Casa Alegre Phase I Limited Partnership

                          RD Case No. 36-024-0850378884

                          Independent Auditors' Report

                     Years Ending December 31, 2002 and 2001









<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 o Big Spring, Texas 79720 o (915) 263-1324 o 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, 2002 and 2001,  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, 2002 and 2001, 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 8,
2003, on our consideration of Casa Alegre Phase I Limited Partnership's internal
control  structure and a report dated February 8, 2003, 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.






                                   KENNETH C. BOOTHE AND COMPANY, P.C.
February 8, 2003
Big Spring, Texas

                                       1
<PAGE>


                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                                  Balance Sheet
                           December 31, 2002 and 2001


                                     Assets
                                     ------
<TABLE>
<CAPTION>

                                                                 Dec. 31, 2002                 Dec. 31, 2001
                                                                ----------------            --------------------

<S>                                                           <C>                         <C>
Current Assets

      Cash and Cash Equivalents                               $           2,278           $              30,775
      Accounts Receivable - RD                                            5,918                               0
      Accounts Receivable - Other                                           104                              14
      Prepaid Expenses                                                    8,292                           8,059
                                                                ----------------            --------------------

           Total Current Assets                                          16,592                          38,848
                                                                ----------------            --------------------

Restricted Deposits & Funded Reserves

      Tenant Security Deposits                                            7,767                           7,717
      Real Estate Tax & Insurance Escrow                                 19,040                          14,481
      Restricted Insurance Proceeds                                           0                          33,490
      Replacement Reserve Escrow                                        157,443                         145,948
                                                                ----------------            --------------------

           Total Restricted Deposits &
                        Funded Reserves                                 184,250                         201,636
                                                                ----------------            --------------------

Property & Equipment

      Land                                                               70,925                          70,925
      Building & Equipment                                            1,837,621                       1,818,296
      Furnishings                                                        13,434                          13,434
      Maintenance Equipment                                               8,306                           8,305
      Accumulated Depreciation                                         (579,164)                       (526,797)
                                                                ----------------            --------------------

           Total Property & Equipment                                 1,351,122                       1,384,163
                                                                ----------------            --------------------

Other Assets

      Deposits                                                            2,000                               0
                                                                ----------------            --------------------

           Total Other Assets                                             2,000                               0
                                                                ----------------            --------------------

           Total Assets                                       $       1,553,964           $           1,624,647
                                                                ================            ====================
</TABLE>
                     The accompanying notes are an integral
                       part of these financial statements
                                       2

<PAGE>


                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                                  Balance Sheet
                           December 31, 2002 and 2001


                                   Liabilities
                                   -----------
<TABLE>
<CAPTION>

                                                                 Dec. 31, 2002                 Dec. 31, 2001
                                                                ----------------            --------------------

Liabilities

<S>                                                           <C>                         <C>
      Current Liabilities

           Current Maturities of
              Long Term Debt                                  $          11,521           $              10,559
           Accounts Payable                                               2,148                          15,733
           Deferred Income - Insurance Proceeds                               0                          22,561
           Accrued Liabilities                                            2,241                           2,296
                                                                ----------------            --------------------

                        Total Current Liabilities                        15,910                          51,149
                                                                ----------------            --------------------

Deposits & Prepayment Items

           Tenant Security Deposits                                       6,545                           6,345
                                                                ----------------            --------------------

                        Total Deposits &
                           Prepayment Liabilities                         6,545                           6,345
                                                                ----------------            --------------------

Long Term Liabilities

           Long Term Debt (Net of
              Current Maturities)                                     1,345,765                       1,357,279
                                                                ----------------            --------------------

                        Total Long Term Liabilities                   1,345,765                       1,357,279
                                                                ----------------            --------------------

                        Total Liabilities                             1,368,220                       1,414,773

Partners' Equity                                                        185,744                         209,874
                                                                ----------------            --------------------

Total Liabilities and Partners Equity                         $       1,553,964           $           1,624,647
                                                                ================            ====================
</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, 2002 and 2001
<TABLE>
<CAPTION>



