FINANCIAL STATEMENTS AND
                          INDEPENDENT AUDITORS' REPORT

                             PATTEN TOWERS, L.P., II

                           DECEMBER 31, 2004 AND 2003

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                             Patten Towers, L.P., II

                                TABLE OF CONTENTS


                                                                           Page
                                                                           ----

INDEPENDENT AUDITORS' REPORT                                                  3

FINANCIAL STATEMENTS

      BALANCE SHEETS                                                          4

      STATEMENTS OF OPERATIONS                                                5

      STATEMENTS OF CHANGES IN PARTNERS' CAPITAL                              6

      STATEMENTS OF CASH FLOWS                                                7

      NOTES TO FINANCIAL STATEMENTS                                           8

<PAGE>

Reznick Group                 Reznick Group, P.C.         Tel: (410) 783-4900
                              500 East Pratt Street       Fax: (410) 727-0460
                              Suite 200                   www.reznickgroup.com
                              Baltimore, MD 21201-3100


                          INDEPENDENT AUDITORS' REPORT


To the Partners
Patten Towers, L.P., II

      We have audited the  accompanying  balance sheets of Patten Towers,  L.P.,
II, as of December 31, 2004 and 2003, and the related  statements of operations,
changes in  partners'  capital  and cash flows for the years then  ended.  These
financial statements are the responsibility of the Partnership's management. Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

      We conducted our audit in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects,  the financial position of Patten Towers, L.P., II, as
of December 31, 2004 and 2003, and the results of its operations, the changes in
partners'  capital,  and its cash flows for the years then ended,  in conformity
with accounting principles generally accepted in the United States of America.

      The accompanying financial statements have been prepared assuming that the
Partnership  will  continue as a going  concern.  As  discussed in Note C to the
financial statements,  the Partnership is in default on certain covenants of its
bond  agreements  at  December  31,  2004 and 2003,  primarily  as a result of a
failure to make principal  payments during 2004 and 2003. The lenders may demand
repayment of the bonds. No such demand has been made. Negotiations are presently
under way to obtain revised debt  agreements to permit the realization of assets
and the  liquidation  of  liabilities  in the ordinary  course of business.  The
Partnership  cannot predict what the outcome of the negotiations  will be. These
conditions raise substantial  doubt about the Partnership's  ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.


Reznick Group, P.C.
-------------------

Baltimore, Maryland
January 29, 2005

                                      -3-

  ATLANTA  -  BALTIMORE  -  BETHESDA  -  CHARLOTTE  -  CHICAGO  -  SACRAMENTO


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<TABLE>
<CAPTION>
                                      Patten Towers, L.P., II

                                          BALANCE SHEETS

                                    December 31, 2004 and 2003


                                                                    2004               2003
                                                              ----------------   ----------------
<S>                                                           <C>                <C>
                                              ASSETS

INVESTMENT IN RENTAL PROPERTY
  Land                                                        $        290,000   $        290,000
  Building and improvements                                         10,699,853         10,699,853
  Furniture, fixtures and equipment                                    125,081            125,081
                                                              ----------------   ----------------
                                                                   11,114, 934         11,114,934
  Less accumulated depreciation                                      3,541,869          3,140,885
                                                              ----------------   ----------------
                                                                     7,573,065          7,974,049
OTHER ASSETS
  Cash                                                                  12,967             18,497
  Restricted cash                                                      440,934            478,333
  Accounts receivable - tenants                                          9,622             18,847
  Accounts receivable - other                                           11,137             11,137
  Tenant security deposits held in trust                                35,700             39,998
  Prepaid expenses                                                       5,236              4,683
  Bond issuance cost, net of accumulated amortization                  210,421            220,823
     of $101,651and $91,249
  Tax credit monitoring fee, net of accumulated
     amortization of $16,391and $14,181                                16,759             18,969
                                                              ----------------   ----------------
                                                              $      8,315,841   $      8,785,336
                                                              ================   ================

                                 LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
  Promissory note payable                                     $      6,025,000   $      6,025,000
  Accounts payable and accrued liabilities                              70,078            102,094
  Accrued management fees                                               85,731             85,731
  Accrued oversight fees                                                43,701             43,701
  Tenant security deposits                                              34,878             40,513
  Prepaid rents                                                         86,723             82,118
  Miscellaneous liabilities                                              4,767             12,405
  Due to affiliates                                                    132,473            132,473
  Accrued interest - affiliate                                          31,743             18,496
  Accrued interest - third-party                                       312,177            255,632
  Accrued property taxes                                               108,902            123,797
  Deferred developer's fee                                           1,137,522          1,137,522
                                                              ----------------   ----------------
                                                                     8,073,695          8,059,482
CONTINGENCY                                                                  -                  -

