60             0/ 38               58             97%
Gulfport, MS

New Haven Plaza                       344           344/  0              344            100%
Far Rockaway, NY

Pennbrook Apts.                       108           108/  0              108            100%
Owosso, MI

Redfern Grove Apts.                    72            72/  0               71             99%
E. Providence, RI

Saturn Apts.                           38            38/  0               38            100%
Idaho Falls, ID

Sugar River Mills                     162           162/  0              159             98%
Claremont, NH

Valebrook                             151           151/  0              151            100%
Lawrence, MA

Westward Ho Apts.                     290           289/  0              267             92%
Phoenix, AZ

Willow Wick Apts.                      24             0/  5               13             54%
Centre, AL
                                    -----         ---------           ------            ---

TOTALS                              2,430         2,273/ 90            2,372             98%
                                    =====         =========           ======
</TABLE>


<PAGE>   6


ITEM 2. PROPERTIES:

Through its investments in local limited partnerships, REAL II holds interests
in various multi-family rental properties. See Item 1 and Schedule XI for
information pertaining to these properties.

ITEM 3. LEGAL PROCEEDINGS:

As of December 31, 1997, REAL II's Corporate General Partner was a plaintiff or
defendant in several lawsuits. In addition, REAL II is involved in the following
lawsuits. In the opinion of management and the Corporate General Partner, the
claims will not result in any material liability to the Partnership.

Joseph Alizio v. Peter Perpignano, New Haven Plaza Associates, Real Estate
Associates Limited II, National Partnership Investments Corp. and National
Partnership Associates, Supreme Court of the State of New York, County of
Nassau, Case No. 1776-94. On January 21, 1994, the Plaintiff filed a lawsuit
seeking to dissolve the New Haven Local Partnership, alleging that he was denied
his pro rata share of the capital contribution, management fees, consultants
fees and profits. REAL II filed a motion to dismiss the complaint which motion
was granted on November 10, 1994. The case was appealed and argued on February
9, 1996. The case was appealed and argued on February 9, 1996. Documents were
refiled and all cases were dismissed in February of 1997, with exception of one
accounting issued. REAL II is now waiting for a decision on the final matter
from the appellate court.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

Not applicable.


PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND RELATED SECURITY
        HOLDER MATTERS:

The Limited Partnership Interests are not traded on a public exchange but were
sold through a public offering managed by Lehman Brothers Inc. It is not
anticipated that any public market will develop for the purchase and sale of any
Partnership interest. Limited Partnership Interests may be transferred only if
certain requirements are satisfied. At December 31, 1997 there were 1,676
registered holders of units in REAL II. No distributions have been made from the
inception of the Partnership to December 31, 1997. The Partnership has invested
in certain government assisted projects under programs which in many instances
restrict the cash return available to project owners. The Partnership was not
designed to provide cash distributions to investors in circumstances other than
refinancing or disposition of its investments in limited partnerships.




<PAGE>   7

ITEM 6.       SELECTED FINANCIAL DATA:

<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                            -------------------------------------------------------------------------------

                                1997             1996             1995             1994             1993
                            -----------      -----------      -----------      -----------      -----------

<S>                         <C>              <C>              <C>              <C>              <C>         
Loss from operations        $  (666,499)     $  (449,123)     $  (474,179)     $  (492,294)     $  (508,753)

Distributions from
   Limited Partnerships
   Recognized as Income         244,281          113,203          172,189          796,658          270,938

Equity in Income of
   Limited Partnerships
   and Amortization of
   Acquisition Costs            820,899        1,154,755        1,172,891          734,711          532,359
                            -----------      -----------      -----------      -----------      -----------

Net Income                  $   398,681      $   818,835      $   870,901      $ 1,039,075      $   294,544
                            ===========      ===========      ===========      ===========      ===========

Net Income per limited
   Partnership Interest     $        37      $        77      $        81      $        96      $        27
                            ===========      ===========      ===========      ===========      ===========

Total assets                $ 5,095,968      $ 4,630,145      $ 3,821,884      $ 2,917,236      $ 1,873,009
                            ===========      ===========      ===========      ===========      ===========

Investments in Limited
   Partnerships             $ 3,493,251      $ 2,808,190      $ 1,959,173      $ 1,135,982      $ 1,407,989
                            ===========      ===========      ===========      ===========      ===========
</TABLE>

<PAGE>   8


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS:

LIQUIDITY

The Partnership's primary sources of funds include interest income on money
market investments and certificates of deposit and distributions from local
partnerships in which the Partnership has invested. It is not expected that any
of the local limited partnerships in which the Partnership has invested will
generate cash flow sufficient to provide for distributions to the Partnership's
limited partners in any material amount.

CAPITAL RESOURCES

REAL II received $13,365,000 in subscriptions for units of Limited Partnership
Interests (at $5,000 per unit) during the period March 17, 1979 to September 15,
1980, pursuant to a registration statement on Form S-11. As of December 31, 1981
REAL II had received an additional $13,365,000 in subscriptions pursuant to the
exercise of warrants and the sale of Additional Limited Partnership Interests.

RESULTS OF OPERATIONS

The Partnership was formed to provide various benefits to its partners as
discussed in Item 1. It is anticipated that the local limited partnerships in
which REAL II has invested could produce tax losses for as long as 20 years. Tax
benefits will decline over time as the advantages of accelerated depreciation
are greatest in the earlier years, as deductions for interest expense decrease
as mortgage principal is amortized, and as the Tax Reform Act of 1986 limits the
deductions available.

At December 31, 1997, the Partnership has investments in 20 limited
partnerships, which own 21 housing projects that were substantially all rented.
The Partnership, as a limited partner, is entitled to 85% to 99% of the profits
and losses of the local limited partnerships. The Partnership accounts for its
investments in the local limited partnerships on the equity method, thereby
adjusting its investment balance by its proportionate share of the income or
loss of the local limited partnerships. Equity in losses of limited partnerships
is recognized in the financial statements until the limited partnership
investment account is reduced to a zero balance. Losses incurred after the
limited partnership investment account is reduced to zero are not recognized.
Limited partners are not liable for losses beyond their contributed capital. At
December 31, 1997, 1996 and 1995, the Partnership has a positive investment
balance in only four, five and five local limited partnerships, respectively.

Distributions received from limited partnerships are recognized as return of
capital until the investment balance has been reduced to zero or to a negative
amount equal to future capital contributions required. Subsequent distributions
received are recognized as income.

The total income from the 20 local limited partnerships that was allocated to
the Partnership was $398,000, $902,000 and $631,000 for the years ended December
31, 1997, 1996 and 1995, respectively. However, because losses incurred after
the investment account is reduced to a zero balance are not recognized and
subsequent income is not recognized until the investment account becomes
positive again, the Partnership recognized equity in income of limited
partnerships, substantially all from the partnerships with a positive investment
balance, of $820,899, $1,154,755 and $1,172,891 for the years ended December 31,
1997, 1996 and 1995, respectively. During the year ended December 31, 1997, the
Partnership contributed $52,000 to a local limited partnership, thereby allowing
the Partnership to recognize a loss from this partnership in that amount, which
reduced the income recognized from the partnerships with positive investment
balances. In addition, the income recognized from one of the partnerships
decreased from $217,000 in 1996 to $3,000 in 1997, primarily as a result of
increases in operating expenses. Also, included in recognized equity in income
of limited partnerships for 1996 and 1995 is $81,000 and $46,000, respectively,
in income from partnerships in which the Partnership does not have a positive
investment balance, but it was able to recognized this income because it
received cash distributions from these partnerships equal to these amounts. The
cumulative amount 



<PAGE>   9

of the unrecognized equity in losses of certain limited partnerships was
approximately $12,142,000 and $11,748,000 as of December 31, 1997 and 1996,
respectively.

Distributions from the local limited partnerships in which the Partnership did
not have a positive investment balance were $244,281, $113,203 and $172,189 for
the years ended December 31, 1997, 1996 and 1995, respectively. These amounts
were recognized as income on the accompanying statements of operations, in
accordance with the equity method of accounting.

As of December 31, 1997, 1996 and 1995, the Partnership has cash and cash
equivalents of $1,602,717, $1,821,955, and $1,862,711, respectively.
Substantially all of these amounts are on deposit with two high credit quality
financial institutions, earning interest. This resulted in the Partnership
earning $82,692, $74,125 and $79,206 in interest income for the years ended
December 31, 1997, 1996 and 1995, respectively. The amount of interest income
varies with market rates available on deposits and with the amount of funds
available for investment. Cash equivalents can be converted to cash to meet
obligations of the Partnership as they arise. The Partnership intends to
continue investing available funds in this manner. Should the Partnership
complete the sale of interests, its obligations may be reduced and a
distribution of cash may be disbursed to the partners.

