<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, 1996

                         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.)


                               8065 LEESBURG PIKE
                                   SUITE 400
                             VIENNA, VIRGINIA 22182
                    (Address of principal executive offices)
                                   (Zip Code)


                                 (703) 394-2400
              (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,
                                                                                 1996             December 31,
                                                                              (Unaudited)             1995       
                                                                             ------------         -------------

                                                              ASSETS
                                                              ------

                    <S>                                                      <C>                   <C>
                    Cash and cash equivalents                                $     39,170          $     30,173
                    Deposits held by escrow agents                                     28                    28
                    Investments in and advances to
                     Local Limited Partnerships (Note 2)                        4,357,171             4,227,334
                                                                              -----------           -----------
                                                                             $  4,396,369          $  4,257,535
                                                                              ===========           ===========
<CAPTION>
                                                  LIABILITIES AND PARTNERS' DEFICIT
                                                  ---------------------------------

                    <S>                                                      <C>                   <C>
                    Liabilities:
                       Due to General Partner (Note 3)                       $      -              $     27,700
                       Deferred acquisition notes
                         payable to General Partner                             2,414,468             2,414,468
                       Accrued interest on deferred
                         acquisition notes payable to
                         General Partner                                        2,757,626             2,576,541
                       Accrued interest on Due to General Partner
                         (Note 3)                                                   -                       860
                       Administrative and reporting fees
                         payable to General Partner (Note 3)                      984,491               960,734
                       Other accrued expenses                                      30,000                41,710
                                                                              -----------           -----------
                                                                                6,186,585             6,022,013
                                                                              -----------           -----------
                    Partners' deficit:
                       General Partner -- The National
                         Housing Partnership (NHP)                               (172,991)             (172,734)
                       Original Limited Partner --
                         1133 Fifteenth Street Two Associates                    (177,891)             (177,634)
                       Other Limited Partners -- 18,300
                         investment units                                      (1,439,334)           (1,414,110)
                                                                              -----------           ----------- 
                                                                               (1,790,216)           (1,764,478)
                                                                              -----------           ----------- 
                                                                             $  4,396,369          $  4,257,535
                                                                              ===========           ===========
</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,      
                                              -----------------------         -----------------------  
                                                 1996          1995             1996             1995
                                                 ----          ----             ----             ----

 <S>                                           <C>           <C>              <C>           <C>
 REVENUES:
    Share of income from
      Local Limited Partnerships               $   1,337     $ 48,194         $151,686      $ 197,298
    Distributions and repayments
      received in excess of
      investment in and advances
      to Local Limited Partnerships              120,914        -              145,914          7,449
    Interest income                                1,012          403            2,624          1,160
                                                 -------      -------          -------       --------

                                                 123,263       48,597          300,224        205,907
                                                 -------      -------          -------       --------

 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       60,361          181,085        181,085
    Interest on due to General Partner                68        6,100            1,587         17,777
    Other operating expenses                      14,297       10,877           40,354         35,727
                                                 -------      -------          -------       --------

                                                 109,039      111,650          325,962        337,525
                                                 -------      -------          -------       --------

 NET PROFIT (LOSS)                             $  14,224     $(63,053)        $(25,738)     $(131,618)
                                                 =======      =======          =======       ========
 NET PROFIT (LOSS)
  ASSIGNABLE TO LIMITED
  PARTNERS                                     $  13,938     $(61,793)        $(25,224)     $(128,986)
                                                 =======      =======          =======       ========
 NET PROFIT (LOSS) PER
  LIMITED PARTNERSHIP
  INTEREST                                     $       1     $     (3)        $     (1)     $      (7)
                                                 =======      =======          =======       ========
</TABLE>




                       See notes to financial statements.

