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

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                         COMMISSION FILE NUMBER 0-14458



                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
             (Exact name of registrant as specified in its charter)



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



                       9200 KEYSTONE CROSSING, SUITE 500
                        INDIANAPOLIS, INDIANA 46240-7602
                    (Address of principal executive offices)
                                   (Zip Code)


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

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                         if changed since last report.)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes   X         No
    -----          -----
<PAGE>   2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                        STATEMENTS OF FINANCIAL POSITION


<TABLE>
<CAPTION>
                                                                                            September 30,
                                                                                                1998                December 31,
                                                                                             (Unaudited)                1997
                                                                                            -------------           -------------

                                      ASSETS
                                      ------
<S>                                                                                        <C>                      <C>
Cash and cash equivalents                                                                     $     8,343            $     23,409
Investments in and advances to Local Limited Partnerships (Note 2)                              4,364,252               4,193,204
                                                                                               ----------             -----------

                                                                                              $ 4,372,595            $  4,216,613
                                                                                               ==========             ===========

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

Liabilities:

   Deferred acquisition notes payable to General Partner                                      $ 2,414,468            $  2,414,468
   Accrued interest on deferred acquisition notes payable to
     General Partner                                                                            3,240,520               3,059,435
   Administrative and reporting fee payable to General Partner (Note 3)                         1,177,767               1,074,831
   Due to General Partner (Note 3)                                                                 33,650                   -
   Accrued interest on partner loans (Note 3)                                                         771                   -
   Other accrued expenses                                                                          70,913                  40,745
                                                                                               ----------             -----------

                                                                                                6,938,089               6,589,479
                                                                                               ----------             -----------

Partners' deficit:
   General Partner -- The National Housing Partnership (NHP)                                     (180,744)               (178,818)
   Original Limited Partner -- 1133 Fifteenth Street Two Associates                              (185,644)               (183,718)
   Other Limited Partners -- 18,300 investment units                                           (2,199,106)             (2,010,330)
                                                                                               ----------             -----------

                                                                                               (2,565,494)             (2,372,866)
                                                                                               ----------             -----------

                                                                                              $ 4,372,595            $  4,216,613
                                                                                               ==========             ===========
</TABLE>





                       See notes to financial statements.

                                      -1-
<PAGE>   3
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                            STATEMENTS OF OPERATIONS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                             Three Months Ended          Nine Months Ended
                                                               September 30,               September 30,
                                                            -----------------------      --------------------
                                                              1998          1997           1998        1997
                                                            ---------     ---------      --------    --------
<S>                                                        <C>           <C>            <C>         <C>
REVENUES:
   Share of profits from Local Limited
    Partnerships (Note 2)                                  $   63,840    $    4,826     $ 161,450   $  66,277
   Distributions and repayments received in excess
    of investment in Local Limited Partnerships                   -             -             -       103,994
   Interest income                                                220           426           540       1,199
                                                            ---------     ---------      --------    --------

                                                               64,060         5,252       161,990     171,470
                                                            ---------     ---------      --------    --------

COSTS AND EXPENSES:
   Administrative and reporting fees to
    General Partner (Note 3)                                   34,312        34,312       102,936     102,936
   Interest on deferred acquisition notes
    to General Partner                                         60,362        60,362       181,085     181,085
   Interest on partner loans (Note 3)                             771           -             771         -
   Other operating expenses                                    67,600        13,219        95,945      41,104
                                                            ---------     ---------      --------    --------

                                                              163,045       107,893       380,737     325,125
                                                            ---------     ---------      --------    --------

LOSS BEFORE EXTRAORDINARY ITEM                                (98,985)     (102,641)     (218,747)   (153,655)

EXTRAORDINARY ITEM - SHARE FROM
    LOCAL LIMITED PARTNERSHIP OF
    GAIN ON EXTINGUISHMENT OF DEBT                             26,119           -          26,119         -
                                                            ---------     ---------      --------    --------

NET LOSS                                                   $  (72,866)   $ (102,641)    $(192,628)  $(153,655)
                                                            =========     =========      ========    ========

LOSS BEFORE EXTRAORDINARY ITEM
  ASSIGNABLE TO LIMITED PARTNERS                           $  (97,006)   $ (100,587)    $(214,372)  $(150,581)

EXTRAORDINARY ITEM - GAIN FROM LOCAL
  LIMITED PARTNERSHIP ON EXTINGUISHMENT
  OF DEBT ASSIGNABLE TO LIMITED PARTNERS                       25,596           -          25,596         -
                                                            ---------     ---------      --------    --------

NET LOSS ASSIGNABLE TO OTHER LIMITED PARTNERS              $  (71,410)   $ (100,587)    $(188,776)  $(150,581)
                                                            =========      ========      ========    ========

LOSS BEFORE EXTRAORDINARY ITEM PER
  OTHER LIMITED PARTNERSHIP INTEREST                       $       (5)   $       (5)    $     (11)  $      (8)

EXTRAORDINARY ITEM - GAIN FROM LOCAL
  LIMITED PARTNERSHIP ON EXTINGUISHMENT OF
  DEBT PER OTHER LIMITED PARTNERSHIP INTEREST                       1           -               1         -
                                                            ---------     ---------      --------    --------

NET LOSS PER OTHER LIMITED PARTNERSHIP INTEREST            $       (4)   $       (5)    $     (10)  $      (8)
                                                            =========     =========      ========    ========
</TABLE>





                       See notes to financial statements.

