----

|                                                                  | PAGE   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |
| INDEPENDENT      AUDITORS’ REPORT                               | 1      |
|                                                                  |   |
| FINANCIAL      STATEMENTS                                             |   |
|                                                                  |   |
|   BALANCE      SHEETS                                       | 2      |
|                                                                  |   |
|   STATEMENTS      OF OPERATIONS                             | 3      |
|                                                                  |   |
|   STATEMENTS      OF PARTNERS' CAPITAL                      | 4      |
|                                                                  |   |
|   STATEMENTS      OF CASH FLOWS                             | 5      |
|                                                                  |   |
|   NOTES      TO FINANCIAL STATEMENTS                        | 6      |
|                                                                  |   |
| SUPPLEMENTAL      INFORMATION                                         |   |
|                                                                  |   |
|   SCHEDULES      OF ADMINISTRATIVE, UTILITIES, MAINTENANCE, |   |
|   TAXES,      INSURANCE, AND INTEREST EXPENSE               | 10     |

----

----

|                                               | 2006                                  |   | 2005                                       |
|----------------------------------------------------|---------------------------------------|--------|--------------------------------------------|
|                                               |                                  |   |                                       |
| ASSETS                                             |                                  |   |                                       |
| CURRENT      ASSETS                                |                                  |   |                                       |
|  Cash                                         | $         15,440  |   | $          8,611  |
|  Tenant      rent receivable                  | 828                              |   | 113                                   |
|  Prepaid      insurance                       | 2,201                            |   | 2,413                                 |
|                                               |                                  |   |                                       |
| TOTAL      CURRENT ASSETS                          | 18,469                           |   | 11,137                                |
|                                               |                                  |   |                                       |
| RESTRICTED      DEPOSITS AND FUNDED RESERVES       |                                  |   |                                       |
|  Tenant      security deposits                | 7,627                            |   | 7,658                                 |
|  Real      estate tax and insurance escrow    | 41,167                           |   | 37,644                                |
|  Replacement      reserve escrow              | 95,782                           |   | 84,881                                |
|                                               |                                  |   |                                       |
| TOTAL      RESTRICTED DEPOSITS AND FUNDED RESERVES | 144,576                          |   | 130,183                               |
|                                               |                                  |   |                                       |
| PROPERTY      AND EQUIPMENT                        |                                  |   |                                       |
|  Land                                         | 55,000                           |   | 55,000                                |
|  Buildings                                    | 1,573,524                        |   | 1,573,524                             |
|  Furniture      and fixtures                  | 14,290                           |   | 14,290                                |
|                                               | 1,642,814                        |   | 1,642,814                             |
| LESS      ACCUMULATED DEPRECIATION                 | 487,825                          |   | 447,637                               |
|                                               |                                  |   |                                       |
| NET      PROPERTY AND EQUIPMENT                    | 1,154,989                        |   | 1,195,177                             |
|                                               |                                  |   |                                       |
| OTHER      ASSETS                                  |                                  |   |                                       |
|  Utility      deposits                        | 250                              |   | 250                                   |
|                                               |                                  |   |                                       |
| TOTAL      OTHER ASSETS                            | 250                              |   | 250                                   |
|                                               |                                  |   |                                       |
|                                               |                                  |   |                                       |
| TOTAL      ASSETS                                  | $1,318,284                       |   | $1,336,747                            |

