**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. **
**20549**

**FORM      10-K**

**[Mark      One]**

**ANNUAL      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES      EXCHANGE ACT OF 1934**

**For      the fiscal year ended December 31, 2006 **

**OR**

**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.**                                                    |
|------------------------------------------------------------------------------------------------------------|
| (Exact                Name of Registrant as Specified in Its Charter)                                      |
|                                                                                                       |   |   |   |   |   |   |   |   |   |
| **Delaware**                                                                                               |   |   |   | **20-3269195** |
| (State                or other jurisdiction of incorporation or organization)                              |   |   |   |                            (I.R.S. Employer Identification                No.) |
|                                                                                                       |   |   |   |   |
|                                                                                                       |   |   |   |   |   |   |   |   |   |
| **1702                N. Collins Boulevard, Suite 100, Richardson, Texas                75080**            |
| (Address                of principal executive offices)                                                    |
| (Zip                Code)                                                                                  |
|                                                                                                       |
| **Registrant’s                telephone number, including area code: (214)                370-8960** |
|                                                                                                       |

**None**

**None**

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Financial      Statement Index

Exhibit      Index

**UNITED      DEVELOPMENT FUNDING III, L.P.**

**FORM      10-**
**K**

**Year      Ended December 31, 2006**

|                    | **PART                I**                                                                                                                        | **Page                No.** |
|-------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|
| Item                1.  | Business.                                                                                                                                        |  1                     |
| Item                1A. | Risk                Factors.                                                                                                                     |  7                     |
| Item                1B. | Unresolved                Staff Comments.                                                                                                        |  28                    |
| Item                2.  | Properties.                                                                                                                                      |  28                    |
| Item                3.  | Legal                Proceedings.                                                                                                                |  28                    |
| Item                4.  | Submission                of Matters to a Vote of Security                Holders.                                                               |  28                    |
|                    |                                                                                                                                             |                        |
|                    | **PART                II**                                                                                                                       |                        |
| Item                5.  | Market                for Registrant’s Common Equity Related Stockholder                Matters and Issuer Purchases of Equity Securities. |  28                    |
| Item                6.  | Selected                Financial Data.                                                                                                          |  32                    |
| Item                7.  | Management's                Discussion and Analysis of Financial Condition                and Results of Operations of the Company.              |  32                    |
| Item                7A. | Quantitative                and Qualitative Disclosures About Market                Risk.                                                        |  38                    |
| Item                8.  | Consolidated                Financial Statements and Supplementary                Data.                                                          |  38                    |
| Item                9.  | Changes                in and Disagreements with Accountants on Accounting                and Financial Disclosure.                              |  38                    |
| Item                9A. | Controls                and Procedures.                                                                                                          |  39                    |
| Item                9B. | Other                Information.                                                                                                                |  39                    |
|                    |                                                                                                                                             |                        |
|                    | **PART                III**                                                                                                                      |                        |
| Item                10. | Directors                and Executive Officers of the                Registrant.                                                                |  39                    |
| Item                11. | Executive                Compensation.                                                                                                           |  42                    |
| Item                12. | Security                Ownership of Certain Beneficial Owners and                management and Related Stockholder Matters.                    |  42                    |
| Item                13. | Certain                Relationships and Related                Transactions.                                                                    |  44                    |
| Item                14. | Principal                Accounting Fees and Services.                                                                                           |  46                    |
| Item                15. | Exhibits                and Financial Statement                Schedules.                                                                        |  46                    |
|                    | Signatures                                                                                                                                       |  48                    |

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Table          of Contents

**Forward-Looking      Statements**

**PART      I**

**Item      1. Business.**

**General**

**Loan      Portfolio**

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**Investment      Objectives and Policies**

*Principal      Investment Objectives*

|   | · | to                make, originate or acquire a participation interest in mortgage loans                (first priority, junior priority and mezzanine) typically in the                range of                $500,000 to $10,000,000, and to provide credit enhancements to real                estate                developers and regional and national homebuilders who acquire real                property, subdivide such real property into single-family residential                lots                and sell such lots to homebuilders or build homes on such                lots; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | to                produce net interest income from the interest on mortgage loans that                we                originate or purchase or in which we acquire a participation                interest; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | to                produce a profitable fee from our credit enhancement                transactions; |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   | · | to                produce income through origination fees charged to                borrowers; |
|--------|--------|------------------------------------------------------------------------------------------------|

|   | · | to                maximize distributable cash to investors;                and |
|--------|--------|--------------------------------------------------------------------------------|

|   | · | to                preserve, protect and return capital                contributions. |
|--------|--------|--------------------------------------------------------------------------------------|

*Investment      Policy *

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| General                Partner                                                                                                                                                                              |   | $      | 15,500 |   |   |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Limited                Partners                                                                                                                                                                             |   | $      | 99,700 |   |   | (1)    |   |
| Retained                Earnings Surplus                                                                                                                                                                    |   | $      | 6,800  |   |   |   |   |
|                                                                                                                                                                                                        |   |   |   |   |   |   |   |
| (1) approximately                $65,400 paid in cash and approximately $34,300 paid through the issuance                of 1,715 units of limited partnership interest under the                DRIP. |   |   |

*Security*

|   | · | the                parcels of land to be developed; |
|--------|--------|-----------------------------------------------------|

|   | · | in                certain cases, a pledge of some or all of the equity interests in                the                developer entity; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|   | · | in                certain cases, additional assets of the developer, including parcels                of                undeveloped and developed real property;                and |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | in                certain cases, personal guarantees of the principals of the developer                entity. |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

*Underwriting      Criteria*

|   | · | *Liens.*All                loans and investments made by us must be evidenced by a note and                must be                secured (1) by a first or second lien that is insured by a title                insurance                company, (2) by a pledge of the partnership interests in the special                purpose entity holding the property or by both a subordinate lien                position                and a pledge of the partnership interests in the special purpose                entity,                or (3) by a commitment as to the priority of the loan or the condition                of                title; in addition, our loans and investments may be secured by a                pledge                of additional ownership interests of the developer and its affiliates                in                other development projects. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | *Interest                Rate.*                We                seek to originate loans bearing interest at rates ranging from 10%                to 15%                per annum. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Term                and Amortization.*                We                currently do not have a policy that establishes a minimum or maximum                term                for the loans we may make, nor do we intend to establish one. Loans                typically are structured as interest-only notes with balloon payments                or                reductions to principal tied to net cash from the sale of developed                lots                and the release formula created by the senior lender, *i.e.*,                the conditions under which principal is repaid to the senior lender,                if                any. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | *Geographical                Boundaries.*                We                may buy or originate loans in any of the 48 contiguous United States.                As                of December 31, 2006, we have originated loans in Texas and Colorado. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Credit      Facility*

*Borrowing      Policies*

|   | · | acquire                or make mortgage loans; |
|--------|--------|------------------------------------------------|