A recurring partnership expense is the annual management fee. The fee is payable
to the Corporate General Partner of the Partnership and is calculated at .4
percent of the Partnership's invested assets. The management fee is paid to the
Corporate General Partner for its continuing management of partnership affairs.
The fee is payable beginning with the month following the Partnership's initial
investment in a local limited partnership. Since the invested assets have not
changed during each of the three years in the period ended December 31, 1996,
management fees have remained constant at $397,680 for each of these years.

Under recent adopted law and policy, HUD has determined not to renew HAP
Contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by
the FHA with respect to properties subject to HAP Contracts that have been
renewed under the new policy. The restructured loans will be held by the
current lender or another lender. Under MAHRAA, an FHA-insured mortgage loan
can be restructured to reduce the annual debt service on such loan. There can
be no assurance that the Partnership will be permitted to restructure its
mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or that
the Partnership would choose to restructure such mortgage indebtedness if it
were eligible to participate in the MAHRAA program. It should be noted that
there are uncertainties as to the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA.
Accordingly, the General Partners are unable to predict with certainty their
impact on the Partnership's future cash flow.

As a result of the foregoing, the Partnership is undergoing an extensive review
of disposition, refinancing or re-engineering alternatives for the properties
in which the limited partnerships have invested and are subject to HUD mortgage
and rental subsidy programs. The Partnership has incurred expenses in
connection with this review by various third party professionals, including
accounting, legal, valuation, structural and engineering costs, which amounted
to $137,723 for the year ended December 31, 1997.

A real estate investment trust ("REIT") organized by an affiliate of NAPICO
has advised the Partnership that it intends to make a proposal to purchase from
the Partnership certain of the limited partnership interests held for
investment by the Partnership.




<PAGE>   10
The REIT proposes to purchase such limited partner interests for cash, which it
plans to raise in connection with a private placement of its equity securities.
The purchase is subject to, among other things, (i) consummation of such
private placement by the REIT; (ii) the purchase of the general partner
interests in the local limited partnerships by the REIT; (iii) the approval of
HUD and certain state housing finance agencies; (iv) the consent of the
limited partners to the sale of the local limited partnership interests held
for investment by REAL II; and (v) the comsummation of a minimum number of
purchase transactions with other Casden affiliated partnerships. As of March
31, 1998, the REIT had completed buy-out negotiations with a majority of the
general partners of the local limited partnerships.

A proxy is contemplated to be sent to the limited partners setting forth the
terms and conditions of the purchase of the limited partners' interests held
for investment by the Partnership, together with certain amendments to the
Partnership Agreement and other disclosures of various conficts of interest in
connection with the transaction.

Operating expenses, other than management fees, consist of legal and accounting
fees for services rendered to the Partnership and administrative expenses. Legal
and accounting fees were $132,650, $62,320 and $92,141 for the years ended
December 31, 1997, 1996 and 1995, respectively. Legal and accounting fees
increase in 1997 primarily as a result of $57,000 in legal fees that were
incurred in 1997 in connection with the Partnership attempting to replace the
unrelated general partner of one of the local partnerships. Administrative
expenses were $218,861, $63,248 and $63,564 for the years ended December 31,
1997, 1996 and 1995, respectively. Included in administrative expenses are
reimbursements to NAPICO for certain expenses, which totalled $35,194, $31,948
and $29,892 for the years ended December 31, 1997, 1996 and 1995, respectively.

Also included in administrative expenses for 1997 is $137,723, approximately
$90,000 of which is included in accounts payable at December 31, 1997, related
to the aforementioned proposed third-party review of the property owned by 
the local partnership.

The results of operations of the local limited partnerships were fairly constant
during the years ended December 31, 1997, 1996 and 1997. Contributing to the
relative stability of operations at the local partnerships is the fact that
substantially all of the local partnerships are operating apartment projects
which are subsidized and have mortgage notes payable to or insured by agencies
of the federal or local government.

Total revenue for the 20 local partnerships has remained fairly constant, and
was $23,111,000, $22,979,000 and $22,855,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

Total expenses for the 20 local partnerships remained fairly consistent, and
were $22,627,000, $21,946,000 and $22,085,000 for the years ended December 31,
1997, 1996 and 1995, respectively. 

The total net income for the 20 local partnerships for 1997, 1996 and 1995
aggregated $483,000, $1,032,000 and $770,000, respectively. The net income
allocated to the Partnership was $398,000, $902,000 and $631,000 for 1997, 1996
and 1995, respectively.

The Partnership, as a Limited Partner in the local limited partnerships in which
it has invested, is subject to the risks incident to the construction,
management, and ownership of improved real estate. The Partnership investments
are also subject to adverse general economic conditions, and, accordingly, the
status of the national economy, including substantial unemployment and
concurrent inflation, and changing legislation which could increase vacancy
levels, rental payment defaults, and operating expenses, which in turn, could
substantially increase the risk of operating losses for the projects.

The Partnership has assessed the potential impact of the Year 2000 computer
systems issue on its operations. The Partnership believes that no significant
actions are required to be taken by the Partnership to address the issue and
that the impact of the Year 2000 computer systems issue will not materially
affect the Partnership's future operating results or financial condition.


<PAGE>   11


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

The Financial Statements and Supplementary Data are listed under Item 14.

ITEM 9. CHANGES WITH AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE:

Not applicable.
<PAGE>   12
                       REAL ESTATE ASSOCIATES LIMITED II
                       (A California limited partnership)

                             FINANCIAL STATEMENTS,
                         FINANCIAL STATEMENT SCHEDULES
                   AND INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
                               DECEMBER 31, 1997


<PAGE>   13




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Real Estate Associates Limited II
(A California limited partnership)

We have audited the accompanying balance sheets of Real Estate Associates
Limited II (a California limited partnership) as of December 31, 1997 and 1996,
and the related statements of operations, partners' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedules listed in the index on
item 14. These financial statements and financial statement schedules are the
responsibility of the management of the Partnership. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits. We did not audit the financial statements of
certain limited partnerships, the investments in which are reflected in the
accompanying financial statements using the equity method of accounting. The
investments in these limited partnerships represent 27 percent and 23 percent of
total assets as of December 31, 1997 and 1996, respectively, and the equity in
income of these limited partnerships represents 22 percent, 33 percent and 59
percent of the total net income of the Partnership for the years ended December
31, 1997, 1996 and 1995, respectively, and represent a substantial portion of
the investee information in Note 2 and the financial statement schedules. The
financial statements of these limited partnerships are audited by other
auditors. Their reports have been furnished to us and our opinion, insofar as it
relates to the amounts included for these limited partnerships, 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 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, the
financial statements referred to above present fairly, in all material respects,
the financial position of Real Estate Associates Limited II as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three 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 financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.



DELOITTE & TOUCHE LLP

Los Angeles, California
April 6, 1998


<PAGE>   14
                         [COOPERS & LYBRAND LETTERHEAD]


                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
New Haven Associates
 Limited Partnership:

We have audited the accompanying balance sheet of New Haven Associates Limited
Partnership, as of December 31, 1997, and the related statements of profit and
loss, partners' capital, and cash flows for the year then ended. These
financial statements are the responsibility of the management of New Haven
Associates Limited Partnership. 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 involves 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 New Haven Associates 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.

In accordance with Government Auditing Standards, we have issued a report dated
January 30, 1998 on our consideration of New Haven Associates Limited
Partnership's internal control and a report dated January 30, 1998 on its
compliance with laws and regulations.


                                        /s/ COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
January 30, 1998
<PAGE>   15
                         [COOPERS & LYBRAND LETTERHEAD]


                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
New Haven Associates
 Limited Partnership:

We have audited the accompanying balance sheet of New Haven Associates Limited
Partnership, as of December 31, 1996, and the related statements of profit and
loss, partners' capital (deficiency), and cash flows for the year then ended.
These financial statements are the responsibility of the management of New Haven
Associates Limited Partnership. 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 involves 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 New Haven Associates 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 issued a report dated
January 31, 1997 on our consideration of New Haven Associates Limited
Partnership's internal control structure and a report dated January 31, 1997 on
its compliance with laws and regulations.


                                        /s/ COOPERS & LYBRAND L.L.P.

Boston, Massachusetts
January 31, 1997
<PAGE>   16
                     [COOPERS & LYBRAND L.L.P. LETTERHEAD]


                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Partners of
New Haven Associates
 Limited Partnership:

We have audited the accompanying balance sheet of New Haven Associates Limited
Partnership, as of December 31, 1995, and the related statements of profit and
loss, partners' capital (deficiency), and cash flows for the year then ended.
These financial statements are the responsibility of the management of New
Haven Associates Limited Partnership. 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 our 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 New Haven Associates Limited
Partnership, as of December 31, 1995 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 issued a report dated
January 31, 1996 on our consideration of New Haven Associates Limited
Partnership's internal control structure and a report dated January 31, 1996
on its compliance with laws and regulations.