                                      -2-
<PAGE>   4


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         STATEMENT OF PARTNERS' DEFICIT
                     NINE MONTHS ENDED SEPTEMBER 30, 1998
                                  (UNAUDITED)



<TABLE>
<CAPTION>
                                         The National         1133
                                           Housing         Fifteenth          Other
                                         Partnership       Street Two        Limited
                                            (NHP)          Associates        Partners          Total
                                         -----------       ----------        --------          -----
<S>                                       <C>              <C>            <C>              <C>
Deficit at January 1, 1998                $(178,818)       $(183,718)     $(2,010,330)     $(2,372,866)

Net loss -- nine months ended
  September 30, 1998                         (1,926)          (1,926)        (188,776)        (192,628)
                                           --------         --------       ----------       ----------

Deficit at September 30, 1998             $(180,744)       $(185,644)     $(2,199,106)     $(2,565,494)
                                           ========         ========       ==========       ==========

Percentage interest at
 September 30, 1998                               1%               1%              98%             100%
                                           ========         ========       ==========       ==========
                                                (A)              (B)              (C)
</TABLE>

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





                       See notes to financial statements.

                                      -3-
<PAGE>   5
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Nine Months Ended September 30,
                                                                    ---------------------------------
                                                                       1998                    1997
                                                                    ----------               --------
<S>                                                                <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Distributions from Local Limited Partnerships                    $   16,521              $  20,974
   Distribution received in excess of investment in
     Local Limited Partnerships                                            -                  103,794
   Payment of administrative and reporting fees to
     General Partner                                                       -                  (81,220)
   Interest received                                                       540                  1,199
   Operating expenses paid                                             (65,777)               (52,049)
                                                                     ---------               --------

   Net cash used in operating activities                               (48,716)                (7,302)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Repayment of advances from Local Limited Partnerships                   -                      200
                                                                     ---------               --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Advances from General Partner                                        33,650                    -
                                                                     ---------               --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                              (15,066)                (7,102)

CASH AND CASH EQUIVALENTS, BEGINNING OF
  PERIOD                                                                23,409                 37,396
                                                                     ---------               --------

CASH AND CASH EQUIVALENTS, END OF PERIOD                            $    8,343              $  30,294
                                                                     =========               ========

RECONCILIATION OF NET LOSS TO NET CASH
  USED IN OPERATING ACTIVITIES:
    Net loss                                                        $ (192,628)             $(153,655)
                                                                     ---------               --------
    Adjustments to reconcile net loss to net cash used in
      operating activities:
         Repayment of advance from Local Limited Partnerships              -                     (200)
         Distributions from Local Limited Partnerships                  16,521                 20,974
         Share of profits from Local Limited Partnerships             (161,450)               (66,277)
         Share of gain on extinguishment of debt                       (26,119)                   -
         Increase in accrued interest on deferred
           acquisition notes                                           181,085                181,085
         Increase in administrative and reporting fees payable         102,936                 21,716
         Increase in accrued interest on partner loans                     771                    -
         Increase (decrease) in accrued expenses                        30,168                (10,945)
                                                                     ---------               --------
         Total adjustments                                             143,912                146,353
                                                                     ---------               --------

   Net cash used in operating activities                            $  (48,716)             $  (7,302)
                                                                     =========               ========
</TABLE>


                       See notes to financial statements.

                                      -4-
<PAGE>   6
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         NOTES TO FINANCIAL STATEMENTS




(1)      ACCOUNTING POLICIES

         ORGANIZATION

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

         The General Partner raised capital for the Partnership by offering and
         selling to additional limited partners 18,300 investment units. The
         Partnership acquired limited partnership interests of 94.5% (98% with
         respect to allocation of losses) in twenty-one Local Limited
         Partnerships, nineteen of which were organized to acquire and operate
         an existing rental housing project. The remaining two Local Limited
         Partnerships were formed to construct and operate rental housing
         projects.