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|   | · | prevent                defaults under senior loans or discharge them entirely if that becomes                necessary to protect our interests;                or |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | assist                in the development or sale of any real property that we have taken                over as                a result of default. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

*Investment      Limitations*

|   | · | acquire                assets in exchange for limited partnership                interests; |
|--------|--------|---------------------------------------------------------------------------------------------|

|   | · | issue                units of limited partnership interest after the termination of the                Offering; or |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

|   | · | make                loans to our general partner or its affiliates except as permitted                by our                Partnership Agreement and the NASAA Mortgage Program Guidelines.                Such                loans are permitted under our Partnership Agreement and the NASAA                Mortgage                Program Guidelines if an independent advisor issues an opinion to                the                effect that the proposed loan is fair and at least as favorable to                us as a                loan to an unaffiliated borrower in similar circumstances. In December                2006, we originated a secured promissory note to United Development                Funding, LP (“UDF I”), a Nevada limited partnership and an affiliate of                our general partner, in the principal amount of approximately $6.3                million                and in connection therewith, we obtained the required opinion from                an                independent advisor. The secured promissory note, which bears interest                at                12% per annum, is collateralized by a first lien deed of trust on                190                developed single-family homes located in Colorado and is payable                on June                21, 2007. The asset manager for UDF I is our general                partner. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Conflicts      of Interest**

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**Housing      Industry**

**Competition**

**Regulations**

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**Employees**

**Financial      Information About Industry Segments**

**Available      Information**

**Item      1A. Risk Factors.** 

**Risks      Related to an Investment in UDF III**

***There      is no public trading market for our units; therefore, it will be difficult      for      limited partners to sell their units.***

***Our      units have limited transferability and lack      liquidity.***

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***Limited      partners will not have the opportunity to evaluate our loans prior to their      origination or purchase.***

***If      we, through our general partner, are unable to find suitable investments, then      we may not be able to achieve our investment objectives or pay      distributions.***

***Competition      with third parties in financing properties may reduce our profitability and      the      return on our limited partners’ investments.***

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***            Increases in interest rates could increase the risk of default under our      development loans and reduce the value of our subordinate loans to      developers.***

***The      loans we make will have a higher risk than conventional real estate loans on      residential properties.***

***Decreases      in the value of the property underlying our loans may decrease the value of      our      assets.***

***We      are subject to the general market risks associated with real estate      development.***

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***If      we are unable to raise substantial funds in the Offering, we will be limited      in      the number and type of properties we may finance and the value of our limited      partners’ investments will fluctuate with the performance of the specific      investments we make.***

***The      prior performance of real estate investment programs sponsored by affiliates      of      our general partner may not be an indication of our future      results.***

|   | · | identify                and acquire investments that further our investment                strategy; |
|--------|--------|------------------------------------------------------------------------------------------------------|

|   | · | increase                awareness of the United Development Funding name within the investment                products market; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|

|   | · | establish                and maintain our network of licensed securities brokers and other                agents; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

|   | · | attract,                integrate, motivate and retain qualified personnel to manage our                day-to-day operations; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|

|   | · | respond                to competition both for investment opportunities and potential investors                in us; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------|

|   | · | continue                to build and expand our operations structure to support our                business. |
|--------|--------|--------------------------------------------------------------------------------------------------------------|

***Limited      partners must rely on our general partner for management of our business and      will have no right or power to take part in our      management.***

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***If      we lose or are unable to obtain key personnel, our ability to implement our      investment strategy could be delayed or hindered.***

***Our      general partner has a limited net worth consisting of assets that are not      liquid, which may adversely affect the ability of our general partner to fulfill      its financial obligations to us.***

***Our      rights and the rights of our limited partners to recover claims against our      general partner are limited.***

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**Risks      Related to Conflicts of Interest**

***Our      general partner has equity interests and/or profit participations in      developments we finance and may have a greater incentive to make loans, which      may or may not be subordinate to our mortgage loans and/or make loans with      respect to such development to preserve and/or enhance its economic interests      in      such development.***

***Our      general partner is an affiliate of the general partner of UDF I and UDF II,      provides asset management services to UDF I and UDF II, and may not always      be      able to allocate investment opportunities on a pro rata basis among us, UDF      I      and UDF II.***

***Our      founders may form other companies that will engage in the same business as      we      will, and we may not always be able to participate in investment opportunities      on a pro rata basis between us and such other      companies.***

***Certain      of the principals of our general partner will face conflicts of interest      relating to the extension and purchase of loans, and such conflicts may not      be      resolved in our favor.***

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***We      will face risks relating to joint ventures with our affiliates and third parties      that are not present with other methods of investing in mortgage      loans.***

|   | · | the                possibility that our co-venturer or partner in an investment might                become                bankrupt, in which case our investment might become subject to the                rights                of the co-venturer or partner’s creditors and we may be forced to                liquidate our investment before we otherwise would choose to do                so; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | that                such co-venturer or partner may at any time have economic or business                interests or goals that are or that become inconsistent with our                business                interests or goals, which may cause us to disagree with our co-venturer                or                partner as to the best course of action with respect to the investment                and                which disagreements may not be resolved to our                satisfaction; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | that                such co-venturer or partner may be in a position to take action contrary                to our instructions or requests or contrary to our policies or objectives,                which may cause us not to realize the return anticipated from our                investment; or, |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | that                it may be difficult for us to sell our interest in any such co-venture                or                partnership. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|

***Our      general partner will face additional conflicts of interest relating to      co-investments with affiliated entities and may make decisions that      disproportionately benefit one or more of our affiliated entities instead of      us.***

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***Employees      of our general partner will face conflicts of interest relating to the      allocation of their time and other resources among the various entities that      they serve or have interests in, and such conflicts may not be resolved in      our      favor.***

***There      is no separate counsel for our affiliates and us, which could result in      conflicts of interest.***

**Risks      Related to Our Business in General**

***The      Delaware Revised Uniform Limited Partnership Act does not grant limited partners      any voting rights, and limited partners’ rights are limited under our      Partnership Agreement.***

|   | · | to                amend our Partnership Agreement; |
|--------|--------|----------------------------------------------------|

|   | · | to                dissolve and terminate UDF III; |
|--------|--------|---------------------------------------------------|

|   | · | to                remove our general partner; and |
|--------|--------|---------------------------------------------------|

|   | · | to                authorize a merger or a consolidation of UDF                III. |
|--------|--------|------------------------------------------------------------------------------------|

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***Limited      partners’ returns will be reduced if we are required to register as an      investment company under the Investment Company Act of      1940.***

|   | · | limitations                on capital structure; |
|--------|--------|--------------------------------------------------|

|   | · | restrictions                on specified investments; |
|--------|--------|-------------------------------------------------------|

|   | · | prohibitions                on transactions with affiliates;                and |
|--------|--------|---------------------------------------------------------------------------------|

|   | · | compliance                with reporting, record keeping, voting, proxy disclosure and other                rules                and regulations that would significantly change our                operations. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Limited      partners are limited in their ability to sell their units pursuant to our      redemption program.***

