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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C.  20549**

**FORM        10-Q**

**        [Mark        One]**

**QUARTERLY        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
**SECURITIES        EXCHANGE ACT OF 1934**

**For        the quarterly period ended June 30, 2007**

**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.                  EmployerIdentification                  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** |
|                                                                                                                      |
| **N/A**                                                                                                                   |
| (Former                  name, former address and former fiscal year, if changed since last                  report)      |

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

**FORM        10-Q**

**Quarter        Ended March 31, 2007**

**PART        I**

**FINANCIAL        INFORMATION**

|                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                | **Page** |
|------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **    Item                  1.** | **Financial                  Statements.**                                                                                                                                                                                                                                                                                                                                                                                                                          |     |
|                                                 | Balance                  Sheets as of June 30, 2007 (Unaudited) and December 31, 2006 (Audited)                  .………………………………………………………………..………….                                                                                                                                           | 3        |
|                                                 | Statements                  of Operations for the Three Months Ended June 30, 2007  and 2006                  (Unaudited)  ………………………………………………………………..                                                                                                                                                | 4        |
|                                                 | Statements                    of Cash Flows for the Three Months Ended June 30, 2007  and                    2006 (Unaudited) ..………………………………………………………………                                                                                                                                             | 5        |
|                                                 | Notes                    to Financial Statements (Unaudited)                    …………………………………………...………………………………………………………………………………                                               | 6        |
| **    Item                  2.** | **Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations.**                     …………………………………………………………………                                                                                                               | 9        |
| **    Item                  3.** | **Quantitative                  and Qualitative Disclosures About Market                  Risk.**** **…………………...….….…………………………………………………………………………                                                                                 | 15       |
| **    Item                  4.** | **Controls                  and                  Procedures.**** **………………………………………………………………………………………………………………………………………………. | 15       |

**PART          II**

**OTHER          INFORMATION**

|                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **Page** |
|-----------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **    Item                    1.**    | **Legal                    Proceedings.**** **…………………………………………………………………..…………………………………………………………………..………………               | 16       |
| **    Item                    1A.**   | **Risk                    Factors.**** **……………………………………………………………………………………………………………………………………………..……………… | 16       |
| **    Item                    2**     | **Unregistered                    Sales of Equity Securities and Use of                    Proceeds.**** **………………………………………………………………………………………..…………..                                                                                       | 16       |
| **    Item                    6.**    | **Exhibits.**** **…………………………………………………………………………………………………………………………………………………..………………..        | 16       |
| **       Signatures.** | ……………………………………………………………………………………………………………………………………………………………..……………….    | 17       |

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**PART      I**

**FINANCIAL      INFORMATION**

**Item      1. Financial Statements.**

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

**BALANCE      SHEETS**

|                                                                   |   | **June                30,****2007****(Unaudited)** |       |   | **December                31, 2006****(Audited)** |   |
|------------------------------------------------------------------------|--------|----------------------------------------------------|------------|--------|---------------------------------------------------|--------|
| **Assets:**                                                            |   |                                               |       |   |                                              |   |
|                                                                   |   |                                               |       |   |                                              |   |
| Cash                and cash equivalents                               |   | $                                                  | 5,216,920  |   |                                              | $      | 672,107 |   |
| Restricted                cash                                         |   |                                               | 2,143,321  |   |                                              |   | 588,516 |   |
| Accrued receivable                - related party                 |   |                                               | 299,722    |   |                                              |   | 6,241 |   |
| Mortgage                notes receivable, net                          |   |                                               | 37,147,523 |   |                                              |   | 11,422,063 |   |
| Mortgage                notes receivable - related party, net          |   |                                               | 12,017,239 |   |                                              |   | 6,328,010 |   |
| Partnership                interest subscriptions receivable           |   |                                               | 100        |   |                                              |   | 100 |   |
| Deferred                offering costs                                 |   |                                               | 2,480,707  |   |                                              |   | 2,047,133 |   |
| Other                assets                                            |   |                                               | 112,203    |   |                                              |   | 167,484 |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| **Total                assets**                                        |   | $                                                  | 59,417,735 |   |                                              | $      | 21,231,654 |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| **Liabilities                and Partners' Capital:**                  |   |                                               |       |   |                                              |   |   |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| **Liabilities:**                                                       |   |                                               |       |   |                                              |   |   |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| Accounts                payable                                        |   | $                                                  | 500        |   |                                              | $      | 2,413 |   |
| Accrued                liabilities                                     |   |                                               | 18,484     |   |                                              |   | 66,927 |   |
| Accrued                liabilities - related party                     |   |                                               | 2,541,306  |   |                                              |   | 2,238,805 |   |
| Escrow                payable                                          |   |                                               | 2,143,321  |   |                                              |   | 588,516 |   |
| Line                of credit                                          |   |                                               | 4,014,858  |   |                                              |   | 6,436,402 |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| **Total                liabilities**                                   |   |                                               | 8,718,469  |   |                                              |   | 9,333,063 |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| Commitments                and contingencies                           |   |                                               | -          |   |                                              |   | - |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| **Partners'                Capital:**                                  |   |                                               |       |   |                                              |   |   |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| Limited                partners' capital: 17,500,000 units authorized; |   |                                               |       |   |                                              |   |   |   |
| 2,800,119 units                issued and outstanding at June 30, |   |                                               |       |   |                                              |   |   |   |
| 2007                and 661,191 units issued and outstanding at        |   |                                               |       |   |                                              |   |   |   |
| December                31, 2006                                       |   |                                               | 50,645,391 |   |                                              |   | 11,879,843 |   |
| General                partner's capital                               |   |                                               | 53,875     |   |                                              |   | 18,748 |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| **Total                partners' capital**                             |   |                                               | 50,699,266 |   |                                              |   | 11,898,591 |   |
|                                                                   |   |                                               |       |   |                                              |   |   |   |
| **Total                liabilities and partners' capital**             |   | $                                                  | 59,417,735 |   |                                              | $      | 21,231,654 |   |

