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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 [Mark One]
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 333-127891 (1933 Act)
 United Development Funding III, L.P.
  Delaware
    
    20-3269195(State or other jurisdiction of incorporation or
    
    (I.R.S. Employerorganization)
    
    Identification No.)
 1702 N. Collins Boulevard, Suite 100, Richardson, Texas(Address of principal executive offices)
    
    75080
(Zip Code)
 Registrants telephone number, including area code: (214) 370-8960
 N/A
  þ o
  o o þ
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UNITED DEVELOPMENT FUNDING III, L.P.
 FORM 10-Q
 Quarter Ended September 30, 2006
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005 (Audited)
    
    
    3Statements of Operations for the Three and Nine Months Ended September 30, 2006 and for the Period from June 13, 2005 (Inception) Through September 30, 2005 (Unaudited)
    
    
    4Statements of Changes in Partners Capital for the Nine Months Ended September 30, 2006 (Unaudited) and the Period from June 13, 2005 (Inception) Through December 31, 2005 (Audited)
    
    
    5Statements of Cash Flows for the Nine Months Ended September 30, 2006 and for the Period from June 13, 2005 (Inception) Through September 30, 2005 (Unaudited)
    
    
    6Notes to Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4. Controls and Procedures
    
    
    14PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 1A. Risk Factors
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3. Defaults Upon Senior Securities
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 5. Other Information
    
    
    15Item 6. Exhibits
    
    
    15Signatures
    
    
    16Secured Promissory Note by Centurion Acquisition, L.P.Secured Promissory Note by Midlothian Longbranch, L.P.Environmental Indemnity Agreement by Midlothian Longbranch, L.P., Centurion Acquisition, L.P., Pars Investment Inc. and Mehrdad MoayediSecured Promissory Note by Arete Real Estate Development Company, Modern Modular Home Rental Corp, and Creative Modular Housing Inc.Security Agreement by Arete Real Estate Development Company, Creative Modular Housing Inc., and Modern Modular Home Rental Corp.Continuing Unconditional Guaranty by Joe Fogarty, Nancy Fogarty and the Fogarty Family TrustRule 13a-14(a)/15d-14(a) Certification of Principal Executive OfficerRule 13a-14(a)/15d-14(a) Certification of Principal Financial OfficerSection 1350 Certification of Chief Executive and Financial Officers




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PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 UNITED DEVELOPMENT FUNDING III, L.P.
 
 BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Audited)AssetsCash and cash equivalents
    
    $
    28,793
    
    
    $
    Restricted cash
    
    
    178,200
    
    
    
    Mortgage notes receivable
    
    
    3,489,118
    
    
    
    Partnership interests subscriptions receivable
    
    
    100
    
    
    
    1,000Deferred offering costs
    
    
    1,282,772
    
    
    
    447,765Other assets
    
    
    211,507
    
    
    
    Total assets
    
    $
    5,190,490
    
    
    $
    448,765Liabilities and Partners CapitalLiabilities:Accounts payable  related party
    
    $
    19,504
    
    
    $
    Accrued liabilities  related party
    
    
    1,397,860
    
    
    
    447,765Escrow payable
    
    
    178,200
    
    
    
    Total liabilities
    
    
    1,595,564
    
    
    
    447,765Commitments and contingencies
    
    
    
    
    
    
    Partners Capital:Limited partners capital; 17,500,000 units authorized;
200,049 and zero units issued and outstanding at
September 30, 2006 and December 31, 2005, respectively
    
    
    3,589,313
    
    
    
    900General partners capital
    
    
    5,613
    
    
    
    100Total partners capital
    
    
    3,594,926
    
    
    
    1,000Total liabilities and partners capital
    
    $
    5,190,490
    
    
    $
    448,765
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UNITED DEVELOPMENT FUNDING III, L.P.
 
 STATEMENTS OF OPERATIONS
 (Unaudited)
 Period fromThree Months
    
    
    Nine Months
    
    
    June 13, 2005 (Inception)Ended
    
    
    Ended
    
    
    ThroughSeptember 30, 2006
    
    
    September 30, 2006
    
    
    September 30, 2005Revenues:Interest income
    
    $
    79,929
    
    
    $
    79,929
    
    
    $
    Mortgage and transaction service revenues
    
    
    19,465
    
    
    
    19,465
    
    
    
    Total revenues
    
    
    99,394
    
    
    
    99,394
    
    
    
    Expenses:Placement fee  related party
    
    
    16,288
    
    
    
    16,288
    
    
    
    General and administrative
    
    
    15,625
    
    
    
    16,147
    
    
    
    31,913
    
    
    
    32,435
    
    
    
    Net income
    
    $
    67,481
    
    
    $
    66,959
    
    
    $
    Earnings per unit, basic and diluted
    
    $
    0.57
    
    
    $
    1.69
    
    
    $
    Weighted average units outstanding
    
    
    117,858
    
    
    
    39,573
    
    
    
    Distributions declared per limited partner unit
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    
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UNITED DEVELOPMENT FUNDING III, L.P.
 