         On June 3, 1997, Apartment Investment and Management Company, a
         Maryland corporation ("AIMCO" and, together with its subsidiaries and
         other controlled entities, the "AIMCO Group"), acquired all of the
         issued and outstanding capital stock of NHP Partners, Inc., a Delaware
         corporation ("NHP Partners"), and the AIMCO Group acquired all of the
         outstanding interests in NHP Partners Two Limited Partnership, a
         Delaware limited partnership ("NHP Partners Two"). The Acquisition was
         made pursuant to a Real Estate Acquisition Agreement, dated as of May
         22, 1997 (the "Agreement"), by and among AIMCO, AIMCO Properties,
         L.P., a Delaware limited partnership (the "Operating Partnership"),
         Demeter Holdings Corporation, a Massachusetts corporation ("Demeter"),
         Phemus Corporation, a Massachusetts corporation ("Phemus"), Capricorn
         Investors, L.P., a Delaware limited partnership ("Capricorn"), J.
         Roderick Heller, III and NHP Partners Two LLC, a Delaware limited
         liability company ("NHP Partners Two LLC"). NHP Partners owns all of
         the outstanding capital stock of the National Corporation for Housing
         Partnerships, a District of Columbia corporation ("NCHP"), which is
         the general partner of The National Housing Partnership, a District of
         Columbia limited partnership ("NHP"). Together, NCHP and NHP Partners
         Two own all of the outstanding partnership interests in NHP. NHP is
         the general partner of National Housing Partnership Realty Fund Two (a
         Maryland Limited Partnership) (the "Registrant"). As a result of these
         transactions, the AIMCO Group has acquired control of the general
         partner of the Registrant and, therefore, may be deemed to have
         acquired control of the Registrant.

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

         BASIS OF PRESENTATION

         The accompanying unaudited interim financial statements reflect all
         adjustments which are, in the opinion of management, necessary to a
         fair statement of the financial condition and results of operations
         for the interim periods presented. All such adjustments are of a
         normal and recurring nature.

         While the General Partner believes that the disclosures presented are
         adequate to make the information not misleading, it is suggested that
         these financial statements be read in conjunction with the financial
         statements and notes included in NHP Realty Fund Two's Annual Report
         filed in Form 10-K for the year ended December 31, 1997.





                                      -5-
<PAGE>   7
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         NOTES TO FINANCIAL STATEMENTS




(2)      INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS

         At December 31, 1997, the Partnership owned a 94.5% limited
         partnership interest (98% with respect to allocation of losses) in
         twenty-one Local Limited Partnerships. Because the Partnership, as a
         limited partner, does not exercise control over the activities of the
         Local Limited Partnerships in accordance with the partnership
         agreements, the investments in Local Limited Partnerships are
         accounted for using the equity method. Thus, the investments (and the
         advances made to the Local Limited Partnerships as discussed below)
         are carried at cost plus the Partnership's share of the Local Limited
         Partnerships' profits less the Partnership's share of the Local
         Limited Partnerships' losses and distributions. However, because the
         Partnership is not legally liable for the obligations of the Local
         Limited Partnerships, and is not otherwise committed to provide
         additional support to them, it does not recognize losses once its
         investments, reduced for its share of losses and cash distributions,
         reaches zero in each of the individual Local Limited Partnerships. As
         of December 31, 1997, investments in nineteen of the twenty-one Local
         Limited Partnerships had been reduced to zero. On January 5, 1998, due
         to a default and pursuant to the security agreement of the deferred
         acquisition note on Menlo Limited Partnership, the Partnership lost
         its interest in Menlo Limited Partnership. In addition, on June 29,
         1998, due to a default and pursuant to the security agreements of the
         deferred acquisition notes on Gulfway Limited Partnership and Rockwell
         Limited Partnership, the Partnership lost its interest in Gulfway and
         Rockwell Limited Partnerships. Total losses not taken from Menlo
         Limited Partnership were $1,835,050 at December 31, 1997, and losses
         not taken from Gulfway and Rockwell Limited Partnerships were
         $1,947,780 and $1,325,162, respectively, at June 29, 1998. During the
         nine months ended September 30, 1998, the property owned by  Tinker
         Creek Limited Partnership was sold. As a result, the Partnership
         recognized an extraordinary gain of $26,119 on the extinguishment of
         debt related to the sale, after recognizing previously unrecognized
         losses of $1,100,062.  Accordingly, as of September 30, 1998, the
         Partnership now owns a 94.5% limited partnership interest in seventeen
         Local Limited Partnerships. During the nine months ended September 30,
         1998, Harold House Limited Partnership recorded sufficient profits to
         fully recover the $19,281 of unrecognized losses at December 31, 1997
         and therefore the Partnership has recognized $78,522 of its share of
         the profits of Harold House Limited Partnership for the nine months
         ended September 30, 1998. As a result, the Partnership did not
         recognize $1,298,387 and $1,203,616 of losses from these sixteen and
         nineteen Local Limited Partnerships, respectively, during the nine
         months ended September 30, 1998 and 1997, respectively, and $19,281 of
         its share of profits of one Local Limited Partnership for the nine
         months ended September 30, 1998. As of September 30, 1998 and December
         31, 1997, the Partnership has not recognized a total of $21,721,896
         and $26,650,844, respectively, of its allocated share of cumulative
         losses from the fifteen and nineteen Local Limited Partnerships,
         respectively, in which its investment is zero.