                                                                 Dec. 31, 2002                 Dec. 31, 2001
                                                                ----------------            --------------------

<S>                                                           <C>                         <C>
Revenue

      Rental Income                                           $         172,951           $             171,045
      Late Fees, Deposit Forfeitures, etc.                                  457                             320
      Interest Income                                                     3,573                           6,280
      Other Income                                                        1,055                           1,446
                                                                ----------------            --------------------

           Total Revenue                                                178,036                         179,091
                                                                ----------------            --------------------

Operating Expenses

      Administrative                                                     42,098                          40,629
      Utilities                                                          22,920                          25,922
      Maintenance                                                        33,660                          29,771
      Taxes and Insurance                                                20,821                          16,666
      Interest, net of subsidy                                           26,700                          27,581
                                                                ----------------            --------------------
           Total Cost Of Operations
                             Before Depreciation                        146,199                         140,569
                                                                ----------------            --------------------

           Net Income Before Depreciation                                31,837                          38,522

      Depreciation                                                       52,367                          53,804
                                                                ----------------            --------------------

           Net Operating Gain or (Loss)                                 (20,530)                        (15,282)
                                                                ----------------            --------------------

Other Income (Expense)

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

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

Net Income or (Loss)                                          $         (22,930)          $             (15,282)
                                                                ================            ====================
</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, 2002 and 2001
<TABLE>
<CAPTION>





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

<S>                              <C>                     <C>               <C>             <C>      <C>
Partner's Equity,

      December 31, 2000          $       225,156         44,665            451             1        180,039



Net Income or (Loss), 2001               (15,282)          (151)            (1)            0        (15,130)

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

Net Income or (Loss), 2002               (22,930)          (227)            (2)            0        (22,701)

Partners' Capital Contributions                0              0              0             0              0

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

Partner's Equity,
      December 31, 2002          $       185,744         44,287            448             1        141,008
                                 ================      =========          ======         =====    ==========
</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, 2002 and 2001
                Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>





                                                                    Dec. 31, 2002           Dec. 31, 2001
                                                                    ---------------        -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                               <C>                    <C>
        Net Income or (Loss)                                      $        (22,930)      $          (15,282)
        Adjustments to Reconcile Net Income
          to Net Cash Provided by
        Operating Activities:
              Depreciation                                                  52,367                   53,804
        (Increase) Decrease In Assets
              Accounts Receivable - Other                                      (90)                   2,464
              Accounts Receivable - RD Rent Supplement                      (5,918)                       0
              Prepaid Property and Liability Insurance                        (233)                  (3,661)
              Tax and Insurance Escrow                                      (4,559)                  (3,440)
              Restricted Insurance Proceeds                                 33,490                  (33,490)
              Tenant Security Deposits                                         (50)                    (250)
              Deposits                                                      (2,000)                       0
        Increase (Decrease) in Liabilities
              Accounts Payable                                             (13,585)                  13,666
              Deferred Income - Insurance Proceeds                         (22,561)                  22,561
              Accrued Liabilities                                              (55)                    (179)
              Tenant Security Deposit                                          200                     (305)
                                                                    ---------------        -----------------
                     Net Cash Provided
                         (Used) by Operating Activities                     14,076                   35,888
                                                                    ---------------        -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:

              Purchase Furniture and Equipment                             (19,326)                  (5,351)
              Reserve for Replacement Deposits                             (18,971)                 (18,269)
              Reserve for Replacement withdrawals                            7,476                    2,639
                                                                    ---------------        -----------------
                     Net Cash Provided
                         (Used) by Investing Activities                    (30,821)                 (20,981)
                                                                    ---------------        -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:

              Principle Payments on Mortgage                               (10,552)                  (9,678)
              Partners Capital  Distribution                                (1,200)                       0
                                                                    ---------------        -----------------
                     Net Cash Provided
                         (Used) by Financing Activities                    (11,752)                  (9,678)
                                                                    ---------------        -----------------

