FORM 10-Q
UNITED STATES 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 Quarter Ended September 30, 1996
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Commission file number 0-11973
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Maryland 52-1321492
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (Zip Code)

(301) 468-9200
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(Registrant's telephone number, including area code)

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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Class Outstanding at September 30, 1996
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 1996

PAGE
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

Balance Sheets - September 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . 1

Statements of Operations - for the three and
nine months ended September 30, 1996 and 1995 2

Statements of Cash Flows - for the nine
months ended September 30, 1996 and 1995 . 3

Notes to Financial Statements . . . . . . . . 4

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 13

PART II. Other Information . . . . . . . . . . . . . . 21

Item 6. Exhibits and Reports on Form 8-K . . . . . . 21

Signature . . . . . . . . . . . . . . . . . . . . . . 22

Exhibit Index . . . . . . . . . . . . . . . . . . . . . 23

PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

BALANCE SHEETS

ASSETS

September 30, December 31,
1996 1995
------------ ------------
(Unaudited)

Investments in and advances to partnerships $ 6,329,035 $ 7,358,510
Cash and cash equivalents 2,160,782 3,192,539
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $432,496 and $407,496,
respectively 567,504 592,504
Property purchase costs, net of accumulated amortization of
$274,776 and $258,343, respectively 382,536 398,969
Other assets 4,862 7,851
------------ ------------
Total assets $ 9,444,719 $ 11,550,373
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships, net of unamortized discount on
purchase money notes of $6,043,004 and $8,206,853, respectively $ 14,097,674 $ 14,213,825
Accrued interest payable 30,056,095 29,256,224
Accounts payable and accrued expenses 111,242 82,324
------------ ------------
Total liabilities 44,265,011 43,552,373
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Commitments and contingencies

Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 50,015,000 50,015,000
------------ ------------
50,017,000 50,017,000
Less:
Accumulated distributions to partners (1,254,612) (1,254,612)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (78,303,700) (75,485,408)
------------ ------------
Total partners' deficit (34,820,292) (32,002,000)
------------ ------------
Total liabilities and partners' deficit $ 9,444,719 $ 11,550,373
============ ============

The accompanying notes are an integral part
of these financial statements.

-1-

PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS

(Unaudited)

For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------

Share of loss from partnerships $ (257,022) $ (117,258) $ (212,596) $ (50,463)
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 27,086 47,297 77,482 135,164
------------ ------------ ------------ ------------
Expenses:
Interest 1,349,380 1,364,771 4,052,638 4,094,313
Management fee 62,499 62,499 187,497 187,497
General and administrative 40,399 31,376 108,884 94,050
Professional fees 21,489 18,170 96,628 55,813
Amortization 13,811 13,812 41,433 41,434
------------ ------------ ------------ ------------
1,487,578 1,490,628 4,487,080 4,473,107
------------ ------------ ------------ ------------
Total other revenue and expenses (1,460,492) (1,443,331) (4,409,598) (4,337,943)
------------ ------------ ------------ ------------
Loss before extraordinary gain from extinguishment
of debt (1,717,514) (1,560,589) (4,622,194) (4,388,406)

Extraordinary gain from extinguishment of debt -- -- 1,803,902 --
------------ ------------ ------------ ------------
Net loss (1,717,514) (1,560,589) (2,818,292) (4,388,406)

Accumulated losses, beginning of period (76,586,186) (72,465,297) (75,485,408) (69,637,480)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(78,303,700) $(74,025,886) $(78,303,700) $(74,025,886)
============ ============ ============ ============
Loss allocated to General Partners (1.51%) $ (25,934) $ (23,565) $ (42,556) $ (66,265)
============ ============ ============ ============
Loss allocated to Initial and Special
Limited Partners (1.49%) $ (25,591) $ (23,252) $ (41,993) $ (65,387)
============ ============ ============ ============
Loss allocated to Additional Limited
Partners (97%) $ (1,665,989) $ (1,513,772) $ (2,733,743) $ (4,256,754)
============ ============ ============ ============
Loss per unit of Additional Limited
Partnership Interest based on 50,000 units
outstanding $ (33.31) $ (30.28) $ (54.67) $ (85.14)
============ ============ ============ ============

The accompanying notes are an integral part
of these financial statements.

