|                                        | PAGE   |
|---------------------------------------------|--------|
|                                        |   |
|    Financial      Section    | 3      |
|                                        |   |
| Independent      Auditors' Report           | 4      |
|                                        |   |
|    Financial      Statements | 5      |
|                                        |   |
| Balance      Sheet                          | 6      |
|                                        |   |
| Statement      of Income                    | 7      |
|                                        |   |
| Statement      of Changes in Owners' Equity | 8      |
|                                        |   |
| Statement      of Cash Flows                | 9      |
|                                        |   |
| Notes      to the Financial Statements      | 10     |

----

----

----

----

|                                                  | 2006                                                                                                     |   | 2005                                                |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|
| Current      Assets                                   |                                                                                                     |   |                                                |
|  Cash      and Cash Equivalents                  | $  19,339.10                                                                              |   | $ 21,006.24                               |
|  Accounts      Receivable                        | 0                                                                                                   |   | 398.05                                         |
|  Prepaid      Insurance                          | 2,039.99                                                                                            |   | 2,214.09                                       |
|  Rent-Up      Reserve - Due from General Partner | 12,800.00                                                                                           |   | 12,800.00                                      |
|                                                  |                                                                                                     |   |                                                |
|   Total      Current Assets                 | 34,179.09                                                                                           |   | 36,418.38                                      |
|                                                  |                                                                                                     |   |                                                |
| Other      Assets                                     |                                                                                                     |   |                                                |
| Restricted      Cash                                  |                                                                                                     |   |                                                |
|  Taxes      and Insurance Escrow                 | 20,958.15                                                                                           |   | 30,732.68                                      |
|  Security      Deposits Held in Trust            | 10,500.00                                                                                           |   | 9,321.00                                       |
|  Reserve      for Replacements                   | 60,280.55                                                                                           |   | 47,143.37                                      |
|                                                  |                                                                                                     |   |                                                |
|   Total      Other Assets                   | 91,738.70                                                                                           |   | 87,197.05                                      |
|                                                  |                                                                                                     |   |                                                |
| Fixed      Assets                                     |                                                                                                     |   |                                                |
|  Land                                            | 40,000.00                                                                                           |   | 40,000.00                                      |
|  Buildings                                       | 1,168,010.00                                                                                        |   | 1,168,010.00                                   |
|  Equipment      and Furnishings                  | 89,521.74                                                                                           |   | 89,521.74                                      |
|  Less      Accumulated Depreciation              | (402,144.78)                                                                                             |   | (365,164.34)                                        |
|                                                  |                                                                                                     |   |                                                |
|   Net      Fixed Assets                     | 895,386.96                                                                                          |   | 932,367.40                                     |
|                                                  |                                                                                                     |   |                                                |
| TOTAL      ASSETS                                     | $1,021,304.75                                                                                       |   | $1,055,982.83                                  |
|                                                  |                                                                                                     |   |                                                |
| Current      Liabilities                              |                                                                                                     |   |                                                |
|  Accounts      Payable                           | $                0  |   | $           6,294.22  |
|  Accrued      Interest Payable                   | 1,586.54                                                                                            |   | 1,176.65                                       |
|  Accrued      Property Taxes                     | 6,770.83                                                                                            |   | 6,320.95                                       |
|  Tenant      Security Deposits                   | 10,500.00                                                                                           |   | 9,321.00                                       |
|  Current      Portion of Long-term Debt          | 23,459.99                                                                                           |   | 42,286.87                                      |
|                                                  |                                                                                                     |   |                                                |
|   Total      Current Liabilities            | 42,317.36                                                                                           |   | 65,399.69                                      |
|                                                  |                                                                                                     |   |                                                |
| Long-Term      Debt, Net of Current Portion           |                                                                                                     |   |                                                |
|  Notes      Payable                              | 178,910.96                                                                                          |   | 192,415.85                                     |
|                                                  |                                                                                                     |   |                                                |
|   Total      Long-Term Debt, Net of         |                                                                                                     |   |                                                |
|   Current      Portion                      | 178,910.96                                                                                          |   | 192,415.85                                     |
|                                                  |                                                                                                     |   |                                                |
| Owners'      Equity                                   |                                                                                                     |   |                                                |
|  T.J.      Embach, Capital                       | 68,004.20                                                                                           |   | 67,985.11                                      |
|  Gateway      Tax Credit Fund III, Ltd., Capital | 732,072.23                                                                                          |   | 730,182.18                                     |
|                                                  |                                                                                                     |   |                                                |
|   Total      Owners' Equity                 | 800,076.43                                                                                          |   | 798,167.29                                     |
|                                                  |                                                                                                     |   |                                                |
| TOTAL      LIABILITIES AND OWNERS' EQUITY             | $1,021,304.75                                                                                       |   | $1,055,982.83                                  |
|                                                  |                                                                                                     |   |                                                |