 STATEMENTS OF CHANGES IN PARTNERS CAPITAL
 For the Nine Months Ended September 30, 2006 and the Period from June 13, 2005 (Inception) Through December

31, 2005
 General
    
    
    Limited
    
    
    Limited
    
    
    TotalPartners
    
    
    Partners
    
    
    Partners
    
    
    PartnersCapital
    
    
    Units
    
    
    Capital
    
    
    CapitalBalance at June 13, 2005 (Inception)
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    Partnership interests subscriptions at Inception
    
    
    100
    
    
    
    
    
    
    
    900
    
    
    
    1,000Balance at December 31, 2005 (Audited)
    
    
    100
    
    
    
    
    
    
    
    900
    
    
    
    1,000Contributions, net of offering costs of $460,178
    
    
    
    
    
    
    199,784
    
    
    
    3,535,499
    
    
    
    3,535,499Redemption of limited partners interest
    
    
    
    
    
    
    
    
    
    
    (900
    )
    
    
    (900
    )Distributions
    
    
    (1,437
    )
    
    
    
    
    
    
    (11,498
    )
    
    
    (12,935
    )Distribution reinvestment
    
    
    
    
    
    
    265
    
    
    
    5,303
    
    
    
    5,303Net income
    
    
    6,950
    
    
    
    
    
    
    
    60,009
    
    
    
    66,959Balance at September 30, 2006 (Unaudited)
    
    $
    5,613
    
    
    
    200,049
    
    
    $
    3,589,313
    
    
    $
    3,594,926
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UNITED DEVELOPMENT FUNDING III, L.P.
 
 STATEMENTS OF CASH FLOWS
 (Unaudited)
 Period FromNine Months
    
    
    June 13, 2005Ended
    
    
    (Inception) ThroughSeptember 30,
    
    
    September 30,2006
    
    
    2005Operating ActivitiesNet income
    
    $
    66,959
    
    
    $
    Changes in operating assets and liabilities:Other assets
    
    
    (211,507
    )
    
    
    Accounts payable  related party
    
    
    19,504
    
    
    
    Net cash used in operating activities
    
    
    (125,044
    )
    
    
    Investing ActivitiesInvestment in mortgage notes receivable
    
    
    (3,489,118
    )
    
    
    Net cash used in investing activities
    
    
    (3,489,118
    )
    
    
    Financing ActivitiesPartnership interests subscriptions receivable
    
    
    900
    
    
    
    Limited partner contributions
    
    
    3,995,678
    
    
    
    Limited partner distributions
    
    
    (7,096
    )
    
    
    General partner distributions
    
    
    (1,437
    )
    
    
    Payments of offering costs
    
    
    (460,178
    )
    
    
    Payments of deferred offering costs
    
    
    (835,007
    )
    
    
    Accrued
liabilities  related party
    
    
    950,095
    
    
    
    Net cash provided by financing activities
    
    
    3,642,955
    
    
    
    Net change in cash and cash equivalents
    
    
    28,793
    
    
    
    Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    Cash and cash equivalents at end of period
    
    $
    28,793
    
    
    $
    
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UNITED DEVELOPMENT FUNDING III, L.P.
 
 NOTES TO FINANCIAL STATEMENTS
  A. Nature of Business
   B. Basis of Presentation
  C. Registration Statement
  D. Summary of Significant Accounting Policies
  Restricted Cash
  Cash and Cash Equivalents
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Mortgage Notes Receivables
  Revenue Recognition
  Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases,
 Allowance for Loan Losses
  Cash Flow Distributions
  E. Related Party Transactions
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Three MonthsEndedPayee
    