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***If      limited partners are able to resell their units to us pursuant to our redemption      program, they will likely receive substantially less than the fair market value      for such units.***

***Our      limited partners’ interest in us may be diluted if the price we pay in respect      of units redeemed under our unit redemption program exceeds the net asset value      of our units.***

***We      will have broad discretion in how we use the net proceeds of the      Offering.***

***The      general partner’s profits interest may create an incentive for the general      partner to make speculative investments.***

***We      established the Offering price on an arbitrary basis; as a result, the      subscription price for units, including the price at which units will be      redeemed pursuant to our unit redemption programs, is not related to any      independent valuation.***

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***Payment      of fees to our general partner and its affiliates will reduce cash available      for      investment and distribution.***

***We      are under no obligation to pay cash distributions. Distributions may be paid      from capital and there can be no assurance that we will be able to pay or      maintain cash distributions, or that distributions will increase over      time.***

***Adverse      economic conditions will negatively affect our returns and      profitability.***

|   | · | poor                economic conditions may result in a slowing of new home sales and                corresponding lot purchases by builders resulting in defaults by                borrowers                under our loans; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | job                transfers and layoffs may cause new home sales to                decrease. |
|--------|--------|-----------------------------------------------------------------------------------------------|

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**Risks      Related to the Mortgage Lending Business** 

***Defaults      on our mortgage loans will reduce our income and limited partner      distributions.***

|   | · | failure                by a borrower to repay loans or interest on loans will reduce our                income                and consequentially, distributions to our limited                partners; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | we                are required to pay loan servicing fees to our general partner on                delinquent loans; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|

|   | · | we                may not be able to resolve the default prior to foreclosure of the                property securing the loan; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | we                may be required to expend substantial funds for an extended period                to                develop foreclosed properties; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                subsequent income and sale proceeds we receive from the foreclosed                properties may be less than competing investments;                and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                proceeds from sales of foreclosed properties may be less than our                investments in the properties. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|

***Investments      in land development loans present additional risks compared to loans secured      by      operating properties.***

|   | · | the                application of the loan proceeds to the development project must                be                assured; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

|   | · | during                development, the property does not separate income for the borrower                to                make loan payments; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the                completion of the planned development may require additional development                financing by the borrower and may not be                available; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | depending                on the sale of lots to homebuilders, demand for lots may decrease,                causing                the price of the lots to decrease; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | there                is no assurance that we will be able to sell unimproved land promptly                if                we are forced to foreclose upon it;                and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | lot                sale contracts are generally not “specific performance” contracts, and the                developer may have no recourse if a homebuilder elects not to purchase                lots. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Investments      in second, mezzanine and wraparound mortgage loans present additional risks      compared to loans secured by first deeds of trust.***

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***Many      of our loans will require balloon payments, which are riskier than loans with      fully amortized payments.***

***Suitable      mortgage loans may not be available to us from time to time, which could reduce      the returns on our limited partners’ investments.***

***The      interest-only loans we make or acquire may be subject to greater risk of default      and there may not be sufficient funds or assets remaining to satisfy our loans,      which may result in losses to us.***

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***Larger      loans result in less diversity and may increase risk.***

***The      concentration of loans with a common borrower may increase our      risks.***

***Incorrect      or changed property values could result in losses and decreased distributions      to      limited partners.***

***Changes      in market interest rates may reduce our income and limited partner      distributions.***

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***Some      losses that borrowers might incur may not be insured and may result in defaults      that would increase our limited partners’ risks.***

***Foreclosures      create additional ownership risks to us of unexpected increased costs or      decreased income.***

|   | · | less                income and reduced cash flows on foreclosed properties than could                be                earned and received on mortgage                loans; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | selling                the lots to homebuilders; |
|--------|--------|--------------------------------------------------|

|   | · | controlling                development and holding expenses; |
|--------|--------|--------------------------------------------------------------|

|   | · | coping                with general and local market                conditions; |
|--------|--------|--------------------------------------------------------------------------------|

|   | · | complying                with changes in laws and regulations pertaining to taxes, use, zoning                and                environmental protections; and |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | possible                liability for injury to persons and                property. |
|--------|--------|--------------------------------------------------------------------------------------|

***If      we were found to have violated applicable usury laws, we would be subject to      penalties and other possible risks.***

***We      have borrowed money to provide transitory indebtedness, which may increase      our      limited partners’ risks if default occurs.***

|   | · | acquire                or make mortgage loans; |
|--------|--------|------------------------------------------------|

|   | · | prevent                defaults under senior loans or discharge them entirely if that becomes                necessary to protect our interests;                or |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | assist                in the development or sale of any real property, which we have taken                over                as a result of default. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

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** **

**General      Risks Related to Investments in Real Estate** 

***Our      operating results will be affected by economic and regulatory changes that      have      an adverse impact on the real estate market in      general.***

|   | · | changes                in interest rates and availability of permanent mortgage                funds; |
|--------|--------|-------------------------------------------------------------------------------------------------------|

|   | · | changes                in general economic or local                conditions; |
|--------|--------|--------------------------------------------------------------------------------|

|   | · | changes                in tax, real estate, environmental and zoning laws;                and |
|--------|--------|-----------------------------------------------------------------------------------------------|

|   | · | periods                of high interest rates and tight money                supply. |
|--------|--------|--------------------------------------------------------------------------------------|

***Our      operating results may be negatively affected by potential development and      construction delays and resultant increased costs and      risks.***

***The      costs of compliance with environmental laws and other governmental laws and      regulations may adversely affect our income and the cash available for any      distributions.***

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***Terrorist      attacks or other acts of violence or war may affect the industry in which we      operate, our operations, and our profitability.***

***We      will be subject to risks related to the geographic concentration of the      properties securing the loans and equity investments we      make.***

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***We      will be subject to a number of legal and regulatory      requirements.***

**Federal      Income Tax Risks** 

***The      Internal Revenue Service may challenge our characterization of material tax      aspects of limited partners’ investments in our units.***

***Investors      may realize taxable income without cash distributions, and limited partners      may      have to use funds from other sources to pay their tax      liabilities.***

***We      could be characterized as a publicly traded partnership, which would have an      adverse tax effect on limited partners.***

|   | · | the                complex nature of the Internal Revenue Service safe                harbors; |
|--------|--------|------------------------------------------------------------------------------------------------|

|   | · | the                lack of interpretive guidance with respect to such provisions;                and |
|--------|--------|------------------------------------------------------------------------------------------------------|

|   | · | the                fact that any determination in this regard will necessarily be based                upon                facts that have not yet occurred. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

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***            The deductibility of losses will be subject to passive loss limitations, and      therefore their deductibility will be limited.***