----

|                                           | 2006                        |   | 2005                    |
|------------------------------------------------|-----------------------------|--------|-------------------------|
| Revenue                                        |                        |   |                    |
|  Dwelling      Rentals                    | $ 134,774.00      |   | $ 125,769.45  |
|  Miscellaneous      Revenues              | 6,966.20               |   | 8,099.66           |
|                                           |                        |   |                    |
|   Total      Revenue                 | 141,740.20             |   | 133,869.11         |
|                                           |                        |   |                    |
| Expenses                                       |                        |   |                    |
|  Administrative                           | 29,733.15              |   | 23,324.11          |
|  Utilities                                | 21,390.51              |   | 22,804.98          |
|  Operating      and Maintenance           | 24,121.90              |   | 26,726.65          |
|  Taxes      and Insurance                 | 12,212.99              |   | 11,714.89          |
|  Depreciation                             | 36,980.44              |   | 36,980.44          |
|                                           |                        |   |                    |
|   Total      Expenses                | 124,438.99             |   | 121,551.07         |
|                                           |                        |   |                    |
| Net      Operating Income (Loss)               | 17,301.21              |   | 12,318.04          |
|                                           |                        |   |                    |
| Other      Revenue (Expense)                   |                        |   |                    |
|  Interest      Expense                    | (18,532.68)                 |   | (19,199.27)             |
|  Interest      Income                     | 3,140.61               |   | 1,600.36           |
|                                           |                        |   |                    |
|   Total      Other Revenue (Expense) | (15,392.07)                 |   | (17,598.91)             |
|                                           |                        |   |                    |
| Net      Income (Loss)                         | $  1,909.14  |   | $  (5,280.87) |
|                                           |                        |   |                    |

----

|                                            | 2006                    |   | 2005                   |
|-------------------------------------------------|-------------------------|--------|------------------------|
| T.J.      Embach, Capital                       |                    |   |                   |
|   Balance      at Beginning of Year   | $ 67,985.11   |   | $ 68,037.92  |
|   Net      Income (Loss)              |   19.09  |   |   (52.81)    |
|                                            |                    |   |                   |
|    Balance      at End of Year   | 68,004.20          |   | 67,985.11         |
|                                            |                    |   |                   |
|                                            |                    |   |                   |
| Gateway      Tax Credit Fund Ill, Ltd., Capital |                    |   |                   |
|   Balance      at Beginning of Year   | 730,182.18         |   | 735,410.24        |
|   Net      Income (Loss)              | 1,890.05           |   | (5,228.06)             |
|                                            |                    |   |                   |
|    Balance      at End of Year   | 732,072.23         |   | 730,182.18        |
|                                            |                    |   |                   |
|                                            |                    |   |                   |
| TOTAL      OWNERS' EQUITY, END OF YEAR          | $800,076.43        |   | $798,167.29       |
|                                            |                    |   |                   |