    Purpose
    
    September 30, 2006Land DevelopmentOrganizational &
Offering Expenses
    
    $
    60,000Due Diligence Fees
    
    
    20,000Wholesaler Reimbursement
    
    
    25,000Acquisition & Origination
Expenses and Fees
    
    
    103,100Promotional Interest
    
    
    1,250Carried Interest
    
    
    185Mortgage Servicing Fee
    
    
    1,600Funding ServicesMarketing Support Fees
    
    
    32,000
  F. Partners Capital
  G. Commitments and Contingencies
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H. Subsequent Events
     
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Forward-Looking Statements
   Overview
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Critical Accounting Policies and Estimates
  Revenue Recognition
  Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,
 Mortgage Notes Receivables
  Cash Flow Distributions
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Results of Operations
 We commenced active operations on July 3, 2006, after we satisfied the escrow condition in
connection with the Offering. As a result, our results of operations for the nine months ended
September 30, 2006 are not comparable to the results of operations for the nine months ended
September 30, 2005. As there was no operational activity from the period of June 13, 2005
(Inception) through September 30, 2005, the only results presented are for the nine months ended
September 30, 2006.
 Revenues
  Expenses
   Cash Flow Analysis
 We commenced active operations on July 3, 2006, after we satisfied the escrow condition in
connection with the Offering. As a result, our cash flows for the nine months ended September 30,
2006 are not comparable to the cash flows for the nine months ended September 30, 2005. As there
was no active operations from the period of June 13, 2005 (Inception) through September 30, 2005,
the only cash flows presented are for the nine months ended September 30, 2006.
    Liquidity and Capital Resources
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Material Trends Affecting Our Business
      Subsequent Events
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Off Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
     
 Item 4. Controls and Procedures.
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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
    
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
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SIGNATURES
  United Development Funding III, L.P.By:
    
    UMTH Land Development, L.P.Its General PartnerDated: November 14, 2006
    
    By:
    
    /s/ Jeff W. ShirleyJeff W. ShirleyPresident and Chief Executive Officer(Principal Executive Officer)By:
    
    /s/ Cara D. ObertCara D. ObertChief Financial Officer(Principal Financial Officer)
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Index to Exhibits
 Exhibit Number
    
    Description3.1
    
    Second Amended and Restated
Agreement of Limited Partnership of Registrant (previously filed in and incorporated by reference to Exhibit B to prospectus dated May 15, 2006)3.2
    
    Certificate of Limited Partnership
of Registrant (previously filed in and incorporated by reference to
Registrants Registration Statement on Form S-11, Commission File No. 333-127891, filed on August 26, 2005)4.1
    
    Subscription Agreement (previously
filed in and incorporated by reference to Exhibit C to prospectus dated May 15, 2006)10.1
    
    Secured Promissory Note by
Centurion Acquisitions, L.P. for the benefit of United Development of Funding III, L.P.10.2
    
    Secured Promissory Note by
Midlothian Longbranch, L.P. for the benefit of United Development Funding, III, L.P.10.3
    
    Environmental Indemnity Agreement
by Midlothian Longbranch, L.P., Centurion Acquisitions, L.P., Pars
Investments, Inc. and Mehrdad Moayedi in favor of United Development Funding III, L.P.10.4
    
    Secured Promissory Note by Arete
Real Estate and Development Company, Modern Modular Home Rental
Corp., and Creative Modular Housing Inc. for the benefit of United Development Funding III, L.P.10.5
    
    Security Agreement by Arete Real
Estate and Development Company, Creative Modular Housing Inc. and Modern Modular Home Rental Corp.,  in favor of United Development Funding III, L.P.10.6
    
    Continuing Unconditional Guaranty
by Joe Fogarty, Nancy Fogarty and the Fogarty Family Trust for the benefit of United Development Funding III, L.P.10.7
    
    Limited Guaranty by Registrant for
the benefit of United Mortgage Trust (previously filed in and incorporated by reference to Form 8-K filed on October 20, 2006)10.8
    
    Letter agreement with respect to
the Limited Guaranty between Registrant and United Mortgage Trust for
the benefit of United Development Funding, L.P. (previously filed in and incorporated by reference to Form 8-K filed on October 20, 2006)10.9
    
    Fairness opinion with respect to
Limited Guaranty by Registrant for the benefit of United Mortgage
Trust and letter agreement with respect to the Limited Guaranty
between Registrant and United Mortgage Trust for the benefit of United Development Funding, L.P. (previously filed in and incorporated by reference to Form 8-K filed on October 20, 2006)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer32.1*
    
    Section 1350 Certifications of Chief Executive and Financial Officers
 
 *
    
    In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed filed for
purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.
Such certifications will not be deemed incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.