              INCREASE (DECREASE) IN CASH                                  (28,497)                   5,229
              CASH AT BEGINNING OF YEAR                                     30,775                   25,546
                                                                    ---------------        -----------------

              CASH AT END OF YEAR                                            2,278                   30,775
                                                                    ===============        =================

SUPPLEMENTAL DISCLOSURES:
              Interest Paid                                                 26,700                   27,581
                                                                    ===============        =================
</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, 2002 and 2001


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, 2002 and 2001


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

     Reclassifications

     Certain items in the 2001 financial  statements  have been  reclassified to
     conform with the 2002 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, 2002:
<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 2002 and 2001,  interest  subsidy  payments  of $91,761 and $92,123  were
treated as a reduction of interest expense.

                                       8
<PAGE>


                     Casa Alegre Phase I Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2002 and 2001

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) $32,893 and
     $28,504 at December 31, 2002 and 2001, 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, 2003            $                         11,521
                   December 31, 2004                                      12,571
                   December 31, 2005                                      13,716
                   December 31, 2006                                      14,965
                   December 31, 2007                                      16,329
                   Other Years                                         1,288,184
                                                       -------------------------
                   RD Note Balance              $                    $ 1,357,286
                                                       =========================

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 2002 and 2001,
     rental assistance payments received under these contracts were $108,188 and
     $107,639, 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  $15,616  and  $15,392  in  2002  and  2001,
     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, 2002 and 2001


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 2002. 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 2002. 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, 2002
     and 2001 were $3,711 and $6,124, respectively.

      Amounts Due to Related Parties

     Amounts  due to  related  parties  at  December  31,  2002,  consist of the
     following:

                      Payroll                                 $               30
                      Purchases/supplies                      $              194


     The  following  items exist as  liabilities  in the  financial  statements.
     However,  they are  only  payable  under  certain  conditions  - See Note C
     regarding these items.

                      Owner Distribution fees                 $               24
                      Priority cash distribution              $            1,200
                      Partnership administration fees         $            2,400




                                       10
<PAGE>


                     Casa Alegre Phase I Limited Partnership

                          NOTES TO FINANCIAL STATEMENTS

                           December 31, 2002 and 2001

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 years  prior to 2001,  the
     distribution and fees had 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
     began  posting the  distribution/fee  in January of the year  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 Limited
     Partnership  and Casa Alegre II Limited  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 Limited 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  were in
     progress  as of  December  31,  2001.  The  repairs  are  complete  and all
     insurance  claims were resolved as of 12-31-02.  All  transactions  between
     Casa  Alegre I & II  involving  the  insurance  and  related  repairs  were
     resolved during 2002.

                                       11
<PAGE>



                   Independent Auditors' Report on Compliance

<PAGE>

Kenneth C. Boothe & Company, P.C.
Certified Public Accountant
--------------------------------------------------------------------------------
1001 East Farm Road 700 o Big Spring, Texas 79720 o (915) 263-1324 o 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, 2002,  and have issued
our report thereon dated February 8, 2003.

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.








                                     KENNETH C. BOOTHE AND COMPANY, P.C.

February 8, 2003
Big Spring, Texas

                                       13
<PAGE>


                     Casa Alegre Phase I Limited Partnership

                          NON-MATERIAL COMPLIANCE ITEMS

                                December 31, 2002





         Finding:
         ---------                  For  Unit # 418 and  #446,  there  was not a
                                    current rent  addendum in the tenant file to
                                    update    the    change   in   net    tenant
                                    contribution.



         Recommendation:
         ---------------            Management  should  prepare a  current  rent
                                    addendum and have it signed by the tenant.




         Management's Reply:
         -------------------        Management  has prepared a rent addendum and
                                    the tenant has signed and dated it.





         Finding:
         --------                   For Unit #474,  documentation of independent
                                    income verification was not on file.




         Recommendation:
         ---------------            Management  should  obtain  adequate  income
                                    verification and maintain the  documentation
                                    in the tenant file.



         Management's Reply:
         -------------------        Management  has  obtained   adequate  income
                                    verification and included the  documentation
                                    in the tenant records.





