Casa Alegre Phase I Limited Partnership

                          RD Case No. 36-024-0850378884

                          Independent Auditors' Report

                     Years Ending December 31, 2001 and 2000


<PAGE>


                     Casa Alegre Phase I Limited Partnership

                                Table of Contents


                                                                            Page

Independent Auditors' Report...................................................1

Financial Statements
       Balance Sheet...........................................................2

       Statement of Operations.................................................4

       Statement of Partners' Equity (Deficit).................................5

       Statement of Cash Flow..................................................6

       Notes to Financial Statements...........................................7

Independent Auditors' Report on Compliance....................................12

Independent Auditors' Report on Internal Control Structure....................15

Supplemental Information
       Schedule of administrative, utilities, maintenance, taxes, insurance,
       interest, and depreciation expenses....................................18


<PAGE>

Kenneth   C.   Boothe   &   Company,    P.C.    Certified   Public    Accountant
--------------------------------------------------------------------------------
1001 East Farm Road 700   Big Spring,  Texas 79720 * (915)  263-1324 * FAX (915)
263-2124



                          INDEPENDENT AUDITORS' REPORT

To the Partners,
Casa Alegre Phase I Limited Partnership

We have audited the  accompanying  balance sheets of Casa Alegre Phase I Limited
Partnership  as of December  31, 2001 and 2000,  and the related  statements  of
operations,  partners'  equity,  and cash flow 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 generally  accepted auditing standards
and  Government  Auditing  Standards  issued by the  Comptroller  General of the
United  States.  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 Casa Alegre Phase I Limited
Partnership  as of December 31, 2001 and 2000, and the results of its operations
and its cash flow for the years then ended in conformity with generally accepted
accounting principles.

In accordance  with  Government  Auditing  Standards  issued by the  Comptroller
General of the United  States,  we have also issued a report  dated  February 4,
2002, on our consideration of Casa Alegre Phase I Limited Partnership's internal
control  structure and a report dated February 4, 2002, on its  compliance  with
laws and regulations.

Our audit was  conducted  for the  purpose  of  forming  an opinion on the basic
financial   statements  taken  as  a  whole.   The  accompanying   supplementary
information shown on Pages 19 through 20 is presented for purposes of additional
analysis and is not a required  part of the basic  financial  statements  of the
Partnership.  Such  information  has been  subjected to the auditing  procedures
applied in the audit of the basic financial  statements and, in our opinion,  is
fairly  stated in all  material  respects  in  relation  to the basic  financial
statements taken as a whole.




                                      /s/KENNETH C. BOOTHE AND COMPANY, P.C.
                                         KENNETH C. BOOTHE AND COMPANY, P.C.

February 4, 2002
Big Spring, Texas
                                       1
<PAGE>

                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                                  Balance Sheet
                           December 31, 2001 and 2000


                                                  Assets
                                                  ------
<TABLE>
<CAPTION>
                                                                 Dec. 31, 2001               Dec. 31, 2000
                                                                ----------------            ----------------

<S>                                                            <C>                        <C>
Current Assets

      Cash and Cash Equivalents                               $          30,775           $          25,546
      Accounts Receivable - RD                                                0                           0
      Accounts Receivable - Other                                            14                       2,478
      Prepaid Expenses                                                    8,059                       4,398
                                                                ----------------            ----------------

           Total Current Assets                                          38,848                      32,422
                                                                ----------------            ----------------

Restricted Deposits & Funded Reserves

      Tenant Security Deposits                                            7,717                       7,467
      Real Estate Tax & Insurance Escrow                                 14,481                      11,041
      Restricted Insurance Proceeds                                      33,490                           0
      Replacement Reserve Escrow                                        145,948                     130,318
                                                                ----------------            ----------------

           Total Restricted Deposits &
                        Funded Reserves                                 201,636                     148,826
                                                                ----------------            ----------------

Property & Equipment

      Land                                                               70,925                      70,925
      Building & Equipment                                            1,818,296                   1,813,080
      Furnishings                                                        13,434                      13,434
      Maintenance Equipment                                               8,305                       8,170
      Accumulated Depreciation                                         (526,797)                   (472,993)
                                                                ----------------            ----------------

