FORM 10-QSB—QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15 (d) OP

10QSB 1 ntci2907.htm FORM 10-QSB—QUARTERLY OR TRANSITIONAL REPORT UNDER SECTION 13 OR 15 (d) OP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

(Mark One)

[X]

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

ACT OF 1934

For the quarterly period ended September 30, 2007

[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from __________ to __________

Commission file number 0-20610

NATIONAL TAX CREDIT INVESTORS II

(Exact name of small business issuer as specified in its charter)

California

95-1017959

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization

Identification No.)

55 Beattie Place, PO Box 1089

Greenville, South Carolina 29602

(Address of principal executive offices)

(864) 239-1000

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X_

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

NATIONAL TAX CREDIT INVESTORS II

BALANCE SHEET

SEPTEMBER 30, 2007

(in thousands)

(Unaudited)


ASSETS

Investments in and advances to Local Partnerships (Note 2)		$ 1,668
Cash and cash equivalents		4,123
Mortgage note receivable, net (Note 3)		4,278
Total assets		$10,069

LIABILITIES AND PARTNERS' (DEFICIENCY) CAPITAL

Liabilities:
Accounts payable and accrued expenses		$ 104
Due to affiliates (Note 4)		6,152

Contingencies (Note 6)

Partners' (deficiency) capital:
General partner	$ (591)
Limited partners	4,404	3,813
Total liabilities and partners' (deficiency) capital		$10,069

See Accompanying Notes to Financial Statements

NATIONAL TAX CREDIT INVESTORS II

STATEMENTS OF OPERATIONS

(in thousands, except per interest data)

(Unaudited)


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2007	2006	2007	2006
Revenues:
Interest income	$ 3	$ 1	$ 9	$ 3
Gain on legal settlement (Note 5)	--	--	--	102
Total revenues	3	1	9	105

Operating expenses:
Management fees - partners (Note 4)	118	135	353	404
General and administrative (Note 4)	44	35	104	111
Interest (Note 4)	113	163	353	280
Legal and accounting	14	22	68	75
Total operating expenses	289	355	878	870

Loss from partnership operations	(286)	(354)	(869)	(765)
Impairment loss (Note 1)	--	--	(240)	--
Gain on sale of investments (Note 2)	3,455	--	3,455	10
Distributions from Local Partnerships
recognized as income (Note 2)	11	22	1,005	91
Return of advances made to Local Partnerships
recognized as income (Note 2)	2	--	32	75
Advances made to Local Partnerships recognized
as expense (Note 2)	(58)	(11)	(433)	(308)
Equity in loss of Local Partnerships
and amortization of acquisition costs
(Note 2)	(14)	(85)	(219)	(215)

Net income (loss)	$ 3,110	$ (428)	$ 2,731	$(1,112)

Net income (loss) allocated to general
partner (1%)	$ 31	$ (4)	$ 27	$ (11)
Net income (loss) allocated to limited
partners (99%)	3,079	(424)	2,704	(1,101)

	$ 3,110	$ (428)	$ 2,731	$(1,112)
Net income (loss) per limited partnership
interest (Note 1)	$ 42.53	$ (5.86)	$ 37.35	$(15.21)

See Accompanying Notes to Financial Statements

NATIONAL TAX CREDIT INVESTORS II

STATEMENT OF CHANGES IN PARTNERS' (DEFICIENCY) CAPITAL

(in thousands, except interest data)

(Unaudited)


	General	Limited
	Partner	Partners	Total

Partnership interests (Note 1)		72,370

Partners' (deficiency) capital,
December 31, 2006	$ (618)	$ 1,700	$ 1,082

Net income for the nine months
ended September 30, 2007	27	2,704	2,731

Partners' (deficiency) capital,
September 30, 2007	$ (591)	$ 4,404	$ 3,813

See Accompanying Notes to Financial Statements

NATIONAL TAX CREDIT INVESTORS II

STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2007	2006
Cash flows from operating activities:
Net income (loss)	$ 2,731	$(1,112)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Advances made to Local Partnerships recognized as expense	433	308
Return of advances made to Local Partnerships
recognized as income	(32)	(75)
Equity in loss of Local Partnerships and amortization
of acquisition costs	219	215
Impairment loss	240	--
Gain on sale of investments in Local Partnerhips	(3,455)	(10)
Change in accounts:
Accounts payable and accrued expenses	(33)	(34)
Accrued fees due to partners	403	454
Accrued interest due to affiliates	134	280
Net cash provided by operating activities	640	26

Cash flows from investing activities:
Acquisition of mortgage note receivable	--	(4,320)
Distributions from Local Partnerships recognized as a
return of investment balance	83	41
Proceeds from sale of Local Partnership interests	3,990	10
Advances to Local Partnerships	(447)	(312)
Repayment of advances by Local Partnerships	46	79
Net cash provided by (used in) investing activities	3,672	(4,502)

Cash flows from financing activities:
Advances from affiliate	--	4,601
Repayment of advances from affiliates	(481)	--
Net cash (used in) provided by financing activities	(481)	4,601

Net increase in cash and cash equivalents	3,831	125
Cash and cash equivalents, beginning of period	292	26

Cash and cash equivalents, end of period	$ 4,123	$ 151
Supplemental disclosure of cash flow information:
Cash paid for interest	$ 219	$ --

See Accompanying Notes to Financial Statements

NATIONAL TAX CREDIT INVESTORS II

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Organization And Summary Of Significant Accounting Policies

General

The information contained in the following notes to the unaudited financial statements is condensed from that which would appear in the annual audited financial statements; accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and related notes thereto contained in the annual report for the fiscal year ended December 31, 2006 filed by National Tax Credit Investors II (the “Partnership” or “NTCI-II”). Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. The results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year.