***The      Internal Revenue Service may challenge our allocations of profit and loss,      and      any reallocation of items of income, gain, deduction and credit could reduce      anticipated tax benefits.***

***We      may be audited, which could result in the imposition of additional tax, interest      and penalties.***

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***State      and local taxes and a requirement to withhold state taxes may apply, and if      so,      the amount of net cash from operations payable to limited partners would be      reduced.***

***Legislative      or regulatory action could adversely affect limited      partners.***

***There      are special considerations that apply to pension or profit sharing trusts or      IRAs investing in our units, including potential adverse effects under ERISA      and      the Internal Revenue Code.***

|   | · | their                investment is consistent with their fiduciary obligations under ERISA                and                the Internal Revenue Code; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | their                investment is made in accordance with the documents and instruments                governing their plan or IRA, including their plan’s investment                policy; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | their                investment satisfies the prudence and diversification requirements                of                ERISA; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | · | their                investment will not impair the liquidity of the plan or                IRA; |
|--------|--------|--------------------------------------------------------------------------------------------------|

|   | · | their                investment will not produce UBTI for the plan or                IRA; |
|--------|--------|-------------------------------------------------------------------------------------------|

|   | · | they                will be able to value the assets of the plan annually in accordance                with                ERISA requirements; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | their                investment will not constitute a prohibited transaction under Section                406                of ERISA or Section 4975 of the Internal Revenue Code. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***We      may terminate the Offering or dissolve UDF III if our assets are deemed to      be“plan assets” or if we engage in prohibited      transactions.***

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|   | · |  terminate              the Offering; |
|--------|--------|--------------------------------------------|
|   | · | compel                a termination and dissolution of UDF III;                or |
|--------|--------|-----------------------------------------------------------------------------------|

|   | · | restructure                our activities to the extent necessary to comply with any exemption                in the                Department of Labor regulations or any prohibited transaction exemption                granted by the Department of Labor or any condition that the Department                of                Labor might impose as a condition to granting a prohibited transaction                exemption. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Adverse      tax considerations may result because of minimum distribution      requirements.***

***UBTI      may be generated with respect to tax-exempt      investors.***

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**Item      1B. Unresolved Staff Comments.**

**Item      2. Properties.**

**Item      3. Legal Proceedings.**

**Item      4. Submission of Matters to a Vote of Security      Holders.**

**Part      II**

**Item      5. Market for Registrant’s Common Equity, Related Stockholder      Matters and Issuer Purchases of Equity Securities.**

**Market      Information**

|   | · | the                estimated value per unit would actually be realized by limited partners                upon liquidation, because these estimates do not necessarily indicate                that                all loans will be paid in full; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | our                limited partners would be able to realize estimated net asset values                if                they were to attempt to sell their units, because no public market                for our                units exists or is likely to develop;                or |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | that                the value, or method used to establish value, would comply with ERISA                or                the Internal Revenue Code                requirements |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Unit      Redemption Program**

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**Holders**

**Distribution      Reinvestment Plan**

**Distributions**

** **

| General                Partner         |   | $       | 15,500 |   |   |                        |   |
|----------------------------------------|--------|---------|--------|--------|--------|-----------------------------|--------|
| Limited                Partners        |   | $       | 99,700 |   |   | (1)     |   |
| Retained              Earnings Surplus |   |  $ | 6,800  |   |   |                        |   |

|                                                                                                                                                                                                        |   |   |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| (1) approximately                $65,400 paid in cash and approximately $34,300 paid through the issuance                of 1,715 units of limited partnership interest under the                DRIP. |

**Recent      Sales of Unregistered Securities**

**Use      of Proceeds from Registered Securities**

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Table          of Contents

**Item      6. Selected Financial Data.**

|                              |   |                                 |    | **Period                from**               |   |
|-----------------------------------|--------|--------------------------------------|---------|----------------------------------------------|--------|
|                              |   |                                 |    | **June                13, 2005 (Inception)** |   |
|                              |   | **Year                Ended**        |    | **Through**                                  |   |
|                              |   | **December                31, 2006** |    | **December                31, 2005**         |   |
| **OPERATING                DATA** |   |                                 |    |                                         |   |   |   |
| Revenues                          |   | $                                    | 459,268 |                                         | $      | - |   |
| Expenses                          |   |                                 | 130,869 |                                         |   | - |   |
| Net                Income         |   | $                                    | 328,399 |                                         | $      | - |   |

|                                                           |   |   |                                   |   |   |                                   |   |
|----------------------------------------------------------------|--------|--------|----------------------------------------|--------|--------|----------------------------------------|--------|
| Earnings                  per unit, basic and diluted          |   | $      | 2.53                                   |   | $      | -                                      |   |
|                                                           |   |   |                                   |   |   |                                   |   |
|                                                           |   |   | **As                  of**        |   |   | **As                  of**             |   |
|                                                           |   |   | **December                  31, 2006** |   |   | **December                  31, 2005** |   |
| **BALANCE                  SHEET DATA**                        |   |   |                                   |   |   |                                   |   |
| Mortgage                  notes receivable                     |   | $      | 11,422,063                             |   | $      | -                                      |   |
| Mortgage                  notes receivable - related party     |   |   | 6,328,010                              |   |   | -                                      |   |
| Deferred                  offering costs                       |   |   | 2,047,133                              |   |   | 447,765                                |   |
| Other                  assets                                  |   |   | 1,434,448                              |   |   | 1,000                                  |   |
| Total                  assets                                  |   | $      | 21,231,654                             |   | $      | 448,765                                |   |
|                                                           |   |   |                                   |   |   |                                   |   |
| Line-of-credit                                                 |   | $      | 6,436,402                              |   | $      | -                                      |   |
| Accrued                  liabilities - related party           |   |   | 2,238,805                              |   |   | 447,765                                |   |
| Other                  liabilities                             |   |   | 657,856                                |   |   | -                                      |   |
| Total                  liabilities                             |   |   | 9,333,063                              |   |   | 447,765                                |   |
| Partners'                  capital                             |   |   | 11,898,591                             |   |   | 1,000                                  |   |
| Total                  liabilities and partners’ capital |   | $      | 21,231,654                             |   | $      | 448,765                                |   |

**Item      7. Management’s Discussion and Analysis of Financial Condition      and Results of Operations.**

**Overview      **

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Table            of Contents

**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*

*Determination      of the Allowance for Loan Losses*

----

Table            of Contents

*Mortgage      Notes Receivable and Mortgage Notes Receivable - Related Party*

*Cash      Flow Distributions*

** **

**Results      of Operations **

* *
*.*
** **

*Revenues*

*Expenses*

----

Table            of Contents

**Cash      Flow Analysis **

* *
*we*
*.*

**Liquidity      and Capital Resources **

----

Table            of Contents

*Material      Trends Affecting Our Business*

----

Table            of Contents

*Off-Balance      Sheet Arrangements*

** **

**Contractual      Obligations**

**Subsequent      Events**

** **

----

Table          of Contents

**Item      7A. Quantitative and Qualitative Disclosures About Market      Risk.**

**Item      8. Financial Statements and Supplementary      Data.**

**Item      9. Changes in and Disagreements with Accountants on Accounting      and Financial Disclosure.**

----

Table            of Contents

**Item      9A. Controls and Procedures.**

**Item      9B. Other Information.**

**Part      III**

**Item      10. Directors, Executive Officers and Corporate      Governance.**

**Our      General Partner**

 