           Total Property & Equipment                                 1,384,163                   1,432,616
                                                                ----------------            ----------------

Other Assets

      Deposits                                                                0                           0
                                                                ----------------            ----------------

           Total Other Assets                                                 0                           0
                                                                ----------------            ----------------

           Total Assets                                       $       1,624,647           $       1,613,864
                                                                ================            ================
</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements
                                       2
<PAGE>

                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                                  Balance Sheet
                           December 31, 2001 and 2000
<TABLE>
<CAPTION>


                                                Liabilities
                                                -----------
                                                                 Dec. 31, 2001               Dec. 31, 2000
                                                                ----------------            ----------------

<S>                                                           <C>                         <C>
Liabilities

      Current Liabilities

           Current Maturities of
              Long Term Debt                                  $          10,559           $           9,678
           Accounts Payable                                              15,733                       2,067
           Deferred Income - Insurance Proceeds                          22,561                           0
           Accrued Liabilities                                            2,296                       2,475
                                                                ----------------            ----------------

                        Total Current Liabilities                        51,149                      14,220
                                                                ----------------            ----------------

Deposits & Prepayment Items

           Tenant Security Deposits                                       6,345                       6,650
                                                                ----------------            ----------------

                        Total Deposits &
                           Prepayment Liabilities                         6,345                       6,650
                                                                ----------------            ----------------

Long Term Liabilities

           Long Term Debt (Net of
              Current Maturities)                                     1,357,279                   1,367,838
                                                                ----------------            ----------------

                        Total Long Term Liabilities                   1,357,279                   1,367,838
                                                                ----------------            ----------------

                        Total Liabilities                             1,414,773                   1,388,708

Partners' Equity                                                        209,874                     225,156
                                                                ----------------            ----------------

Total Liabilities and Partners Equity                         $       1,624,647           $       1,613,864
                                                                ================            ================
</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements

                                       3
<PAGE>

                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                             Statement of Operations
                           December 31, 2001 and 2000
<TABLE>
<CAPTION>


                                                                 Dec. 31, 2001               Dec. 31, 2000
                                                                ----------------            ----------------

<S>                                                           <C>                         <C>
Revenue

      Rental Income                                           $         171,045           $         174,770
      Late Fees, Deposit Forfeitures, etc.                                  320                         450
      Interest Income                                                     6,280                       7,074
      Other Income                                                        1,446                       1,182
                                                                ----------------            ----------------

           Total Revenue                                                179,091                     183,476
                                                                ----------------            ----------------

Operating Expenses

      Administrative                                                     40,629                      38,343
      Utilities                                                          25,922                      21,897
      Maintenance                                                        29,771                      25,127
      Taxes and Insurance                                                16,666                      15,731
      Interest, net of subsidy                                           27,581                      28,278
                                                                ----------------            ----------------
           Total Cost Of Operations
                             Before Depreciation                        140,569                     129,376
                                                                ----------------            ----------------

           Net Income Before Depreciation                                38,522                      54,100

      Depreciation                                                       53,804                      50,010
                                                                ----------------            ----------------

           Net Operating Gain or (Loss)                                 (15,282)                      4,090
                                                                ----------------            ----------------

Other Income (Expense)

      Administrative Fee                                                      0                      (2,400)
                                                                ----------------            ----------------

           Total Other Income (Expense)                                       0                      (2,400)
                                                                ----------------            ----------------

Net Income or (Loss)                                          $         (15,282)          $           1,690
                                                                ================            ================
</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements

                                       4
<PAGE>

                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                          Statement of Partners Equity
                           December 31, 2001 and 2000
<TABLE>
<CAPTION>


                                                   General        General       General        Limited
                                     Total         Partner        Partner       Partner        Partner
                                     -----         -------        -------       -------        -------

<S>                             <C>                   <C>               <C>             <C>      <C>
Partner's Equity,
      December 31, 1999         $      224,666        44,649            451              1       179,565

Net Income or (Loss), 2000               1,690            17              0              0         1,673

Partners' Capital Contributions              0             0              0              0             0

Partners' Distributions                 (1,200)            0              0              0        (1,200)