In the opinion of the Partnership, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position as of September 30, 2007 and the results of operations and changes in cash flows for the nine months ended September 30, 2007 and 2006.

Organization

NTCI-II is a limited partnership formed under the California Revised Local Partnership Act as of January 12, 1990. The Partnership was formed to invest primarily in other limited partnerships (“Local Partnerships”) which own and operate multifamily housing complexes that are eligible for low income housing federal income tax credits (the “Housing Tax Credit”). The general partner of the Partnership is National Partnership Investments Corp. (the “General Partner” or “NAPICO”), a California corporation. The Partnership shall continue in full force and effect until December 31, 2030 unless terminated earlier pursuant to the Partnership Agreement or law.

The General Partner has a one percent interest in the operating profits and losses of the Partnership. The limited partners will be allocated the remaining 99 percent interest in proportion to their respective investments. The General Partner is an affiliate of Apartment Investment and Management Company ("AIMCO"), a publicly traded real estate investment trust.

Upon total or partial liquidation of the Partnership or the disposition or partial disposition of a project or project interest and distribution of the proceeds, the General Partner will be entitled to a property disposition fee as mentioned in the partnership agreement. The limited partners will have a priority item equal to their invested capital plus 6 percent priority return as defined in the partnership agreement. This property disposition fee may accrue but shall not be paid until the limited partners have received distributions equal to 100 percent of their capital contributions plus the 6 percent priority return. No disposition fees have been paid or accrued.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States.

Certain reclassifications have been made to the 2006 information to conform to the 2007 presentation.

Method of Accounting for Investments in Local Partnerships

The investments in Local Partnerships are accounted for on the equity method. Acquisition fees, selection fees and other costs related to the acquisition of the projects have been capitalized as part of the investment account and are being amortized by the straight line method over the estimated lives of the underlying assets, which is generally 30 years.

Mortgage Note Receivable

The Partnership reviews its mortgage note receivable whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Partnership has recorded its mortgage note receivable at September 30, 2007 at the amount at which the Partnership acquired the mortgage note receivable during 2006 less equity in loss recognized with respect to the Local Partnership that is obligated under the mortgage note. No reserve was recognized during the nine months ended September 30, 2007. See “Note 3 – Mortgage Note Receivable” for further information.

Impairment of Long-Lived Assets

The Partnership reviews long-lived assets to determine if there has been any impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the assets, the Partnership recognizes an impairment loss. The Partnership recognized an impairment loss of approximately $240,000 during the nine months ended September 30, 2007. No impairment loss was recognized during the nine months ended September 30, 2006.

Abandonment of Limited Partnership Interests

During the nine months ended September 30, 2007, the number of Limited Partnership Interests decreased by 34 units, due to limited partners abandoning their units. In abandoning his or her Limited Partnership Interests, a limited partner relinquishes all right, title, and interest in the Partnership as of the date of abandonment.

Net Income (Loss) Per Limited Partnership Interest

Net income (loss) per limited partnership interest was computed by dividing the limited partners’ share of net income (loss) by the number of limited partnership interests outstanding as of the beginning of the year. The number of limited partner interests was 72,404 as of January 1, 2007 and 2006.

FASB Interpretation No. 46

As of December 31, 2004, the Partnership adopted FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” (or “FIN 46”) and applied its requirements to all Local Partnerships in which the Partnership held a variable interest. FIN 46 addresses the consolidation by business enterprises of variable interest entities. Generally, a variable interest entity, or VIE, is an entity with one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. FIN 46 requires a VIE to be consolidated in the financial statements of the entity that is determined to be the primary beneficiary of the VIE.

The Partnership holds variable interests in 12 VIEs for which the Partnership is not the primary beneficiary. These 12 VIEs consist of Local Partnerships in which the Partnership acquired an interest prior to the adoption of FIN 46 that are directly engaged in the ownership or management of twelve apartment properties with a total of 1,309 units. The Partnership is involved with those VIEs as a non-controlling limited partner equity holder. The Partnership’s maximum exposure to loss as a result of its involvement with unconsolidated VIEs is limited to the Partnership’s recorded investments in and receivables from those VIEs, which was approximately $5,946,000 at September 30, 2007. The Partnership may be subject to additional losses to the extent of any financial support that the Partnership voluntarily provides in the future.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS No. 157 establishes a hierarchy that prioritizes the information used in developing fair value estimates. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data. SFAS No. 157 requires fair value measurements to be disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Partnership does not anticipate that the adoption of SFAS No. 157 will have a material effect on the Partnership’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Partnership has not yet determined whether it will elect the fair value option for any of its financial instruments.

In June 2007, the American Institute of Certified Public Accountants (“the AICPA”) issued Statement of Position No. 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” ("SOP 07-1"). SOP 07-1 provides guidance for determining whether the accounting principles of the AICPA Audit and Accounting Guide “Investment Companies” are required to be applied to an entity by clarifying the definition of an investment company and, whether investment company accounting should be retained by a parent company upon consolidation of an investment company subsidiary, or by an investor in the application of the equity method of accounting to an investment company investee. SOP 07-1 applies to reporting periods beginning on or after December 15, 2007; however, the FASB has decided to issue an exposure draft that would indefinitely delay the effective date of SOP 07-1 until the FASB can reassess the provisions of SOP 07-1. The Partnership is currently evaluating the impact, if any, that adoption of SOP 07-1 may have on its financial statements in the period of adoption.