----

|                                               | 2006                                           |   | 2005                                           |
|----------------------------------------------------|------------------------------------------------|--------|------------------------------------------------|
|                                               |                                           |   |                                           |
| LIABILITIES      AND PARTNERS’ CAPITAL       |                                           |   |                                           |
|                                               |                                           |   |                                           |
| CURRENT      LIABILITIES                           |                                           |   |                                           |
|  Accounts      payable                        | $           557  |   | $           536  |
|  Accrued      property taxes                  | 2,209                                     |   | 2,207                                     |
|  Accrued      payroll and taxes               | 495                                       |   | 495                                       |
|  Accrued      management fees                 | 4,566                                     |   | 4,461                                     |
|  Accrued      interest                        | 56,624                                    |   | 52,001                                    |
|  Rent      received in advance                | 236                                       |   | 226                                       |
|                                               |                                           |   |                                           |
| TOTAL      CURRENT LIABILITIES                     | 64,687                                    |   | 59,926                                    |
|                                               |                                           |   |                                           |
| LONG-TERM      DEBT                                | 869,600                                   |   | 874,264                                   |
|                                               |                                           |   |                                           |
| TENANT      SECURITY DEPOSITS                      | 7,340                                     |   | 10,882                                    |
|                                               |                                           |   |                                           |
| TOTAL      LIABILITIES                             | 941,627                                   |   | 945,072                                   |
|                                               |                                           |   |                                           |
| PARTNERS’      CAPITAL                       | 376,657                                   |   | 391,675                                   |
|                                               |                                           |   |                                           |
|                                               |                                           |   |                                           |
| TOTAL      LIABILITIES AND PARTNERS’ CAPITAL | $1,3l8,284                                |   | $1,336,747                                |

----

|                                  | 2006                 |   | 2005                 |
|---------------------------------------|----------------------|--------|----------------------|
|                                  |                 |   |                 |
|                                  |                 |   |                 |
| REVENUE                               |                 |   |                 |
|  Rental      income:             |                 |   |                 |
|   Tenants                   | $ 115,552  |   | $ 109,514  |
|  Laundry      income             | 3,037           |   | 2,831           |
|  Interest      income            | 1,269           |   | 1,351           |
|  Security      deposit forfeited | 5,314           |   | --              |
|  Late      charges               | 820             |   | 444             |
|                                  |                 |   |                 |
| TOTAL      REVENUE                    | 125,992         |   | 114,140         |
|                                  |                 |   |                 |
| EXPENSES                              |                 |   |                 |
|  Administrative                  | 20,974          |   | 20,334          |
|  Utilities                       | 5,321           |   | 3,941           |
|  Management      fee             | 12,174          |   | 11,667          |
|  Maintenance      and operations | 35,136          |   | 30,655          |
|  Taxes                           | 10,426          |   | 10,679          |
|  Insurance                       | 7,568           |   | 10,010          |
|  Interest                        | 4,623           |   | 4,624           |
|  Depreciation                    | 40,188          |   | 39,939          |
|                                  |                 |   |                 |
| TOTAL      EXPENSES                   | 136,410         |   | 131,849         |
|                                  |                 |   |                 |
| NET      LOSS                         | $ (10,418)      |   | $ (17,709)      |

----

|                          |           |   | Gateway      |   |        |   | Gateway      Tax    |
|-------------------------------|----------------|--------|--------------|--------|-------------|--------|---------------------|
|                          |           |   | Construction |   | Allan       |   | Credit              |
|                          |           |   | Corporation  |   | Rappuhn     |   | Fund      III, Ltd. |
|                          |           |   | General      |   | General     |   | Limited             |
|                          | TOTAL          |   | Partner      |   | Partner     |   | Partner             |
|                          |           |   |         |   |        |   |                |
|                          |           |   |         |   |        |   |                |
| Balance,                      |           |   |         |   |        |   |                |
|  January      1,2005     | $417,384  |   | $(36,057)    |   | $(52,587)   |   | $506,028       |
|                          |           |   |         |   |        |   |                |
| Less:                         |           |   |         |   |        |   |                |
|  Capital      withdrawal | 8,000     |   | --      |   | 5,550  |   | 2,450          |
|                          |           |   |         |   |        |   |                |
| Deduct:                       |           |   |         |   |        |   |                |
|  Net      loss for year  | 17,709    |   | 89      |   | 89     |   | 17,531         |
|                          |           |   |         |   |        |   |                |
| Balance,                      |           |   |         |   |        |   |                |
|  December      31, 2005  | 391,675   |   | (36,146)     |   | (58,226)    |   | 486,047        |
|                          |           |   |         |   |        |   |                |
| Less:                         |           |   |         |   |        |   |                |
|  Capital      withdrawal | 4,600     |   | --      |   | 3,000  |   | 1,600          |
|                          |           |   |         |   |        |   |                |
| Deduct:                       |           |   |         |   |        |   |                |
|  Net      loss for year  | 10,418    |   | 52      |   | 52     |   | 10,314         |
|                          |           |   |         |   |        |   |                |
| Balance,                      |           |   |         |   |        |   |                |
|  December      31, 2006  | $376,657  |   | $(36,198)    |   | $(61,278)   |   | $474,133       |