Partner's Equity,
      December 31, 2000         $      225,156        44,665            451              1       180,038

Net Income or (Loss), 2001             (15,282)         (151)            (1)            (0)      (15,129)

Partners' Capital Contributions              0             0              0              0             0

Partners' Distributions                      0             0              0              0             0

Partner's Equity,
      December 31, 2001         $      209,874        44,514            450              1       164,909
</TABLE>
                     The accompanying notes are an integral
                       part of these financial statements
                                       5
<PAGE>

                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                             Statement of Cash Flow
                           December 31, 2001 and 2000
                Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>



                                                                     Dec. 31, 2001     Dec. 31, 2000
                                                                     -------------     -------------

<S>                                                            <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

        Net Income or (Loss)                                   $        (15,282)     $         1,690
        Adjustments to Reconcile Net Income
          to Net Cash Provided by
        Operating Activities:
              Depreciation                                               53,804               50,010
        (Increase) Decrease In Assets
              Accounts Receivable - Other                                 2,464               (2,463)
              Accounts Receivable - RD Rent Supplement                        0                6,755
              Prepaid Property and Liability Insurance                   (3,661)                 121
              Tax and Insurance Escrow                                   (3,440)               8,927
              Restricted Insurance Proceeds                             (33,490)                   0
              Tenant Security Deposits                                     (250)                (292)
              Deposits                                                        0                    0
        Increase (Decrease) in Liabilities
              Accounts Payable                                           13,666                 (885)
              Deferred Income - Insurance Proceeds                       22,561                    0
              Accrued Liabilities                                          (179)                 (48)
              Tenant Security Deposit                                      (305)                 150
                                                                 ---------------       --------------
                    Net Cash Provided
                        (Used) by Operating Activities                   35,888               63,965
                                                                 ---------------       --------------

CASH FLOWS FROM INVESTING ACTIVITIES:

              Purchase Furniture and Equipment                           (5,351)             (27,525)
              Reserve for Replacement Deposits                          (18,269)             (30,412)
              Reserve for Replacement withdrawals                         2,639               15,064
                                                                 ---------------       --------------
                    Net Cash Provided
                        (Used) by Investing Activities                  (20,981)             (42,873)
                                                                 ---------------       --------------

CASH FLOWS FROM FINANCING ACTIVITIES:

              Principle Payments on Mortgage                             (9,678)              (8,868)
              Partners Capital Contributions                                  0               (1,200)
                                                                 ---------------       --------------
                    Net Cash Provided
                        (Used) by Financing Activities                   (9,678)             (10,068)
                                                                 ---------------       --------------

              INCREASE (DECREASE) IN CASH                                 5,229               11,024
              CASH AT BEGINNING OF YEAR                                  25,546               14,522
                                                                 ---------------       --------------

              CASH AT END OF YEAR                                        30,775               25,546
                                                                 ===============       ==============

SUPPLEMENTAL DISCLOSURES:
              Interest Paid                                              27,581               28,278
                                                                 ===============       ==============

</TABLE>
                     The accompanying notes are an integral
                       part of these financial statements
                                       6
<PAGE>




                     Casa Alegre Phase I Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------

     Casa Alegre Phase I Limited  Partnership was organized  September 21, 1989,
     as a limited partnership to develop,  construct, own, maintain, and operate
     a 42-unit  rental  housing  project for persons of low and moderate  income
     pursuant  to  Sections  515 (b)  and 521 of the  Housing  Act of  1949,  as
     amended,  which provides for interest and rental subsidies.  The project is
     located in the city of Las Vegas,  New Mexico,  and is  currently  known as
     Casa  Alegre  Apartments.  The  major  activities  of the  partnership  are
     governed by the  partnership  agreement  and Rural  Economic and  Community
     Development  (RD).  Annual  distributions to the partners are limited by RD
     regulations to 8% of the borrower's  initial capital investment of $45,000,
     which is $3,600.

     Summary of significant accounting policies follows.

     Basis of Accounting
     -------------------

     The  financial  statements of the  partnership  are prepared on the accrual
     basis of accounting and in accordance  with generally  accepted  accounting
     principles.