-2-

PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

(Unaudited)

For the nine months ended
September 30,
-----------------------------
1996 1995
------------ ------------

Cash flows from operating activities:
Net loss $ (2,818,292) $ (4,388,406)

Adjustments to reconcile net loss to net cash used in operating
activities:
Share of loss from partnerships 212,596 50,463
Amortization of deferred costs 41,433 41,434
Amortization of discount on purchase money notes 2,163,849 2,112,357
Gain on extinguishment of debt (1,803,902) --
Payment of purchase money note interest (65,016) (227,722)

Changes in assets and liabilities:
Decrease (increase) in other assets 2,989 (1,774)
Increase in accrued interest payable 1,888,789 1,981,956
Increase in accounts payable and accrued expenses 28,918 31,983
------------ ------------
Net cash used in operating activities (348,636) (399,709)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 816,879 870,339
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money note (1,500,000) --
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,031,757) 470,630

Cash and cash equivalents, beginning of period 3,192,539 2,812,577
------------ ------------
Cash and cash equivalents, end of period $ 2,160,782 $ 3,283,207
============ ============

The accompanying notes are an integral part
of these financial statements.

-3-

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements contain all adjustments of a normal
recurring nature necessary to present fairly the financial position of Capital
Realty Investors-II Limited Partnership (the Partnership) as of September 30,
1996 and December 31, 1995, and the results of its operations for the three and
nine months ended September 30, 1996 and 1995 and its cash flows for the nine
months ended September 30, 1996 and 1995.

These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the Managing General Partner believes that the dis-
closures presented are adequate to make the information not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes included in the Partnership's Annual
Report filed on Form 10-K for the year ended December 31, 1995.

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS

The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$20,140,678 (exclusive of unamortized discount on purchase money notes of
$6,043,004) plus accrued interest of $30,056,095 as of September 30, 1996, are
payable in full upon the earliest of: (i) sale or refinancing of the respective
Local Partnership's rental property; (ii) payment in full of the respective
Local Partnership's permanent loan; or (iii) maturity. Purchase money notes in
an aggregate principal amount of $2,100,000 are scheduled to mature on December
31, 1996, as discussed below. The remaining purchase money notes mature in 1998
and 1999. The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnership. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Managing General
Partner is continuing to investigate possible alternatives to reduce the
Partnership's long-term debt obligations. These alternatives include, among
others, retaining the cash available for distribution to meet the purchase money
note requirements, buying out certain purchase money notes at a discounted
price, extending the due dates of certain purchase money notes, or refinancing
the respective properties' underlying debt and using the Partnership's share of
the proceeds to pay off or buy down certain purchase money note obligations.

Interest expense on the Partnership's purchase money notes was $1,349,380
and $4,052,638 for the three and nine months ended September 30, 1996,
respectively and $1,364,771 and $4,094,313 for the three and nine months ended
September 30, 1995, respectively. Amortization of the imputed interest on
purchase money notes increased interest expense during the three and nine months
ended September 30, 1996 by $721,283 and $2,163,849, respectively, and by
$704,119 and $2,112,357 during the three and nine months ended September 30,
1995, respectively.

-4-

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

As of September 30, 1996 and December 31, 1995, the Partnership had
advanced funds totalling $324,410 to Local Partnerships.

The Partnership defaulted on its purchase money note relating to Rock Glen
Limited Partnership (Rock Glen) on August 1, 1995 when the note matured and was
not paid. The noteholder signed a standstill agreement which expired on October
31, 1995. The Managing General Partner made an offer to the noteholder to
extend the purchase money note due date to August 2000. This offer was rejected
by the noteholder. On January 11, 1996, the Partnership paid off the purchase
money note at a discount, resulting in a gain on extinguishment of debt of
$1,803,902.

The Partnership defaulted on its purchase money notes relating to Beech
Hill Development Co. (Beech Hill I) and Beech Hill Development Co. II (Beech
Hill II) on August 1, 1995 when the notes matured and were not paid. On March
29, 1996, the noteholders agreed to extend the purchase money note due dates to
January 1, 1998. Under the agreement, the Partnership will pay the purchase
money noteholders of Beech Hill I and Beech Hill II all annual cash flow
distributions received from the related Local Partnerships in excess of $5,000
and $2,500, respectively. There were no annual cash flow distributions made to
the Partnership from the related Local Partnerships during the nine months ended
September 30, 1996 and 1995. Also under the agreement, documents transferring
the Partnership's interests in the related Local Partnerships to the noteholders
have been placed in escrow and would be released to the noteholders upon a
future default by the Partnership on the respective purchase money notes.