Note 2 - Investments In and Advances to Local Partnerships

As of September 30, 2007 the Partnership holds limited partnership interests in 19 Local Partnerships, located in 13 states and Puerto Rico. At September 30, 2007, the Local Partnerships own residential projects consisting of 2,034 apartment units. As a limited partner of the Local Partnerships, the Partnership does not have authority over day-to-day management of the Local Partnerships or their properties (the "Apartment Complexes"). The general partners responsible for management of the Local Partnerships (the "Local Operating General Partners") are not affiliated with the General Partner of the Partnership, except as discussed below.

The projects owned by the Local Partnerships in which NTCI-II has invested were developed by the Local Operating General Partners who acquired the sites and applied for applicable mortgages and subsidies, if any. NTCI-II became the principal limited partner in these Local Partnerships pursuant to arm's-length negotiations with the Local Operating General Partners. As a limited partner, NTCI-II's liability for obligations of the Local Partnerships is limited to its investment. The Local Operating General Partner of the Local Partnerships retains responsibility for developing, constructing, maintaining, operating and managing the Projects. Under certain circumstances, an affiliate of NAPICO or NTCI-II may act as the Local Operating General Partner. An affiliate, National Tax Credit Inc. II ("NTC-II") is acting either as a special limited partner or non-managing administrative general partner (the “Administrative General Partner”) of each Local Partnership.

The individual investments are carried at cost plus the Partnership’s share of the Local Partnership’s profits less the Partnership’s share of the Local Partnership’s losses, distributions and impairment charges. The Partnership is not legally liable for the obligations of the Local Partnerships and is not otherwise committed to provide additional support to them. Therefore, it does not recognize losses once its investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. When the investment balance has been reduced to zero, subsequent distributions received are recognized as income in the accompanying statements of operations.

For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received and amortization of acquisition costs from those Local Partnerships. Therefore, the Partnership limits its recognition of equity earnings to the amount it expects to ultimately realize.

As of September 30, 2007, the investment balance in 15 of the 19 Local Partnerships had been reduced to zero, however, as discussed in Note 3, during 2006 the Partnership acquired the mortgage note receivable with respect to a Local Partnership that is obligated under the mortgage note.

At times, advances are made to Local Partnerships in order to preserve the ability to receive applicable Tax Credits. Advances made by the Partnership to the individual Local Partnerships are considered part of the Partnership’s investment in limited partnerships. Advances made to Local Partnerships in which the investment balance has been reduced to zero are charged to expense. During the nine months ended September 30, 2007 and 2006 the Partnership advanced to several Local Partnerships approximately $447,000 and $312,000, respectively. One Local Partnership repaid advances of approximately $46,000 during the nine months ended September 30, 2007, of which approximately $32,000 had been previously charged to expense and two Local Partnerships repaid advances, one of which was previously reserved, of approximately $79,000 during the nine months ended September 30, 2006.

The following is a summary of the investments in and advances to Local Partnerships for the nine months ended September 30, 2007 (in thousands):


Investment balance, beginning of period	$ 2,703
Equity in loss of Local Partnerships, net (see Note 3)	(142)
Distributions recognized as a reduction
of investment balance	(83)
Advances to Local Partnerships	447
Repayment of advances by Local Partnerships	(46)
Advances made to Local Partnerships
recognized as expense	(401)
Sale of local partnership interests	(535)
Amortization of capitalized acquisition
costs and fees	(35)
Impairment loss	(240)
Investment balance, end of period	$ 1,668

The following are unaudited condensed combined estimated statements of operations for the three and nine months ended September 30, 2007 and 2006 for the Local Partnerships in which the Partnership has investments. In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, the 2007 amounts exclude Jefferson Meadows due to the sale of its investment property on March 30, 2007, exclude Pam Apartments which was sold May 14, 2007, exclude Edgewood, Salem Park, Germantown, and Meadow Lake Apartments for which the Partnership assigned its Local Partnership interest to third parties on September 28, 2007 and exclude Jamestown Terrace which is classified as held for sale at September 30, 2007. The Partnership has no remaining investment balance in these Local Partnerships at September 30, 2007. The 2006 amounts have been restated to exclude the seven Local Partnerships above, and to also exclude Oak View Apartments due to the sale of its investment property in December 2006 and Great Basin Associates due to the sale of the Partnership’s interest in October 2006.


	Three Months Ended		Nine months ended
	September 30,		September 30,
	2007	2006	2007	2006
		(Restated)		(Restated)
Revenues:
Rental and other income	$ 3,176	$ 2,995	$ 9,511	$ 9,021
Expenses
Operating expenses	1,909	1,789	5,982	5,502
Interest	846	863	2,537	2,585
Depreciation and amortization	752	748	2,256	2,240
Total expenses	3,507	3,400	10,775	10,327
Loss from continuing operations	$ (331)	$ (405)	$(1,264)	$(1,306)

An affiliate of the General Partner is currently the Local Operating General Partner in five of the Partnership’s 19 Local Partnerships included above, and another affiliate receives property management fees of approximately 5 percent of gross revenues from one of the Local Partnerships (See “Note 4 – Related Party Transactions").

During 2002, a Local Partnership, Michigan Beach, reached a settlement with the City of Chicago to complete necessary repairs to the exterior façade of the building. As of September 30, 2007, the Partnership had advanced Michigan Beach approximately $1,347,000 to complete these repairs and an additional approximately $893,000 for other operational items. These advances bear interest at prime plus 2% (approximately 9.75% at September 30, 2007) and interest earned by the Partnership was approximately $169,000 for both of the nine months ended September 30, 2007 and 2006. The Partnership has charged to expense all of the advances and any interest earned related to the advances to Michigan Beach due to the uncertainty of collection.