                                        /s/ COOPERS & LYBRAND L.L.P.


Boston, Massachusetts
January 31, 1996

<PAGE>   17
            [DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C. LETTERHEAD]


                          INDEPENDENT AUDITORS' REPORT


Partners
Branford Development Associates
(A Limited Partnership)
Branford, Connecticut

We have audited the accompanying balance sheet of Branford Development 
Associates (a limited partnership), Project No. 78-055M as of December 31,
1997, and the related statements of profit and loss, partners' equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards
and the standards applicable to financial audits contained in 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 Branford Development
Associates (a limited partnership) as of December 31, 1997, and the results of
its operations and its cash flow for the year then ended, in conformity with
generally accepted accounting principles.

The accompanying information contained on pages 12 through 16 is presented for
additional analysis in accordance with the regulations of the U.S. Department
of Housing and Urban Development and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is presently fairly in all material respects in relation to the basic
financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued a report
dated January 31, 1998 on our consideration of Branford Development Associates'
(a limited partnership) internal controls and a report dated January 31, 1998,
on its compliance with laws and regulations.


                                   /s/ DWORKEN, HILLMAN, LAMORTE 
                                       & STERCZALA, P.C.


Bridgeport, Connecticut
January 31, 1998

Federal Tax ID#06-1308345
C. Robert Hillman, CPA, Principal
1-203-333-5133
<PAGE>   18
            [DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C. LETTERHEAD]


                          INDEPENDENT AUDITORS' REPORT

Partners
Branford Development Associates
(A Limited Partnership)
Branford, Connecticut

We have audited the accompanying balance sheet of Branford Development
Associates (a limited partnership), Project No. 78-055M as of December 31,
1996, and the related statements of profit and loss (HUD Form 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 Branford Development
Associates (a 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 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 24, 1997, on our
consideration of Branford Development Associates' (a limited partnership)
internal control structure, and reports dated January 24, 1997, on its
compliance with specific requirements applicable to Affirmative Fair Housing,
and specific requirements applicable to nonmajor HUD program transactions.

The accompanying information contained on pages 12 through 16 is presented for
additional analysis in accordance with the regulations of the U.S. Department
of Housing and Urban Development and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is presented fairly in all material respects in relation to the basic
financial statements taken as a whole.



Bridgeport, Connecticut          /s/ DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C.

January 24, 1997

Federal Tax ID# 06-1308345
C. Robert Hillman, CPA, Principal
1-203-333-5133
<PAGE>   19


                          INDEPENDENT AUDITORS REPORT



Partners
Branford Development Associates
(A Limited Partnership)
Branford, Connecticut


We have audited the accompanying balance sheet of Branford Development
Associates (a limited partnership), Project No. 78-055M as of December 31, 1995,
and the related statements of profit and loss (HUD Form 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 Branford Development Associates
(a limited partnership) as of December 31, 1995, 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 19, 1996 on our consideration of Branford Development Associates'
(a limited partnership) internal control structure and a report dated January
19, 1996 on its compliance with laws and regulations.

The accompanying information contained on pages 12 through 16 is presented for
additional analysis in accordance with the regulations of the U.S. Department
of Housing and Urban Development and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is presented fairly in all material respects in relation to the basic
financial statements taken as a whole.



                                 /s/ DWORKEN, HILLMAN, LAMORTE & STERCZALA, P.C.


Bridgeport, Connecticut
January 19, 1996

Federal Tax ID# 06-1308345
C. Robert Hillman, CPA, Principal
1-203-333-5133
<PAGE>   20
                       [KPMG PEAT MARWICK LLP LETTERHEAD]


                     REPORT ON AUDITED FINANCIAL STATEMENTS
                         AND SUPPLEMENTARY INFORMATION

                          INDEPENDENT AUDITORS' REPORT

The Partners
Redfern Grove Associates:

We have audited the accompanying balance sheet of Redfern Grove Associates (the
"Partnership"), HUD Project No. RI-43-HO23-102, as of July 31, 1997, and the
related statements of profit and loss (on HUD Form 92410), changes in 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 the Partnership as of July 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 September 12, 1997 on: our consideration of the Partnership's internal
controls, the Partnership's compliance with specific requirements applicable to
major HUD programs, and the Partnership's compliance with 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 accompanying supplementary
information included in Schedules 1 through 7 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.


                                        /s/ KPMG PEAT MARWICK LLP

Providence, Rhode Island
September 12, 1997
<PAGE>   21
                       [KPMG PEAT MARWICK LLP LETTERHEAD]


                     REPORT ON AUDITED FINANCIAL STATEMENTS
                         AND SUPPLEMENTARY INFORMATION



                          INDEPENDENT AUDITORS REPORT

The Partners
Redfern Grove Associates
(A Limited Partnership):


We have audited the accompanying balance sheet of Redfern Grove Associates (A
Limited Partnership) (the "Partnership"), HUD Project No. RI-43-HO23-102, as of
July 31, 1996, and the related statements of profit and loss (on HUD Form
92410), changes in 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 the Partnership as of July 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 September 13, 1996 on: our consideration of the Partnership's internal
control structure, the Partnership's compliance with specific requirements
applicable to major HUD programs, and the Partnership's compliance with
specific requirements applicable to affirmative fair housing.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information included in Schedules 1 through 7 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 financial statements
taken as a whole.



                                        /s/ KPMG PEAT MARWICK LLP

Providence, Rhode Island
September 13, 1996


<PAGE>   22

                       [KPMG PEAT MARWICK LLP LETTERHEAD]


                          INDEPENDENT AUDITORS REPORT

The Partners
Redfern Grove Associates
(A Limited Partnership):

We have audited the accompanying balance sheet of Redfern Grove Associates (A
Limited Partnership) Project No. RI-43-HO23-102 as of July 31, 1995, and the
related statements of profit and loss (on HUD Form 92410), changes in partners'
equity and cash flows for the year then ended. These financial statements are
the responsibility of 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 Redfern Grove Associates (A
Limited Partnership) Project No. RI-43-HO23-102 at July 31, 1995 and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information included in Schedules
1 through 7 is presented for purposes of additional analysis and is not a
required part of the basic financial statements and, in our opinion, is fairly
presented in all material respects in relation to the basic financial
statements taken as a whole.


                                        /s/ KPMG PEAT MARWICK LLP

Providence, Rhode Island
September 19, 1995

<PAGE>   23
                         [BDO SEIDMAN, LLP LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners of
Valebrook Associates

We have audited the accompanying balance sheet of Valebrook Associates (A
Limited Partnership) FHA Project No. MA 74-120, as of December 31, 1997 and the
related statements of income, 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 Valebrook Associates (A
Limited Partnership) FHA Project No. MA74-120 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 a report
dated February 3, 1998, on our consideration of Valebrook Associates' internal
control structure, a reported dated February 3, 1998, on its compliance with
laws and regulations, and a report dated February 3, 1998, on its compliance
with specific requirements applicable to HUD programs.


                                        /s/ BDO SEIDMAN, LLP


Boston, Massachusetts
February 3, 1998
<PAGE>   24
                         [BDO SEIDMAN, LLP LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners of
Valebrook Associates

We have audited the accompanying balance sheet of Valebrook Associates (A
Limited Partnership) FHA Project No. MA 74-120, as of December 31, 1996 and the
related statements of income, partners' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valebrook Associates (A
Limited Partnership) FHA Project No. MA74-120 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.


                                        /s/ BDO SEIDMAN, LLP


Boston, Massachusetts
February 5, 1997

<PAGE>   25
                         [BDO SEIDMAN, LLP LETTERHEAD]

                          INDEPENDENT AUDITORS' REPORT

To the Partners of
Valebrook Associates

We have audited the accompanying balance sheet of Valebrook Associates (A
Limited Partnership) FHA Project No. MA 74-120, as of December 31, 1995 and the
related statements of income, partners' equity (deficit) and cash flows for the
year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valebrook Associates (A Limited
Partnership) at December 31, 1995, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.


