----

|                                                                  | 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                                         | $    8,973  |   | $    8,147  |
|  Tenant      rent receivable                  | --                              |   | 286                             |
|  Prepaid      insurance                       | 2,528                           |   | 3,030                           |
|  Prepaid      management fees                 | 177                             |   | 181                             |
|                                               |                                 |   |                                 |
| TOTAL      CURRENT ASSETS                          | 11,678                          |   | 11,644                          |
|                                               |                                 |   |                                 |
| RESTRICTED      DEPOSITS AND FUNDED RESERVES       |                                 |   |                                 |
|  Tenant      security deposits                | 8,495                           |   | 9,494                           |
|  Real      estate tax and insurance escrow    | 22,977                          |   | 19,327                          |
|  Replacement      reserve escrow              | 110,784                         |   | 99,249                          |
|                                               |                                 |   |                                 |
| TOTAL      RESTRICTED DEPOSITS AND FUNDED RESERVES | 142,256                         |   | 128,070                         |
|                                               |                                 |   |                                 |
| PROPERTY      AND EQUIPMENT                        |                                 |   |                                 |
|  Land                                         | 125,000                         |   | 125,000                         |
|  Land      improvements                       | 1,385                           |   | --                              |
|  Buildings                                    | 1,695,046                       |   | 1,695,046                       |
|  Furniture      and fixtures                  | 43,386                          |   | 35,839                          |
|                                               | 1,864,817                       |   | 1,855,885                       |
|                                               |                                 |   |                                 |
| LESS      ACCUMULATED DEPRECIATION                 | 533,770                         |   | 489,002                         |
|                                               |                                 |   |                                 |
| NET      PROPERTY AND EQUIPMENT                    | 1,331,047                       |   | 1,366,883                       |
|                                               |                                 |   |                                 |
| OTHER      ASSETS                                  |                                 |   |                                 |
|  Utility      deposits                        | 100                             |   | 100                             |
|                                               |                                 |   |                                 |
|                                               |                                 |   |                                 |
| TOTAL      ASSETS                                  | $1,485,081                      |   | $1,506,697                      |

----

|                                               | 2006                                           |   | 2005                                           |
|----------------------------------------------------|------------------------------------------------|--------|------------------------------------------------|
|                                               |                                           |   |                                           |
| LIABILITIES      AND PARTNERS’ CAPITAL       |                                           |   |                                           |
|                                               |                                           |   |                                           |
|                                               |                                           |   |                                           |
| CURRENT      LIABILITIES                           |                                           |   |                                           |
|  Accounts      payable                        | $      335  |   | $      727  |
|  Accrued      property taxes                  | 3,857                                     |   | 3,858                                     |
|                                               |                                           |   |                                           |
| TOTAL      CURRENT LIABILITIES                     | 4,192                                     |   | 4,585                                     |
|                                               |                                           |   |                                           |
| ACCRUED      INTEREST                              | 68,373                                    |   | 62,490                                    |
|                                               |                                           |   |                                           |
| LONG-TERM      DEBT                                | 1,114,105                                 |   | 1,114,105                                 |
|                                               |                                           |   |                                           |
| TENANT      SECURITY DEPOSITS                      | 7,140                                     |   | 7,290                                     |
|                                               |                                           |   |                                           |
| TOTAL      LIABILITIES                             | 1,193,810                                 |   | 1,188,470                                 |
|                                               |                                           |   |                                           |
| PARTNERS’      CAPITAL                       | 291,271                                   |   | 318,227                                   |
|                                               |                                           |   |                                           |
|                                               |                                           |   |                                           |
|                                               |                                           |   |                                           |
| TOTAL      LIABILITIES AND PARTNERS’ CAPITAL | $1,485,081                                |   | $1,506,697                                |