On February 28, 2006, a Local Partnership, Ashville Equity, sold its investment property to a third party. The Partnership received a partial repayment of approximately $75,000 of fully reserved advances due from Ashville Equity during the three months ended March 31, 2007. The Partnership had no investment balance in this Local Partnership at September 30, 2007.

On June 30, 2006, the local operating general partner of Nickel River elected to exercise its option to buy the Partnership’s remaining interest in the Local Partnership for $10,000. The Partnership had no remaining investment balance in this Local Partnership at June 30, 2006 and the proceeds were recorded as gain on sale of investment for the nine months ended September 30, 2006.

On December 13, 2006, a Local Partnership, Oak View Spartanburg Limited Partnership (“Oakview”), sold its investment property. The distribution proceeds received of approximately $1,880,000 exceeded the Partnership’s investment balance in Oakview by approximately $469,000, which was recognized as a distribution in excess of investment during the year ended December 31, 2006. The Partnership had no investment balance remaining in this Local Limited Partnership at September 30, 2007.

On September 19, 2005, a Local Partnership, Pen-Hill-Co Limited Partnership, granted an option to sell its property, Westbridge Apartments, on or after January 2, 2006 to an affiliate of the lender for the outstanding indebtedness. Westbridge Apartments was sold to a third party on March 29, 2006 and the transaction was recorded as a deed-in-lieu of foreclosure. The Partnership had no remaining investment balance in this Local Partnership at September 30, 2007.

On March 30, 2007 a Local Partnership, Jefferson Meadows Apartments, sold its investment property to a third party. The Partnership received a distribution of approximately $39,000 during the second quarter of 2007. The Partnership had no investment balance remaining in this Local Partnership at September 30, 2007 and the distribution was recognized as income during the nine months ended September 30, 2007.

During the second quarter of 2007, a Local Partnership, Pampa Partnership Limited, entered into a sale contract to sell its investment property to a third party. The sale was subject to the defeasance of the bonds encumbering the investment property. The sale was completed during the second quarter of 2007 and the Partnership received a distribution of approximately $931,000 from the sale proceeds. During the third quarter of 2007, the Partnership received an additional distribution of approximately $11,000 from the sale. The Partnership had no investment balance remaining in this Local Partnership at September 30, 2007 and the distributions were recognized as income during the nine months ended September 30, 2007.

During the second quarter of 2007, the Partnership was notified by the general partner of a Local Partnership, Jamestown Terrace Limited Partnership (“Jamestown”), that Jamestown had entered into a sale contract to sell its investment property, along with fourteen other investment properties in which the general partner is affiliated, to a third party. The sale price of each property is based upon a third party appraisal and the amount of replacement reserves transferred to the purchaser at closing. The estimated sale price, if the sale occurs, for the investment property owned by Jamestown is approximately $3,900,000. The estimated closing date of the sale is during the first quarter of 2008. The Partnership had no investment balance remaining in Jamestown at September 30, 2007. It is expected that the sale of the investment property owned by Jamestown will result in distributable proceeds to the Partnership; however, at this time an estimate of the distributable proceeds is not available.

During the second quarter of 2007, the Partnership recognized an impairment loss of approximately $240,000 in one Local Partnership, Meadowlakes Apartments (“Meadowlakes”). Based upon information obtained by the Partnership relating to the estimated fair value of Meadowlakes, the Partnership determined that the carrying amount of its limited partnership investment in Meadowlakes exceeded the estimated proceeds the Partnership would expect to receive from a sale of the investment property owned by Meadowlakes. The Partnership had no investment balance in this Local Partnership at September 30, 2007.

During the three and nine months ended September 30, 2007, the Partnership assigned its limited partnership interest in Edgewood Limited Partnership (“Edgewood”), Germantown Limited Partnership (“Germantown”), Meadow Lake Limited Partnership (“Meadow Lake”), and Salem Park Limited Partnership (“Salem Park”) to various individuals for approximately $411,000, $1,533,000, $99,000, and $1,947,000, respectively. The proceeds were recorded as gain on sale of investment for the three and nine months ended September 30, 2007. The Partnership had investment balances of approximately $206,000, $230,000, $99,000, and zero in Edgewood, Germantown, Meadow Lake and Salem Park, respectively, at the time of assignment and no investment balance as of September 30, 2007.

Note 3 – Mortgage Note Receivable

On May 30, 2006, the Partnership purchased the second mortgage for a Local Partnership, Michigan Beach, from the second mortgage holder, PAMI Midatlantic, LLC (“PAMI”) for a purchase price of $4,320,000. PAMI had filed an action for foreclosure and the appointment of a receivor for the alleged failure to make surplus cash payments and provide required financial reporting. As a result of the purchase, the Partnership was substituted in place of PAMI in the foreclosure action and then the Partnership dismissed the foreclosure action with prejudice on June 9, 2006. The Partnership is a limited partner in Michigan Beach. The Partnership borrowed $4,320,000 from an affiliate of NAPICO in order to purchase the second mortgage at Michigan Beach.