                                        /s/ BDO SEIDMAN, LLP


Boston, Massachusetts
January 24, 1996
<PAGE>   26
                        REAL ESTATE ASSOCIATES LIMITED II
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                     ASSETS


                                                     1997             1996
                                                  -----------      -----------

INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)      $ 3,493,251      $ 2,808,190

CASH AND CASH EQUIVALENTS (Note 1)                  1,602,717        1,821,955
                                                  -----------      -----------

TOTAL ASSETS                                      $ 5,095,968      $ 4,630,145
                                                  ===========      ===========


                        LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:

Accounts payable                                  $    98,954      $    31,812
                                                  -----------      -----------



COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)


PARTNERS' EQUITY (DEFICIENCY):
General partners                                     (168,125)        (172,112)
Limited partners                                    5,165,139        4,770,445
                                                  -----------      -----------

                                                    4,997,014        4,598,333
                                                  -----------      -----------

TOTAL LIABILITIES AND PARTNERS' EQUITY            $ 5,095,968      $ 4,630,145
                                                  ===========      ===========



     The accompanying notes are integral part of these financial statements.


<PAGE>   27

                        REAL ESTATE ASSOCIATES LIMITED II
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>

                                                         1997             1996             1995
                                                     -----------      -----------      -----------
<S>                                                  <C>              <C>              <C>        
INTEREST INCOME                                      $    82,692      $    74,125      $    79,206
                                                     -----------      -----------      -----------

OPERATING EXPENSES:
      Legal and accounting                               132,650           62,320           92,141
      Management fees - general partner (Note 3)         397,680          397,680          397,680
      Administrative  (Note 3)                           218,861           63,248           63,564
                                                     -----------      -----------      -----------

             Total operating expenses                    749,191          523,248          553,385
                                                     -----------      -----------      -----------

LOSS FROM OPERATIONS                                    (666,499)        (449,123)        (474,179)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                    244,281          113,203          172,189

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTIZATION
      OF ACQUISITION COSTS (Note 2)                      820,899        1,154,755        1,172,891
                                                     -----------      -----------      -----------

NET INCOME                                           $   398,681      $   818,835      $   870,901
                                                     ===========      ===========      ===========


NET INCOME PER LIMITED PARTNERSHIP
      INTEREST (Note 1)                              $        37      $        77      $        81
                                                     ===========      ===========      ===========
</TABLE>




     The accompanying notes are integral part of these financial statements.

<PAGE>   28
                          REAL ESTATE ASSOCIATES LIMITED II
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>

                                          General        Limited
                                         Partners        Partners        Total
                                        ----------      ----------     ----------
<S>                                    <C>             <C>            <C>       
EQUITY (DEFICIENCY),
      January 1, 1995                   $ (189,009)     $3,097,606     $2,908,597

    Net income for 1995                      8,709         862,192        870,901
                                        ----------      ----------     ----------

EQUITY (DEFICIENCY),
    December 31, 1995                     (180,300)      3,959,798      3,779,498

    Net income for 1996                      8,188         810,647        818,835
                                        ----------      ----------     ----------

EQUITY (DEFICIENCY),
    December 31, 1996                     (172,112)      4,770,445      4,598,333

    Net income for 1997                      3,987         394,694        398,681
                                        ----------      ----------     ----------

EQUITY (DEFICIENCY),
    December 31, 1997                   $ (168,125)     $5,165,139     $4,997,014
                                        ==========      ==========     ==========
</TABLE>



     The accompanying notes are integral part of these financial statements.

<PAGE>   29
                        REAL ESTATE ASSOCIATES LIMITED II
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>

                                                              1997             1996             1995
                                                          -----------      -----------      -----------

<S>                                                       <C>              <C>              <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                          $   398,681      $   818,835      $   870,901
      Adjustments to reconcile net income to net cash
        used in operating activities:
          Equity in income of limited partnerships
            and amortization of acquisition costs            (820,899)      (1,154,755)      (1,172,891)
          (Decrease) increase in accounts payable              67,142          (10,574)          33,747
                                                          -----------      -----------      -----------

      Net cash used in operating activities                  (355,076)        (346,494)        (268,243)
                                                          -----------      -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Investments in limited partnerships:
        Capital Contribution                                  (52,000)              --               --
        Distributions from limited partnerships
          recognized as return of capital                     187,838          305,738          349,700
                                                          -----------      -----------      -----------

                                                              135,838          305,738          349,700
                                                          -----------      -----------      -----------

NET (DECREASE) INCREASE IN CASH
      AND CASH EQUIVALENTS                                   (219,238)         (40,756)          81,457

CASH AND CASH EQUIVALENTS,
      BEGINNING OF YEAR                                     1,821,955        1,862,711        1,781,254
                                                          -----------      -----------      -----------

CASH AND CASH EQUIVALENTS,
       END OF YEAR                                        $ 1,602,717      $ 1,821,955      $ 1,862,711
                                                          ===========      ===========      ===========
</TABLE>



     The accompanying notes are integral part of these financial statements.



<PAGE>   30


                        REAL ESTATE ASSOCIATES LIMITED II
                       (a California limited partnership)

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Organization

        Real Estate Associates Limited II (the Partnership) was formed under the
        California Limited Partnership Act on December 4, 1979. The Partnership
        was formed to invest in other limited partnerships which own and operate
        primarily federal, state or local government-assisted housing projects.
        The general partners are National Partnership Investment Associates
        (NAPIA), a limited partnership, and National Partnership Investments
        Corp. (NAPICO) a wholly owned subsidiary of Casden Investment
        Corporation, the corporate general partner. Casden Investment
        Corporation owns 100 percent of NAPICO's stock. The business of REAL II
        is conducted primarily by NAPICO. 

        The Partnership offered 3,000 units and issued 2,673 units of limited
        partner interests through a public offering. Each unit was comprised of
        two limited partner interests and a warrant granting an investor the
        right to purchase two additional limited partner interests. An
        additional 5,346 interests were issued from the exercise of the warrants
        and the sale of interests associated with warrants not exercised. The
        general partners have a 1 percent interest in the profits and losses of
        the Partnership. The limited partners have the remaining 99 percent
        interest in proportion to their respective investments.

        The Partnership shall be dissolved only upon the expiration of 52
        complete calendar years (December 31, 2031) from the date of the
        formation of the Partnership or the occurrence of various other events
        as specified in the terms of the Partnership agreement.

        Upon total or partial liquidation of the Partnership or the disposition
        or partial disposition of a project or project interest and distribution
        of the proceeds, the general partners will be entitled to a liquidation
        fee as stipulated in the Partnership agreement. The limited partners
        will have a priority return equal to their invested capital attributable
        to the project(s) or project interest(s) sold and shall receive from the
        sale of the project(s) or project interest(s) an amount sufficient to
        pay state and federal income taxes, if any, calculated at the maximum
        rate then in effect. The general partners' liquidation fee may accrue
        but shall not be paid until the limited partners have received
        distributions equal to 100 percent of their capital contributions.

        Use of Estimates

        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 reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.

        Method of Accounting for Investments in Limited Partnerships

        The investments in limited partnerships are accounted for on the equity
        method. Acquisition, selection and other costs related to the
        acquisition of the projects were capitalized as part of the investment

                                       5
<PAGE>   31



                        REAL ESTATE ASSOCIATES LIMITED II
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        account and are being amortized on a straight line basis over the
        estimated lives of the underlying assets, which is generally 30 years.

        Net Income Per Limited Partnership Interest

        Net income per limited partnership interest was computed by dividing the
        limited partners' share of net income by the number of limited
        partnership interests outstanding during the year. The number of limited
        partnership interests was 10,693 for all years presented.

        Cash and Cash Equivalents

        Cash and cash equivalents consist of cash and bank certificates of
        deposit with an original maturity date of three months or less. The
        Partnership has its cash and cash equivalents on deposit primarily with
        two high credit quality financial institutions. Such cash and cash
        equivalents are in excess of the FDIC insurance limit.

        Impairment of Long-Lived Assets

        The Partnership reviews long-lived assets to determine if there has been
        any permanent impairment whenever events or changes in circumstances
        indicate that the carrying amount of the asset may not be recoverable.
        If the sum of the expected future cash flows is less than the carrying
        amount of the assets, the Partnership recognizes an impairment loss.

2.      INVESTMENTS IN LIMITED PARTNERSHIPS

        The Partnership holds limited partnership interests in 20 limited
        partnerships, owning 21 apartment complexes. The partnerships own
        residential low income rental projects consisting of 2,430 apartment
        units. The mortgage loans of these projects are payable to or insured by
        various governmental agencies. The Partnership, as a limited partner, is
        entitled to between 85 percent and 99 percent of the profits and losses
        of the limited partnerships.

        Equity in losses of limited partnerships is recognized in the financial
        statements until the limited partnership investment account is reduced
        to a zero balance. Losses incurred after the limited partnership
        investment account is reduced to zero are not recognized. The cumulative
        amount of the unrecognized equity in losses of certain limited
        partnerships was approximately $12,274,000 and $11,748,000 as of
        December 31, 1997 and 1996, respectively.