Chevy Chase Park, Limited (Chevy Chase) is dependent on the receipt of
housing assistance payments guaranteed by contract under the HUD Section 8
Housing Assistance Payment (HAP) program. The Section 8 contract for this
property expired in September 1996. As mentioned below, Congress has authorized
a one-year extension of all project-based Section 8 HAP contracts expiring
during fiscal years 1996 and 1997. Continued funding of annual renewals for
Section 8 HAP contracts expiring after fiscal year 1997, however, is uncertain
due to recent political scrutiny of appropriations for HUD programs. In the
event that the HUD Section 8 HAP program is eliminated or funding of Chevy
Chase's Section 8 HAP contract is discontinued, there is no assurance that Chevy
Chase will be able to maintain the occupancy levels necessary to pay debt
service and operating costs or that the rents necessary to pay debt service and
operating costs will be competitive with rents for comparable units in the
property's market area.

Purchase money notes relating to Chevy Chase in the aggregate principal
amount of $2,100,000 mature on December 31, 1996. The Managing General Partner
is currently negotiating with the noteholders to extend the purchase money note
due dates to coincide with potential future processing under the Low Income
Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA), or to
agree upon a discounted pay-off. There is no assurance that a sale will take
place under the LIHPRHA program, nor is there any assurance that any agreement
will be reached with the noteholders. As such, there is no assurance that the
Partnership will be able to retain its interest in Chevy Chase. The uncertainty
regarding the continued ownership of the Partnership's interests in Chevy Chase
does not impact the Partnership's financial condition because the related
purchase money notes are nonrecourse and secured solely by the Partnership's
interest in the related Local Partnership. Therefore, should the investment in
Chevy Chase not produce sufficient value to satisfy the related purchase money

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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

notes, the Partnership's exposure to loss is limited since the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership.

The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf II), in conjunction with the Managing General Partner,
applied to the U. S. Department of Housing and Urban Development (HUD), holder
of the mortgage on the property, for a three-year extension of the previous
workout arrangement which expired in December 1990. The local HUD office
verbally agreed to an extension expiring December 31, 1993 and recommended
approval of the extension to the HUD central office in Washington, D.C. In
December 1993, the local HUD office requested that a new workout proposal be
submitted, and in January 1994, the local general partner met with HUD to
discuss the long-term capital needs of the property in connection with a workout
proposal. On March 1, 1994, the local general partner submitted a nine-year
workout proposal to HUD. This proposal was rejected by HUD in December 1995.
On April 30, 1996, the local general partner received approval from HUD for a
four-year workout. Under the workout agreement, Frenchman's Wharf II will make
minimum monthly payments to HUD, consisting of a service charge and tax escrow.
Additionally, Frenchman's Wharf II will make monthly interest payments
representing approximately 50%, 65%, 85% and 100% of the interest due on the
outstanding principal balance of the note for the periods July 1 through June 30
during the years 1996 through 2000, respectively.

To cover operating deficits incurred in prior years for Frenchman's Wharf
II, the Partnership advanced funds totalling $324,410 as of both September 30,
1996 and December 31, 1995. The last advance was made to Frenchman's Wharf II
in March 1987. The Partnership does not expect to advance any additional funds
in connection with Frenchman's Wharf II's loan workout with HUD. These loans,
together with accrued interest of $187,372 as of both September 30, 1996 and
December 31, 1995, are payable from cash flow of Frenchman's Wharf II after
payment of first-mortgage debt service and after satisfaction by the Partnership
of certain other interest obligations on the purchase money notes relating to
the Local Partnership. There is no assurance that the Local Partnership, upon
expiration of the workout, will be able to repay the loans in accordance with
the terms.