The second mortgage had a principal balance of approximately $3,596,000 at the time of purchase and accrues interest at a fixed rate of 6.11%. Semiannual payments from 50% of surplus cash are required and the note matures in July of 2031. There is an option to the noteholder to accelerate maturity of the second mortgage after October 2008. There have been no payments made on the loan and Michigan Beach did not generate any surplus cash for the years ended December 31, 2006 and 2005. The accrued interest at the time the Partnership purchased the second mortgage was approximately $1,605,000. The accrued interest balance at September 30, 2007 was approximately $1,898,000. In June 2006, the local general partner, an affiliate of the General Partner, negotiated a purchase and sale contract for the sale of Michigan Beach to a third party for a total sales price of $13,700,000. In September 2006, the third party terminated the purchase and sale contract. The local general partner is currently marketing the property for sale. The Partnership recognized approximately $42,000 in equity in loss from Michigan Beach during the nine months ended September 30, 2007 and reduced the carrying value of the mortgage note receivable. The Partnership currently expects to receive payment in full on the second mortgage from Michigan Beach upon ultimate sale of the property and accordingly no reserve has been established against the carrying value of the mortgage note receivable at September 30, 2007, however, the Partnership has fully reserved any additional accrued interest.

Note 4 - Related Party Transactions

Under the terms of its Partnership Agreement, the Partnership is obligated to the General Partner for the following fees:

(a)

An annual Partnership management fee in an amount equal to 0.5 percent of invested assets (as defined in the Partnership Agreement) at the beginning of the year is payable to the General Partner. For the nine months ended September 30, 2007 and 2006, partnership management fees in the amount of approximately $353,000 and $404,000, respectively, were recorded as an expense. At September 30, 2007, approximately $1,537,000 of these fees remain unpaid and are included in due to affiliates on the accompanying balance sheet.

(b)

A property disposition fee is payable to the General Partner in an amount equal to the lesser of (i) one-half of the competitive real estate commission that would have been charged by unaffiliated third parties providing comparable services in the area where the apartment complex is located, or (ii) 3 percent of the sale price received in connection with the sale or disposition of the apartment complex or local partnership interest, but in no event will the property disposition fee and all amounts payable to unaffiliated real estate brokers in connection with any such sale exceed in the aggregate, the lesser of the competitive rate (as described above) or 6 percent of such sale price. Receipt of the property disposition fee will be subordinated to the distribution of sale or refinancing proceeds by the Partnership until the limited partners have received distributions of sale or refinancing proceeds in an aggregate amount equal to (i) their 6 percent priority return for any year not theretofore satisfied (as defined in the Partnership Agreement) and (ii) an amount equal to the aggregate adjusted investment (as defined in the Partnership Agreement) of the limited partners. No disposition fees have been paid or accrued.

(c)

The Partnership reimburses NAPICO for certain expenses. The reimbursement to NAPICO was approximately $45,000 for both of the nine months ended September 30, 2007 and 2006, and is included in general and administrative expenses. At September 30, 2007 approximately $167,000 of the reimbursement remains unpaid and is included in due to affiliates on the accompanying balance sheet. NTC-II or another affiliate of the General Partner is the Local Operating General Partner in five of the Partnership's 19 Local Partnerships. In addition, NTC-II is typically either a special limited partner or an administrative general partner in each Local Partnership.

An affiliate of the General Partner managed one property and two properties owned by Local Partnerships during the nine months ended September 30, 2007 and 2006, respectively. During the nine months ended September 30, 2006 one of the properties managed by an affiliate of the General Partner was sold. The Local Partnerships pay the affiliate property management fees in the amount of five percent of their gross rental revenues and data processing fees. The amounts paid were approximately $76,000 and $71,000 for the nine months ended September 30, 2007 and 2006, respectively.

The General Partner is not obligated to advance funds to the Partnership for operations or to fund Partnership advances to Local Partnerships, but may voluntarily do so from time to time. Accordingly, prior to January 1, 2006, during the nine months ended September 30, 2006 and later in 2006, an affiliate of the General Partner advanced the Partnership funds for advances to Local Partnerships and for the Partnership’s purchase of the second mortgage at Michigan Beach. There were no such advances during the nine months ended September 30, 2007. These advances bear interest at prime plus 2% (9.75% at September 30, 2007). Interest expense was approximately $353,000 and $280,000 for the nine months ended September 30, 2007 and 2006, respectively. Approximately $700,000 of principal and accrued interest were repaid during the nine months ended September 30, 2007 from the distribution received from Pampa Partnership. There were no such repayments during the nine months ended September 30, 2006. Approximately $4,448,000 of advances and accrued interest remain unpaid at September 30, 2007 and are included in due to affiliates on the accompanying balance sheet. Subsequent to September 30, 2007, advances and accrued interest of approximately $3,600,000 were repaid from the proceeds received from the assignment of the Partnership’s limited partnership interest in four Local Partnerships during September 2007.

As of September 30, 2007, the accrued fees and advances due to the General Partner exceeded the Partnership’s cash. The General Partner has indicated that, during the forthcoming year, it will not demand payment of amounts due in excess of such cash; however, the Partnership still remains liable for all such amounts.

Note 5 – Gain on Legal Settlement

During 2001, the Partnership and an affiliated partnership filed a suit against several parties for breach of fiduciary duties and breach of the partnership agreements of Quivira Limited Partnership, in which the Partnership has invested, and another Limited Partnership in which the affiliated partnership is invested. The property in each respective Limited Partnership had been refinanced during 2001; however, the proceeds from the refinancing were being held within the Quivira Limited Partnership instead of being distributed.