----

|                                                        | 2006                   |   | 2005                   |
|-------------------------------------------------------------|------------------------|--------|------------------------|
|                                                        |                   |   |                   |
| Cash      Flows From Operating Activities                   |                   |   |                   |
|                                                        |                   |   |                   |
|  Net      Income (Loss)                                | $ 1,909.14   |   | $ (5,280.87)      |
|                                                        |                   |   |                   |
|  Adjustments      to Reconcile Net Income to Net       |                   |   |                   |
|  Cash      Provided by Operating Activities:           |                   |   |                   |
|   Depreciation      and Amortization              | 36,980.44         |   | 36,980.44         |
|   (Increase)      Decrease in Accounts Receivable | 398.05            |   | (398.05)               |
|   (Increase)      Decrease in Prepaid Expenses    | 174.10            |   | (345.19)               |
|   Increase      (Decrease) in Accounts Payable    | (6,294.22)             |   | 1,580.00          |
|   Increase      (Decrease) in Security Deposits   | 1,179.00          |   | 1,346.00          |
|   Increase      (Decrease) in Accrued Liabilities | 449.88            |   | 595.44            |
|   Increase      (Decrease) in Interest Payable    | 409.89            |   | (64.33)                |
|                                                        |                   |   |                   |
|   Total      Adjustments                          | 33,297.14         |   | 39,694.31         |
|                                                        |                   |   |                   |
|  Net      Cash Provided by Operating Activities        | 35,206.28         |   | 34,413.44         |
|                                                        |                   |   |                   |
| Cash      Flows From Investing Activities                   |                   |   |                   |
|   Security      Deposits Held in Trust Funded     | (1,179.00)             |   | (1,346.00)             |
|   Taxes      and Insurance Escrow Funded          | 9,774.53          |   | (1,691.66)             |
|   Reserve      for Replacements, Deposits         | (18,903.81)            |   | (10,754.54)            |
|   Reserve      for Replacements, Interest         |                   |   |                   |
|   Retained      in Reserve Account                | (1,906.87)             |   | (651.27)               |
|   Interest      Earned on Investments             | --      |   | 18,153.97         |
|   Reserve      for Replacements, Withdrawals      | 7,673.50          |   | 5,725.34          |
|                                                        |                   |   |                   |
|  Net      Cash Provided by Investing Activities        | (4,541.65)             |   | 9,435.84          |
|                                                        |                   |   |                   |
| Cash      Flows From Financing Activities                   |                   |   |                   |
|   Debt      Retirement                            | (12,331.77)            |   | (11,190.96)            |
|   Developers      Fees Paid                       | (20,000.00)            |   | (20,000.00)            |
|                                                        |                   |   |                   |
|  Net      Cash Provided by Financing Activities        | (32,331.77)            |   | (31,190.96)            |
|                                                        |                   |   |                   |
| Net      Increase (Decrease) in Cash and                    |                   |   |                   |
| Cash      Equivalents                                       | (1,667.14)             |   | 12,658.32         |
|                                                        |                   |   |                   |
| Cash      and Cash Equivalents, Beginning of Year           | 21,006.24         |   | 8,347.92          |
|                                                        |                   |   |                   |
|  Cash      and Cash Equivalents, End of Year           | $ 19,339.10  |   | $ 21,006.24  |
|                                                        |                   |   |                   |
| Supplemental      Disclosures of Cash Flow Information      |                   |   |                   |
|  Cash      Paid During the Year for:                   |                   |   |                   |
|   Interest      Expense                           | $ 18,122.79  |   | $ 19,263.60  |
|                                                        |                   |   |                   |

----

| Asset     |   | Useful      Life |
|-----------|--------|------------------|
| Buildings |   | 40      years    |
| Equipment |   | 12      years    |

----

|                                                |   | 2006                   |   | 2005                   |
|-----------------------------------------------------|--------|------------------------|--------|------------------------|
|    Balance,      beginning of period |   | $ 47,143.37  |   | $ 41,462.90  |
|    Deposits                          |   | 18,903.81         |   | 10,754.54         |
|    Interest                          |   | 1,906.87          |   | 651.27            |
|    Withdrawals                       |   | (7,673.50)             |   | (5,725.34)             |
|    Balance,      end of period       |   | $ 60,280.55  |   | $ 47,143.37  |

|                                                          |   | 2006                                                                               |   | 2005                                                                         |
|---------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|
|     Security      Deposits Held in Trust  |   | $ 10,500.00                                                              |   | $  9,321.00                                                   |
|     Tenant      Security Deposits Payable |   | (10,500.00)                                                                        |   | (9,321.00)                                                                   |
|      Excess      (Deficit)           |   | $                 .00  |   | $                .00  |

|                                                    |   | 2006                   |   | 2005                   |
|---------------------------------------------------------|--------|------------------------|--------|------------------------|
|     Taxes      and insurance escrow |   |                   |   |                   |
|      account      balance      |   | $ 20,958.15  |   | $ 30,732.68  |
|                                                    |   |                   |   |                   |
|     Accrued      and unpaid:        |   |                   |   |                   |
|      Real      estate taxes    |   | (1,521.12)             |   | (1,420.05)             |
|      Insurance      expense    |   | (2,101.06)             |   | (2,358.54)             |
|                                                    |   |                   |   |                   |
|      Excess      (Deficit)     |   | $ 17,335.97  |   | $ 26,954.09  |