The purchase money notes related to Frenchman's Wharf II in the principal
amount of $3,150,000 which were initially due to mature on June 1, 1988 have
been extended to mature on June 1, 1998. In conjunction with the four-year
workout agreement, the Partnership is currently negotiating with the purchase
money note holders to reach an extension agreement which would be coterminous
with the expiration of the HUD workout arrangement. There is no assurance that
the noteholders will consent to an extension agreement. As of October 24, 1996,
the noteholders had not given consent to an extension agreement. Accordingly,
the Local Partnership's continued ownership of the property is uncertain. The
uncertainty about the Local Partnership's continued ownership of the property
does not impact the Partnership's financial condition because the related
purchase money note is nonrecourse and secured solely by the Partnership's
interest in the Local Partnership. Therefore, should the investment in
Frenchman's Wharf II not produce sufficient value to satisfy the related
purchase money note, the indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss

-6-

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

of this investment would not have a material impact on the operations of the
Partnership.

Posada Associates Limited Partnership (Posada Vallarta Apartments) was
operating under an extension of a three-year workout agreement with HUD, the
holder of the mortgage. The workout provided for, among other things, a minimum
monthly debt service payment, with excess cash, if any, being applied to
delinquent interest. All debt service payments were made in accordance with the
workout. In June 1995, the three-year workout which originally expired on
October 1, 1995 was extended to October 1, 1996. In June 1996, HUD sold the
mortgage loan to a third party. The new mortgagee issued a notice of default
and acceleration of the loan to Posada Vallarta Apartments. The notice was
determined to be in error, and on July 8, 1996 the notice of default and
acceleration was withdrawn by the new mortgagee. The Local Partnership has made
an offer to buy-out the mortgagee at a discount based on assumed refinancing
potential, and is awaiting the mortgagee's response. There is no assurance that
an agreement will be reached. The workout agreement provides that upon
cancellation of the workout agreement, the loan would be recast at an annual
interest rate of 7.5%, if certain conditions are satisfied. As of October 24,
1996, the Managing General Partner and the new mortgagee are disputing whether
or not those conditions have been satisfied. On October 1, 1996, the Local
Partnership made a monthly payment on the debt in the amount which would be due
if the loan is recast at a 7.5% annual interest rate. There is no assurance
that an agreement will be reached with the mortgagee. Should the mortgagee
begin foreclosure proceedings, the Partnership intends to vigorously defend any
action by the mortgagee. The uncertainty about the Local Partnerships continued
ownership of the property does not impact the Partnership's financial condition
because the related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Posada Vallarta Apartments not produce sufficient value to satisfy
the related purchase money note, the Partnership's exposure to loss is limited
since the amount of nonrecourse indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss
of this investment would not have a material impact on the operations of the
Partnership.

On January 31, 1996, the local managing general partner of Palatine-
Barrington Associates Limited Partnership (Deer Grove) received an offer to sell
the property to an unaffiliated entity. This offer was rejected by the local
managing general partner. On September 13, 1996, the local managing general
partner of Deer Grove received another offer to sell the property. The local
managing general partner has accepted the offer and the sale is expected to take
place on or before February 1997. There is no assurance that a sale of Deer
Grove will occur as the potential buyer has the option to cancel the contract on
or before December 31, 1996, subject to its due diligence review.

Wexford Ridge Associates Local Partnership (located in Madison, Wisconsin),
its local general partner, and its management agent have been named in eight
sexual harassment and discrimination complaints filed with HUD. The Managing
General Partner believes the claims will have no aggregate material effect on
the financial statements of the Partnership and that legal costs associated with
the claims will be borne by the management agent.

On May 1, 1996, CRHC, Inc. (CRHC), an affiliate of the Managing General
Partner, notified the local managing general partner of Arrowhead Apartments

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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Associates Limited Partnership (Arrowhead) and Moorings Apartments Associates
Limited Partnership (Moorings) that it was in default under the Partnership
Agreements and threatened to remove him as managing general partner of the Local
Partnerships. The managing agent of Arrowhead and Moorings, which is an
affiliate of the local managing general partner, filed arbitration against CRHC
seeking, among other things, a declaration that the allegations set forth in
CRHC's notice did not constitute grounds for removal of the local managing
general partner. CRHC subsequently filed for arbitration against the local
managing general partner seeking his removal. On September 3, 1996, CRHC filed
an emergency petition in the arbitration to have a trustee appointed to serve as
local managing general partner and managing agent of the Local Partnerships
until the arbitration hearings are held. Hearings related to arbitration are
scheduled for November 19, 1996.