PARTNERS' CAPITAL                                                      242,146            725,854
                                                              ----------------   ----------------
                                                              $      8,315,841   $      8,785,336
                                                              ================   ================

                                 See notes to financial statements

                                                -4-

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                             Patten Towers, L.P., II

                            STATEMENTS OF OPERATIONS

                     Years ended December 31, 2004 and 2003

                                                2004                2003
                                          ----------------    ----------------
Revenue
   Rental                                 $      1,393,243    $      1,412,926
   Other                                            54,900              39,236
                                          ----------------    ----------------

      Total revenue                              1,448,143           1,452,162
                                          ----------------    ----------------

Expenses
   Depreciation                                    400,984             420,668
   Amortization                                     12,612              12,612
   Interest                                        391,584             390,133
   Administrative                                  102,074              55,993
   Property management fees                         79,560              79,560
   Repairs and maintenance                         167,348             190,073
   Property insurance                               64,022              57,771
   Real estate taxes                               121,803             109,069
   Salaries and wages                              194,912             188,815
   Bad debts                                        11,775              24,983
   Utilities                                       278,752             304,843
   Miscellaneous operating                          77,041              32,684
   Financing                                         6,610               2,915
   Miscellaneous taxes and insurance                22,774              88,112
                                          ----------------    ----------------

      Total expenses                             1,931,851           1,958,231
                                          ----------------    ----------------

      NET LOSS                            $       (483,708)   $       (506,069)
                                          ================    ================



                        See notes to financial statements

                                       -5-

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                             Patten Towers, L.P., II

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

                     Years ended December 31, 2004 and 2003


Balance, December 31, 2002                                     $     1,231,923

Net loss                                                              (506,069)
                                                               ----------------

Balance, December 31, 2003                                             725,854

Net loss                                                              (483,708)
                                                               ----------------

Balance, December 31, 2004                                     $       242,146
                                                               ================






                        See notes to financial statements

                                       -6-

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                                         Patten Towers, L.P., II

                                         STATEMENTS OF CASH FLOWS

                                  Years ended December 31, 2004 and 2003

                                                                          2004               2003
                                                                    ----------------   ----------------
Cash flows from operating activities
  Net loss                                                          $       (483,708)  $       (506,069)
  Adjustments to reconcile net loss to net cash (used
  in) provided by operating activities
    Depreciation                                                             400,984            420,668
    Amortization                                                              12,612             12,612
    Bad debts                                                                 11,775             24,983
    (Increase) decrease in assets
       Accounts receivable - tenants                                          (2,550)           (40,432)
       Accounts receivable - HUD                                                   -             27,405
       Accounts receivable - other                                                 -            (11,137)
       Prepaid expenses                                                         (553)               369
    Increase (decrease) in liabilities
       Accounts payable and accrued liabilities                              (32,016)            (5,490)
       Accrued interest - affiliate                                           13,247             13,247
       Accrued interest - third-party                                         56,545             61,811
       Tenant security deposits, net                                          (1,337)             9,162
       Prepaid rents                                                           4,605             81,089
       Miscellaneous liabilities                                              (7,638)           (24,798)
       Accrued property taxes                                                (14,895)           (12,983)
                                                                    ----------------   ----------------

        Net cash (used in) provided by operating activities                  (42,929)            50,437
                                                                    ----------------   ----------------

Cash flows from investing activities
  Restricted cash held by Bond Trustee                                        37,399            (40,043)
                                                                    ----------------   ----------------

        Net cash provided by (used in) investing activities                   37,399            (40,043)
                                                                    ----------------   ----------------

        NET (DECREASE) INCREASE IN CASH                                       (5,530)            10,394

Cash, beginning                                                               18,497              8,103
                                                                    ----------------   ----------------

Cash, ending                                                        $         12,967   $         18,497
                                                                    ================   ================

Supplemental disclosure of cash flow information
  Cash paid during the year for interest                            $        321,792   $        315,075
                                                                    ================   ================


                                    See notes to financial statements

                                                   -7-
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                             Patten Towers, L.P., II

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2004 and 2003

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Patten  Towers,  L.P.,  II (the  Partnership),  was organized as a limited
      partnership under the laws of the State of Tennessee during November 1995.
      The  Partnership  was  formed  to  acquire,  own,  develop,  rehabilitate,
      maintain,  and  operate a  221-unit  rental  housing  project  located  in
      Chattanooga, Tennessee, called Patten Towers Apartments (the Project).