----

Table            of Contents

**Key      Personnel **

| **Name**                          |   | **Age** |   |   | **Position                with Our General Partner**         |
|-----------------------------------|--------|---------|--------|--------|--------------------------------------------------------------|
|                              |   |    |   |   |                                                         |
| Todd                F. Etter      |   | 56      |   |   | Director                of UMT Services, its general partner |
| Hollis                M. Greenlaw |   | 42      |   |   | Director                of UMT Services, its general partner |
| Michael                K. Wilson  |   | 44      |   |   | Director                of UMT Services, its general partner |
| Jeff                W. Shirley    |   | 48      |   |   | President                and Chief Executive Officer         |
| Cara                D. Obert      |   | 37      |   |   | Chief                Financial Officer                       |

*Todd      F. Etter, Jr.*

----

Table            of Contents

*Hollis      M. Greenlaw.*

*Michael      K. Wilson.*

*Jeff      W. Shirley.*

----

Table            of Contents

*Cara      D. Obert.*

**No      Audit Committee; No “Audit Committee Financial Expert”**

**Section      16(a) Beneficial Ownership Reporting Compliance **

**Code      of Ethics**

**Item      11. Executive Compensation.**

**Item      12. Security Ownership of Certain Beneficial Owners and      Management and Related Stockholder Matters.**

----

Table            of Contents

|                                                                                                                                                                                                                                                                                                |                                           | **Limited**      |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|------------------|-------------|
|                                                                                                                                                                                                                                                                                                |                                           | **Partnership**  |        |
|                                                                                                                                                                                                                                                                                                |                                           | **Units**        | **Percent** |
|                                                                                                                                                                                                                                                                                                |                                           | **Beneficially** | **of**      |
| **Title                of Class**                                                                                                                                                                                                                                                                   | **Beneficial                Owner**            | **Owned**        | **Class**   |
| Limited                partner interest                                                                                                                                                                                                                                                             | Todd                F. Etter (1) (2) (3)       | 207.32           | *           |
| Limited                partner interest                                                                                                                                                                                                                                                             | Hollis                M. Greenlaw (1) (2) (3)  | 0                | *           |
| Limited                partner interest                                                                                                                                                                                                                                                             | Michael                K. Wilson (1) (3)       | 0                | *           |
| Limited                partner interest                                                                                                                                                                                                                                                             | Jeff                W Shirley (1) (2)          | 0                | *           |
| Limited                partner interest                                                                                                                                                                                                                                                             | Cara                D. Obert (1) (2)           | 0                | *           |
| General                partner interest                                                                                                                                                                                                                                                             | UMTH                Land Development, L.P. (4) | 0                | 100%        |
|  All                directors, executive officers and the general partner as a group                (6                persons)                                                                                                                                                                 |                                           | 207.32           | *           |
| *                Denotes less than 1%                                                                                                                                                                                                                                                               |                                           |             |        |
|                                                                                                                                                                                                                                                                                                |                                           |             |        |
| (1)                The addresses of Messrs. Etter, Greenlaw, Wilson and Shirley and                Ms. Obert                is 1702 N. Collins Boulevard, Richardson TX 75080.                                                                                                                      |                                           |
| (2)                Executive officers of UMTH Land Development, L.P., our general                partner.                                                                                                                                                                                           |                                           |
| (3)                Executive officers and or directors of UMT Services, Inc, general                partner                of UMTH Land                Development, L.P.                                                                                                                            |                                           |
| (4)                The address of UMTH Land Development, L.P. is 1702 N. Collins Boulevard,                Richardson, TX 75080. UMTH Land Development, L.P. had an initial                $100                capital contribution, but has not purchased limited partnership                units |
|                                                                                                                                                                                                                                                                                                |                                           |             |        |
| None                of the above units have been pledged as security.                                                                                                                                                                                                                               |                                           |             |

----

Table          of Contents

**Item      13. Certain Relationships and Related Transactions, and      Director Independence.**

**Transactions      with Related Persons**

----

Table            of Contents

**Policies      and Procedures for Transactions with Related Persons **

** **

** **

** **

----

Table            of Contents

** **

**Item      14. Principal Accountant Fees and      Services.**

**Fees      Paid to Independent Registered Public Accounting Firm**

|                                  |   | **2006** |     |
|---------------------------------------|--------|----------|----------|
| Audit                Fees (1)         |   | $        | 47,300   |   |
| Audit-Related                Fees (2) |   |     | -        |   |
| Tax                Fees (3)           |   |     | 14,700   |   |
| All                Other Fees         |   |     | -        |   |
| Total                Fees             |   | $        | 62,000   |   |
|                                  |   |     |     |   |
|                                  |   |     |     |   |
|                                  |   |     | **2005** |   |
| Audit                Fees (1)         |   | $        | 50,500   |   |
| Audit-Related                Fees (2) |   |     | -        |   |
| Tax                Fees (3)           |   |     | 1,200    |   |
| All                Other Fees         |   |     | -        |   |
| Total                Fees             |   | $        | 51,700   |   |

|   | (1) | Audit                fees consisted of professional services performed in connection with                the                audit of our financial statements, review of our financial statements                included in our Form 10-Q and our Registration Statement on Form                S-11. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Fees                related to consultations concerning financial accounting and reporting                standards. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------|

|   | (3) | Tax                fees consisted principally of assistance with matters relating to                tax                preparation and tax advice. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------|

**Part      IV**

**Item      15. Exhibits and Financial Statement      Schedules.**

|   | **(a)** | **List                of Documents Filed.** |
|--------|---------|---------------------------------------------|

|   | **1.** | **Financial                Statements.** |
|--------|--------|------------------------------------------|

|   | **2.** | **Financial                Statement Schedules.** |
|--------|--------|---------------------------------------------------|

|   | **3.** | **Exhibits.** |
|--------|--------|---------------|

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Table            of Contents

|   | **(b)** | **Exhibits.** |
|--------|---------|---------------|

|   | **(c)** | **Financial                Statement Schedules.** |
|--------|---------|---------------------------------------------------|

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Table            of Contents