Some of the rental properties owned by the Local Partnerships have
mortgages which are federally insured under Section 236 or Section 221(d)(3) of
the National Housing Act, as amended. These properties may be eligible for
sale, subject to numerous requirements, under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). This program may
provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include: (i)
severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. HUD has subsequently received appropriations of $175 million
to fund sales of qualifying properties under the LIHPRHA program during the
federal government's fiscal year 1997, which began October 1, 1996. Continued
funding of the LIHPRHA program after fiscal year 1997, however, is uncertain.
There is no assurance that a sale of any of the properties will occur.

On July 11, 1996, the local managing partner's plan of action regarding the
sale of the property owned by Tanglewood Apartments Associates II (Tanglewood
II) under the LIHPRHA program was approved by HUD. The local general partner is
currently seeking funding under the LIHPRHA program for the proposed sale of the
property and the Managing General Partner anticipates that such a sale will
occur. There is, however, no assurance that a sale of Tanglewood II may occur
due to the federal government's limited funding of appropriations to the LIHPRHA
program for fiscal year 1997.

Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop a strategy to sell or refinance certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or to refinance the property,
or to obtain supplemental financing. The Managing General Partner continues to
monitor certain state housing agency programs to ascertain whether the

-8-

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

properties would qualify within the parameters of these programs and whether
these programs would provide an appropriate economic benefit to the limited
partners of the Partnership.

Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 HAP program. The level of funding for the Section 8 HAP program,
and HUD-insured multifamily housing in general, is dependent upon the
continuation of appropriations approved by Congress for subsidy payments. In
March 1996, HUD released a revised version of the Reinvention Blueprint issued
one year ago. The Reinvention Blueprint contains a proposal which has come to
be known as the "Mark to Market" initiative. Per this initiative, HUD is
proposing to eliminate the Section 8 HAP contracts on certain properties, under
which the property owners directly receive monthly subsidies for units occupied
by low-income tenants. Instead, HUD would provide voucher or certificate rental
assistance directly to eligible residents. In the event that the Section 8 HAP
program is eliminated or funding of Section 8 HAP contracts of rental properties
owned by the Local Partnerships is discontinued, there is no assurance that the
rental properties will be able to maintain the occupancy levels necessary to pay
debt service and operating costs or that the rents necessary to pay debt service
and operating costs will be competitive with rents for comparable units in the
rental properties' respective market areas. As of October 24, 1996, Congress,
the Senate and the Clinton Administration continue to struggle with the "Mark to
Market" legislation. In the interim, Congress has authorized a one-year
extension of project-based Section 8 HAP contacts expiring during fiscal years
1996 and 1997. In light of recent political scrutiny of appropriations for HUD
programs, continued funding of annual renewals for Section 8 HAP contracts
expiring after fiscal year 1997 is uncertain.

On August 29, 1996, Equity Resource Bay Fund (Bay Fund), a Massachusetts
Limited Partnership and an Additional Limited Partner in the Partnership, and
affiliates of Bay Fund initiated a tender offer to purchase 1,500 additional
units in the Partnership at a price of $10 per Additional Limited Partner unit.
Bay Fund which is unaffiliated with CRI, Inc., stated that it made the offer for
the express purpose of holding the limited partnership units for investment
purposes and not with a view to resale. The purchase offer was determined
solely at the discretion of Bay Fund and does not necessarily represent the fair
market value of each Additional Limited Partner unit. The Bay Fund and
affiliates' offer expired on September 29, 1996, and as of October 24, 1996, Bay
Fund and affiliates held approximately 2.2% of the Additional Limited Partner
units of the Partnership as a result of their tender offer.

The following are combined statements of operations for the twenty-two
Local Partnerships in which the Partnership has invested. The statements are
compiled from information supplied by the management agents of the projects and
are unaudited.