----

|                                  | 2006                 |   | 2005                 |
|---------------------------------------|----------------------|--------|----------------------|
|                                  |                 |   |                 |
|                                  |                 |   |                 |
| REVENUE                               |                 |   |                 |
|  Rental      income:             |                 |   |                 |
|   Tenants                   | $ 121,538  |   | $ 121,659  |
|  Laundry      income             | --              |   | 305             |
|  Interest      income            | 1,794           |   | 1,251           |
|  Security      deposit forfeited | 1,600           |   | --              |
|  Late      charges               | 30              |   | --              |
|  Miscellaneous      income       | 160             |   | --              |
|                                  |                 |   |                 |
| TOTAL      REVENUE                    | 125,122         |   | 123,215         |
|                                  |                 |   |                 |
| EXPENSES                              |                 |   |                 |
|  Administrative                  | 19,399          |   | 18,819          |
|  Utilities                       | 13,324          |   | 12,186          |
|  Management      fee             | 12,533          |   | 12,196          |
|  Maintenance      and operations | 23,551          |   | 26,110          |
|  Taxes                           | 16,662          |   | 17,271          |
|  Insurance                       | 10,958          |   | 10,782          |
|  Interest                        | 5,883           |   | 5,854           |
|  Depreciation                    | 44,768          |   | 44,856          |
|                                  |                 |   |                 |
| TOTAL      EXPENSES                   | 147,078         |   | 148,074         |
|                                  |                 |   |                 |
| NET      LOSS                         | $ (21,956)      |   | $ (24,859)      |

----

|                          |           |   | Gateway      |   |        |   | Gateway             |
|-------------------------------|----------------|--------|--------------|--------|-------------|--------|---------------------|
|                          |           |   | Construction |   | Allan       |   | Tax      Credit     |
|                          |           |   | Corporation  |   | Rappuhn     |   | Fund      III, Ltd. |
|                          |           |   | General      |   | General     |   | Limited             |
|                          | TOTAL          |   | Partner      |   | Partner     |   | Partner             |
|                          |           |   |         |   |        |   |                |
|                          |           |   |         |   |        |   |                |
| Balance,                      |           |   |         |   |        |   |                |
|  January      1,2005     | $343,086  |   | $(72,161)    |   | $(62,329)   |   | $477,576       |
|                          |           |   |         |   |        |   |                |
| Deduct:                       |           |   |         |   |        |   |                |
|  Net      loss for year  | 24,859    |   | 124     |   | 124    |   | 24,611         |
|                          |           |   |         |   |        |   |                |
| Balance,                      |           |   |         |   |        |   |                |
|  December      31, 2005  | 318,227   |   | (72,285)     |   | (62,453)    |   | 452,965        |
|                          |           |   |         |   |        |   |                |
| Less:                         |           |   |         |   |        |   |                |
|  Capital      withdrawal | 5,000     |   | --      |   | 3,300  |   | 1,700          |
|                          |           |   |         |   |        |   |                |
| Deduct:                       |           |   |         |   |        |   |                |
|  Net      loss for year  | 21,956    |   | 109     |   | 111    |   | 21,736         |
|                          |           |   |         |   |        |   |                |
| Balance,                      |           |   |         |   |        |   |                |
|  December      31, 2006  | $291,271  |   | $(72,394)    |   | $(65,864)   |   | $429,529       |

----

|                                                                   | 2006                     |   | 2005                     |
|------------------------------------------------------------------------|--------------------------|--------|--------------------------|
|                                                                   |                     |   |                     |
| CASH      FLOWS FROM OPERATING ACTIVITIES                              |                     |   |                     |
| Net      loss                                                          | $(21,956)                |   | $(24,859)                |
| Adjustments      to reconcile net loss to net cash                     |                     |   |                     |
| provided      by (used in) operating activities:                       |                     |   |                     |
|   Depreciation                                               | 44,768              |   | 44,856              |
|   (Increase)      Decrease in accounts receivable            | 286                 |   | (174)                    |
|   (Increase)      Decrease in prepaid insurance              | 502                 |   | (190)                    |
|   (Increase)      Decrease in prepaid management fees        | 4                   |   | (181)                    |
|   (Increase)      Decrease in escrow for insurance and taxes | (3,650)                  |   | (8,572)                  |
|   Increase      (Decrease) in accounts payable               | (392)                    |   | 304                 |
|   Increase      (Decrease) in accrued property taxes         | (1)                      |   | (8)                      |
|   Increase      (Decrease) in accrued interest               | 5,883               |   | 5,854               |
|   Net      security deposits received (paid)                 | 849                 |   | (1,719)             |
|                                                                   |                     |   |                     |
| NET      CASH PROVIDED BY OPERATING ACTIVITIES                         | 26,293              |   | 15,311              |
|                                                                   |                     |   |                     |
| CASH      FLOWS FROM INVESTING ACTIVITIES                              |                     |   |                     |
|   Deposits      to reserve for replacements                  | (11,535)                 |   | (11,040)                 |
|   Purchase      of fixed assets                              | (8,932)                  |   | (3,453)                  |
|                                                                   |                     |   |                     |
| NET      CASH USED IN INVESTING ACTIVITIES                             | (20,467)                 |   | (14,493)                 |
|                                                                   |                     |   |                     |
| CASH      FLOWS FROM FINANCING ACTIVITIES                              |                     |   |                     |
|   Capital      withdrawals                                   | (5,000)                  |   | --                  |
|                                                                   |                     |   |                     |
| NET      CASH USED IN FINANCING ACTIVITIES                             | (5,000)                  |   | --                  |
|                                                                   |                     |   |                     |
| NET      INCREASE IN CASH                                              | 826                 |   | 818                 |
|                                                                   |                     |   |                     |
| CASH      AT BEGINNING OF YEAR                                         | 8,147               |   | 7,329               |
|                                                                   |                     |   |                     |
| CASH      AT END OF YEAR                                               | $  8,973  |   | $  8,147  |