         Advances made by the Partnership to the individual Local Limited
         Partnerships are considered part of the Partnership's investment in
         Local Limited Partnerships. When advances are made to a Local Limited
         Partnership for which the Partnership carries its investment at zero,
         they are charged to operations as a loss on investment in the Local
         Limited Partnership using previously unrecognized cumulative losses.
         As discussed above, due to the cumulative losses incurred by eighteen
         and nineteen of the Local Limited Partnerships, the aggregate balance
         of investments in and advances to Local Limited Partnerships, for
         these eighteen and nineteen Local Limited Partnerships, has been
         reduced to zero at September 30, 1998 and December 31, 1997,
         respectively. To the extent these advances are repaid by the Local
         Limited Partnerships in the future, the repayments will be credited as
         distributions and repayments received in excess of investment in Local
         Limited Partnerships. These advances are carried as a payable to the
         Partnership by the Local Limited Partnerships.

         No working capital advances or repayments were made between the
         Partnership and the Local Limited Partnerships during the nine months
         ended September 30, 1998 and 1997. The combined amount carried as due
         to the Partnership by the Local Limited Partnerships was $592,727 at
         September 30, 1998.





                                      -6-
<PAGE>   8
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         NOTES TO FINANCIAL STATEMENTS





         The following are combined statements of operations for the three and
         nine months ended September 30, 1998 and 1997, respectively, of the
         Local Limited Partnerships in which the Partnership has invested. The
         statements are compiled from financial statements of the Local Limited
         Partnerships, prepared on the accrual basis of accounting, as supplied
         by the management agents of the projects, and are unaudited.


                       COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                               Three Months Ended             Nine Months Ended
                                                 September 30,                    September 30,
                                        -----------------------------   --------------------------------
                                            1998             1997             1998             1997
                                        -------------- --------------   ---------------- ---------------
<S>                                     <C>              <C>            <C>                <C>
Rental income                            $2,953,591       $3,625,549     $  9,877,908       $10,898,488
Other income                                105,354          213,925          340,942           461,873
                                          ---------        ---------      -----------        ----------

   Total income                           3,058,945        3,839,474       10,218,850        11,360,361
                                          ---------        ---------       ----------        ----------

Operating expenses                        2,107,752        2,534,861        6,834,820         7,394,228
Interest, taxes and insurance               858,873        1,181,808        2,996,334         3,340,542
Depreciation                                479,843          562,617        1,598,565         1,780,007
Loss on disposal of rental property         341,658              -            341,658               -
                                          ---------        ---------       ----------        ----------

   Total expenses                         3,788,126        4,279,286       11,771,377        12,514,777
                                          ---------        ---------       ----------        ----------

Loss before extraordinary item             (729,181)        (439,812)      (1,552,527)       (1,154,416)

Extraordinary Item - Gain on
   extinguishment of debt                 1,623,199              -          1,623,199               -
                                          ---------        ---------       ----------        ----------

Net profit (loss)                        $  894,018       $ (439,812)     $    70,672       $(1,154,416)
                                          =========        =========       ==========        ==========

National Housing Partnership Realty
  Fund Two share of profits (losses)     $  831,622       $ (434,606)     $    20,412       $(1,137,339)
                                          =========        =========       ==========        ==========
</TABLE>


(3)      TRANSACTIONS WITH THE GENERAL PARTNER

         During the nine month periods ended September 30, 1998 and 1997, the
         Partnership accrued administrative and reporting fees payable to the
         General Partner in the amount of $102,936 for services provided to the
         Partnership. The Partnership did not make any payments to the General
         Partner for these fees during the nine months ended September 30,
         1998, while the Partnership paid the General Partner $81,220 during
         the nine months ended September 30, 1997. The amount of fees due to
         the General Partner by the Partnership was $1,177,767 and $1,074,831
         at September 30, 1998 and December 31, 1997, respectively.

         During the nine months ended September 30, 1998, the General Partner
         advanced the Partnership $33,650 for working capital to pay legal fees
         related to the civil action taken by the deferred acquisition note
         holders of Rodeo





                                      -7-
<PAGE>   9
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         NOTES TO FINANCIAL STATEMENTS




         Drive Limited Partnership. No working capital advances were made
         during the nine months ended September 30, 1997. No repayments were
         made to the General Partner by the Partnership during the nine months
         ended September 30, 1998 and 1997.  The amount owed to the General
         Partner at September 30, 1998 was $33,650. There were no amounts owed
         to the General Partner at December 31, 1997. Interest is charged on
         borrowings at the Chase Manhattan Bank rate of prime plus 2%. Chase
         Manhattan Bank prime was 8.5% at September 30, 1998. Accrued interest
         on this loan amounted to $771 and zero at September 30, 1998 and
         December 31, 1997, respectively. There can be no assurance that the
         General Partner will continue to advance such funds to the
         Partnership.