-9-

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

COMBINED STATEMENTS OF OPERATIONS
(Unaudited)

Revenue:
Rental revenue $ 6,966,409 $ 6,992,515 $ 21,585,100 $ 21,168,915
Other 334,324 444,233 938,930 1,227,585
------------ ------------ ------------ ------------
7,300,733 7,436,748 22,524,030 22,396,500
------------ ------------ ------------ ------------
Expenses:
Operating 5,015,785 4,999,332 15,017,996 14,778,431
Interest 2,114,726 2,097,325 6,344,184 6,291,984
Depreciation and amortization 1,378,526 1,351,817 4,135,596 4,055,456
------------ ------------ ------------ ------------
8,509,037 8,448,474 25,497,776 25,125,871
------------ ------------ ------------ ------------
Net loss $ (1,208,304) $ (1,011,726) $ (2,973,746) $(2,729,371)
============ ============ ============ ============

As of September 30, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for nine of the twenty-two Local Partnerships exceeds
the amount of the Partnership's investments in and advances to those Local
Partnerships by $27,400,786 and $24,699,157, respectively. As the Partnership
has no further obligation to advance funds or provide financing to these Local
Partnerships, the excess losses have not been reflected in the accompanying
financial statements.

3. RELATED-PARTY TRANSACTIONS

In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership. The Partnership paid $24,052 and $79,575 for the
three and nine months ended September 30, 1996, respectively, and $22,729 and
$67,424 for the three and nine months ended September 30, 1995, respectively, as
direct reimbursement of expenses incurred on behalf of the Partnership. Such
expenses are included in the statements of operations as general and
administrative expenses. Additionally, the Partnership is obligated to pay an
annual incentive management fee (the Management Fee) after all other expenses of
the Partnership are paid. The Partnership paid the Managing General Partner a
Management Fee of $62,499 and $187,497 for the three and nine months,
respectively, ended September 30, 1996 and 1995.

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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

4. CONTINGENCIES

In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.

Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby breached the asset management agreement pursuant to which Mr.
Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership was not named as a
defendant in this action. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby
publicly responded that Mr. Schwartzberg's suit was motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. On February 12, 1996, the Circuit Court also issued a memorandum opinion
and order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.

On June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement
(which contemplates the execution of a subsequent definitive agreement) to
resolve the disputes between CRI and CMS. The Partnership was not a signatory
to the agreement. As part of the resolution, Mr. Schwartzberg withdrew any
derogatory statements he made about CRI and its principals. Upon execution of
the definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner
of this Partnership and his interest will become that of a Special Limited
Partner. As of October 24, 1996, CRI and Mr. Schwartzberg continue to finalize
the terms of the definitive agreement.

-11-

PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------

Capital Realty Investors-II Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains information that may be considered forward looking. This
information contains a number of risks and uncertainties, as discussed herein
and in the Partnership's Annual Report filed on Form 10-K, that could cause
actual results to differ materially.

Financial Condition/Liquidity
-----------------------------

The Partnership's liquidity, with unrestricted cash resources of $2,160,782
(or approximately $41.92 per Additional Limited Partner unit) and $3,192,539 (or
approximately $61.94 per Additional Limited Partner unit) as of September 30,
1996 and December 31, 1995, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs. As of October 24, 1996, there are no material
commitments for capital expenditures.

-12-

January 1, 1998. Under the agreement, the Partnership will pay the purchase
money noteholders of Beech Hill I and Beech Hill II all annual cash flow
distributions received from the related Local Partnerships in excess of $5,000
and $2,500, respectively. There were no annual cash flow distributions made to
the Partnership from the related Local Partnerships during the nine months ended
September 30, 1996 and 1995. Also under the agreement, documents transferring
the Partnership's interests in the related Local Partnerships to the noteholders
have been placed in escrow and would be released to the noteholders upon a
future default by the Partnership on the respective purchase money notes.

The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the nine months ended September 30, 1996, the receipt of distributions from
Local Partnerships was adequate to support operating cash requirements. Cash
and cash equivalents decreased during the nine months ended September 30, 1996
as a result of the pay-off of the Rock Glen purchase money note, as discussed
above.

-13-

Results of Operations
---------------------

The Partnership's net loss for the three months ended September 30, 1996
increased from the comparable period in 1995 primarily due to an increase in
share of loss from partnerships resulting principally from increased operating
costs at one property. Contributing to the increase in the Partnership's net
loss was a decrease in interest income as a result of decreased cash and cash
equivalent balances in 1996. Also contributing to the increase in the
Partnership's net loss was an increase in general and administrative expenses
primarily due to increased payroll costs. Partially offsetting the increase in
the Partnership's net loss was a decrease in interest expense due to the
extinguishment of the Rock Glen purchase money note during the first quarter of
1996.