----

----

----

----

|                                                        |   | 2006                     |
|-------------------------------------------------------------|--------|--------------------------|
|                                                        |   |                     |
| Allan      Rappuhn, the general partner                     |   | $  3,300  |
| Gateway      Tax Credit Fund III, Ltd., the limited partner |   | 1,700               |
|                                                        |   |                     |
|                                                        |   | $  5,000  |

----

----

|                                                    | 2006               |   | 2005               |
|---------------------------------------------------------|--------------------|--------|--------------------|
|                                                    |               |   |               |
| ADMINISTRATIVE      EXPENSES                            |               |   |               |
|  Accounting                                        | $ 2,550  |   | $ 2,541  |
|  Auditing                                          | 542           |   | 276           |
|  Advertising                                       | 228           |   | 461           |
|  Credit      bureau expense                        | 188           |   | 87            |
|  Educational      seminars                         | 1,132         |   | 803           |
|  Office      expense and postage                   | 3,739         |   | 3,919         |
|  Salaries      – manager                     | 10,411        |   | 10,039        |
|  Telephone                                         | 609           |   | 693           |
|                                                    |               |   |               |
|                                                    | $19,399       |   | $18,819       |
|                                                    |               |   |               |
| UTILITIES                                               |               |   |               |
|  Electricity                                       | $ 2,944  |   | $ 2,959  |
|  Heat,      light and water allowance              | --            |   | --            |
|  Fuel      Oil                                     | 2,159         |   | 2,065         |
|  Water                                             | 3,841         |   | 3,860         |
|  Sewer                                             | 4,380         |   | 3,302         |
|                                                    |               |   |               |
|                                                    | $13,324       |   | $12,186       |
|                                                    |               |   |               |
| MAINTENANCE      EXPENSE                                |               |   |               |
|  Grounds      upkeep                               | $ 8,903  |   | $ 9,135  |
|  Salaries      – maintenance                 | 975           |   | 1,043         |
|  Repairs      – appliances                   | 238           |   | 446           |
|  Repairs      – buildings                    | 1,304         |   | 832           |
|  Repairs      – heating and air conditioning | 2,586         |   | 3,960         |
|  Repairs      – plumbing                     | 249           |   | 154           |
|  Repairs      – painting                     | 657           |   | 671           |
|  Apartment      clean-up labor                     | 970           |   | 671           |
|  Pest      Control                                 | 1,728         |   | 1,197         |
|  Garbage      and trash removal                    | 4,320         |   | 5,184         |
|  Supplies                                          | 1,621         |   | 2,617         |
|                                                    |               |   |               |
|                                                    | $23,551       |   | $26,110       |

----

|                                         | 2006               |   | 2005               |
|----------------------------------------------|--------------------|--------|--------------------|
|                                         |               |   |               |
| TAXES                                        |               |   |               |
|   Taxes      and licenses          | $15,526       |   | $15,523       |
|   Payroll      taxes               | 1,136         |   | 1,748         |
|                                         |               |   |               |
|                                         | $16,662       |   | $17,271       |
|                                         |               |   |               |
|                                         |               |   |               |
| INSURANCE      EXPENSE                       |               |   |               |
|   Property      insurance          | $ 7,448  |   | $ 7,817  |
|   Worker’s      compensation | 636           |   | 541           |
|   Employee      health             | 2,874         |   | 2,424         |
|                                         |               |   |               |
|                                         | $10,958       |   | $10,782       |
|                                         |               |   |               |
|                                         |               |   |               |
| INTEREST      EXPENSE                        |               |   |               |
|   Interest      on mortgage        | $ 5,883  |   | $ 5,854  |
|   Other      interest              | --       |   | --       |
|                                         |               |   |               |
|                                         | $ 5,883  |   | $ 5,854  |