                                      -2-
<PAGE>   4



                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         STATEMENT OF PARTNERS' DEFICIT
                                  (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, 1996               $(172,734)       $(177,634)     $(1,414,110)    $(1,764,478)

 Net loss -- nine months
  ended September 30, 1996                     (257)            (257)         (25,224)        (25,738)
                                           --------         --------       ----------      ---------- 

 Deficit at September 30, 1996            $(172,991)       $(177,891)     $(1,439,334)    $(1,790,216)
                                           ========         ========       ==========      ========== 
 Percentage interest at
  September 30, 1996                              1%              1%              98%            100%
                                           =========       =========       ==========      ==========
                                                 (A)             (B)              (C)
</TABLE>

 (A) General Partner
 (B) Original Limited Partner
 (C) Consists of 18,300 investments units of 0.00536% held by 1,299 investors





                       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              
                                                                                -----------------------------
                                                                                  1996                1995
                                                                                  ----                ----

<S>                                                                             <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Distributions from Local Limited Partnerships                                $ 21,849            $    -
   Distributions received in excess of investment in and
     advances to Local Limited Partnerships                                      142,476                 -
   Interest received                                                               2,624               1,160
   Payment of administrative and reporting fees
     to General Partner                                                          (79,179)                -
   Operating expenses paid                                                       (52,064)            (42,327)
   Payment of interest on partner loans                                           (2,447)                -    
                                                                                --------             -------

   Net cash provided by (used in) operating activities                            33,259             (41,167)
                                                                                --------             -------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Repayment of advances to Local Limited Partnerships                             3,438               7,449
                                                                                --------             -------
CASH FLOWS FROM FINANCING ACTIVITIES
   Repayment of advances from General Partner                                    (27,700)                -    
                                                                                --------             -------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                                 8,997             (33,718)

CASH AND CASH EQUIVALENTS, BEGINNING OF
  PERIOD                                                                          30,173              44,627
                                                                                --------             -------

CASH AND CASH EQUIVALENTS, END OF PERIOD                                        $ 39,170            $ 10,909
                                                                                ========             =======

</TABLE>




                       See notes to financial statements.

                                      -4-
<PAGE>   6



                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                            STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
                                  (CONTINUED)


<TABLE>
<CAPTION>
                                                                                 Nine Months Ended
                                                                                    September 30,             
                                                                          --------------------------------
                                                                             1996                 1995
                                                                             ----                 ----

 <S>                                                                      <C>                  <C>
 RECONCILIATION OF NET LOSS TO NET CASH
  PROVIDED BY (USED IN) OPERATING
  ACTIVITIES:

 Net loss                                                                 $  (25,738)           $(131,618)
                                                                           ---------             -------- 

 Adjustments to reconcile net loss to net cash used in
  operating activities:
    Repayment of advances to Local Limited Partnerships                       (3,438)              (7,449)
    Share of income from Local Limited Partnerships                         (151,686)            (197,298)
    Distributions from Local Limited Partnerships                             21,849                -
    Increase in accrued interest on deferred acquisition
      notes                                                                  181,085              181,085
    (Decrease) increase in accrued interest on due to
      General Partner                                                           (860)              17,777
    Increase in administrative and reporting fees payable                     23,757              102,936
    Decrease in accrued expenses                                             (11,710)              (6,600)
                                                                           ---------             -------- 

      Total adjustments                                                       58,997               90,451
                                                                           ---------             -------- 

 Net cash provided by (used in) operating activities                      $   33,259           $  (41,167)
                                                                           =========             ======== 

</TABLE>




                       See notes to financial statements.

                                      -5-
<PAGE>   7
                  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 at a
         price of $1,000 per unit. 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.

         BASIS OF PRESENTATION

         The accompanying unaudited interim financial statements reflect all
         adjustments which are, in the opinion of management, necessary for 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, 1995.

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from these estimates.