     Capitalization and Depreciation
     -------------------------------

     Land,  building,  and  improvements  are recorded 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
     method.  Improvements are capitalized,  while  expenditures for maintenance
     and  repairs  are  charged  to  expense  as  incurred.   Upon  disposal  of
     depreciable property,  the appropriate property accounts are reduced by the
     related costs and accumulated depreciation.  The resulting gains and losses
     are reflected in the statement of operations.

     Receivables
     -----------

     The  receivables  reported  in the  balance  sheets  are  considered  fully
     collectable,  and  therefore  no allowance  for doubtful  accounts has been
     recorded.

     Income taxes
     ------------

     No  provision  or  benefit  for  income  taxes has been  included  in these
     financial statements since taxable income or loss passes through to, and is
     reportable  by,  the  partners   individually.   The  Partnership   Federal
     Identification Number is 85-0378884.

     Cash equivalents
     ----------------

     The partnership  considers all highly liquid  investments  with maturity of
     three months or less at the date of acquisition to be "cash equivalents."

     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.

                                       7
<PAGE>


                     Casa Alegre Phase I Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------

     Reclassifications
     -----------------

     Certain items in the 2000 financial  statements  have been  reclassified to
     conform with the 2001 presentation.

     Use of Estimates
     ----------------

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

NOTE B - PARTNERS' PROFIT AND LOSS ALLOCATION AND DISTRIBUTIONS
------

     The  partners  of  Casa  Alegre  Phase  I  Limited  Partnership  and  their
     respective profit and loss and capital ownership percentages are as follows
     at December 31, 2001:
<TABLE>
<CAPTION>

                                                                     PROFIT                  CAPITAL
                                                                    AND LOSS                OWNERSHIP
                                                              ---------------------    --------------------
<S>                                                                 <C>                    <C>
        Managing General Partner
             Western States Housing Corporation                      00.9900%               16.725599%
        General Partner
             A.B.O. Corporation                                      00.0005%               00.000371%
        General Partner
             Alan D. Nofsker                                         00.0095%               00.168994%
        Limited Partner
             WNC Housing Tax Credit Fund II                          99.0000%               83.105036%
                                                              ---------------------    --------------------

        TOTAL                                                       100.0000%              100.000000%
                                                              =====================    ====================
</TABLE>

     Distributable cash flow is payable as follows:

     1)   Payment of current Priority Cash Distribution,  then to the payment of
          any accrued Priority Cash Distribution from previous years;

     2)   Payment of Partnership Administration Fee;

     3)   The balance 99% to the Limited Partner and 1% to the General Partners.

NOTE C - LONG TERM DEBT
------

     The project is financed by a 50-year mortgage payable to RD in the original
     amount of $1,455,000.  The partnership has entered into an interest subsidy
     agreement  with  RD,  which  effectively   reduces  the  interest  rate  to
     approximately  1% over the term of the loan.  The 8.75% mortgage is payable
     in monthly  installments  of $3,111  net of the  interest  subsidy  through
     September  20,  2040.  During 2001 and 2000  interest  subsidy  payments of
     $92,123 and $92,273 were treated as a reduction of interest expense.


                                       8
<PAGE>

                     Casa Alegre Phase I Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


NOTE C - LONG TERM DEBT (continued)
------

     In accordance  with the loan agreement with RD, a reserve for  replacements
     is to be funded  $14,550  annually  until the account  reaches a balance of
     $145,500.  The replacement reserve is overfunded  (underfunded) $28,504 and
     $24,826 at December 31, 2001 and 2000, respectively.

     The apartment project is pledged as collateral for the mortgage.

     The  mortgage  loan is  nonrecourse  debt  secured by deeds of trust on the
     related real estate.

     Aggregate  maturities  of  long-term  debt for the next  five  years are as
     follow:


                                December 31, 2002           $  10,559
                                December 31, 2003              11,521
                                December 31, 2004              12,571
                                December 31, 2005              13,716
                                December 31, 2006              14,965
                                Other Years                 1,304,506
                                                       ----------------
                                RD Note Balance           $ 1,367,838
                                                       ================


NOTE D - RENTAL ASSISTANCE
------

     RD has contracted with the partnership effective April 3, 1991, pursuant to
     Section 521 of the Housing Act of 1949, to make rental assistance  payments
     to the partnership on behalf of qualified tenants.  The contracts terminate
     upon total disbursement of the assistance obligation. During 2001 and 2000,
     rental assistance payments received under these contracts were $107,639 and
     $114,432 respectively.