**SIGNATURES**

|                                    |                                                                                                                                                                                                                                                                                 |                                                  |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                                    | **UNITED              DEVELOPMENT FUNDING III, L.P.**                                                                                                                                                                                                                                |
|                               |                                                                                                                                                                                                                                                                            |                                             |
| April              2,              2007 | By:                                                                                                                                                                                                                                                                        | /s/ Hollis              M.              Greenlaw |
|                                    | Hollis M. Greenlaw                                                                                                                                                                                                                                                                   |
|                                    | Chief              Executive Officer of UMTH Land Development, L.P., sole general partner              of              the Registrant and President and Chief Executive Officer of UMT Services,              Inc., sole general partner of UMTH Land Development,              L.P. |

|                                    |                                                                                                                                                                                                                                                                                                                              |                                                  |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                                    |                                                                                                                                                                                                                                                                                                                              |
|                               |                                                                                                                                                                                                                                                                                                                         |                                             |
| April              2,              2007 | By:                                                                                                                                                                                                                                                                                                                     | /s/ Hollis              M.              Greenlaw |
|                                    | Hollis M. Greenlaw                                                                                                                                                                                                                                                                                                                |
|                                    | Chief                Executive Officer of UMTH Land Development, L.P., sole general partner                of                the Registrant and President and Chief Executive Officer of UMT Services,                Inc., sole general partner of UMTH Land Development, L.P. (Principal Executive                Officer) |

|                                    |                                                                                                                                                                                                                           |                                             |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------|
|                                    |                                                                                                                                                                                                                           |
|                               |                                                                                                                                                                                                                      |                                        |
| April              2,              2007 | By:                                                                                                                                                                                                                  | /s/ Cara              D.              Obert |
|                                    | Cara D. Obert                                                                                                                                                                                                                  |
|                                    | Chief                Financial Officer of UMTH Land Development, L.P., sole general partner                of                the Registrant (Principal Financial Officer and Principal Accounting                Officer) |

|                                    |                                                                                                                                                                            |                                    |
|-----------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|
|                                    |                                                                                                                                                                            |
|                               |                                                                                                                                                                       |                               |
| April              2,              2007 | By:                                                                                                                                                                   | /s/ Theodore              F. Etter |
|                                    | Theodore F. Etter                                                                                                                                                               |
|                                    | Chairman              of the Board of UMT Services, Inc., sole general partner of UMTH Land              Development, L.P., sole general partner of the              Registrant |

----

Table            of Contents

**INDEX        TO FINANCIAL STATEMENTS**

|                                                                                      |   |  **Page** |
|-------------------------------------------------------------------------------------------|--------|----------------|
| Report                  of Independent Registered Public Accounting                  Firm |   |  F-2      |
|                                                                                      |   |           |
| Audited                  Financial Statements:                                            |   |           |
|                                                                                      |   |           |
| Balance                  Sheets                                                           |   |  F-3      |
|                                                                                      |   |           |
| Statement                  of Operations                                                  |   |  F-4      |
|                                                                                      |   |           |
| Statements                  of Changes in Partners’                  Capital        |   |  F-5      |
|                                                                                      |   |           |
| Statements                  of Cash Flows                                                 |   |  F-6      |
|                                                                                      |   |           |
| Notes                  to Financial Statements                                            |   |  F-7      |
|                                                                                      |   |           |
|                                                                                      |   |           |

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Table            of Contents

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING      FIRM**

----

Table            of Contents

| **UNITED                DEVELOPMENT FUNDING III, L.P.**                |   |
|------------------------------------------------------------------------|--------|
|                                                                   |   |   |   |   |   |
| **BALANCE                SHEETS**                                      |   |
|                                                                   |   |   |   |   |   |
|                                                                   |   | **December                31,** |   |
|                                                                   |   | **2006** |   | **2005** |   |
|                                                                   |   |   |   |   |   |   |   |
| **Assets**                                                             |   |   |   |   |   |   |   |
| Cash                and cash equivalents                               |   | $ | 672,107 |   | $ | - |   |
| Restricted                cash                                         |   |   | 588,516 |   |   | - |   |
| Accrued                interest receivable - related party             |   |   | 6,241 |   |   | - |   |
| Mortgage                notes receivable, net                          |   |   | 11,422,063 |   |   | - |   |
| Mortgage                notes receivable - related party               |   |   | 6,328,010 |   |   | - |   |
| Partnership                interest subscriptions receivable           |   |   | 100 |   |   | 1,000 |   |
| Deferred                offering costs                                 |   |   | 2,047,133 |   |   | 447,765 |   |
| Other                assets                                            |   |   | 167,484 |   |   | - |   |
|                                                                   |   |   |   |   |   |   |   |
| Total                assets                                            |   | $ | 21,231,654 |   | $ | 448,765 |   |
|                                                                   |   |   |   |   |   |   |   |
| **Liabilities                and Partners' Capital**                   |   |   |   |   |   |   |   |
| Liabilities:                                                           |   |   |   |   |   |   |   |
| Accounts                payable                                        |   | $ | 2,413 |   | $ | - |   |
| Accrued                liabilities                                     |   |   | 66,927 |   |   | - |   |
| Accrued                liabilities - related party                     |   |   | 2,238,805 |   |   | 447,765 |   |
| Escrow                payable                                          |   |   | 588,516 |   |   | - |   |
| Line-of-credit                                                         |   |   | 6,436,402 |   |   | - |   |
|                                                                   |   |   |   |   |   |   |   |
| Total                liabilities                                       |   |   | 9,333,063 |   |   | 447,765 |   |
|                                                                   |   |   |   |   |   |   |   |
| Commitments                and contingencies                           |   |   | - |   |   | - |   |
|                                                                   |   |   |   |   |   |   |   |
| Partners'                Capital:                                      |   |   |   |   |   |   |   |
| Limited                partners' capital; 17,500,000 units authorized; |   |   |   |   |   |   |   |
| 661,191                units issued and outstanding at December 31,    |   |   |   |   |   |   |   |
| 2006                and no units issued and outstanding at             |   |   |   |   |   |   |   |
| December                31, 2005                                       |   |   | 11,879,843 |   |   | 900 |   |
| General                partner's capital                               |   |   | 18,748 |   |   | 100 |   |
|                                                                   |   |   |   |   |   |   |   |
| Total                partners' capital                                 |   |   | 11,898,591 |   |   | 1,000 |   |
|                                                                   |   |   |   |   |   |   |   |
| Total                liabilities and partners' capital                 |   | $ | 21,231,654 |   | $ | 448,765 |   |