----

|                                                                   | 2006                      |   | 2005                           |
|------------------------------------------------------------------------|---------------------------|--------|--------------------------------|
|                                                                   |                      |   |                           |
| CASH      FLOWS FROM OPERATING ACTIVITIES                              |                      |   |                           |
| Net      loss                                                          | $ (10,419)           |   | $ (17,709)                |
| Adjustments      to reconcile net loss to net cash                     |                      |   |                           |
| provided      by (used in) operating activities:                       |                      |   |                           |
|   Depreciation                                               | 40,188               |   | 39,939                    |
|   (Increase)      Decrease in accounts receivable            | (715)                     |   | 222                       |
|   (Increase)      Decrease in prepaid insurance              | 212                  |   | 1,690                     |
|   (Increase)      Decrease in escrow for insurance and taxes | (3,523)                   |   | (15,354)                       |
|   Increase      (Decrease) in accounts payable               | 22                   |   | (22)                           |
|   Increase      (Decrease) in accrued property taxes         | 2                    |   | (4)                            |
|   Increase      (Decrease) in accrued management fees        | 105                  |   | --                        |
|   Increase      (Decrease) in accrued interest               | 4,623                |   | 4,624                     |
|   Increase      (Decrease) in rent received in advance       | 10                   |   | 201                       |
|   Net      security deposits received (paid)                 | (3,511)                   |   | 3,705                     |
|                                                                   |                      |   |                           |
| NET      CASH PROVIDED BY OPERATING ACTIVITIES                         | 26,994               |   | 17,292                    |
|                                                                   |                      |   |                           |
| CASH      FLOWS FROM INVESTING ACTIVITIES                              |                      |   |                           |
|   Deposits      to reserve for replacements                  | (10,901)                  |   | (11,056)                       |
|   Withdrawals      from reserve for replacements             | --                   |   | 22,560                    |
|   Purchase      of fixed assets                              | --                   |   | (22,560)                       |
|                                                                   |                      |   |                           |
| NET      CASH USED IN INVESTING ACTIVITIES                             | (10,901)                  |   | (11,056)                       |
|                                                                   |                      |   |                           |
| CASH      FLOWS FROM FINANCING ACTIVITIES                              |                      |   |                           |
|   Debt      reduction:                                       |                      |   |                           |
|    Long-term                                            | (4,664)                   |   | (7,526)                        |
|   Capital      withdrawals                                   | (4,600)                   |   | (8,000)                        |
|                                                                   |                      |   |                           |
| NET      CASH USED IN FINANCING ACTIVITIES                             | (9,264)                   |   | (15,526)                       |
|                                                                   |                      |   |                           |
| NET      INCREASE (DECREASE) IN CASH                                   | 6,829                |   | (9,290)                        |
|                                                                   |                      |   |                           |
| CASH      AT BEGINNING OF YEAR                                         | 8,611                |   | 17,901                    |
|                                                                   |                      |   |                           |
| CASH      AT END OF YEAR                                               | $  15,440  |   | $   8,611  |

