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|                                                           | Page   |
|----------------------------------------------------------------|--------|
| Independent Auditors' Report                                   | 1      |
|                                                           |   |
| Balance Sheet                                                  | 2      |
|                                                           |   |
| Statement of Income, Expenses and Changes in Partners' Capital | 3      |
|                                                           |   |
| Statement of Cash Flows                                        | 4      |
|                                                           |   |
| Notes to Financial Statements                                  | 5      |
|                                                           |   |
| Supplementary Information:                                     |   |
| Analysis of Replacement Reserve Account                        | 10     |
| Return to Owner Calculation                                    | 11     |

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| WALLACE ROWE & ASSOCIATES  | Accounting Firm |
|-------------------------------------|-----------------|

| 430 Verbena Court Pleasant Hill, CA 94523 | (925) 229-1950Fax (925) 229-1952wroweassoc@aol.com |
|-------------------------------------------|----------------------------------------------------|

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|                                                                                              |   | 2006   |      |   | 2005   |   |
|---------------------------------------------------------------------------------------------------|--------|--------|-----------|--------|--------|--------|
| ASSETS                                                                                            |   |   |      |   |   |   |
| CURRENT ASSETS                                                                                    |   |   |      |   |   |   |
| Cash (Note 2)                                                                                     |   | $      | 84,157    |   |   | $      | 61,416 |   |
| Accounts receivable                                                                               |   |   | 94        |   |   |   | 333 |   |
| Prepaid expenses                                                                                  |   |   | 2,908     |   |   |   | 3,070 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| TOTAL CURRENT ASSETS                                                                              |   |   | 87,159    |   |   |   | 64,819 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| Restricted reserves (Note 3)                                                                      |   |   | 65,304    |   |   |   | 60,805 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| Land, structures and equipment, net of accumulated depreciation of $873,873 and $805,922 (Note 4) |   |   | 1,291,481 |   |   |   | 1,359,432 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| Organizational costs, net of accumulated amortization of $22,333 and $20,665 (Note 5)             |   |   | 4,585     |   |   |   | 6,253 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| TOTAL ASSETS                                                                                      |   | $      | 1,448,529 |   |   | $      | 1,491,309 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| LIABILITIES AND PARTNERS' CAPITAL                                                                 |   |   |      |   |   |   |   |   |
| CURRENT LIABILITIES                                                                               |   |   |      |   |   |   |   |   |
| Accounts payable - other                                                                          |   | $      | 6,146     |   |   | $      | 7,961 |   |
| Accounts payable - related party (Note 7)                                                         |   |   | 2,177     |   |   |   | 2,436 |   |
| Security deposits payable                                                                         |   |   | 8,946     |   |   |   | 9,247 |   |
| Current portion of long-term debt (Note 6)                                                        |   |   | 44,619    |   |   |   | 39,804 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| TOTAL CURRENT LIABILITIES                                                                         |   |   | 61,888    |   |   |   | 59,448 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| Long-term debt (Note 6)                                                                           |   |   | 417,192   |   |   |   | 463,125 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| TOTAL LIABILITIES                                                                                 |   |   | 479,080   |   |   |   | 522,573 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| Partners' Capital:                                                                                |   |   |      |   |   |   |   |   |
| General partner                                                                                   |   |   | 99,195    |   |   |   | 137,014 |   |
| Limited partner                                                                                   |   |   | 870,254   |   |   |   | 831,722 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| TOTAL PARTNERS' CAPITAL                                                                           |   |   | 969,449   |   |   |   | 968,736 |   |
|                                                                                              |   |   |      |   |   |   |   |   |
| TOTAL LIABILITIES AND PARTNERS' CAPITAL                                                           |   | $      | 1,448,529 |   |   | $      | 1,491,309 |   |