NOTE E - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
------

     Management Fee
     --------------

     In accordance with the Management  agreement,  the partnership has incurred
     management   fee  expenses  of  $15,392  and  $15,190  in  2001  and  2000,
     respectively,  for  services  rendered in  connection  with the leasing and
     operation of the project.  The  management fee is equal to $32 per unit per
     month per occupied units. The Management  Company is a related party to the
     Managing General Partner.

                                       9
<PAGE>


                     Casa Alegre Phase I Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


NOTE E - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (continued)
------

     Owner Distribution-Priority Cash
     --------------------------------

     In accordance with the partnership agreement, prior to any distributions of
     Cash  Flow From  Operations  or the  Partnership  Administration  Fee,  the
     Partnership  shall  distribute  annually to the Investment  Limited Partner
     from Net Rental Income the sum of $1,200 ("Priority Cash Distribution"). In
     the event the Partnership does not have adequate revenue to meet the annual
     Priority Cash Distribution,  then the Priority Cash Distribution deficiency
     shall  accrue  and shall be paid in the next year in which the  Partnership
     has Net Rental Income.  Priority Cash  Distributions of $1,200 were applied
     in 2000. See Note F regarding 2001.

     Owner Distribution-Partnership Administration Fee
     -------------------------------------------------

     In accordance with the Partnership agreement,  the partnership shall pay to
     the General  Partner a Partnership  Administration  Fee equal to $2,400 for
     each fiscal year of the  partnership.  The Partnership  Administration  Fee
     shall be payable within seventy-five (75) days following each calendar year
     and shall be payable  from Cash Flow From  Operations.  If the  Partnership
     Administration Fee is not paid in any year, it shall not accrue for payment
     in subsequent years. Partnership Administration Fees of $2,400 were applied
     in 2000. See Note F regarding 2001.


     Purchases
     ---------

     The partnership  occasionally purchases supply and repair materials from an
     entity,  which has common ownership with the current management company and
     a General Partner. Purchases incurred for the years ended December 31, 2001
     and 2000 were $6,124 and $13,945, respectively.

     Construction and Services
     -------------------------

     The partnership enters into contracts for construction jobs from an entity,
     which has  common  ownership  with the  current  management  company  and a
     General  Partner.  Construction  and service  fees of $-0- and $12,837 were
     incurred in 2001 and 2000, respectively.

     Amounts Due to Related Parties
     ------------------------------


     Amounts  due to  related  parties  at  December  31,  2001,  consist of the
     following:



            Payroll costs                                                $ 1,882

            Management Fees                                                  198


                                       10
<PAGE>



                     Casa Alegre Phase I Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2001 and 2000



NOTE E - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (continued)
------

     Payroll Reimbursement
     ---------------------

     State  agencies   governing   employee/payroll   related  issues  view  the
     management agent as the employer of all personnel, including site-based. As
     required by these state  agencies,  Medlock  Southwest  Management  Company
     furnish personnel to the partnership,  administer  personnel policies,  and
     pay all related payroll cost. In return, the partnership reimburses Medlock
     Southwest  Management  Company each pay period for the cost associated with
     the  payroll  expenses.  The  management  company  is a related  party to a
     General Partner.


NOTE F - OWNER DISTRIBUTIONS
------

     As  discussed in Note A, the  partnership  is limited as to the amount that
     can be  distributed  to the  partners  each  year  in the  form  of  equity
     distributions  or other  partnership  fees. In prior years the distribution
     and fees have been accrued as of December 31st. However, in the years where
     cash  flow  was  insufficient  to pay the  distribution/fee  that  does not
     accrue; the amounts  previously  reported would necessitate  reversals.  In
     order  to add  clarity  to the  financial  statements,  management  will be
     posting the  distribution/fee  in January  following  the time period being
     addressed.  This timing  difference  has caused the 2001  documents  to not
     include owner distributions/fees.