----

----

----

|                                                         |   | 2006                     |   | 2005                     |
|--------------------------------------------------------------|--------|--------------------------|--------|--------------------------|
|                                                         |   |                     |   |                     |
| Allan      Rappuhn, the general partner.                     |   | $  3,000  |   | $  5,550  |
|                                                         |   |                     |   |                     |
| Gateway      Tax Credit Fund III, Ltd., the limited partner. |   | 1,600               |   | 2,450               |
|                                                         |   |                     |   |                     |
|                                                         |   | $  4,600  |   | $  8,000  |

|                                                                      |   | 2006            |   | 2005            |
|---------------------------------------------------------------------------|--------|-----------------|--------|-----------------|
|                                                                      |   |            |   |            |
|     Financial      statement net earnings (loss)      |   | $      (10,418) |   | $      (17,709) |
|                                                                      |   |            |   |            |
|     Adjustments                                       |   |            |   |            |
|     Excess      of depreciation for income tax        |   |            |   |            |
|     purposes      over Financial reporting purposes   |   | 17,985     |   | 18,497     |
|                                                                      |   |            |   |            |
|     Taxable      income (loss) as shown on tax return |   | $      (28,403) |   | $      (36,206) |

----

----

|                                                    | 2006                     |   | 2005                     |
|---------------------------------------------------------|--------------------------|--------|--------------------------|
|                                                    |                     |   |                     |
| ADMINISTRATIVE      EXPENSES                            |                     |   |                     |
|  Accounting                                        | $  3,100  |   | $  3,100  |
|  Auditing                                          | 542                 |   | 317                 |
|  Advertising                                       | 182                 |   | 181                 |
|  Credit      bureau expense                        | 462                 |   | --                  |
|  Educational      seminars                         | 1,128               |   | 995                 |
|  Legal      fees                                   | 78                  |   | --                  |
|  Office      expense and postage                   | 2,376               |   | 3,080               |
|  Salaries      – manager                     | 12,289              |   | 11,983              |
|  Telephone                                         | 817                 |   | 678                 |
|                                                    |                     |   |                     |
|                                                    | $ 20,974       |   | $ 20,334       |
|                                                    |                     |   |                     |
| UTILITIES                                               |                     |   |                     |
|  Electricity                                       | $  3,745  |   | $  2,919  |
|  Water                                             | 1,010               |   | 559                 |
|  Sewer                                             | 566                 |   | 463                 |
|                                                    |                     |   |                     |
|                                                    | $  5,321  |   | $  3,941  |
|                                                    |                     |   |                     |
| MAINTENANCE      EXPENSE                                |                     |   |                     |
|  Grounds      upkeep                               | $  9,788  |   | $  9,921  |
|  Salaries      – maintenance                 | 1,333               |   | --                  |
|  Repairs      – appliances                   | 132                 |   | 908                 |
|  Repairs      – buildings                    | 448                 |   | 3,390               |
|  Repairs      – heating and air conditioning | 4,141               |   | 3,708               |
|  Repairs      – plumbing                     | 1,578               |   | 2,557               |
|  Repairs      – painting                     | 2,105               |   | 1,997               |
|  Apartment      clean-up labor                     | 1,252               |   | 1,937               |
|  Pest      Control                                 | 6,612               |   | 2,389               |
|  Garbage      and trash removal                    | 2,077               |   | 1,856               |
|  Supplies                                          | 5,670               |   | 1,992               |
|                                                    |                     |   |                     |
|                                                    | $ 35,136       |   | $ 30,655       |

----

|                                         | 2006                     |   | 2005                     |
|----------------------------------------------|--------------------------|--------|--------------------------|
| TAXES                                        |                     |   |                     |
|   Taxes      and licenses          | $  9,129  |   | $  8,926  |
|   Payroll      taxes               | 1,297               |   | 1,753               |
|                                         |                     |   |                     |
|                                         | $ 10,426       |   | $ 10,679       |
|                                         |                     |   |                     |
|                                         |                     |   |                     |
| INSURANCE      EXPENSE                       |                     |   |                     |
|   Property      insurance          | $  7,372  |   | $  9,469  |
|   Worker’s      compensation | 196                 |   | 541                 |
|                                         |                     |   |                     |
|                                         | $  7,568  |   | $ 10,010       |
|                                         |                     |   |                     |
|                                         |                     |   |                     |
| INTEREST      EXPENSE                        |                     |   |                     |
|   Interest      on mortgage        | $  4,623  |   | $  4,624  |