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|                              |   | 2006   |    |   | 2005   |   |
|-----------------------------------|--------|--------|---------|--------|--------|--------|
|                              |   |   |    |   |   |   |
| OPERATING INCOME                  |   |   |    |   |   |   |
| Rental income                     |   | $      | 232,802 |   |   | $      | 225,820 |   |
| Tenant charges                    |   |   | 732     |   |   |   | 4,170 |   |
| Other                             |   |   | 1,899   |   |   |   | 2,100 |   |
|                              |   |   |    |   |   |   |   |   |
| TOTAL OPERATING INCOME            |   |   | 235,433 |   |   |   | 232,090 |   |
|                              |   |   |    |   |   |   |   |   |
| OPERATING EXPENSES                |   |   |    |   |   |   |   |   |
| Administration                    |   |   | 23,626  |   |   |   | 22,736 |   |
| Insurance and taxes               |   |   | 8,038   |   |   |   | 8,536 |   |
| Maintenance                       |   |   | 27,593  |   |   |   | 44,615 |   |
| Utilities                         |   |   | 22,746  |   |   |   | 24,981 |   |
| Depreciation and amortization     |   |   | 69,618  |   |   |   | 69,618 |   |
|                              |   |   |    |   |   |   |   |   |
| TOTAL EXPENSES                    |   |   | 151,621 |   |   |   | 170,486 |   |
|                              |   |   |    |   |   |   |   |   |
| NET INCOME (LOSS) FROM OPERATIONS |   |   | 83,812  |   |   |   | 61,604 |   |
|                              |   |   |    |   |   |   |   |   |
| OTHER INCOME AND EXPENSES         |   |   |    |   |   |   |   |   |
| Interest income                   |   |   | 3,464   |   |   |   | 1,850 |   |
| Interest expense                  |   |   | (35,447 | )      |   |   | (38,500 | ) |
|                              |   |   |    |   |   |   |   |   |
| NET OTHER INCOME UNDER EXPENSES   |   |   | (31,983 | )      |   |   | (36,650 | ) |
|                              |   |   |    |   |   |   |   |   |
| NET INCOME (LOSS)                 |   |   | 51,829  |   |   |   | 24,954 |   |
|                              |   |   |    |   |   |   |   |   |
| BEGINNING PARTNERS' CAPITAL       |   |   | 968,736 |   |   |   | 997,545 |   |
|                              |   |   |    |   |   |   |   |   |
| Partner withdrawals               |   |   | (51,116 | )      |   |   | (53,763 | ) |
|                              |   |   |    |   |   |   |   |   |
| ENDING PARTNERS' CAPITAL          |   | $      | 969,449 |   |   | $      | 968,736 |   |

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|                                                                           |   | 2006   |     |   | 2005   |   |
|--------------------------------------------------------------------------------|--------|--------|----------|--------|--------|--------|
|                                                                           |   |   |     |   |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |   |   |     |   |   |   |
| Rents received                                                                 |   | $      | 233,044  |   |   | $      | 226,740 |   |
| Other operating revenues                                                       |   |   | 2,625    |   |   |   | 6,266 |   |
| Cash payments for goods and services                                           |   |   | (83,860  | )      |   |   | (104,136 | ) |
| Net cash provided (used) by operating activities                               |   |   | 151,809  |   |   |   | 128,870 |   |
|                                                                           |   |   |     |   |   |   |   |   |
| CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:                               |   |   |     |   |   |   |   |   |
| Increases (decreases) in security deposits                                     |   |   |     |   |   |   | (300 | ) |
| Withdrawal from replacement reserves                                           |   |   |     |   |   |   |   |   |
| Additions to replacement reserves                                              |   |   | (4,800   | )      |   |   | (4,800 | ) |
| Net cash provided (used) by capital and financing activities                   |   |   | (4,800   | )      |   |   | (5,100 | ) |
|                                                                           |   |   |     |   |   |   |   |   |
| CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES:                      |   |   |     |   |   |   |   |   |
| Capital withdrawals                                                            |   |   | (51,116  | )      |   |   | (53,763 | ) |
| Interest paid on notes                                                         |   |   | (35,502  | )      |   |   | (38,500 | ) |
| Payment of debt                                                                |   |   | (41,118  | )      |   |   | (38,238 | ) |
| Net cash provided (used) by capital and related financing activities           |   |   | (127,736 | )      |   |   | (130,501 | ) |
|                                                                           |   |   |     |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |   |   |     |   |   |   |   |   |
| Interest income                                                                |   |   | 3,468    |   |   |   | 1,850 |   |
| Net cash provided (used) by investing activities                               |   |   | 3,468    |   |   |   | 1,850 |   |
|                                                                           |   |   |     |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH                                                |   |   | 22,741   |   |   |   | (4,881 | ) |
| CASH - BEGINNING OF YEAR                                                       |   |   | 61,416   |   |   |   | 66,297 |   |
| CASH - END OF YEAR                                                             |   | $      | 84,157   |   |   | $      | 61,416 |   |
|                                                                           |   |   |     |   |   |   |   |   |
| RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: |   |   |     |   |   |   |   |   |
| Net income from operations                                                     |   | $      | 83,812   |   |   | $      | 61,604 |   |
| Adjustments to reconcile net loss to Net cash provided by operating activities |   |   |     |   |   |   |   |   |
| Depreciation and amortization                                                  |   |   | 69,618   |   |   |   | 69,618 |   |
| Decrease (increase) in accounts receivable                                     |   |   | 236      |   |   |   | 916 |   |
| Decrease (increase) in prepaid expenses                                        |   |   | 162      |   |   |   | 265 |   |
| Increase (decrease) in accounts payable - other                                |   |   | (1,760   | )      |   |   | (2,507 | ) |
| Increase (decrease) in accounts payable - related parties                      |   |   | (259     | )      |   |   | (1,026 | ) |
|                                                                           |   |   |     |   |   |   |   |   |
| NET CASH PROVIDED BY OPERATING ACTIVITIES                                      |   | $      | 151,809  |   |   | $      | 128,870 |   |