NOTE G - INSURANCE PROCEEDS
------
     Insurance  proceeds  were  received  for roof  damage to Casa Alegre I Ltd.
     Partnership  And Casa  Alegre  II Ltd.  Partnership.  The  insurance  agent
     disbursed one check for the combined  damage to the  properties.  The funds
     are held in a  restricted  account by Casa Alegre I Ltd.  Partnership.  The
     accounts  payable total includes the proceeds due to Casa Alegre II for the
     insurance  damage less  payments  made for  construction  during 2001.  The
     insurance receipts not disbursed for repairs have been reported as deferred
     income  on the  financial  statements.  The  repairs  to the  units  are in
     progress as of December 31, 2001.


                                       11
<PAGE>



                   Independent Auditors' Report on Compliance



                                       12
<PAGE>


Kenneth   C.   Boothe   &   Company,    P.C.    Certified   Public    Accountant
--------------------------------------------------------------------------------
1001 East Farm Road 700 * Big Spring,  Texas 79720 * (915)  263-1324 * FAX (915)
263-2124



                   INDEPENDENT AUDITORS' REPORT ON COMPLIANCE
                            WITH LAWS AND REGULATIONS


To the Partners,
Casa Alegre Phase I Limited Partnership

We have  audited  the  financial  statements  of  Casa  Alegre  Phase I  Limited
Partnership  as of, and for the year ended,  December 31, 2001,  and have issued
our report thereon dated February 4, 2002.

We conducted our audit in accordance with generally  accepted auditing standards
and  Government  Auditing  Standards  issued by the  Comptroller  General of the
United  States.  Those  standards  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material misstatement.

Compliance  with laws,  regulations,  contracts,  and grants  applicable  to the
Partnership is the  responsibility of the Partnership's  management.  As part of
obtaining  reasonable  assurance about whether the financial statements are free
of material  misstatement,  we performed tests of the  Partnership's  compliance
with certain  provisions  of laws,  regulations,  and  contracts.  However,  the
objective of our audit was not to provide an opinion on overall  compliance with
such provisions; accordingly, we do not express such an opinion.

We also considered those compliance  matters regarding types of services allowed
or disallowed,  eligibility, matching, level of effort and earmarking, reporting
and  special  tests,  and  provisions  comprehended  in  Attachment  2  of  U.S.
Department of Agriculture,  Farmers Home Administration  Audit Program Handbook,
dated December 1989.

We noted certain nonmaterial  instances of noncompliance and have attached these
to this report.

This  report is intended  for the  information  of Casa  Alegre  Phase I Limited
Partnership,  its  management,  and the U.S.  Department of  Agriculture,  Rural
Development  and  Community  Development.  However,  this  report is a matter of
public record and its distribution is not limited.


                                      /s/KENNETH C. BOOTHE AND COMPANY, P.C.
                                         KENNETH C. BOOTHE AND COMPANY, P.C.

February 4, 2002
Big Spring, Texas

                                       13
<PAGE>


                     Casa Alegre Phase I Limited Partnership

                          NON-MATERIAL COMPLIANCE ITEMS

                           December 31, 2001 and 2000



Find              KENNETH C. BOOTHE AND  COMPANY,  P.C.ing:  For Unit #412,  the
----              current  tenant  certification  on file was not  signed by the
                  manager.


Recommendation:   Management should have the current tenant certification signed
---------------   by the manager.

Managements Reply:Management has instructed manager to sign and date the current
----------------  tenant certification.





Finding:          For  Unit  #464,  the  social   security   number  listed  was
--------          incorrect.  There  was no  current  rent  addendum  in file to
                  update the change in net tenant contribution.

Recommendation:   Management  should  verify  correct  social  security  number.
---------------   Management  should  correct  the  tenant  certification,  make
                  necessary  changes  to the net tenant  contribution,  have the
                  tenant  initial  the changes on the Tenant  Certification  and
                  sign a rent addendum.

Managements Reply:Management  has  verified   social  security  number  and  the
----------------- resident has signed rent payment addendum.