----

Table            of Contents

| **UNITED                DEVELOPMENT FUNDING III, L.P.**            |   |
|--------------------------------------------------------------------|--------|
|                                                               |   |   |   |   |   |
| **STATEMENTS                OF OPERATIONS**                        |   |
|                                                               |   |   |   |   |   |
|                                                               |   |
|                                                               |   |   |   | **Period                from** |   |
|                                                               |   |   |   | **June                13, 2005 (Inception)** |   |
|                                                               |   | **Year                Ended** |   | **Through** |   |
|                                                               |   | **December                31, 2006** |   | **December                31, 2005** |   |
|                                                               |   |   |   |   |   |   |   |
| Revenues:                                                          |   |   |   |   |   |   |   |
| Interest                income                                     |   | $ | 317,507 |   | $ | - |   |
| Credit                enhancement fees - related party             |   |   | 75,571 |   |   | - |   |
| Mortgage                and transaction service revenues           |   |   | 66,190 |   |   | - |   |
| Total                revenues                                      |   |   | 459,268 |   |   | - |   |
|                                                               |   |   |   |   |   |   |   |
| Expenses:                                                          |   |   |   |   |   |   |   |
| Interest                expense                                    |   |   | 4,425 |   |   | - |   |
| General                and administrative                          |   |   | 126,444 |   |   | - |   |
| Total                expenses                                      |   |   | 130,869 |   |   | - |   |
|                                                               |   |   |   |   |   |   |   |
| Net                income                                          |   | $ | 328,399 |   | $ | - |   |
|                                                               |   |   |   |   |   |   |   |
| Earnings                per unit, basic and diluted                |   | $ | 2.53 |   | $ | - |   |
|                                                               |   |   |   |   |   |   |   |
| Weighted                average units outstanding                  |   |   | 129,608 |   |   | - |   |
|                                                               |   |   |   |   |   |   |   |
| Distributions                declared per limited partnership unit |   | $ | 0.18 |   | $ | - |   |

----

Table            of Contents

| **UNITED                DEVELOPMENT FUNDING III, L.P.**                                                   |   |
|-----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |   |   |   |   |   |   |   |   |   |
| **STATEMENTS                OF CHANGES IN PARTNERS'                CAPITAL**                              |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |
| **For                the Period from June 13, 2005 (Inception) Through December 31,                2005** |   |
| **and                the Year Ended December 31, 2006**                                                   |   |
|                                                                                                      |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   | **General** |   | **Limited** |   | **Limited** |   | **Total** |   |
|                                                                                                      |   | **Partner's** |   | **Partners'** |   | **Partners'** |   | **Partners'** |   |
|                                                                                                      |   | **Capital** |   | **Units** |   | **Capital** |   | **Capital** |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at June 13, 2005 (Inception)                                                       |   | $ | - |   |   | - |   | $ | - |   | $ | - |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partnership                interest subscriptions at Inception                                            |   |   | 100 |   |   | - |   |   | 900 |   |   | 1,000 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at December 31, 2005                                                               |   |   | 100 |   |   | - |   |   | 900 |   |   | 1,000 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contributions,                net of offering costs of $1,538,599                                         |   |   | - |   |   | 659,476 |   |   | 11,650,926 |   |   | 11,650,926 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Redemption                of initial limited partner's interest                                           |   |   | - |   |   | - |   |   | (900 | ) |   | (900 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Distributions                                                                                             |   |   | (15,441 | ) |   | - |   |   | (99,698 | ) |   | (115,139 | ) |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Distribution                reinvestment                                                                  |   |   | - |   |   | 1,715 |   |   | 34,305 |   |   | 34,305 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                 |   |   | 34,089 |   |   | - |   |   | 294,310 |   |   | 328,399 |   |
|                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance                at December 31, 2006                                                               |   | $ | 18,748 |   |   | 661,191 |   | $ | 11,879,843 |   | $ | 11,898,591 |   |

----

Table            of Contents

| **UNITED                DEVELOPMENT FUNDING III, L.P.**                |   |
|------------------------------------------------------------------------|--------|
|                                                                   |   |   |   |   |   |
| **STATEMENTS                OF CASH FLOWS**                            |   |
|                                                                   |   |   |   |
|                                                                   |   | **Period                From** |   |
|                                                                   |   | **For                the Year** |   | **June                13, 2005** |   |
|                                                                   |   | **Ended** |   | **(Inception)                Through** |   |
|                                                                   |   | **December                31,** |   | **December                31,** |   |
|                                                                   |   | **2006** |   | **2005** |   |
| **Operating                Activities**                                |   |   |   |   |   |   |   |
| Net                income                                              |   | $ | 328,399 |   | $ | - |   |
| Changes                in operating assets and liabilities:            |   |   |   |   |   |   |   |
|  Accrued                interest receivable - related party       |   |   | (6,241 | ) |   | - |   |
|  Other                assets                                      |   |   | (167,484 | ) |   | - |   |
|  Accounts                payable                                  |   |   | 2,413 |   |   | - |   |
|  Accrued                liabilities                               |   |   | 66,927 |   |   | - |   |
| Net                cash provided by operating activities     |   |   | 224,015 |   |   | - |   |
|                                                                   |   |   |  |   |   |   |   |
| **Investing                Activities**                                |   |   |   |   |   |   |   |
| Investment                in mortgage notes receivable                 |   |   | (11,422,063 | ) |   | - |   |
| Investment                in mortgage notes receivable - related party |   |   | (6,328,010 | ) |   | - |   |
| Net                cash used in investing activities                   |   |   | (17,750,073 | ) |   | - |   |
|                                                                   |   |   |   |   |   |   |   |
| **Financing                Activities**                                |   |   |   |   |   |   |   |
| Net                proceeds from line-of-credit                        |   |   | 6,436,402 |   |   | - |   |
| Partnership                interest subscriptions receivable           |   |   | 900 |   |   | - |   |
| Limited                partner contributions                           |   |   | 13,189,525 |   |   | - |   |
| Limited                partner distributions                           |   |   | (99,698 | ) |   | - |   |
| Limited                partner distribution reinvestment               |   |   | 34,305 |   |   | - |   |
| General                partner distributions                           |   |   | (16,341 | ) |   | - |   |
| Escrow                payable                                          |   |   | 588,516 |   |   | - |   |
| Restricted                cash                                         |   |   | (588,516 | ) |   | - |   |
| Payments                of offering costs                              |   |   | (1,538,599 | ) |   | - |   |
| Accrued                liabilites - related party                      |   |   | 191,672 |   |   | - |   |
| Net                cash provided by financing activities               |   |   | 18,198,166 |   |   | - |   |
|                                                                   |   |   |   |   |   |   |   |
| Net                increase in cash and cash equivalents               |   |   | 672,107 |   |   | - |   |
| Cash                and cash equivalents at beginning of period        |   |   | - |   |   | - |   |
| Cash                and cash equivalents at end of period              |   | $ | 672,107 |   | $ | - |   |
|                                                                   |   |   |   |   |   |   |   |

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Table          of Contents

**UNITED      DEVELOPMENT FUNDING III, L.P.**

**NOTES      TO FINANCIAL STATEMENTS**

**December      31, 2006 and 2005**

**A.**
**Nature      of Business**

**B.**
**Summary      of Significant Accounting Policies**

**Basis      of Accounting**

**Use      of Estimates**

**Restricted      Cash**

**Mortgage      Notes Receivable**

**Allowance      for Loan Losses**

**Revenue      Recognition**

*Accounting      for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans      and Initial Direct Costs of Leases*