----

|                                                    |   | 2006                               |   | 2005                               |
|---------------------------------------------------------|--------|------------------------------------|--------|------------------------------------|
|    Land,      land improvements          |   | $   40,000.00  |   | $   40,000.00  |
|    Buildings                             |   | 1,168,010.00                  |   | 1,168,010.00                  |
|    Equipment                             |   | 89,521.74                     |   | 89,521.74                     |
|    Total                                 |   | 1,297,531.74                  |   | 1,297,531.74                  |
|    Less      accumulated depreciation    |   | (402,144.78)                       |   | (365,164.34)                       |
|                                                    |   |                               |   |                               |
|     Net      property and equipment |   | $  895,386.96       |   | $  932,367.40       |

|    9.122%      note due First Security Bank, payable    |   | 2006              |   | 2005                         |
|------------------------------------------------------------------------|--------|-------------------|--------|------------------------------|
|    in      monthly installments of $2,537.88, including |   |              |   |                         |
|    principal      and interest, through June 10, 2016.  |   |              |   |                         |
|    See      Note 8 - Security Agreement.                |   | $192,370.95  |   | $204,702.72             |
|                                                                   |   |              |   |                         |
|    Thomas      J. Embach, 0.00%, the entire amount      |   |              |   |                         |
|    that      is unpaid on June 1, 2006, will be due     |   |              |   |                         |
|    and      payable on that date.                       |   |              |   |                         |
|    See      Note 9 - Related Party      Transactions.   |   | 10,000.00    |   | 30,000.00               |
|                                                                   |   |              |   |                         |
|    Total                                                |   | 202,370.95   |   | 234,702.72              |
|    Current      portion of long-term debt               |   | (23,459.99)       |   | (42,286.87)                  |
|    Long-term      debt, net of current portion          |   | $178,910.96  |   | $192,415.85             |
|                                                                   |   |              |   |                         |
|    Maturities      of long-term debt are as follows:    |   |              |   |                         |
|                                                                   |   |              |   |                         |
|    Within      first year                               |   |              |   | $  23,459.99  |
|    Within      second year                              |   |              |   | 14,740.46               |
|    Within      third year                               |   |              |   | 16,142.77               |
|    Within      fourth year                              |   |              |   | 17,678.47               |
|    Within      fifth year                               |   |              |   | 19,360.27               |
|    Thereafter                                           |   |              |   | 110,988.99              |

----

|                                                            | 2006                   |   | 2005                   |
|-----------------------------------------------------------------|------------------------|--------|------------------------|
|    Management      fees                          | $ 10,830.00  |   | $ 10,620.00  |
|    Manager      salaries                         | 5,596.00          |   | 5,613.75          |
|    Maintenance      salaries                     | 4,048.25          |   | 3,081.00          |
|    Payroll      taxes and other payroll expenses | 1,497.42          |   | 1,213.59          |
|    Property      and liability insurance         | 148.60            |   | 113.73            |
|    Management      bonus incentive               | 890.00            |   | 315.00            |
|    Workers'      compensation                    | 748.72            |   | 606.80            |
|    HVAC-labor                                    | 1,281.79          |   | 960.79            |
|    HVAC-parts                                    | 698.68            |   | 555.45            |
|    Fidelity      bond premiums                   | 8.64              |   | 8.68              |
|    Advertising                                   | 9.83              |   | .00               |
|    Office      supplies                          | 184.96            |   | 320.78            |
|    Auto      insurance – employees         | 6.71              |   | .00               |
|    Repairs      and maintenance contracts        | 621.25            |   | 412.00            |
|    Elevator      maintenance                     | .00               |   | 20.00             |
|    Telephone      - pager – fax            | 37.03             |   | 24.02             |
|    Tool/      equipment                          | .00               |   | 110.30            |
|    Painting      and decorating                  | 1,375.00          |   | 660.00            |
|    Damage      insurance settlement              | 304.11            |   | .00               |
|    Other      administrative expenses            | 31.00             |   | .00               |