                                       14

<PAGE>



           Independent Auditors' Report on Internal Control Structure

                                       15
<PAGE>



Kenneth   C.   Boothe   &   Company,    P.C.    Certified   Public    Accountant
--------------------------------------------------------------------------------
1001 East Farm Road 700 o Big Spring,  Texas 79720 o (915)  263-1324 o 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, 2002,  and have issued
our report thereon dated February 8, 2003.

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.

                                       16
<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.







                                  KENNETH C. BOOTHE AND COMPANY, P.C.

February 8, 2003
Big Spring, Texas

                                       17
<PAGE>










                            Supplemental Information







                                       18
<PAGE>
                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                      Schedule of Administrative, Utilities
               Maintenance, Taxes, Insurance and Interest Expense
                           December 31, 2002 and 2001
<TABLE>
<CAPTION>

                                                      Dec. 31, 2002               Dec. 31, 2001
                                                      -------------               -------------
<S>                                                            <C>                        <C>
          Administrative Expenses

               Advertising                                       268                         158
               Office Supplies                                 1,464                       1,189
               Office Furniture & Equipment                    1,450                         589
               Manager Salaries                                8,922                       9,251
               Management Fee                                 15,616                      15,392
               Legal                                             164                         192
               Auditing                                        5,050                       3,905
               Payroll Taxes (Project Share)                   2,377                       2,941
               Workers Compensation Ins                          649                         734
               Health Insurance                                3,273                       2,949
               Telephone                                       1,255                       1,155
               Other Financial Expense                           888                          98
               Miscellaneous                                     722                       2,076
                                                      ---------------             ---------------

                                                              42,098                      40,629
                                                      ===============             ===============

          Utilities

               Electricity                                     1,314                       2,208
               Water                                           7,080                       8,072
               Gas                                             2,428                       1,887
               Sewer                                           5,841                       7,304
               Garbage & Trash Removal                         5,643                       6,239
               Other Utilities                                   614                         212
                                                      ---------------             ---------------

                                                              22,920                      25,922
                                                      ===============             ===============

</TABLE>


                                       19
<PAGE>

                     CASA ALEGRE PHASE I LIMITED PARTNERSHIP
                      Schedule of Administrative, Utilities
               Maintenance, Taxes, Insurance and Interest Expense
                           December 31, 2002 and 2001
<TABLE>
<CAPTION>

                                                      Dec. 31, 2002               Dec. 31, 2001
                                                      -------------               -------------
<S>                                                           <C>                         <C>
          Maintenance Expenses

               Janitor & Cleaning Supplies                       437                         425
               Janitor & Cleaning Contract                         0                           0
               Extermination Payroll/Contract                  1,447                         422
               Security Contract                                 617                         181
               Grounds Contracts                                  65                           0
               Grounds Supplies                                2,912                       1,507
               Repairs Payroll                                18,668                      17,812
               Repairs Material                                4,385                       6,224
               Repairs Contract                                3,629                       1,484
               Heating/Cooling Rep & Maint                        38                          20
               Decorating Payroll                                  0                           0
               Decorating Supplies                             1,027                         648
               Furniture & Furnishing Replace                    212                         894
               Veh & Main Equip Oper & Rep                       223                         154
                                                      ---------------             ---------------

                                                              33,660                      29,771
                                                      ===============             ===============
          Taxes and Insurance

               Real Estate Taxes                               6,809                       7,099
               Misc Taxes, Licenses & Permit                   4,236                       1,557
               Property & Liab Ins (Hazard)                    9,463                       7,835
               Fidelity Bond Insurance - (On
                 Site Personnel)                                 313                         175

                                                              20,821                      16,666
                                                      ===============             ===============

          Interest Expense

               Interest on Mortgage                           26,700                      27,581
                                                                                  ---------------

                                                              26,700                      27,581
                                                      ===============             ===============

          Other Financial Expenses

               Administrative Fee                              2,400                           0
                                                      ---------------             ---------------

                                                               2,400                           0
                                                      ===============             ===============
</TABLE>






                                       20