        Distributions from limited partnerships are accounted for as a return of
        capital until the investment balance is reduced to zero. Subsequent
        distributions received are recognized as income.



                                       6
<PAGE>   32

                        REAL ESTATE ASSOCIATES LIMITED II
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997


2.      INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        The following is a summary of the investments in limited partnerships
        and reconciliation to the limited partnership accounts:
<TABLE>
<CAPTION>
                                                               1997             1996
                                                           -----------      -----------
<S>                                                        <C>              <C>        
Investment balance, beginning of year                      $ 2,808,190      $ 1,959,173
Capital contributions                                           52,000
Cash distributions recognized as a return of capital          (187,838)        (305,738)
Equity in income of limited partnerships                       829,162        1,163,018
Amortization of capitalized acquisition costs and fees          (8,263)          (8,263)
                                                           -----------      -----------

Investment balance, end of year                            $ 3,493,251      $ 2,808,190
                                                           ===========      ===========
</TABLE>

        The difference between the investment per the accompanying balance
        sheets at December 31, 1997 and 1996, and the deficiency per the limited
        partnerships' combined financial statements is due primarily to
        cumulative unrecognized equity in losses of certain limited
        partnerships, costs capitalized to the investment account and cumulative
        distributions recognized as income.

        Selected financial information from combining the financial statements
        of the limited partnerships at December 31, 1997 and 1996 and for each
        of three years in the period ended December 31, 1997 is as follows:
                                       
<TABLE>
<CAPTION>
                                 Balance Sheets

                                           1997          1996
                                         --------      --------
                                              (in thousands)

<S>                                      <C>           <C>     
Land and buildings, net                  $ 48,792      $ 50,604
                                         ========      ========

Total assets                             $ 65,330      $ 66,883
                                         ========      ========

Mortgages payable                        $ 80,218      $ 87,060
                                         ========      ========

Total liabilities                        $ 83,550      $ 84,684
                                         ========      ========

Deficiency of Real Estate Associates
  Limited II                             $(13,507)     $(13,350)
                                         ========      ========

Deficiency of other partners             $ (4,713)     $ (4,450)
                                         ========      ========
</TABLE>


                                       7
<PAGE>   33
                       REAL ESTATE ASSOCIATES LIMITED II
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997



2.      INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
<TABLE>
<CAPTION>
                            Statements of Operations

                                              1997        1996        1995
                                            -------     -------     -------
                                                     (in thousands)
<S>                                         <C>         <C>         <C>    
Total revenue                               $23,111     $22,979     $22,855
                                            =======     =======     =======

Interest expense                            $ 6,509     $ 7,339     $ 6,660
                                            =======     =======     =======

Depreciation                                $ 3,174     $ 3,292     $ 3,215
                                            =======     =======     =======

Total expenses                              $22,627     $21,946     $22,085
                                            =======     =======     =======

Net income                                  $   483     $ 1,032     $   770
                                            =======     =======     =======

Net income allocable to the Partnership     $   398     $   902     $   631
                                            =======     =======     =======
</TABLE>

        An affiliate of NAPICO is the general partner in three of the limited
        partnerships included above, and another affiliate receives property
        management fees of approximately 5% of their revenue. The affiliate
        received property management fees of $310,109, $309,874 and $311,822 in
        1997, 1996 and 1995, respectively. The following sets forth the
        significant data for these partnerships, reflected in the accompanying
        financial statements using the equity method of accounting:
<TABLE>
<CAPTION>

                                    1997         1996          1995
                                 --------      --------      --------
                                       (in thousands)
<S>                              <C>           <C>           <C>
Total assets                     $ 11,304      $ 11,829
                                 ========      ========

Total liabilities                $ 16,913      $ 17,118
                                 ========      ========

Deficiency of Real Estate
  Associates Limited II          $ (3,587)     $ (3,437)
                                 ========      ========

Deficiency of other partners     $ (2,023)     $ (1,852)
                                 ========      ========

Total revenue                    $  5,157      $  5,125      $  5,174
                                 ========      ========      ========

Net income                       $     14      $    129      $    380
                                 ========      ========      ========
</TABLE>




                                       8
<PAGE>   34

                       REAL ESTATE ASSOCIATES LIMITED II
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997


2.      INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)

        Under recent adopted law and policy, HUD has determined not to renew HAP
        Contracts on a long term basis on the existing terms. In connection with
        renewals of the HAP Contracts under such new law and policy, the amount
        of rental assistance payments under renewed HAP Contracts will be based
        on market rentals instead of above market rentals, which was generally
        the case under existing HAP Contracts. As a result, existing HAP
        Contracts that are renewed in the future on projects insured by the FHA
        will not provide sufficient cash flow to permit owners of properties to
        meet the debt service requirements of these existing FHA-insured
        mortgages. In order to address the reduction in payments under HAP
        Contracts as a result of this new policy, the Multi-family Assisted
        Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was
        adopted in October 1997, provides for the restructuring of mortgage
        loans insured by the FHA with respect to properties subject to HAP
        Contracts that have been renewed under the new policy. The restructured
        loans will be held by the current lender or another lender. Under
        MAHRAA, an FHA-insured mortgage loan can be restructured to reduce the
        annual debt service on such loan. There can be no assurance that the
        Partnership will be permitted to restructure its mortgage indebtedness
        pursuant to the new HUD rules implementing MAHRAA or that the
        Partnership would choose to restructure such mortgage indebtedness if it
        were eligible to participate in the MAHRAA program. It should be noted
        that there are uncertainties as to the economic impact on the
        Partnership of the combination of the reduced payments under the HAP
        Contracts and the restructuring of the existing FHA-insured mortgage
        loans under MAHRAA. Accordingly, the General Partners are unable to
        predict with certainty their impact on the Partnership's future cash
        flow.

        As a result of the foregoing, the Partnership is undergoing an extensive
        review of disposition, refinancing or re-engineering alternatives for
        the properties in which the limited partnerships have invested and are
        subject to HUD mortgage and rental subsidy programs. The Partnership has
        incurred expenses in connection with this review by various third party
        professionals, including accounting, legal, valuation, structural and
        engineering costs, which amounted to $137,723 for the year ended
        December 31, 1997.

        A real estate investment trust ("REIT") organized by an affiliate of
        NAPICO has advised the Partnership that it intends to make a proposal to
        purchase from the Partnership certain of the limited partnership
        interests held for investment by the Partnership.

        The REIT proposes to purchase such limited partner interests for cash,
        which it plans to raise in connection with a private placement of its
        equity securities. The purchase is subject to, among other things, (i)
        consummation of such private placement by the REIT; (ii) the purchase of
        the general partner interests in the local limited partnerships by the
        REIT; (iii) the approval of HUD and certain state housing finance
        agencies; (iv) the consent of the limited partners to the sale of the
        local limited partnership interests held for investment by REAL II; and
        (v) the consummation of a minimum number of purchase transactions with
        other Casden affiliated partnerships. As of March 31, 1998, the REIT had
        completed buy-out negotiations with a majority of the general partners
        of the local limited partnerships.

        A proxy is contemplated to be sent to the limited partners setting
        forth the terms and conditions of the purchase of the limited partners'
        interests held for investment by the Partnership, together with certain
        amendments to the Partnership Agreement and other disclosures of
        various conflicts of interest in connection with the transaction.


                                       9
<PAGE>   35
                       REAL ESTATE ASSOCIATES LIMITED II
                       (a California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997



3.      FEES AND EXPENSES DUE TO GENERAL PARTNER

        Under the terms of the Restated Certificate and Agreement of Limited
        Partners, the Partnership is liable to NAPICO for an annual management
        fee equal to .4 percent of the original invested assets of the limited
        partnerships. Invested assets is defined as the costs of acquiring
        project interests, including the proportionate amount of the mortgage
        loans related to the Partnership's interest in the capital accounts of
        the respective partnerships.

        The Partnership reimburses NAPICO for certain expenses. The
        reimbursement to NAPICO was $35,194, $31,948 and $29,872 in 1997, 1996
        and 1995, respectively, and is included in operating expenses.

4.      CONTINGENCIES

        The corporate general partner of the Partnership is a plaintiff in
        various lawsuits and has also been named a defendant in other lawsuits
        arising from transactions in the ordinary course of business. In
        addition, the Partnership is involved in a lawsuit. In the opinion of
        management and the corporate general partner, the claims will not result
        in any material liability to the Partnership.