         The advances and accrued administrative and reporting fees payable to
         the General Partner will be paid only as cash flow permits or from the
         sale or refinancing of one or more of the underlying properties of the
         Local Limited Partnerships.

(4)      DISPOSAL OF RENTAL PROPERTY

         Tinker Creek Limited Partnership had a deferred acquisition note
         payable due on June 30, 1998. During February 1998, Tinker Creek
         Limited Partnership entered into a sales agreement with Artcraft
         Investment, L.C. for the sale of Tinker Creek Apartments. The closing
         occurred on July 2, 1998, with a purchase price of $1,785,000. Net
         proceeds of the difference between the $1,785,000 and the mortgage
         note payable, were divided between the holders of the Tinker Creek
         deferred acquisition note and Tinker Creek Limited Partnership, with
         the note holders receiving 80% of the net proceeds in full
         satisfaction of amounts due on their notes. Any unpaid balances were
         forgiven. Tinker Creek Limited Partnership received the remaining 20%
         of the net proceeds. The Partnership's share of the gain from the
         sale, in excess of cumulative losses not taken, in the amount of
         $26,119 has been recorded in the accompanying statements of operations
         for the three and nine months ended September 30, 1998, as an
         extraordinary item - gain on extinguishment of debt. At September 30,
         1998, the Partnership's investment in the Tinker Creek Limited
         Partnership was $26,119. The sale may generate taxable income to the
         Partnership's investors. The specific impact of the tax consequences
         is dependent upon each specific partner's individual tax situation.





                                      -8-
<PAGE>   10



ITEM 2 -     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report and other Partnership filings (collectively "SEC
Filings") under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC Filings) contains or may contain
information that is forward-looking, including statements regarding the effect
of government regulations. Actual results may differ materially from those
described in the forward-looking statements and will be affected by a variety
of factors including national and local economic conditions, the general level
of interest rates, terms of governmental regulations that affect the
Partnership and interpretations of those regulations, the competitive
environment in which the properties owned by the Local Limited Partnerships
operate, the availability of working capital and dispositions of properties
owned by the Partnership.

YEAR 2000 COMPLIANCE

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

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

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

Status of Progress in Becoming Year 2000 Compliant

The Managing Agent's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation.  To date, the
Managing Agent has fully completed its assessment of all information systems
that could be significantly affected by the Year 2000, and has begun the
remediation, testing and implementation phase on both hardware and software
systems.  Assessments are continuing in regards to embedded systems in
operating equipment.  The Managing Agent anticipates having all phases complete
by June 1, 1999.

In addition to the areas the Partnership is relying on the Managing Agent to
verify compliance with,  the Partnership has certain operating equipment,
primarily at the property sites,  which needed to be evaluated for Year 2000
compliance.  The focus of the General Partner was to the security systems,
elevators, heating-ventilation-air-conditioning systems, telephone systems and
switches, and sprinkler systems. The General Partner is currently engaged in
the identification of all non-compliant operational systems, and is in the
process of estimating the costs associated with any potential modifications or
replacements needed to such systems in order for them to be Year 2000
compliant.  It is not expected that such costs would have a material adverse
affect upon the operations of the Partnership.





                                      -9-
<PAGE>   11
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS




Risk Associated with the Year 2000

The General Partner believes that the Managing Agent has an effective program
in place to resolve the Year 2000 issue in a timely manner and has appropriate
contingency plans in place for critical applications that could affect the
Partnership's operations.   To date, General Partner is not aware of any
external agent with a Year 2000 issue that would materially impact the
Partnership's results of operations, liquidity or capital resources.  However,
the General Partner has no means of ensuring that external agents will be Year
2000 compliant.  The  General Partner does not believe that the inability of
external agents to complete their Year 2000 resolution process in a timely
manner will have a material impact on the financial position or results of
operations of the Partnership.  However, the effect of non-compliance by
external agents is not readily determinable.


LIQUIDITY AND CAPITAL RESOURCES

The properties in which the Partnership has invested, through its investments
in the Local Limited Partnerships, receive one or more forms of assistance from
Federal, state or local governments or agencies. As a result, the Local Limited
Partnerships' ability to transfer funds either to the Partnership or among
themselves in the form of cash distributions, loans or advances is generally
restricted by these government-assistance programs. These restrictions may
impact the Partnership's ability to meet its cash obligations.