During the year ended December 31, 2002, the Partnership received approximately $108,000 from one of the parties involved in this legal action as part of a settlement agreement. Approximately $1,492,000 of its share of the refinancing proceeds of Quivira Limited Partnership were received during August 2002. The Partnership obtained judgments totaling approximately $4,800,000 against certain defendants in 2002. During the year ended December 31, 2003, the Partnership received approximately $1,682,000 from the parties involved in this legal action as part of a global settlement agreement with the local general partner. During the nine months ended September 30, 2006 and the years ended December 31, 2005 and 2004, the Partnership received approximately $102,000, $80,000 and $193,000, respectively, in additional settlement payments. There were no settlement payments received during the nine months ended September 30, 2007. As part of the settlement agreement, the Partnership expects to receive additional payments from the defendants over the next three years, however, no assurance can be given that these additional payments will be received. Therefore, the Partnership will recognize any additional settlement payments in its statement of operations when received.

Note 6 - Contingencies

The General Partner is involved in various lawsuits arising from transactions in the ordinary course of business. In the opinion of management and the General Partner, the claims will not result in any material liability to the Partnership.

Item 2.

Management's Discussion And Analysis Or Plan Of Operation

The matters discussed in this report contain certain forward-looking statements, including, without limitation, statements regarding future financial performance and 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 risks and factors including, without limitation: national and local economic conditions; the terms of governmental regulations that affect the Registrant and interpretations of those regulations; the competitive environment in which the Registrant operates; financing risks, including the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; real estate risks, including variations of real estate values and the general economic climate in local markets and competition for tenants in such markets; litigation, including costs associated with prosecuting and defending claims and any adverse outcomes, and possible environmental liabilities. Readers should carefully review the Registrant's financial statements and the notes thereto, as well as the risk factors described in the documents the Registrant files from time to time with the Securities and Exchange Commission.

The General Partner monitors developments in the area of legal and regulatory compliance. For example, the Sarbanes-Oxley Act of 2002 mandates or suggests additional compliance measures with regard to governance, disclosure, audit and other areas. In light of these changes, the Partnership expects that it will incur higher expenses related to compliance.

Liquidity and Capital Resources

Some of the properties in which the Partnership has invested, through its investment in other limited partnerships (“Local Partnerships”), receive one or more forms of assistance from the Federal Government. As a result, the Local Partnership’s ability to transfer funds either to the Partnership or among themselves in the form of cash distributions, loans or advances may be restricted by these government assistance programs. These restrictions, however, are not expected to impact the Partnership’s ability to meet its cash obligations.

It is not expected that any of the Local Partnerships in which the Partnership invests will generate cash from operations sufficient to provide distributions to the Limited Partners in any material amount. Such cash from operations, if any, would first be used to meet operating expenses of the Partnership. The Partnership's investments will not be readily marketable and may be affected by adverse general economic conditions which, in turn, could substantially increase the risk of operating losses for the projects, the Local Partnerships and the Partnership. These problems may result from a number of factors, many of which cannot be controlled by the General Partner.

An infrequent source of funds for the Partnership would be from proceeds received as a result of a sale of a Local Partnership’s investment property or from the sale of the Partnership’s interest in a Local Partnership. In this regard, on February 28, 2006, a Local Partnership, Ashville Equity, sold its investment property to a third party. The Partnership received a partial repayment of approximately $75,000 of fully reserved advances due from Ashville Equity during the nine months ended September 30, 2006. The Partnership had no investment balance in this Local Partnership at September 30, 2007. On June 30, 2006, the local operating general partner of Nickel River elected to exercise its option to buy the Partnership’s remaining interest in the Partnership for $10,000. The Partnership had no remaining investment balance in this Local Partnership at September 30, 2006 and the proceeds were recorded as gain on sale of investment for the nine months ended September 30, 2006. The Partnership had no investment balance in this limited partnership at September 30, 2007. On March 30, 2007, a local partnership, Jefferson Meadows, sold its investment property to a third party. The Partnership received approximately $39,000 in distributable proceeds during the second quarter of 2007. The Partnership had no investment balance in this Local Partnership at September 30, 2007. On April 5, 2007, a local partnership, Pampa Partnership Limited, sold its investment property to a third party. The Partnership received approximately $931,000 in distributable proceeds during the second quarter of 2007 and an additional distribution of approximately $11,000 during the third quarter of 2007. The Partnership had no investment balance in this Local Partnership at September 30, 2007.

As of September 30, 2007, the Partnership has cash and cash equivalents of approximately $4,123,000 on deposit with a financial institution, earning interest at market rates. This resulted in the Partnership earning approximately $9,000 and $3,000 in interest income for the nine months ended September 30, 2007 and 2006, respectively. The amount of interest income varies with the market rates available on deposits and with the amount of funds available for investment. Cash equivalents can be converted to cash to meet obligations of the Partnership as they arise. The Partnership intends to continue investing available funds in this manner.

The General Partner is not obligated to advance funds to the Partnership for operations or to fund Partnership advances to Local Partnerships, but may voluntarily do so from time to time. Accordingly, prior to January 1, 2006, during the nine months ended September 30, 2006 and later in 2006, an affiliate of the General Partner advanced the Partnership funds for advances to Local Partnerships and for the Partnership’s purchase of the second mortgage at Michigan Beach. There were no such advances during the nine months ended September 30, 2007. These advances bear interest at prime plus 2% (9.75% at September 30, 2007). Interest expense was approximately $353,000 and $280,000 for the nine months ended September 30, 2007 and 2006, respectively. Approximately $700,000 of principal and accrued interest were repaid during the nine months ended September 30, 2007 from the distribution received from Pampa Partnership. There were no such repayments during the nine months ended September 30, 2006. Approximately $4,448,000 of advances and accrued interest remain unpaid at September 30, 2007 and are included in due to affiliates on the accompanying balance sheet included in “Item 1. Financial Statements”. Subsequent to September 30, 2007, advances and accrued interest of approximately $3,600,000 were repaid from the proceeds received from the assignment of the Partnership’s limited partnership interest in four Local Partnerships during September 2007.