        The Partnership has assessed the potential impact of the Year 2000
        computer systems issue on its operations. The Partnership believes that
        no significant actions are required to be taken by the Partnership to
        address the issue and that the impact of the Year 2000 computer systems
        issue will not materially affect the Partnership's future operating
        results or financial condition.

5.      INCOME TAXES

        No provision has been made for income taxes in the accompanying
        financial statements since such taxes, if any, are the liability of the
        individual partners. The major differences in tax and financial
        reporting result from the use of different bases and depreciation
        methods for the properties held by the limited partnerships. Differences
        in tax and financial losses also arise as losses are not recognized for
        financial reporting purposes when the investment balance has been
        reduced to zero.



                                       10

<PAGE>   36

                       REAL ESTATE ASSOCIATES LIMITED II
                       (a California limited partnership)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1997



6.      FAIR VALUE OF FINANCIAL INSTRUMENTS

        Statement of Financial Accounting Standards No. 107, "Disclosure about
        Fair Value of Financial Instruments," requires disclosure of fair value
        information about financial instruments. The carrying amount of assets
        and liabilities reported on the balance sheets that require such
        disclosure approximates fair value due to their short-term maturity.

7.      FOURTH-QUARTER ADJUSTMENT

        The Partnership's policy is to record its equity in the income of
        limited partnerships on a quarterly basis, using estimated financial
        information furnished by the various local operating general partners.
        The equity in income of limited partnerships reflected in the
        accompanying annual financial statements is based primarily upon audited
        financial statements of the investee limited partnerships. The decrease
        of approximately $16,899, between the estimated nine-month equity in
        income and the actual 1997 year end equity in income has been recorded
        in the fourth quarter.




                                       11
<PAGE>   37
                                                                        SCHEDULE
                        REAL ESTATE ASSOCIATES LIMITED II
                       INVESTMENTS IN LIMITED PARTNERSHIPS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>

                                                                Year Ended December 31, 1997
                                       --------------------------------------------------------------------------
                                                                           Cash
                                         Balance                         Distri-         Equity         Balance
                                         January         Capital         butions           in           December
Limited Partnerships                     1, 1997       Contributions     Received        Income         31, 1997
-----------------------                -------------   -------------   -------------  -------------   -----------
<S>                                    <C>             <C>             <C>            <C>             <C>       
Azalea Court Apartments                $               $               $              $               $

Berger Apartments                           514,942                                       211,773         726,715

Biltmore                                                    52,000                        (52,000)

Branford Elderly Housing                    330,012                                        37,162         367,174

Castlewood Apartments

Cherrywood/Saturn Apartments

Clearfield Manor

Crystal Springs

East Farm Village

Grant Park/Ormewood Park

Lakeside Apartments

Landmark Towers

Magnolia State Apts 

New Haven Plaza                             129,795                       (132,640)         2,845

Pennbrook Apartments

Redfern Grove Apartments                    432,950                        (28,281)       128,771         533,440

Sugar River Mills

Valebrook                                 1,400,491                        (26,917)       492,348       1,865,922

Westward Ho Apartments

Willow Wick Apartments
                                         ----------     ----------      ----------    -----------      ----------

                                         $2,808,190     $   52,000      $ (187,838)   $   820,899      $3,493,251
                                         ==========     ==========      ==========    ===========      ==========
</TABLE>


<PAGE>   38




                                                                        SCHEDULE
                                                                     (CONTINUED)
                        REAL ESTATE ASSOCIATES LIMITED II
                       INVESTMENTS IN LIMITED PARTNERSHIPS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>

                                                                     Year Ended December 31, 1996
                                       ----------------------------------------------------------------------------
                                                                           Cash
                                         Balance                         Distri-         Equity         Balance
                                         January         Capital         butions           in           December
Limited Partnerships                     1, 1996       Contributions     Received        Income         31, 1996
-----------------------                -------------   -------------   -------------  -------------   -------------
<S>                                    <C>             <C>             <C>            <C>             <C>         
Azalea Court Apartments                $               $               $              $               $

Berger Apartments                           339,210                         (20,466)       196,198         514,942

Biltmore

Branford Elderly Housing                    292,932                                         37,080         330,012

Castlewood Apartments

Cherrywood/Saturn Apartments                                                (24,037)        24,037

Clearfield Manor

Crystal Springs

East Farm Village                                                           (57,226)        57,226

Grant Park/Ormewood Park

Lakeside Apartments

Landmark Towers

Magnolia State Apts.

New Haven Plaza                              89,625                        (177,092)       217,262         129,795

Pennbrook Apartments

Redfern Grove Apartments                    328,124                                        104,826         432,950

Sugar River Mills

Valebrook                                   909,282                         (26,917)       518,126       1,400,491

Westward Ho Apartments

Willow Wick Apartments
                                       ------------    -------------   ------------   ------------    ------------

                                       $  1,959,173    $          --   $   (305,738)  $  1,154,755    $  2,808,190
                                       ============    =============   ============   ============    ============
</TABLE>


<PAGE>   39
                                                                        SCHEDULE
                                                                     (CONTINUED)
                        REAL ESTATE ASSOCIATES LIMITED II
                       INVESTMENTS IN LIMITED PARTNERSHIPS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>

                                                        Year Ended December 31, 1995
                                  ---------------------------------------------------------------------------
                                                                     Cash
                                     Balance       Capital          Distri-         Equity          Balance
                                     January       Contri-          butions           In            December
Limited Partnerships                 1, 1995       butions         Received         Income          31, 1995
------------------------          -----------   ------------    -------------     -----------     -----------
<S>                               <C>           <C>             <C>               <C>             <C>  
Azalea Court Apartments           $             $               $                 $               $

Berger Apartments                    248,914                                          90,296          339,210

Biltmore

Branford Elderly Housing             271,292                                          21,640          292,932

Castlewood Apartments

Cherrywood/Saturn Apartments            -                            (46,063)         46,063

Clearfield Manor

Crystal Springs

East Farm Village

Grant Park/Ormewood Park

Lakeside Apartments

Landmark Towers

Magnolia State Apts.

New Haven Plaza                                                     (276,720)        366,345          89,625

Pennbrook Apartments

Redfern Grove Apartments             198,944                                         129,180         328,124

Sugar River Mills

Valebrook                            416,832                         (26,917)        519,367         909,282

Westward Ho Apartments

Willow Wick Apartments
                                  ----------    -----------     ------------      ----------      ----------

                                  $1,135,982    $       --      $   (349,700)     $1,172,891      $1,959,173
                                  ==========    ===========     ============      ==========      ==========
</TABLE>
<PAGE>   40




                        REAL ESTATE ASSOCIATES LIMITED II
               INVESTMENTS IN, EQUITY IN EARNINGS OF AND DIVIDENDS
                   RECEIVED FROM AFFILIATES AND OTHER PERSONS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


NOTES:      1.     Equity in losses represents the Partnership's allocable share
                   of the net loss from the limited partnerships for the year.
                   Equity in losses of the limited partnerships will be
                   recognized until the investment balance is reduced to zero or
                   a negative balance equal to further commitments by the
                   Partnership.

            2.     Cash distributions from the limited partnerships are treated
                   as a return on the investment and reduce the investment
                   balance until such time as the investment is reduced to zero
                   or a negative balance equal to further commitments by the
                   Partnership. Distributions subsequently received will be
                   recognized as income.




<PAGE>   41
<TABLE>
<CAPTION>
                                                                                                                        SCHEDULE III
                                                 REAL ESTATE ASSOCIATES LIMITED II
                                              REAL ESTATE AND ACCUMULATED DEPRECIATION
                                           OF PROPERTY HELD BY LOCAL LIMITED PARTNERSHIPS
                                                  IN WHICH REAL II HAS INVESTMENTS
                                                         DECEMBER 31, 1997
    
                                                                              BUILDINGS, FURNISHINGS
                                                                              & EQUIPMENT - INITIAL
                                                                               COST TO PARTNERSHIP
                             NUMBER           OUTSTANDING                       AND AMOUNT CARRIED              
                               OF              MORTGAGE                            AT CLOSE OF                          ACCUMULATED
                              UNITS              LOAN              LAND               PERIOD                TOTAL       DEPRECIATION
                              -----           -----------       ----------    ----------------------    ------------    ------------
<S>                          <C>             <C>                <C>           <C>                       <C>             <C>
Azalea Court Apts.                                                                
 Theodore, AL                    48           $ 1,002,135       $   62,500        $  1,274,152          $  1,336,652     $   755,158
                                                                           
Berger Apartments 
 New Haven, Connecticut         144             4,473,274         156,386            7,563,147             7,719,533       4,259,474

Branford Elderly Hsng.
 Branford, Connecticut           38             1,011,858          138,000           1,559,747             1,697,747         574,199