For the past several years, various proposals have been advanced by the United
States Department of Housing and Urban Development ("HUD"), Congress and others
proposing the restructuring of HUD's rental assistance programs under Section 8
of the United States Housing Act of 1937 ("Section 8"), under which 2,180
units, 82 percent of the total units owned by the properties in which the
Partnership has invested, receive rental subsidies. These subsidies are
generally provided pursuant to project-based Housing Assistance Payment
Contracts ("HAP Contracts") between HUD and the owners of the properties. On
October 27, 1997, the President signed into law the Multifamily Assisted
Housing Reform and Affordability Act of 1997 (the "1997 Housing Act"). Under
the 1997 Housing Act, the mortgage financing and HAP contracts of certain
properties assisted under Section 8, with rents above market levels and
financed with HUD-insured mortgage loans, will be restructured by adjusting
subsidized rents to market levels, thereby reducing subsidy levels, and
lowering required debt service costs as needed to ensure financial viability at
the reduced rents and subsidy levels. The 1997 Housing Act retains
project-based subsidies for most properties (properties in rental markets with
limited supply, properties serving the elderly, and certain other properties).

The 1997 Housing Act phases out project-based subsidies on selected properties
servicing families not located in rental markets with limited supply,
converting such subsidies to a tenant-based subsidy. Under a tenant-based
system, rent vouchers would be issued to qualified tenants who then could elect
to reside at properties of their choice, provided the tenant has the financial
ability to pay the difference between the selected property's monthly rent and
the value of the voucher, which would be established based on HUD's regulated
fair market rent for the relevant geographical areas. The 1997 Housing Act
provides that properties will begin the restructuring process in federal fiscal
year 1999 (beginning October 1, 1998), and that HUD will issue final
regulations implementing 1997 Housing Act on or before October 27, 1998.
Congress has elected to renew HAP Contracts expiring before October 1, 1998 for
one year terms, generally at existing rents, so long as the properties remain
in compliance with the HAP Contracts. While the Partnership does not expect the
provisions of the 1997 Housing Act to result in a significant number of tenants
relocating from properties owned by the Local Limited Partnerships, there can
be no assurance that the provisions will not significantly affect the
operations of the properties of the Local Limited Partnerships. Furthermore,
there can be no assurance that other changes


                                     -10-
<PAGE>   12
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS




in Federal housing subsidy policy will not occur. Any such changes could have
an adverse effect on the operation of the Partnership.

Net cash used in operations for the nine months ended September 30, 1998 was
$48,716 as compared to net cash used in operations of $7,302 for the nine
months ended September 30, 1997. The increase in cash used in operations
resulted from a decrease in distributions received from Local Limited
Partnerships and an increase in operating expenses paid during the nine months
ended September 30, 1998, compared to the nine months ended September 30, 1997,
partially offset by a decrease in administrative and reporting fees paid to the
General Partner.

No working capital advances were made by the Partnership to the Local Limited
Partnerships during the nine months ended September 30, 1998 and 1997.
Repayments of advances of $200 was made to the Partnership during the nine
months ended September 30, 1977. No repayments were made during the nine months
ended September 30, 1998. The combined amount carried as due to the Partnership
by the Local Limited Partnerships was $592,727 at September 30, 1998.

Distributions received from Local Limited Partnerships represent the
Partnership's proportionate share of the excess cash available for distribution
from the Local Limited Partnerships. As a result of the use of the equity
method of accounting for the Partnership's investments, as of September 30,
1998, investments in fifteen of the eighteen Local Limited Partnerships had
been reduced to zero. For these investments, cash distributions received are
recorded in income as distributions received in excess of investment in Local
Limited Partnerships. For those investments not reduced to zero, distributions
received are recorded as distributions from Local Limited Partnerships. Cash
distributions of $16,521 and $124,768 were received from the Local Limited
Partnerships during the nine months ended September 30, 1998 and 1997,
respectively. The receipt of distributions in future quarters is dependent upon
the operations of the underlying properties of the Local Limited Partnerships
to generate sufficient cash for distribution in accordance with applicable HUD
regulations.

Cash and cash equivalents amounted to $8,343 at September 30, 1998. The ability
of the Partnership to meet its on-going cash requirements, in excess of cash on
hand at September 30, 1998, is dependent upon the future receipt of
distributions from the Local Limited Partnerships or proceeds from sales or
refinancings of one or more of the underlying properties of the Local Limited
Partnerships. The General Partner will continue to manage the Partnership's
assets prudently in an effort to achieve positive cash flow and will evaluate
lending the Partnership additional funds as such funds are needed, but is in no
way legally obligated to make such loans.

During the nine months ended September 30, 1998, the General Partner advanced
the Partnership $33,650 for working capital to pay legal fees related to the
civil action taken by the deferred acquisition note holders of Rodeo Drive
Limited Partnership. No working capital advances were made during the nine
months ended September 30, 1997. No repayments were made to the General Partner
by the Partnership during the nine months ended September 30, 1998 and 1997.
The amount owed to the General Partner at September 30, 1998 was $33,650. There
were no amounts owed to the General Partner at December 31, 1997. Interest is
charged on borrowings at the Chase Manhattan Bank rate of prime plus 2%. Chase
Manhattan Bank prime was 8.5% at September 30, 1998. Accrued interest on this
loan amounted to $771 and zero at September 30, 1998 and December 31, 1997,
respectively. There can be no assurance that the General Partner will continue
to advance such funds to the Partnership.