The General Partner has the right to cause distributions received by the Partnership from the Local Partnerships (that would otherwise be available for distributions as cash flow) to be dedicated to the increase or replenishment of reserves at the Partnership level. The reserves will generally be available to satisfy working capital or operating expense needs of the Partnership (including payment of partnership management fees) and will also be available to pay any excess third-party costs or expenses incurred by the Partnership in connection with the administration of the Partnership, the preparation of reports to the Limited Partners and other investor servicing obligations of the Partnership. At the discretion of the General Partner, reserves may be available for advances to the Local Partnerships.

The Partnership does not have the ability to assess Limited Partners for additional capital contributions to provide capital if needed by the Partnership or Local Partnerships. Accordingly, if circumstances arise that cause the Local Partnerships to require capital in addition to that contributed by the Partnership and any equity of the local general partners, the only sources from which such capital needs will be able to be satisfied (other than the limited reserves available at the Partnership level) will be (i) third-party debt financing (which may not be available if, as expected, the projects owned by the Local Partnerships are already substantially leveraged), (ii) other equity sources (which could adversely affect the Partnership's interest in operating cash flow and/or proceeds of sale or refinancing of the projects which would result in adverse tax consequences to the Limited Partners), or (iii) the sale or disposition of projects. There can be no assurance that any of such sources would be readily available in sufficient proportions to fund the capital requirements of the Local Partnerships. If such sources are not available, the Local Partnerships would risk foreclosure on their projects if they were unable to renegotiate the terms of their first mortgages and any other debt secured by the projects, which would have significant adverse tax consequences to the Limited Partners.

Results of Operations

The Partnership was formed to provide various benefits to its Limited Partners. It is not expected that any of the Local Partnerships in which the Partnership has invested will generate cash flow sufficient to provide for distributions to Limited Partners in any material amount. The Partnership accounts for its investments in the Local Partnerships on the equity method, thereby adjusting its investment balance by its proportionate share of the income or loss of the Local Partnerships. The investments in 15 of the 19 Local Partnerships have been reduced to zero as of September 30, 2007, however, as discussed in Note 3 included in the financial statements in “Item 1. Financial Statements”, during 2006 the Partnership acquired the second mortgage note receivable with respect to a Local Partnership that is obligated under the second mortgage note.

Because of (i) the nature of the projects, (ii) the difficulty of predicting the resale market for low-income housing in the future, and (iii) the inability of the Partnership to directly cause the sale of projects by local general partners, but generally only to require such local general partners to use their respective best efforts to find a purchaser for the projects, it is not possible at this time to predict whether the liquidation of substantially all of the Partnership's assets and the disposition of the proceeds, if any, in accordance with the partnership agreement will be able to be accomplished promptly at the end of the 15-year period. If a Local Partnership is unable to sell a project, it is anticipated that the local general partner will either continue to operate such projects or take such other actions as the local general partner believes to be in the best interest of the Local Partnership. In addition, circumstances beyond the control of the General Partner may occur during the Compliance Period which would require the Partnership to approve the disposition of a project prior to the end of the Compliance Period.

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

The Partnership, as a limited partner, does not have a contractual relationship with the Local Partnerships or exercise control over the activities and operations, including refinancing or selling decisions of the Local Partnerships that would require or allow for consolidation. Accordingly, the Partnership accounts for its investment in the Local Partnerships using the equity method. Thus the individual investments are carried at cost plus the Partnership’s share of the Local Partnership’s profits less the Partnership’s share of the Local Partnership’s losses, distributions and impairment charges. However, since the Partnership is not legally liable for the obligations of the Local Partnerships, or is not otherwise committed to provide additional support to them, it does not recognize losses once its investment in each of the Local Partnerships reaches zero. Distributions from the Local Partnerships are accounted for as a reduction of the investment balance until the investment balance is reduced to zero. Subsequent distributions received are recognized as income in the accompanying statements of operations. For those investments where the Partnership has determined that the carrying value of its investments approximates the estimated fair value of those investments, the Partnership’s policy is to recognize equity in income of the Local Partnerships only to the extent of distributions received, and amortization of acquisition costs from those Local Partnerships. During the nine months ended September 30, 2007 and 2006, the Partnership recognized equity in loss and amortization of acquisition costs of approximately $203,000 and $215,000, respectively, from Local Partnerships. Included in equity in loss and amortization of acquisition costs for the nine months ended September 30, 2007 is approximately $42,000 of equity in loss related to a Local Partnership, Michigan Beach, that reduced the carrying amount of the mortgage note receivable due from the Local Partnership. During the nine months ended September 30, 2007 and 2006, the Partnership received approximately $1,005,000 and $91,000, respectively, in distributions from Local Partnerships that were recognized as income in the statements of operations, included in “Item 1. Financial Statements,” since the Partnership’s investment in those Local Partnerships had been reduced to zero.

A recurring Partnership expense is the annual partnership management fee. The fee, as defined in the Partnership Agreement, is payable to the General Partner and is calculated at 0.5% of the Partnership’s invested assets as of the beginning of the year. The management fee represents the annual recurring fee which will be paid to the General Partner for its continuing management of Partnership affairs. During the nine months ended September 30, 2007 and 2006, management fees were approximately $353,000 and $404,000, respectively. The decrease in management fees is due to the loss of investment in five Local Partnerships during 2006.