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




(2)      INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS

         The Partnership owns 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 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 September 30, 1996 and December 31, 1995,
         investments in nineteen of the twenty-one Local Limited Partnerships
         had been reduced to zero. As a result, the Partnership did not
         recognize $1,127,954 and $1,422,389 of losses from these nineteen
         Local Limited Partnerships during the nine months ended September 30,
         1996 and 1995, respectively. As of September 30, 1996 and December 31,
         1995, the Partnership has not recognized a total of $18,998,121 and
         $17,870,167, respectively, of its allocated share of cumulative losses
         from the Local Limited Partnerships 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, 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 nineteen of the Local Limited
         Partnerships, the aggregate balance of investments in and advances to
         Local Limited Partnerships, for these nineteen Local Limited
         Partnerships, has been reduced to zero at September 30, 1996 and
         December 31, 1995. 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 were made during the nine months ended
         September 30, 1996 and 1995. Repayments of advances of $3,438 and
         $7,449 were made to the Partnership during the nine months ended
         September 30, 1996 and 1995, and were credited as income from
         operations. The combined amount carried as due to the Partnership by
         the Local Limited Partnerships was $592,927 at September 30, 1996.





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





         In March 1995, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 121 "Accounting for
         the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
         Disposed Of" (the "Statement") effective for financial statements for
         fiscal years beginning after December 15, 1995. This Statement
         requires an impairment loss to be recognized if the sum of estimated
         future cash flows (undiscounted and without interest charges) is less
         than the carrying amount of rental property. The impairment loss would
         be the amount by which the carrying value exceeds the fair value of
         the rental property. If the rental property is to be disposed of, fair
         value is calculated net of costs to sell. The Partnership's initial
         implementation of this Statement during 1996 did not have any effect
         on its results of operations for the nine months ended September 30,
         1996, or its financial position.

         One of the properties owned by the Partnership (Kimberton Apartments)
         was eligible to receive financial incentives under the Low Income
         Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA).
         The appropriation for the Department of Housing and Urban Development
         ("HUD") (which administers LIHPRHA) for the 1997 fiscal year was
         recently approved and is insufficient to meet existing program demand.
         As part of this appropriation, Congress directed HUD to suspend
         processing of any property which has not received approval of a sale
         or refinancing under LIHPRHA as of the date of enactment of the
         appropriation, which occurred on September 26, 1996. Kimberton
         Apartments had not received approval of a sale or refinancing under
         the program within the requisite timeframe and, therefore, will not
         receive financial incentives under LIHPRHA. As a result, the carrying
         value of the property may exceed its fair value. In light of this
         recent development, the Partnership is evaluating the impact of this
         legislation on the fair value of Kimberton Apartments. The result may
         require an impairment loss be recognized which could have a
         significant impact (non-cash) on the Partnership' results of
         operations and financial position. Such a loss would be recorded in
         the quarter ending December 31, 1996 and, therefore, would be shown in
         the Partnership's annual financial statements as of and for the year
         ending December 31, 1996.

         The following are combined statements of operations for the three
         months and nine months ended September 30, 1996 and 1995,
         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.





                                      -8-
<PAGE>   10
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         NOTES TO FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
                                                                   
                                                                   
                                             COMBINED STATEMENTS OF OPERATIONS
                                             ---------------------------------

                                             Three Months Ended September 30,          Nine Months Ended September 30,
                                             --------------------------------          -------------------------------
                                                 1996                 1995                1996                1995
                                                 ----                 ----                ----                ----

             <S>                              <C>                   <C>                <C>                  <C>
             Rental income                    $3,638,898            $3,615,199         $10,887,452         $10,781,444
             Other income                        118,116                79,360             346,271             265,830
                                               ---------             ---------          ----------          ----------

                Total income                   3,757,014             3,694,559          11,233,723          11,047,274
                                               ---------             ---------          ----------          ----------

             Operating expenses                2,430,526             2,551,207           7,148,449           7,189,860
             Interest, taxes and
               insurance                       1,122,043             1,160,318           3,279,297           3,361,329
             Depreciation                        615,546               597,811           1,793,119           1,738,721
                                               ---------             ---------          ----------          ----------