The Partnership's net loss for the nine months ended September 30, 1996
decreased from the corresponding period in 1995 primarily due to the gain on
extinguishment of the Rock Glen purchase money note, as discussed above.
Contributing to the decrease in the Partnership's net loss was a decrease in
interest expense, as discussed above. Partially offsetting the decrease in the
Partnership's net loss was an increase in share of loss from partnerships, a
decrease in interest income and an increase in general and administrative
expenses, as discussed above. Also partially offsetting the decrease in the
Partnership's net loss was an increase in professional fees due to legal fees
incurred associated with the removal of the Arrowhead and Mooring local managing
general partner.

For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three and nine months
ended September 30, 1996 did not include losses of $929,058 and $2,701,629,
respectively, compared to excluded losses of $873,303 and $2,619,912 for the
three and nine months ended September 30, 1995, respectively.

-14-

-15-

ownership of the property does not impact the Partnership's financial condition
because the related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Posada Vallarta Apartments not produce sufficient value to satisfy
the related purchase money note, the Partnership's exposure to loss is limited
since the amount of nonrecourse indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss
of this investment would not have a material impact on the operations of the
Partnership.

On May 1, 1996, CRHC, Inc. (CRHC), an affiliate of the Managing General
Partner, notified the local managing general partner of Arrowhead Apartments
Associates Limited Partnership (Arrowhead) and Moorings Apartments Associates
Limited Partnership (Moorings) that it was in default under the Partnership
Agreements and threatened to remove him as managing general partner of the Local
Partnerships. The managing agent of Arrowhead and Moorings, which is an
affiliate of the local managing general partner, filed arbitration against CRHC
seeking, among other things, a declaration that the allegations set forth in
CRHC's notice did not constitute grounds for removal of the local managing
general partner. CRHC subsequently filed for arbitration against the local
managing general partner seeking his removal. On September 3, 1996, CRHC filed
an emergency petition in the arbitration to have a trustee appointed to serve as
local managing general partner and managing agent of the Local Partnerships
until the arbitration hearings are held. Hearings related to arbitration are
scheduled for November 19, 1996.

-16-

owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. HUD has subsequently received appropriations of $175 million
to fund sales of qualifying properties under the LIHPRHA program during the
federal government's fiscal year 1997, which began October 1, 1996. Continued
funding of the LIHPRHA program after fiscal year 1997, however, is uncertain.
There is no assurance that a sale of any of the properties will occur.

On July 11, 1996, the local managing partner's plan of action regarding the
sale of the property owned by Tanglewood Apartments Associates II (Tanglewood
II) under the LIHPRHA program was approved by HUD. The local general partner is
currently seeking funding under the LIHPRHA program for the proposed sale of the
property and the Managing General Partner anticipates that such a sale may
occur. There is, however, no assurance that a sale of Tanglewood II will occur
due to the federal government's limited funding of appropriations to the LIHPRHA
program for fiscal year 1997.

-17-

programs, continued funding of annual renewals for Section 8 HAP contracts
expiring after fiscal year 1997 is uncertain.

No other significant changes in the Partnership's operations have taken
place during this period.

General
-------

-18-

the definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner
of this Partnership and his interest will become that of a Special Limited
Partner. As of October 24, 1996, CRI and Mr. Schwartzberg continue to finalize
the terms of the definitive agreement.

PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------

No Reports on Form 8-K were filed with the Commission during the quarter
ended September 30, 1996.

All other items are not applicable.

-19-

SIGNATURE

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

CAPITAL REALTY INVESTORS-II
LIMITED PARTNERSHIP
(Registrant)

By: C.R.I., Inc.
Managing General Partner

October 29, 1996 By: /s/ Deborah K. Browning
- --------------------- --------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting
Officer

Signing on behalf of the
Registrant and as Principal
Accounting Officer

-20-

EXHIBIT INDEX
-------------

Exhibit Method of Filing
- ------- -----------------------------

27 Financial Data Schedule Filed herewith electronically

-21-