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

**STATEMENTS      OF OPERATIONS**

**(Unaudited)**

|                                                               |   | **Three                Months Ended** |      |   | **Six                Months Ended** |   |
|--------------------------------------------------------------------|--------|---------------------------------------|-----------|--------|-------------------------------------|--------|
|                                                               |   | **June                30,**           |      |   | **June                30,**         |   |
|                                                               |   | **2007**                              |      |   | **2006**                            |   |   | **2007** |   |   | **2006** |   |
| Revenues:                                                          |   |                                  |      |   |                                |   |   |   |   |   |   |   |
| Interest                income                                     |   | $                                     | 1,513,382 |   |                                | $      | - |   |   | $ | 2,326,601 |   |   | $ | - |   |
| Credit                enhancement fees - related party             |   |                                  | 154,207   |   |                                |   | - |   |   |   | 296,394 |   |   |   | - |   |
| Mortgage                and transaction service revenues           |   |                                  | 160,324   |   |                                |   | - |   |   |   | 247,107 |   |   |   | - |   |
| Total                revenues                                      |   |                                  | 1,827,913 |   |                                |   | - |   |   |   | 2,870,102 |   |   |   | - |   |
|                                                               |   |                                  |      |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Expenses:                                                          |   |                                  |      |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Interest                expense                                    |   |                                  | 91,523    |   |                                |   | - |   |   |   | 192,269 |   |   |   | - |   |
| General                and administrative                          |   |                                  | 336,211   |   |                                |   | - |   |   |   | 505,063 |   |   |   | 522 |   |
| Total                expenses                                      |   |                                  | 427,734   |   |                                |   | - |   |   |   | 697,332 |   |   |   | 522 |   |
|                                                               |   |                                  |      |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Net                income/(loss)                                   |   | $                                     | 1,400,179 |   |                                | $      | - |   |   | $ | 2,172,770 |   |   | $ | (522 | ) |
|                                                               |   |                                  |      |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Earnings                per unit, basic and diluted                |   | $                                     | 0.65      |   |                                | $      | - |   |   | $ | 1.37 |   |   | $ | - |   |
|                                                               |   |                                  |      |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average units outstanding                  |   |                                  | 2,157,755 |   |                                |   | - |   |   |   | 1,582,866 |   |   |   | - |   |
|                                                               |   |                                  |      |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Distributions                declared per limited partnership unit |   | $                                     | 0.15      |   |                                | $      | - |   |   | $ | 0.43 |   |   | $ | - |   |