                Total expenses                 4,168,115             4,309,336          12,220,865          12,289,910
                                               ---------             ---------          ----------          ----------
                     
             Net loss                         $ (411,101)           $ (614,777)        $  (987,142)        $(1,242,636)
                                               =========             =========          ==========          ==========

             National Housing
               Partnership Realty
               Fund Two share of
               losses                         $ (402,145)           $ (604,267)        $  (976,268)        $(1,225,091)
                                               =========             =========          ==========          ==========
</TABLE>

(3)      TRANSACTIONS WITH THE GENERAL PARTNER

         During the nine month periods ended September 30, 1996 and 1995, the
         Partnership accrued administrative and reporting fees payable to the
         General Partner in the amount of $102,936 for services provided to the
         Partnership. During the nine months ended September 30, 1996, the
         Partnership paid $79,179 to the General Partner for these fees. No
         payments were made to the General Partner for these fees during the
         nine months ended September 30, 1995. The amount due the General
         Partner by the Partnership was $984,491 and $960,734 at September 30,
         1996 and December 31, 1995, respectively.

         During the nine months ended September 30, 1996, the Partnership
         repaid $27,700 of advances from the General Partner and $2,447 of
         accrued interest on these advances. During the nine months ending
         September 30, 1995, no operating deficit funding or





                                     -9-
<PAGE>   11
                  NATIONAL HOUSING PARTNERSHIP REALTY FUND TWO
                        (A MARYLAND LIMITED PARTNERSHIP)
                         NOTES TO FINANCIAL STATEMENTS




         repayment activity occurred between the General Partner and the
         Partnership. The amount owed to the General Partner by the Partnership
         was zero as of September 30, 1996 and $27,700 as of December 31, 1995.
         Interest is charged on borrowings at the Chase Manhattan Bank rate of
         prime plus 2%. Accrued interest on this loan was zero as of September
         30, 1996 and $860 as of December 31, 1995.

         The 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.





                                      -10-
<PAGE>   12



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

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

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,
however, are not expected to impact the Partnership's ability to meet its cash
obligations.

Net cash provided by operations for the nine months ended September 30, 1996
was $33,259 as compared to net cash used in operations of $41,167 for the nine
months ended September 30, 1995. The increase in cash provided by operations
resulted from an increase in distributions received from the Local Limited
Partnerships, partially offset by an increase in operating expenses paid and
the payment of administrative and reporting fees to the General Partner during
the nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995.

No working capital advances were made to the Local Limited Partnerships during
the nine months ended September 30, 1996 and 1995.  Repayments of advances of
$3,438 and $7,449 were made by two and one Local Limited Partnership to the
Partnership during the nine months ended September 30, 1996 and 1995,
respectively, and were credited as income from operations. As of September 30,
1996, the combined amount carried by the Local Limited Partnerships, as due to
the Partnership, amounted to $592,927. Future advances made to the nineteen
Local Limited Partnerships' properties whose investments have been reduced to
zero, will be charged to operations; likewise, future repayments from these
properties will be credited to operations.

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,
1996, investments in nineteen 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 $164,325 were received from six Local Limited Partnerships
during the nine months ended September 30, 1996. There were no cash
distributions during the nine months ended September 30, 1995. The receipt of
distributions in future quarters is dependent upon the operations of the
underlying properties of the Local Limited Partnerships.






                                     -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




Cash and cash equivalents amounted to $39,170 at September 30, 1996. The
ability of the Partnership to meet its on-going cash requirements, in excess of
cash on hand at September 30, 1996, is dependent upon the future receipt of
distributions from the Local Limited Partnerships, General Partner advances, or
proceeds from sales or refinancings of one or more of the underlying properties
of the Local Limited Partnerships. Cash on hand at September 30, 1996, plus any
distributions from the underlying operations of the combined Local Limited
Partnerships is expected to adequately fund the operations of the Partnership
in the current year. However, there can be no assurance that future
distributions will be adequate to fund the operations beyond the current year.