**Organization      Costs and Offering Costs**

*Reporting      on the Costs of Start-up Activities, *

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Table            of Contents

**Cash      Flow Distributions**

**Income      Taxes**

**Fair      Value of Financial Instruments**

*Disclosures      About Fair Value of Financial Instruments*

**Impact      of Recently Issued Accounting Standards**

*Consolidation      of Variable Interest Entities*
*Consolidation      of Variable Interest Entities *

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Table            of Contents

**C.      Registration Statement**
** **

**D.      Line of Credit**

**E.**
**Partners’      Capital**

**F.**
**Offering      Compensation**

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Table            of Contents

**G.      Operational Compensation**

**H.      Unit Redemption Program**

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Table            of Contents

**I.      Commitments and Contingencies**

**J.      Related Party Transactions **

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Table            of Contents

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Table          of Contents

|                                |   |                                                               |   | **For                    the Year**      |
|-------------------------------------|--------|--------------------------------------------------------------------|--------|------------------------------------------|
|                                |   |                                                               |   | **Ended**                                |
| **Payee**                           |   | **Purpose**                                                        |   | **December                    31, 2006** |
| Land                    Development |   |                                                               |   |                                     |
|                                |   | Organization                    & Offering Expenses            |   | $                    197,800             |
|                                |   | Bona                    Fide Due Diligence Fees                    |   | $                    65,900              |
|                                |   | Wholesaler                    Reimbursement                        |   | $                    111,300             |
|                                |   | Acquisition                    & Origination Expenses and Fees |   | $                    317,000             |
|                                |   | Promotional                    Interest                            |   | $                    13,500              |
|                                |   | Carried                    Interest                                |   | $                    2,000               |
|                                |   | Mortgage                    Servicing Fee                          |   | $                    8,100               |
| Funding                    Services |   |                                                               |   |                                     |
|                                |   | Marketing                    Support Fees                          |   | $                    105,500             |

**K.      Subsequent Events**

** **

** **

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Table            of Contents

**Index      to Exhibits** 

|  **Exhibit              Number** | ** Description** |
|---------------------------------------|-----------------------|
|   |   |
|--------|--------|
|  3.1 |  Second              Amended and Restated Agreement of Limited Partnership of Registrant              (previously filed in and incorporated by refernece 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 Supplement No. 1 to prospectus dated May 15, 2006, filed on January              5,              2007 |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
| 10.1 | Form                of Escrow Agreement between the Registrant and Coppermark Bank (previously                filed in and incorporated by reference to Pre-Effective Amendment                No. 4 to                Registrant’s Registration Statement on Form S-11, Commission File No.                333-127891, filed on February 10,                2006) |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Distribution                Reinvestment Plan (previously                filed in and incorporated by reference to Exhibit D to prospectus                dated                May 15, 2006) |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Form                of Participation Agreement by and between the Registrant, UMTH Land                Development, L.P., United Development Funding, L.P. and United Development                Funding II, L.P. (previously filed in and incorporated by reference                to Pre-Effective Amendment No. 1 to Registrant’s Registration Statement on                Form S-11, Commission File No. 333-127891, filed on November 18,                2005) |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.4 | Form                of Marketing Support Agreement (previously filed in and incorporated                by                reference to Pre-Effective Amendment No. 3 to Registrant’s Registration                Statement on Form S-11, Commission File No. 333-127891, filed on                February                1, 2006) |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.5 | 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) |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.6 | 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) |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.7 | 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) |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.8 | Secured                Promissory Note by Centurion Acquisitions, L.P. for the benefit of                United                Development of Funding III, L.P. (previously filed in and incorporated                by                reference to Form 10-Q filed on November 14,                2006) |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.9 | Secured                Promissory Note by Midlothian Longbranch, L.P. for the benefit of                United                Development Funding, III, L.P. (previously filed in and incorporated                by                reference to Form 10-Q filed on November 14,                2006) |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table            of Contents

| 10.10 | 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. (previously filed in and incorporated                by reference to Form 10-Q filed on November 14,                2006) |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.11 | 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. (previously filed                in and                incorporated by reference to Form 10-Q filed on November 14,                2006) |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.12 | 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. (previously filed in and incorporated                by                reference to Form 10-Q filed on November 14,                2006) |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.13 | Continuing                Unconditional Guaranty by Joe Fogarty, Nancy Fogarty and the Fogarty                Family Trust for the benefit of United Development Funding III, L.P.                (previously filed in and incorporated by reference to Form 10-Q filed                on                November 14, 2006) |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.14 | Secured                promissory note by Centurion Acquisitions, L.P. for the benefit of                United                Development Funding III, L.P. (previously filed in and incorporated                by                reference to Form 8-K filed November 21,                2006) |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.15 | Security                Agreement by Centurion Acquisitions, L.P. and Pars Investment Inc.,                for                the benefit of United Development Funding III, L.P. (previously filed                in                and incorporated by reference to Form 8-K filed November 21,                2006) |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.16 | Continuing                Unconditional Guaranty by Pars Investment Inc. for the benefit of                United                Development Funding III, L.P. (previously filed in and incorporated                by                reference to Form 8-K filed November 21,                2006) |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.17 | Loan                and Security Agreement between United Development Funding III, L.P.,                as                borrower, and Premier Bank, as lender, (previously filed in and                incorporated by reference to Form 8-K filed January 3,                2007) |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.18 | Revolving                Note from United Development Funding III, L.P. for the benefit of                Premier                Bank (previously filed in and incorporated by reference to Form 8-K                filed                January 3, 2007) |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.19 | Secured                Promissory Note by United Development Funding, L.P. for the benefit                of                Untied Development Funding III, L.P. (previously filed in and incorporated                by reference to Form 8-K filed January 4,                2007) |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.20 | Fairness                opinion with respect to Secured Promissory Note by United Development                Funding, L.P. for the benefit of United Development Funding III,                L.P.                (previously filed in and incorporated by reference to Form 8-K filed                January 4, 2007) |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
|  10.21              (1) |  Secured              Promissory Note by Buffington Hidden Lakes, LTD for the benefit of              United              Development Funding III, L.P. |
|------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
|  10.22              (1) |  Continuing              Unconditional Guaranty by Buffington Hidden Lakes GP, Inc. for the              benefit              of United Development Funding III, L.P. |
|------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
|  31.1              (1) |  Rule              13a-14(a)/15d-14(a) Certification of Principal Executive              Officer |
|-----------------------------|-------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
|  31.2              (2) |  Rule              13a-14(a)/15d-14(a) Certification of Principal Financial              Officer |
|-----------------------------|-------------------------------------------------------------------------------------------------------|
|   |   |
|--------|--------|
|  32.1              (1)(2) |  Section              1350 Certifications |
|--------------------------------|------------------------------------------------|