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<PAGE>


           Independent Auditors' Report on Internal Control Structure







                                       15

<PAGE>

18   Kenneth  C.   Boothe  &   Company,   P.C.   Certified   Public   Accountant
--------------------------------------------------------------------------------
1001 East Farm Road 700 * Big Spring,  Texas 79720 * (915)  263-1324 * FAX (915)
263-2124




           INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL STRUCTURE


To the Partners,
Casa Alegre Phase I Limited Partnership

We have  audited  the  financial  statements  of  Casa  Alegre  Phase I  Limited
Partnership  as of, and for the year ended,  December 31, 2001,  and have issued
our report thereon dated February 4, 2002.

We conducted our audit in accordance with generally  accepted auditing standards
and  Government  Auditing  Standards  issued by the  Comptroller  General of the
United  States  and  the  Audit  Program  issued  by  the  U.S.   Department  of
Agriculture,  Rural Economic and Community  Development,  dated December,  1989.
Those standards and the Audit Program require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of  misstatement  and  about  whether  the  Partnership  complied  with laws and
regulations,  noncompliance  with  which  would be  material  to an RD  assisted
program.

The  management  of  the  Partnership  is  responsible  for   establishing   and
maintaining an internal control  structure.  In fulfilling this  responsibility,
estimates  and  judgments  by  management  are  required to assess the  expected
benefits  and  related  costs  of  internal  control   structure   policies  and
procedures.  The  objectives  of an internal  control  structure  are to provide
management  with  reasonable,  but  not  absolute,  assurance  that  assets  are
safeguarded  against  loss  from  unauthorized  use  or  disposition,  and  that
transactions  are executed in accordance  with  management's  authorization  and
recorded  properly  to  permit  the  preparation  of  financial   statements  in
accordance with generally accepted accounting  principles,  and that RD assisted
programs are managed in compliance with applicable laws and regulations. Because
of  inherent   limitations  in  any  internal  control   structure,   errors  or
irregularities may nevertheless occur and not be detected.  Also,  projection of
any  evaluation of the  structure to future  periods is subject to the risk that
procedures  may become  inadequate  because of changes in conditions or that the
effectiveness  of the  design and  operation  of  policies  and  procedures  may
deteriorate.

In planning and performing our audit, we obtained an understanding of the design
of relevant  internal control  structure  policies and procedures and determined
whether they had been placed in operation, and we assessed control risk in order
to determine our auditing  procedures for the purpose of expressing our opinions
on the  financial  statements  of the  Partnership  and on its  compliance  with
requirements  applicable  to its RD  assisted  programs  and  to  report  on the
internal  control  structure  and not to provide any  assurance  on the internal
control structure.

We performed tests of controls to evaluate the  effectiveness  of the design and
operation  of  internal  control  structure  policies  and  procedures  that  we
considered  relevant to  preventing  or detecting  material  noncompliance  with
requirements   applicable  to  the  Partnership's  RD  assisted  programs.   Our
procedures  were less in scope than would be  necessary  to render an opinion on
internal control policies and procedures. Accordingly, we do not express such an
opinion.

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<PAGE>


Our  consideration  of the  internal  control  structure  would not  necessarily
disclose all matters in the internal  control  structure  that might be material
weaknesses  under standards  established by the American  Institute of Certified
Public Accountants.  A material weakness is a reportable  condition in which the
design or operation of one or more of the specific  internal  control  structure
elements  does not  reduce to a  relatively  low  level the risk that  errors or
irregularities  in amounts  that would be material in relation to the  financial
statements  or that  noncompliance  with  laws  and  regulations  that  would be
material to an RD assisted program may occur and not be detected within a timely
period by employees in the normal course of performing their assigned functions.
We note no matters  involving the internal  control  structure and its operation
that we consider to be material weaknesses as defined above.

This  report  is  intended  for the  information  of  management  and  the  U.S.
Department of Agriculture,  Rural Economic and Community  Development.  However,
this report is a matter of public record and its distribution is not limited.


                                    /s/KENNETH C. BOOTHE AND COMPANY, P.C.
                                       KENNETH C. BOOTHE AND COMPANY, P.C.

February 4, 2002
Big Spring, Texas

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