At September 30, 1998, the Partnership owes the General Partner $1,177,767 for
administrative and reporting services performed. The payment of these unpaid
administrative and reporting fees will most likely result from the sale or
refinancing of the underlying properties of the Local Limited Partnerships,
rather than through recurring operations.





                                      -11-
<PAGE>   13
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS




Nineteen of the Local Limited Partnerships in which the Partnership had
invested carried deferred acquisition notes. These notes are secured by both
the Partnership's and the General Partner's interests in the Local Limited
Partnerships and, as discussed below, with the exception of West Oak Village
which was refinanced during 1997, these notes either matured during 1997 or
will mature by December, 1999. In the event of a default on the notes, the note
holders would be able to assume the General Partner's and the Partnership's
interests in the Local Limited Partnerships.

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

Additionally, the Gulfway and Rockwell Limited Partnerships had deferred
acquisition notes which were due on November 7, 1997. The Local Limited
Partnerships did not have the resources to pay amounts due on the deferred
acquisition notes. On June 29, 1998, pursuant to the security agreements of the
deferred acquisition notes, the note holders were substituted as sole limited
partner of the Local Limited Partnerships in place of NHP Realty Fund Two and
the note holders' assignee was substituted as the general partner. With the
loss of the Partnership's interest in Gulfway and Rockwell Limited Partnerships
to the note holders, the Partnership will not receive any future benefits from
these Local Limited Partnerships and taxable income will be generated and flow
to the Partnership's investors without any distributable cash. The specific
impact of the tax consequence is dependent upon each partner's individual tax
situation.

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

        a) the original principal sum of the deferred acquisition note, plus 
        b) interest which accrued on such principal at the rate of 9% per 
           annum from the original date to October 25, 1997, plus 
        c) interest on the foregoing sums of principal and interest from 
           October 25, 1997 at the rate of 5.54% per annum, compounded annually.

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

Tinker Creek Limited Partnership had a deferred acquisition note payable due on
June 30, 1998. During February 1998, Tinker Creek Limited Partnership entered
into a sales agreement with Artcraft Investment, L.C. for the sale of Tinker
Creek Apartments. The closing occurred on July 2, 1998, with a purchase price
of $1,785,000. Net proceeds of the difference between the $1,785,000 and the
mortgage note payable, were divided between the holders of the Tinker Creek
deferred acquisition note and Tinker Creek Limited Partnership, with the note
holders





                                      -12-
<PAGE>   14
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS




receiving 80% of the net proceeds in full satisfaction of amounts due on their
notes. Any unpaid balances were forgiven. Tinker Creek Limited Partnership
received the remaining 20% of the net proceeds. The Partnership's share of the
gain from the sale, in excess of cumulative losses not taken, in the amount of
$26,119 has been recorded in the accompanying statements of operations for the
nine months ended September 30, 1998, as an extraordinary item - gain on
extinguishment of debt. At September 30, 1998, the Partnership's investment in
the Tinker Creek Limited Partnership was $26,119. The sale may generate taxable
income to the Partnership's investors. The specific impact of the tax
consequences is dependent upon each specific partner's individual tax
situation.

The deferred acquisition note with respect to Rodeo Drive Limited Partnership
matured on December 6, 1997. The Local Limited Partnership does not have the
resources to pay amounts due on the deferred acquisition note. The holders of
the note commenced a civil action seeking to gain control of the general and
limited partnership interests of the Rodeo Drive Limited Partnership. With the
loss of the Partnership's interest in Rodeo Drive Limited Partnership to the
note holder, the Partnership will not receive any future benefits from this
Local Limited Partnership and taxable income will be generated and flow to the
Partnership's investors without any distributable cash. The specific impact of
the tax consequence is dependent upon each partner's individual tax situation.

Additionally, Meadows Apartments and Meadows East Apartments Local Limited
Partnerships continued existence as a going concern is dependent on the Local
Limited Partnerships' ability to pay principal and interest obligations under
their deferred acquisition notes, which became due on December 12, 1997, or
negotiate further amendments of the terms of the notes. Should no agreement be
reached and absent a sale or refinancing which produces sufficient funds to
repay the notes in full, a default would occur on the notes. Such default could
lead to a foreclosure by the note holder of the security underlying the notes
such that the Partnership may lose its interest in these Local Limited
Partnerships. Should the Partnership lose its interest in a Local Limited
Partnership, partners in the Partnership may incur adverse tax consequences.
The impact of the tax consequence is dependent upon each partner's individual
tax situation.

The notes related to the other eleven Local Limited Partnerships, in addition
to the extensions to the notes relating to Mayfair Manor and Esbro Local
Limited Partnerships discussed above, will reach final maturity during the
fourth quarter of 1999. These notes are secured by both the Partnership's and
the General Partner's interests in the Local Limited Partnerships. In the event
of a default on the notes, the note holders would be able to assume the General
Partner's and the Partnership's interests in the Local Limited Partnerships.
Should the Partnership lose its interest in a Local Limited Partnership,
partners in the Partnership may incur adverse tax consequences. The impact of
the tax consequence is dependent upon each partner's individual tax situation.
There can be no assurance that the General Partner will be successful in
extending or restructuring the deferred acquisition notes as they mature.