Castlewood Apartments
 Davenport, Iowa                 96             2,994,700          270,422           3,177,727             3,448,149       2,160,629

Cherrywood/Saturn Apartments
 Twin Falls/Idaho Falls, Idaho   78             3,214,194          146,186           2,484,235             2,630,421       1,772,460

Clearfield Manor
 Clearfield, KY                  40             1,102,448           50,000           1,271,490             1,321,490         826,944

Crystal Springs Apts.
 Crystal Springs, MS             28               626,571           35,835             770,153               805,988         547,826

East Farm Village
 East Haven, Connecticut        240             9,011,324          291,416          13,552,727            13,844,143       7,184,769

Grant Park/Ormewood Park
 Atlanta, Georgia               188             4,626,302          299,193           6,282,753             6,581,946       3,469,165

Lakeside Apartments 
 Mishawaka, IN                   48             1,700,000          115,366           1,555,835             1,671,201       1,517,067

Landmark Towers
 Nampa, Idaho                    40               940,822           38,700           1,536,595             1,575,295       1,303,731

Magnolia State Apts.  
 Gulfport, MS                    60             1,213,221           57,165           1,584,368             1,641,533         914,715

New Haven Plaza
 Far Rockaway, New York         344            10,392,024        1,250,000          12,597,416            13,847,416       8,444,800

Pennbrook Apartments
 Owasso, Michigan               108             2,920,669           64,256           3,376,911             3,441,167       1,893,358

Redfern Grove Apartments
 E. Providence, RI               72             1,696,138          238,522           2,710,136             2,948,658       1,722,012

Sugar River Mills
 Claremon, NH                   162             7,302,000           301,107          9,249,091             9,550,098       4,622,540

The Biltmore
 Dayton, Ohio                   231             9,680,157          754,973          11,327,420            12,082,393       4,650,574

Valebrook Assoc.
 Lawrence, Massachusetts        151             3,773,930           88,886           6,599,441             6,688,327       5,471,673

Westward Ho Apartments
 Phoenix, Arizona               290            12,105,467        1,040,000          14,931,435            15,971,435       8,105,789

Willow Wick Apts.
 Centre, AL                      24               430,601           21,675             622,317               643,922         458,595

                              -----           -----------       ----------        ------------          ------------     -----------
TOTAL                         2,430           $80,217,835       $5,420,488        $104,027,096          $109,447,584     $60,655,478
                              =====           ===========       ==========        ============          =============    ===========
</TABLE>
<PAGE>   42
                                                                    SCHEDULE III
                                                                     (Continued)


                        REAL ESTATE ASSOCIATES LIMITED II
              REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
                      HELD BY LOCAL LIMITED PARTNERSHIPS IN
                          WHICH REAL II HAS INVESTMENTS
                                DECEMBER 31, 1997


NOTES:    1.    Each local limited partnership has developed, owns and operates
                the housing project. Substantially all project costs, including
                construction period interest expense, were capitalized by the
                limited partnerships.

          2.    Depreciation is provided for by various methods over the
                estimated useful lives of the projects. The estimated composite
                useful lives of the buildings are generally from 25 to 40 years.

          3.    Investments in property and equipment:
<TABLE>
<CAPTION>

                                                    Buildings,
                                                   Furnishings
                                                       And
                                     Land           Equipment         Total
                                 ------------     ------------     ------------
<S>                              <C>              <C>              <C>         
Balance at January 1, 1995       $  5,288,309     $101,260,489     $106,548,798

Net additions during 1995              34,500          903,158          937,658
                                 ------------     ------------     ------------

Balance at December 31, 1995        5,322,809      102,163,647      107,486,456

Net additions during 1996              22,503          691,232          713,735
                                 ------------     ------------     ------------

Balance at December 31, 1996        5,345,312      102,854,879      108,200,191

Net additions during 1997              75,176        1,172,217        1,247,393
                                 ------------     ------------     ------------

Balance at December 31, 1997     $  5,420,488     $104,027,096     $109,447,584
                                 ============     ============     ============
</TABLE>

<PAGE>   43
                                                                    SCHEDULE III
                                                                     (Continued)


                        REAL ESTATE ASSOCIATES LIMITED II
              REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
                      HELD BY LOCAL LIMITED PARTNERSHIPS IN
                          WHICH REAL II HAS INVESTMENTS
                                DECEMBER 31, 1997
<TABLE>
<CAPTION>

                                  Buildings,
                                 Furnishings
                                     And
                                  Equipment
                                 -----------
Accumulated Depreciation:

<S>                              <C>        
Balance at January 1, 1995       $51,316,472

Net additions during 1995          3,080,419
                                 -----------

Balance at December 31, 1995      54,396,891

Net additions during 1996          3,199,147
                                 -----------

Balance at December 31, 1996      57,596,038

Net additions during 1997          3,059,440
                                 -----------

Balance at December 31, 1997     $60,655,478
                                 ===========
</TABLE>
<PAGE>   44



PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

REAL ESTATE ASSOCIATES LIMITED II (the "Partnership") has no directors or
executive officers of its own.

National Partnership Investment Corp. ("NAPICO" or "the Managing General
Partner") is a wholly-owned subsidiary of Casden Investment Corporation, an
affiliate of The Casden Company. The following biographical information is
presented for the directors and executive officers of NAPICO with principal
responsibility for the Partnership's affairs.

CHARLES H. BOXENBAUM, 68, Chairman of the Board of Directors and Chief Executive
Officer of NAPICO.

Mr. Boxenbaum has been associated with NAPICO since its inception. He has been
active in the real estate industry since 1960, and prior to joining NAPICO was a
real estate broker with the Beverly Hills firm of Carl Rhodes Company.

Mr. Boxenbaum has been a guest lecturer at national and state realty
conventions, certified properties exchanger's seminars, Los Angeles Town Hall,
National Association of Home Builders, International Council of Shopping
Centers, Society of Conventional Appraisers, California Real Estate Association,
National Institute of Real Estate Brokers, Appraisal Institute, various mortgage
banking seminars, and the North American Property Forum held in London, England.
In 1963, he was the winner of the Snyder Award, the highest annual award offered
by the National Association of Real Estate Boards for Best Exchange. He is one
of the founders and a past director of the First Los Angeles Bank, organized in
November 1974. Mr. Boxenbaum was a member of the Board of Directors of the
National Housing Council. Mr. Boxenbaum received his Bachelor of Arts degree
from the University of Chicago.

BRUCE E. NELSON, 46, President and a director of NAPICO.

Mr. Nelson joined NAPICO in 1980 and became President in February 1989. He is
responsible for the operations of all NAPICO sponsored limited partnerships.
Prior to that he was primarily responsible for the securities aspects of the
publicly offered real estate investment programs. Mr. Nelson is also involved in
the identification, analysis, and negotiation of real estate investments.

From February 1979 to October 1980, Mr. Nelson held the position of Associate
General Counsel at Western Consulting Group, Inc., private residential and
commercial real estate syndicators. Prior to that time, Mr. Nelson was engaged
in the private practice of law in Los Angeles. Mr. Nelson received his Bachelor
of Arts degree from the University of Wisconsin and is a graduate of the
University of Colorado School of Law. He is a member of the State Bar of
California and is a licensed real estate broker in California and Texas.

ALAN I. CASDEN, 52, Chairman of The Casden Company, an affiliate of Casden
Properties (formerly CoastFed Properties), a director and member of the audit
committee of NAPICO, and chairman of the Executive Committee of NAPICO.

Mr. Casden is Chairman of the Board, Chief Executive Officer and sole
shareholder of The Casden Company and Casden Investment Company. Prior to that,
he was the president and chairman of Mayer Group, Inc., which he joined in 1975.
He is also chairman of Mayer Management, Inc., a real estate management firm.
Mr. Casden has been involved in approximately $3 billion of real estate
financings and sales and has been responsible for the development and
construction of more than 12,000 apartment units and 5,000 single-family homes
and condominiums.


<PAGE>   45



Mr. Casden is a member of the American Institute of Certified Public Accountants
and of the California Society of Certified Public Accountants. Mr. Casden is a
member of the advisory board of the National Multi-Family Housing Conference,
the Multi-Family Housing Council, and the President's Council of the California
Building Industry Association. He also serves on the advisory board to the
School of Accounting of the University of Southern California. He holds a
Bachelor of Science degree and a Masters in Business Administration degree from
the University of Southern California.

HENRY C. CASDEN, 54, President, Chief Operating Officer and Secretary of The
Casden Company and a director and secretary of NAPICO.