      During November 2001, the Partnership  agreement was amended to remove the
      old general  partner and admit the new general  partner,  Patten  Towers -
      Yarco,  LLC as one percent general partner and WNC Housing Tax Credit Fund
      V, L.P., Series 3, as 99 percent limited partner.

      Each building of the Project has qualified and been  allocated  low-income
      housing tax credits  pursuant to Internal Revenue Code Section 42 (Section
      42), which regulates the use of the Project as to occupant eligibility and
      unit gross rent,  among other  requirements.  Each building of the Project
      must  meet  the  provisions  of  these  regulations   during  each  of  15
      consecutive years in order to remain qualified to receive the tax credits.
      In  addition,  the  Partnership  has  executed a  declaration  of land use
      restrictive  covenants  which  requires  the  utilization  of the  Project
      pursuant to Section 42 for a minimum of 30 years,  even if the Partnership
      disposes of the Project.

      USE OF ESTIMATES

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

      ACCOUNTS RECEIVABLE AND BAD DEBTS

      Tenant  receivables  are  charged  to  bad  debt  expense  when  they  are
      determined  to be  uncollectible  based  upon  a  periodic  review  of the
      accounts by management.  Accounting  principles  generally accepted in the
      United  States of America  require  that the  allowance  method be used to
      recognize  bad debts;  however,  the effect of using the direct  write-off
      method is not  materially  different from the results that would have been
      obtained under the allowance method.

                                      -8-
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                             Patten Towers, L.P., II

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2004 and 2003

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      INVESTMENT IN RENTAL PROPERTY

      Investment in rental property is carried at cost. Depreciation is provided
      for in  amounts  sufficient  to relate the cost of  depreciable  assets to
      operations over their estimated  service lives using the straight-line and
      double-declining balance methods as follows:

           Building                                   27.5 years
           Building improvements                      27.5 years
           Building equipment                          5-7 years

      AMORTIZATION

      Bond issuance costs consist of fees for obtaining the mortgage payable and
      are  being  amortized  over the  30-year  life of the  mortgage  using the
      straight-line method, which approximates the effective interest method.

      Tax credit monitoring fees are being amortized over the 15-year tax credit
      period.

      RENTAL INCOME

      Rental  income is  recognized  as  rentals  become  due.  Rental  payments
      received in advance are  deferred  until  earned.  All leases  between the
      Partnership and the tenants of the property are operating leases.

      INCOME TAXES

      Profit or loss of the  Partnership  is  allocated 1 percent to the general
      partner  and 99 percent to the  investor  limited  partner.  No income tax
      provision has been included in the  financial  statements  since income or
      loss of the  Partnership  is required  to be  reported  by the  respective
      partners on their income tax returns.

NOTE B - ACQUISITION AND REHABILITATION

      The financing of the  acquisition  and  rehabilitation  of the Project was
      provided by the  Industrial  Development  Board of the County of Hamilton,
      Tennessee  (the   Authority),   through  a  tax-exempt  bond  issue,   for
      $7,930,000.   Additional   equity   funding   was   provided   by  capital
      contributions from the investor limited partner.


                                      -9-
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                             Patten Towers, L.P., II

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2004 and 2003

NOTE C - PROMISSORY NOTE PAYABLE

      A promissory  note  payable,  in the original  amount of  $7,930,000,  was
      funded with  proceeds  from the issuance of  Multifamily  Housing  Revenue
      Bonds (the Bonds), issued by the Authority. Repayment terms and conditions
      under the  mortgage  equal those of the Bonds.  The  interest  rate on the
      Tax-Exempt  1995A Bonds is 6.125% until August 1, 2007,  6.3% until August
      1, 2026,  and 6.375% until  maturity.  The interest  rates for the Taxable
      1995  Bonds  and  the  Tax-Exempt  1995B  Bonds  are  6.250%  and  7.125%,
      respectively.  Principal and interest are payable semiannually  commencing
      August 1, 1997,  and  continuing  through  maturity on August 1, 2026. The
      Partnership  failed to make principal payments of $445,000 and $420,000 in
      2004 and 2003,  respectively.  The  Partnership  is in default of its bond
      covenants  and the  property  could be  foreclosed  on by the  Trustee  to
      satisfy its  obligations  under the bonds.  Currently,  the Partnership is
      attempting to refinance the bonds.  As of December 31, 2004 and 2003,  the
      bonds are  fully  payable  on demand  under  the  events of  default.  The
      principal   balance  was   $6,025,000  at  December  31,  2004  and  2003,
      respectively.