The Partnership currently owes the General Partner $984,491 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.

National Corporation for Housing Partnerships (NCHP) was a significant
participant in the drafting and passage of the Low Income Housing Preservation
and Resident Homeownership Act of 1990 (LIHPRHA). LIHPRHA creates a procedure
under which owners of properties assisted under the HUD Section 236 or
221(d)(3) program may be eligible to receive financial incentives in return for
agreeing to extend their property's use as low income housing. The
appropriation for the Department of Housing and Urban Development (which
administers LIHPRHA) for the 1997 fiscal year was recently approved and is
insufficient to meet existing program demand. As part of this appropriation,
Congress directed HUD to suspend processing of any property which had not
received approval of a sale or refinancing under LIHPRHA as of the date of
enactment of the appropriation, which occurred on September 26, 1996. None of
the Local Limited Partnerships received approval of a sale or refinancing under
the program within the requisite timeframe and, therefore, none are expected to
receive incentives under LIHPRHA in the future. This could have a negative
impact on the Partnership's future available capital resources.

Nineteen of the Local Limited Partnerships in which the Partnership has
invested carry deferred acquisition notes due to the original owners of the
Properties. In the event of a default on these notes, the noteholders would
re-assume both NHP's and the Partnership's interest in the Local Limited
Partnerships. The note related to the acquisition of West Oak Village has a
final maturity date in 1996. All of the other notes have final maturity dates
between 1997 and 1999. The West Oak Village note finally matures on November
30, 1996. The General Partner is preparing to begin negotiating with the
noteholders to extend the maturity date of the note. It is unknown at this time
whether the noteholders will agree to extend the maturity date of the note.
Should the noteholder declare the note in default at maturity on November 30,
1996 and proceed to foreclose, the






                                     -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




Partnership may lose its interest in the Local Limited Partnership. A loss of
interest in this Local Limited Partnership may cause the partners in the
Partnership to incur adverse tax consequences. Such tax consequences will be
dependent on each partner's individual tax situation. There can be no assurance
that the General Partner will be successful in its efforts to renegotiate the
terms of this note.

RESULTS OF OPERATIONS

The Partnership has invested as a limited partner in Local Limited Partnerships
which operate twenty-one 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 interest on deferred acquisition notes
which are noncash in nature. Nineteen of the twenty-one investments in Local
Limited Partnership's have been reduced to zero. As a result, the Partnership's
operations are no longer being affected by its share of the operations from
these nineteen partnerships. The Partnership has recorded its share of income
in the remaining two Local Limited Partnership's which amounted to $151,686 and
$197,298 for the nine months ended September 30, 1996 and 1995, respectively.

The Partnership's net loss decreased to $25,738 for the nine months ended
September 30, 1996 from a net loss of $131,618 for the nine months ended
September 30, 1995. Net loss per unit of limited partnership interest decreased
to $1 from $7 for the 18,300 units outstanding throughout both periods. The
decrease in net loss was primarily due to an increase in distributions and
repayments received in excess of investment in and advances to Local Limited
Partnerships, and a decrease in interest due to the General Partner partially
offset by a decrease in the Partnership's share of income from Local Limited
Partnerships. The Partnership did not recognize $1,127,954 of its allocated
share of losses from nineteen Local Limited Partnerships for the nine months
ended September 30, 1996, as the Partnership's net carrying basis in these
Partnerships had been reduced to zero. The Partnership's share of losses from
the Local Limited Partnerships, if not limited to its investment account
balance, would have decreased $248,823 between periods, primarily due to an
increase in rental income and a decrease in operating expenses.





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<PAGE>   15



                                   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 7, 1996        By:                        /s/
----------------                ----------------------------------------------
                                Jeffrey J. Ochs
                                As Vice President and Chief Accounting Officer





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