Mr. Casden has been President and Chief Operating Officer of The Casden Company,
as well as a director of NAPICO since February 1988. He became secretary of both
companies in late 1994. From 1982 to 1988, Mr. Casden was of counsel and a
partner in the Los Angeles law firm of Troy, Casden & Gould. From 1978 to 1981,
he was of counsel and a partner in the Los Angeles law firm of Loeb & Loeb. From
1972 to 1978, Mr. Casden was a member of the Beverly Hills law firm of Fink &
Casden, Professional Corporation.

Mr. Casden received his Bachelor of Arts degree from the University of
California at Los Angeles, and is a graduate of the University of San Diego Law
School. Mr. Casden is a member of the State Bar of California and has numerous
professional affiliations.

BOB SCHAFER, 56, Senior Vice President and Corporate Controller.

Mr. Schafer joined NAPICO in 1984 and is the Corporate Controller responsible
for the financial reporting function of the Company. Prior to this, he was a
Group and Division Controller at Bergen Brunswig for over eight years,
Controller at a Flintkote subsidiary for over four years, and Assistant
Controller at an electronics subsidiary of General Electric for two years. Mr.
Schafer is a member of the California Society of Certified Public Accountants.
He holds a Bachelor of Science degree in accounting from Woodbury University,
Los Angeles.

PATRICIA W. TOY, 68, Senior Vice President - Communications and Assistant
Secretary

Mrs. Toy joined NAPICO in 1977, following her receipt of an MBA from the
Graduate School of Management, UCLA. From 1952 to 1956, Mrs. Toy served as a
U.S. Naval Officer in communications and personnel assignments. She holds a
Bachelor of Arts Degree from the University of Nebraska.

MARK L. WALTHER, 37, Executive Vice President, General Counsel and Assistant
Secretary.

Mr. Walther joined NAPICO in 1987 and is responsible for the legal affairs of
the NAPICO sponsored limited partnerships. Prior to joining NAPICO, Mr. Walther
worked in the San Francisco law firm of Browne and Kahn which specialized in
construction litigation. Mr. Walther received his Bachelor of Arts Degree in
Political Science from the University of California, Santa Barbara and is a
graduate of the University of California, Davis, School of Law. He is a member
of the State Bar of Hawaii.

NAPICO and several of its officers, directors and affiliates, including Charles
H. Boxenbaum, Bruce E. Nelson and Alan I. Casden, consented to the entry, on
June 25, 1997, of an administrative cease and desist order by the U.S.
Securities and Exchange Commission (the "Commission"), without admitting or
denying any of the findings made by the Commission. The Commission found that
NAPICO and others had violated certain federal securities laws in connection
with transactions unrelated to the Partnership. The Commission's order did not
impose any cost, burden or penalty on any partnership managed by NAPICO and
does not impact NAPICO's ability to serve as the Partnership's Managing General
Partner.


<PAGE>   46



ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS:

Real Estate Associates Limited II has no officers, employees, or directors.
However, under the terms of the Restated Certificate and Agreement of Limited
Partnership, the Partnership is obligated to pay the Corporate General Partner
an annual management fee. The annual management fee is approximately equal to .4
percent of the invested assets, including the Partnership's allocable share of
the mortgages related to real estate properties held by local limited
partnerships. The fee is earned beginning in the month the Partnership makes its
initial contribution to the limited partnership. In addition, the Partnership
reimburses the Corporate General Partner for certain expenses.

An affiliate of the Corporate General Partner is responsible for the on-site
property management for certain properties owned by the limited partnerships in
which the Partnership has invested.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

(a)      Security Ownership of Certain Beneficial Owners

         The general partners own all of the outstanding general partnership
         interests of REAL II; no person is known to own beneficially in excess
         of 5% of the outstanding Limited Partnership Interests.

(b)      At December 31, 1997, security ownership of management is as listed:
<TABLE>
<CAPTION>

                                                                                 Percentage of
                                                                                  Outstanding
                                                            Amount and              Limited
                                  Name of                    Nature of            Partnership
Title of Class                     Owner                 Beneficial Owner          Interests
--------------                     -----                 ----------------          ---------
<S>                        <C>                           <C>                     <C>
Limited                    Charles H. Boxenbaum              $ 30,000                  *
Partnership                780 Latimer Road
Interest                   Santa Monica, CA 90402

Initial
Limited                    Patricia W. Toy                      4,550                  *
Partnership                1782 Westridge Road
Interest                   Los Angeles, CA 90049
</TABLE>

* Cumulative Limited Partnership Interest owned by corporate officers is less
  than 1% of outstanding Limited Partnership Interests.



<PAGE>   47

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

The Partnership has no officers, directors or employees of its own. All of its
affairs are managed by the Corporate General Partner, National Partnership
Investments Corp. The Partnership is obligated to NAPICO for an annual
management fee equal to .4 percent of the original invested assets of the
limited partnerships. Invested assets is defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage loans
related to the Partnership's interest in the capital accounts of the respective
partnerships. The management fee was $397,680 for each of the three years in the
period ended December 31, 1997.

The Partnership reimburses NAPICO for certain expenses. The reimbursement to
NAPICO was $35,194, $31,948 and $29,892 in 1997, 1996 and 1995, respectively,
and is included in operating expenses.

An affiliate of NAPICO is the general partner in three of the limited
partnerships in which the Partnership has an investment, and another affiliate
receives property management fees of approximately 5 percent of their revenue.
The affiliate received property management fees of $310,109, $309,874 and
$311,822 in 1997, 1996 and 1995, respectively.

A real estate investment trust ("REIT") organized by an affiliate of NAPICO 
has advised the Partnership that it intends to make a proposal to purchase 
from the Partnership certain of the limited partnership interests held for
investment by the Partnership.

The REIT proposes to purchase such limited partner interests for cash, which it
plans to raise in connection with a private placement of its equity securities.
The purchase is subject to, among other things, (i) consummation of such private
placement by the REIT; (ii) the purchase of the general partner interests in
the local limited partnerships by the REIT; (iii) the approval of HUD and
certain state housing finance agencies; (iv) the consent of the limited
partners to the sale of the local limited partnership interests held for
investment by REAL II; and (v) the consummation of a minimum number of purchase
transactions with other Casden affiliated partnerships. As of March 31, 1998,
the REIT had completed buy-out negotiations with a majority of the general
partners of the local limited partnerships.

A proxy is contemplated to be sent to the limited partners setting forth the
terms and conditions of the purchase of the limited partners' interests held
for investment by the Partnership, together with certain amendments to the
Partnership Agreement and other disclosures of various conflicts of interest in
connection with the transaction.


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

FINANCIAL STATEMENTS

Reports of Independent Public Accountants.

Balance Sheets as of December 31, 1997 and 1996.

Statements of Operations for the years ended December 31, 1997, 1996 and 1995.

Statements of Partners' Equity (Deficiency) for the years ended December 31,
1997, 1996 and 1995.

Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.

Notes to Financial Statements.

FINANCIAL STATEMENT SCHEDULES
APPLICABLE TO REAL ESTATE ASSOCIATES LIMITED II AND TO THE LIMITED PARTNERSHIPS
IN WHICH REAL ESTATE ASSOCIATES LIMITED II HAS INVESTMENTS:

Schedule - Investments in Limited Partnerships, December 31, 1997, 1996 and
1995.

Schedule III - Real Estate and Accumulated Depreciation, December 31, 1997.

The remaining schedules are omitted because the required information is included
in the financial statements and notes thereto, or they are not applicable or not
required.
<PAGE>   48

EXHIBITS
--------

(3)     Articles of incorporation and bylaws: The registrant is not
        incorporated. The Partnership Agreement was filed with Form S-11 #266171
        incorportated herein by reference.

(10)    Material contracts: The registrant is not party to any material
        contracts, other than the Restated Certificate and Agreement of Limited
        Partnership dated December 4, 1979, and the twenty-one contracts
        representing the Partnership investment in Local Limited Partnerships as
        previously filed at the Securities and Exchange Commission, File
        #266171, which is hereby incorporated by reference.

REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the year ended December 31, 1997.



<PAGE>   49



                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California.


REAL ESTATE ASSOCIATES LIMITED II

By:       NATIONAL PARTNERSHIP INVESTMENTS CORP.
          General Partner


/s/ CHARLES H. BOXENBAUM
--------------------------------------
Charles H. Boxenbaum
Chairman of the Board of Directors
and Chief Executive Officer



/s/ BRUCE E. NELSON
--------------------------------------
Bruce E. Nelson
Director and President



/s/ ALAN I. CASDEN
--------------------------------------
Alan I. Casden
Director



/s/ HENRY C. CASDEN
--------------------------------------
Henry C. Casden
Director


/s/ BOB E. SCHAFER
--------------------------------------
Bob E. Schafer
Senior Vice President of Finance