Operating expenses, exclusive of the management fee, consist of legal and accounting fees for services rendered to the Partnership, general and administrative expenses and interest expense. Legal and accounting fees were approximately $68,000 and $75,000 for the nine month periods ended September 30, 2007 and 2006, respectively. General and administrative expenses were approximately $104,000 and $111,000 for the nine months ended September 30, 2007 and 2006, respectively. Interest expense was approximately $353,000 and $280,000 for the nine months ended September 30, 2007 and 2006, respectively. The increase in interest expense is primarily due to an increase in advances from an affiliate of the General Partner.

Off-Balance Sheet Arrangements

The Partnership owns limited partnership interests in unconsolidated Local Limited Partnerships, in which the Partnership’s ownership percentage ranges from 50.49% to 99%. However, based on the provisions of the relevant partnership agreements, the Partnership, as a limited partner, does not have control or a contractual relationship with the Local Partnerships that would require or allow for consolidation under accounting principles generally accepted in the United States (see “Note 1 – Organization and Summary of Significant Accounting Policies” of the financial statements in “Item 1. Financial Statements”). There are no lines of credit, side agreements or any other derivative financial instruments between the Local Partnerships and the Partnership. Accordingly the Partnership’s maximum risk of loss related to these unconsolidated Local Partnerships is limited to the recorded investments in and receivables from the Local Partnerships. See “Note 2 – Investments In and Advances to Local Partnerships” of the financial statements in “Item 1. Financial Statements” for additional information about the Partnership’s investments in unconsolidated Local Partnerships.

Other

AIMCO and its affiliates owned 397 limited partnership interests (the "Units") in the Partnership representing 0.55% of the outstanding Units at September 30, 2007. It is possible that AIMCO or its affiliates will acquire additional Units in exchange for cash or a combination of cash and units in AIMCO Properties, L.P., the operating partnership of AIMCO. Pursuant to the Partnership Agreement, unitholders holding a majority of the Units are entitled to take action with respect to a variety of matters that include, but are not limited to, voting on certain amendments to the Partnership Agreement and voting to remove the General Partner. Although the General Partner owes fiduciary duties to the limited partners of the Partnership, the General Partner also owes fiduciary duties to AIMCO as its sole stockholder. As a result, the duties of the General Partner, as General Partner, to the Partnership and its limited partners may come into conflict with the duties of the General Partner to AIMCO its sole stockholder.

FASB Interpretation No. 46

Critical Accounting Policies and Estimates

The financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Partnership to make estimates and assumptions. The Partnership believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

Method of Accounting for Investments in Local Partnerships

Item 3.

Controls And Procedures

(a)

Disclosure Controls and Procedures. The Partnership’s management, with the participation of the principal executive officer and principal financial officer of the General Partner, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer of the General Partner, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective.

(b)

Internal Control Over Financial Reporting. There have not been any changes in the Partnership’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 5.

Other Information

None.

Item 6.

Exhibits

See Exhibit Index Attached.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	NATIONAL TAX CREDIT INVESTORS II
	(a California limited partnership)

	By: National Partnership Investments Corp.
	General Partner

Date: November 13, 2007	By: /s/Martha L. Long
	Martha L. Long
	Senior Vice President

Date: November 13, 2007	By: /s/Stephen B. Waters
	Stephen B. Waters
	Vice President

NATIONAL TAX CREDIT INVESTORS II

EXHIBIT INDEX

Exhibit

Description of Exhibit

Partnership Agreement (herein incorporated by reference to the Partnership's Form S-11 Registration No. 33-27658)

Loan Sale Agreement between Pami Midatlantic LLC, a Delaware limited liability company and National Tax Credit Investors II, a California limited partnership dated May 30, 2006. Incorporated by reference to Current Report on Form 8-K dated May 30, 2006.

10.1

Assignment and Assumption Agreement by and between National Tax Credit Investors II, a California limited partnership and National Tax Credit, Inc. II, a California Corporation and Edgewood Management Company, Inc., an Arkansas Corporation, and James E. Lindsey, Walter L. Harber, and Gary S. Cuozzo individuals, dated September 28, 2007. Incorporated by reference to Current Report on Form 8-K dated September 28, 2007.

10.2

Assignment and Assumption Agreement by and between National Tax Credit Investors II, a California limited partnership and National Tax Credit, Inc. II, a California Corporation and Germantown Management Company, Inc., an Arkansas Corporation, and James E. Lindsey, Walter L. Harber, Gary S. Cuozzo, and Edward Calhoun individuals, dated September 28, 2007. Incorporated by reference to Current Report on Form 8-K dated September 28, 2007.

10.3

Assignment and Assumption Agreement by and between National Tax Credit Investors II, a California limited partnership and National Tax Credit, Inc. II, a California Corporation and Meadow Lake Management Company, Inc., an Arkansas Corporation, and Porter R. Rodgers Jr., William Ball, and James E. Lindsey, individuals, dated September 28, 2007. Incorporated by reference to Current Report on Form 8-K dated September 28, 2007.

10.4

Assignment and Assumption Agreement by and between National Tax Credit Investors II, a California limited partnership and National Tax Credit, Inc. II, a California Corporation and Salem Park Management Company, Inc., an Arkansas Corporation, and James E. Lindsey, Walter L. Harber, Gary S. Cuozzo, and Edward Calhoun individuals, dated September 28, 2007. Incorporated by reference to Current Report on Form 8-K dated September 28, 2007.

31.1

Certification of equivalent of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of equivalent of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the equivalent of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.