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

**STATEMENTS      OF CASH FLOWS**

**(Unaudited)**

|                                                                              |   | **Six                    Months Ended** |        |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------|-------------|
|                                                                              |   | **June                    30,**         |        |
|                                                                              |   | **2007**                                |        |   | **2006** |   |
| **Operating                    Activities**                                       |   |                                    |        |   |   |   |
|                                                                              |   |                                    |        |   |   |   |
|  Net                    income                                               |   | $                                       | 2,172,770   |   |   | $ | (522 | ) |
|  Changes                    in operating assets and liabilities:             |   |                                    |        |   |   |   |   |   |
| Accrued                    interest receivable - related party                    |   |                                    | (293,481    | ) |   |   | - |   |
| Other                    assets                                                   |   |                                    | 55,281      |   |   |   | - |   |
| Accounts                    payable                                               |   |                                    | (1,913      | ) |   |   | 522 |   |
| Accrued                    liabilities                                            |   |                                    | (48,443     | ) |   |   | - |   |
|   Net                    cash provided by operating activities          |   |                                    | 1,884,214   |   |   |   | - |   |
|                                                                              |   |                                    |        |   |   |   |   |   |
| ** Investing                    Activities**                                 |   |                                    |        |   |   |   |   |   |
|  Investments                    in mortgage notes receivable                 |   |                                    | (25,842,310 | ) |   |   | - |   |
|  Investments                    in mortgage notes receivable - related party |   |                                    | (5,775,015  | ) |   |   | - |   |
|  Receipts                    from mortgage notes receivable                  |   |                                    | 116,850     |   |   |   | - |   |
|  Receipts                    from mortgage notes receivable - related party  |   |                                    | 85,786      |   |   |   | - |   |
|  Net                    cash used in investing activities                    |   |                                    | (31,414,689 | ) |   |   | - |   |
|                                                                              |   |                                    |        |   |   |   |   |   |
| **Financing                    Activities**                                       |   |                                    |        |   |   |   |   |   |
|  Payments                    on line-of-credit, net                          |   |                                    | (2,421,544  | ) |   |   | - |   |
|  Limited                    partner contributions                            |   |                                    | 37,459,147  |   |   |   | - |   |
|  Limited                    partner distributions                            |   |                                    | (908,110    | ) |   |   | - |   |
|  Limited                    partner distribution reinvestment                |   |                                    | 267,288     |   |   |   | - |   |
|  General                    partner distributions                            |   |                                    | (190,420    | ) |   |   | - |   |
|  Escrow                    payable                                           |   |                                    | 1,554,805   |   |   |   | - |   |
|  Restricted                    cash                                          |   |                                    | (1,554,805  | ) |   |   | - |   |
|  Payments                    of offering costs                               |   |                                    | (433,574    | ) |   |   | - |   |
|  Accrued                    liabilities - related party                      |   |                                    | 302,501     |   |   |   | - |   |
|  Net                    cash provided by financing activities                |   |                                    | 34,075,288  |   |   |   | - |   |
|                                                                              |   |                                    |        |   |   |   |   |   |
|  Net                    increase in cash and cash equivalents                |   |                                    | 4,544,813   |   |   |   | - |   |
|  Cash                    and cash equivalents at beginning of period         |   |                                    | 672,107     |   |   |   | - |   |
|  Cash                    and cash equivalents at end of period               |   | $                                       | 5,216,920   |   |   | $ | - |   |

|  **Supplemental                        Disclosure of Cash Flow Information**                  |   |    |                |   |   |    |    |   |
|----------------------------------------------------------------------------------------------------|--------|---------|---------------------|--------|--------|---------|---------|--------|
|   Cash                        paid during the                        period for interest |   |  $ | 196,694   |   |   |  $ | -  |   |

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

**NOTES        TO FINANCIAL STATEMENTS**

**A.        Nature of Business**

**B.            Basis of Presentation**

**C.            Registration Statement**

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**D.  Line            of Credit**

**E.  Partners’            Capital**

**F.  Commitments            and Contingencies**

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**G.            Related Party Transactions**

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|                                  |                                                           |   | For                      the Six   |      |
|---------------------------------------|----------------------------------------------------------------|--------|------------------------------------|-----------|
|                                  |                                                           |   | Months                      Ended  |      |
| Payee                                 | Purpose                                                        |   | June                      30, 2007 |      |
| Land                      Development |                                                           |   |                               |      |
|                                  | Organization                      &                        |   |                               |      |
|                                  |     Offering                      Expenses |   | $                                  | 637,200   |   |
|                                  | Due                      Diligence Fees                        |   |                               | 212,400   |   |
|                                  | Wholesaler                      Reimbursement                  |   |                               | 126,600   |   |
|                                  | Acquisition                      & Origination             |   |                               |      |   |
|                                  |     Expenses                      and Fees |   |                               | 1,156,519 |   |
|                                  | Promotional                      Interest                      |   |                               | 166,000   |   |
|                                  | Carried                      Interest                          |   |                               | 24,400    |   |
|                                  | Mortgage                      Servicing Fee                    |   |                               | 44,000    |   |
| Funding                      Services |                                                           |   |                               |      |   |
|                                  | Marketing                      Support Fees                    |   |                               | 498,900   |   |