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|   | a.  | Basis of accounting |
|--------|----------|---------------------|

|   | The partnership is accounted for on the accrual basis of accounting. Under this method revenues are recognized when they are earned and expenses are recognized when they are incurred. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b.  | Fixed assets and depreciation Fixed assets are carried at cost. Expenditures for the fixed assets are capitalized. Maintenance and repairs are charged to operations. Depreciation is calculated using the straight-line basis over the estimated useful lives. |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c.  | Income taxes Taxable income or expenses and related tax credits are not reflected as expenses or credits of the partnership. These items are the responsibilities of the individual partners. |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|      |   | Cost   |      |   | AccumulatedDepreciation |   |
|-----------|--------|--------|-----------|--------|-------------------------|--------|
| Land      |   | $      | 275,000   |   |                    | $      | - |   |
| Building  |   |   | 1,868,634 |   |                    |   | 852,152 |   |
| Equipment |   |   | 21,720    |   |                    |   | 21,721 |   |
|      |   | $      | 2,165,354 |   |                    | $      | 873,873 |   |

|                           |   | Cost |   |   | AccumulatedAmortization |   |
|--------------------------------|--------|------|--------|--------|-------------------------|--------|
| Organization costs   |   | $    | 26,918 |   |                    | $      | 22,333 |   |

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|   | Year ending December 31            |   |   |    |
|--------|------------------------------------|--------|--------|---------|
|   |                               |   |   |    |   |
|   | 2007                               |   | $      | 76,620  |   |
|   | 2008                               |   |   | 76,620  |   |
|   | 2009                               |   |   | 379,405 |   |
|   |                               |   |   |    |   |
|   | Total                              |   |   | 532,645 |   |
|   |                               |   |   |    |   |
|   | Less amounts representing interest |   |   | 70,834  |   |
|   |                               |   |   |    |   |
|   |                               |   | $      | 461,811 |   |

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| Balance of replacement reserve account - beginning of year              |   | $      | 51,558 |   |
|-------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                    |   |   |   |   |
| Contributions to account during the fiscal year ended December 31, 2006 |   |   | 4,800  |   |
|                                                                    |   |   |   |   |
| Balance of replacement reserve account - end of year                    |   | $      | 56,358 |   |

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| Net Income - for the year ended December 31, 2006                       |   | $      | 51,829   |   |
|-------------------------------------------------------------------------|--------|--------|----------|--------|
|                                                                    |   |   |     |   |
| Add back depreciation expense                                           |   |   | 67,950   |   |
|                                                                    |   |   |     |   |
| Add back amortization expense                                           |   |   | 1,669    |   |
|                                                                    |   |   |     |   |
| Deposits to replacement reserve account                                 |   |   | (4,800   | )      |
|                                                                    |   |   |     |   |
| Debt service (mortgage loan)                                            |   |   | (41.,118 | )      |
|                                                                    |   |   |     |   |
| Adjusted cash available from operations through December 31, 2006       |   | $      | 75,530   |   |
|                                                                    |   |   |     |   |
| Net cash available for disbursement                                     |   | $      | 75,530   |   |
|                                                                    |   |   |     |   |
| Limited partner distribution = 75%                                      |   | $      | 56,647   |   |
|                                                                    |   |   |     |   |
| General partner distribution = 25%                                      |   |   | 18,883   |   |
|                                                                    |   |   |     |   |
| Total partner distributions for the fiscal year ended December 31, 2006 |   | $      | 75,530   |   |

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| HASLO                                            | 487 Leff Street Post Office Box 1289 San Luis Obispo CA 93406-1289 (805) 543-4478 fax (805) 543-4992 |
|--------------------------------------------------|------------------------------------------------------------------------------------------------------|
| Housing Authority of the City of San Luis Obispo | Executive Director-SecretaryCarol Hatley                                                             |

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