RESULTS OF OPERATIONS

The Partnership has invested as a limited partner in Local Limited Partnerships
which operate twenty rental housing properties. In prior years, results of
operations of NHP Realty Fund Two were significantly impacted by the
Partnership's share of the losses of the Local Limited Partnerships. These
losses included depreciation and accrued deferred acquisition note interest
expense which are noncash in nature. Eighteen of the remaining twenty
investments in Local Limited Partnerships had been reduced to zero at December
31, 1997. During the nine months ended September 30, 1998, the property owned
by Tinker Creek Limited Partnership was sold. As a result, the Partnership
recognized an extraordinary gain of $26,119 on the extinguishment of debt
related to the sale, after recognizing previously unrecognized losses of
$1,100,062. Additionally, during the nine months ended September 30, 1998,
Harold House Limited Partnership recorded





                                      -13-
<PAGE>   15
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS




sufficient profits to fully recover the $19,281 of unrecognized losses which
existed at December 31, 1997. As a result, the Partnership's operations are no
longer being affected by its share of the operations from seventeen of the
partnerships. The Partnership has recorded its share of profits in the
remaining three and two Local Limited Partnerships which amounted to $161,450
and $66,277 for the nine months ended September 30, 1998 and 1997,
respectively, and $63,840 and $4,826 for the three months ended September 30,
1998 and 1997.

The Partnership's net loss increased to $192,628 for the nine months ended
September 30, 1998 from a net loss of $153,655 for the nine months ended
September 30, 1997. Net loss per unit of other limited partnership interest
increased from $8 to $10 for the 18,300 units outstanding throughout both
periods. The increase in net loss was primarily due to an increase in operating
expenses, partially offset by an extraordinary gain on extinguishment of debt
related to the sale of Tinker Creek during the nine months ended September 30,
1998. In addition, a decrease in distributions received in excess of investment
in Local Limited Partnerships, was offset by an increase in the Partnership's
share of profits from the Local Limited Partnerships. During the nine months
ended September 30, 1998, the Partnership incurred operating expenses of
approximately $62,000 related to complying with SEC filing, auditing, and
reporting and mailing requirements. The Partnership did not recognize
$1,298,387 of its allocated share of losses from sixteen Local Limited
Partnerships for the nine months ended September 30, 1998, as the Partnership's
net carrying basis in these Local Limited Partnerships had been reduced to
zero. The Partnership's share of losses before extraordinary item from the
Local Limited Partnerships, if not limited to its investment account balance,
would have increased $376,172 between periods, primarily due to the loss on the
disposal of Tinker Creek during the nine months ended September 30, 1998. In
addition, rental income and operating expenses decreased due to the
Partnership's loss of its interest in three properties during 1998.

The Partnership's net loss decreased to $72,866 for the three months ended
September 30, 1998 from a net loss of $102,641 for the three months ended
September 30, 1997. Net loss per unit of other limited partnership interest
decreased from $5 to $4 for the 18,300 units outstanding throughout both
periods. The decrease in net loss was primarily due to an increase in the share
of profits from Local Limited Partnerships and by an extraordinary gain on
extinguishment of debt related to the sale of Tinker Creek during the three
months ended September 30, 1998, partially offset by an increase in operating
expenses. During the three months ended September 30, 1998, the Partnership
incurred operating expenses of approximately $22,000 related to complying with
SEC filing, auditing, and reporting and mailing requirements. The Partnership
did not recognize $370,286 of its allocated share of losses from sixteen Local
Limited Partnerships for the three months ended September 30, 1998, as the
Partnership's net carrying basis in these Local Limited Partnerships had been
reduced to zero. The Partnership's share of losses before extraordinary item
from the Local Limited Partnerships, if not limited to its investment account
balance, would have increased $267,695 between periods, primarily due to the
loss on the disposal of Tinker Creek during the three months ended September
30, 1998, partially offset by a decrease in operating losses to the
Partnership's loss of its interest in three properties during 1998.

PART II - OTHER INFORMATION

ITEM 6  -  EXHIBITS AND REPORTS ON FORM 8-K

         (a)     Exhibits

                 Exhibit No.

                 27       Financial Data Schedule.





                                      -14-
<PAGE>   16



                                   SIGNATURES



         Pursuant to the requirements 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.



                           NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                           --------------------------------------------
                           (Registrant)


                           By:     The National Housing Partnership,
                                   its sole General Partner


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



November 13, 1998          By:                         /s/
-----------------                  --------------------------------------------
                                   Troy D. Butts
                                   As Senior Vice President and Chief Financial
                                   Officer





                                      -15-