**H.  Subsequent            Events**

**Item            2. Management’s Discussion and Analysis of Financial Condition and Results of            Operations.**

***Forward-Looking            Statements***

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***Overview***

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***Current            Public Offering***

***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, *

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*Determination            of the Allowance for Loan Losses*

*Mortgage            Notes Receivable and Mortgage Notes Receivable – Related Party*

*Cash            Flow Distributions*

** **

***Results            of Operations***

*We            commenced active operations *
*on July 3, 2006, *
*after we*
*satisfied the minimum escrow condition*
* in connection with*
*the Offering*
*.*
*  As            a result,*
*our*
* results of operations for the six months ended June            30,            2007 are not comparable to the results of operations for the six months            ended            June 30, 2006.  As there was no operational activity for the six            months ended June 30, 2006*
* the only results presented are for the            six*
* months ended June 30,            2007.*
** **

*Revenues*

*Expenses*

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***Cash            Flow Analysis***

*We            commenced active operations *
*on July 3, 2006, *
*after*
*we*
* satisfied the minimum escrow            condition*
* in            connection with*
* the Offering*
*.*
*  As a result,*
*our*
* cash flows for the            six months ended June 30, 2007 are not            comparable to the cash flows for the six months ended June 30,            2006.  As there were no active operations from the six months ended            June 30, 2006, the only cash flows presented are for the six months ended            June            30, 2007.*

***Liquidity            and Capital Resources***

***Material            Trends Affecting Our Business***

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**     *Off            Balance Sheet**Arran**gements***

***Contractual            Obligations***

***Subsequent            Events***

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**Item            3. Quantitative and Qualitative Disclosures About Market            Risk.**

**Item            4. Controls and Procedures.**

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**PART            II**

**OTHER            INFORMATION**

**Item            1. Legal Proceedings.**

**Item            1A. Risk Factors.**

**Item            2. Unregistered Sales of Equity Securities and Use of            Proceeds.**

**Item            6. Exhibits.**

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**SIGNATURES**

|   | **United                  Development                  Funding III, L.P.** |                                         |
|--------|----------------------------------------------------------------------------|----------------------------------------------|
|   |                                                                       |                                         |   |
|   | By:                                                                        | UMTH                  Land Development, L.P. |   |
|   |                                                                       | Its                  General Partner         |   |

|                                                          |   |                                                                                                                                                                                                              |
|---------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                          |   |                                                                                                                                                                                                              |   |
| Dated:  August                        14, 2007 | By:    | /s/ Hollis                  M. Greenlaw                                                                                                                                                                      |   |
|                                                          |   | Hollis                  M. Greenlaw                                                                                                                                                                               |   |
|                                                          |   | Chief                  Executive Officer, and                  President and Chief Executive Officer of UMT Services, Inc., sole                  general                  partner of UMTH Land Development, L.P. |   |
|                                                          |   | (Principal                  Executive                  Officer)                                                                                                                                                   |   |

|   |   |                                                            |
|--------|--------|-----------------------------------------------------------------|
|   |   |                                                            |   |
|   | By:    | /s/ Cara                  D. Obert                         |   |
|   |   | Cara                  D. Obert                                  |   |
|   |   | Chief                  Financial Officer                        |   |
|   |   | (Principal                  Financial                  Officer) |   |

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**Index            to Exhibits**

**Exhibit            Number                    Description**

| 3.1 | Second                      Amended and Restated Agreement of Limited Partnership of Registrant                      (previously filed in and incorporated by reference to Exhibit                      B to                      prospectus dated May 15, 2006, filed pursuant to Rule 424(b)(3)                      on May 18,                      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. 2 to prospectus dated May 15, 2006, contained                      within                      Post-Effective Amendment No. 1 to Registrant’s Registration Statement on                      Form S-11, Commission File No. 333-127891, filed on April 30,                      2007) |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Letter                        of engagement between UMTH Funding Services, L.P. and United                        Development                        Funding III, L.P. regarding arrangement of financing and financial                        advising (previously filed in and incorporated by reference                        to                        Post-Effective Amendment No. 1 to Registrant’s Registration Statement on                        Form S-11, Commission File No. 333-127891, filed on April 30,                        2007) |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.1 | Rule                      13a-14(a)/15d-14(a) Certification of Principal Executive                      Officer |
|------|-----------------------------------------------------------------------------------------------------------------|

| 31.2 | Rule                      13a-14(a)/15d-14(a) Certification of Principal Financial                      Officer |
|------|-----------------------------------------------------------------------------------------------------------------|

| 32.1* | Section                      1350 Certifications |
|-------|--------------------------------------------------|