      The  liability  of the  Partnership  under the  mortgage is limited to the
      underlying value of the real estate collateral.

NOTE D - HOUSING ASSISTANCE PAYMENT CONTRACT AGREEMENT

      The U.S.  Department of Housing and Urban Development (HUD) has contracted
      with the  Partnership,  under  Section  8 of Title II of the  Housing  and
      Community  Development  Act of 1974, to make housing  assistance  payments
      (HAP) to the  Partnership  on behalf of qualified  tenants.  The agreement
      expires December 2007.

      The HAP  contract  is pledged as  collateral  under the  promissory  loan.
      Payments  received are required to be deposited  directly into the revenue
      fund  pursuant to the Trust  Indenture.  All  disbursements  are  strictly
      controlled by the Trustee.

NOTE E - RELATED PARTY TRANSACTIONS

      DEVELOPMENT AGREEMENT

     Pursuant to a  development  agreement,  the  Partnership  agreed to pay the
     general  partner a development  fee of $1,333,163.  As of December 31, 2004
     and 2003,  $1,137,522  remains  payable.  The unpaid amount is payable from
     future  capital   contributions  and  cash  flow  in  accordance  with  the
     Partnership agreement.

                                      -10-
<PAGE>

                             Patten Towers, L.P., II

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2004 and 2003

NOTE E - RELATED PARTY TRANSACTIONS (CONTINUED)

      NOTE PAYABLE - AFFILIATES

      During 2002, an affiliate of the limited partner entered into an unsecured
      note for $132,473. The note bears interest at 10% and matures August 2012.
      Accrued interest on the note was $31,743 and $18,496,  respectively, as of
      December 31, 2004 and 2003.  Interest  expense on the note was $13,247 for
      the years ended December 31, 2004 and 2003.

      MANAGEMENT FEE

      The  property  is managed by an  affiliate  of the  general  partner.  The
      management  agreement  provides  for a  management  fee  of  5%  of  gross
      operating  revenue.  The  minimum  monthly  payment  to be made is $6,630.
      Management  fees charged to  operations  for the years ended  December 31,
      2004 and 2003,  were  $79,560.  As of December 31, 2004 and 2003,  $85,731
      remains due.

NOTE F - RESTRICTED CASH HELD BY BOND TRUSTEE

      Restricted cash is comprised of funds held by the Bond Trustee established
      at closing of the bond issue as required by the Trust Indenture. The funds
      were established to be used to complete the  rehabilitation of the Project
      and to remit the amounts required to pay for insurance,  taxes,  principal
      and interest when due and payable.  The debt service  reserve fund is used
      solely to make up any  deficiency in the bond fund relating to payments of
      interest and  principal on the bonds,  whether at maturity or upon earlier
      redemption.  Investments of the amounts held by the Trustee are subject to
      those options chosen by the Trustee.

      The balances in the funds at December 31, 2004 and 2003, are as follows:

                                                  2004               2003
                                             ---------------   ---------------

           Exempt interest                   $         5,389   $             -
           Bond insurance/tax fund                         -             7,420
           Debt service fund                          55,132           293,577
           Surplus fund                                    -                 8
           General expenses fund                     282,749            79,664
           Transition fund                            97,664            97,664
                                             ---------------   ---------------

                                             $       440,934   $       478,333
                                             ===============   ===============


                                      -11-
<PAGE>

                             Patten Towers, L.P., II

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

                           December 31, 2004 and 2003

NOTE F - RESTRICTED CASH HELD BY BOND TRUSTEE (CONTINUED)

      The  Partnership  will  receive  any amounts  remaining  in the funds upon
      redemption of the bonds after payment of all fees and expenses.

NOTE G - CONTINGENCY

      The Project's low-income housing tax credits are contingent on its ability
      to  maintain  compliance  with  applicable  sections  of Section 42 of the
      Internal  Revenue  Code.  Failure to maintain  compliance  with  occupancy
      eligibility,  and/or  gross  rent,  or to correct  noncompliance  within a
      specified  time period  could  result in  recapture  of tax  credits  plus
      interest.  In  addition,  such  potential  noncompliance  may  require  an
      adjustment to the contributed capital by the limited partner.

NOTE H - CONCENTRATION OF CREDIT RISK

      The Partnership  maintains its cash accounts with two banks. Cash balances
      are insured by the Federal Deposit Insurance Corporation up to $100,000 at
      each bank.  As of December 31,  2004,  the  uninsured  portion of the cash
      balances held at the banks was $340,934.



                                      -12-