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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 March 31, 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 March 31, 2007 (Unaudited) and December 31, 2006 (Audited)                  .………………………………………………………………..………….                                                                                                                                          | 3        |
|                                                 | Statements                  of Operations for the Three Months Ended March 31, 2007 and 2006                  (Unaudited)  ………………………………………………………………..                                                                                                                                                     | 4        |
|                                                 | Statements                    of Cash Flows for the Three Months Ended March 31, 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.**** **…………………...….….…………………………………………………………………………                                                                                 | 14       |
| **    Item                  4.** | **Controls                  and                  Procedures.**** **………………………………………………………………………………………………………………………………………………. | 14       |

**PART          II**

**OTHER          INFORMATION**

|                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | **Page** |
|-------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **    Item                    1.**                        | **Legal                    Proceedings.**** **…………………………………………………………………..…………………………………………………………………..………………               | 15       |
| **    Item                    1A.**                       | **Risk                    Factors.**** **……………………………………………………………………………………………………………………………………………..……………… | 15       |
| **    Item                    2**                         | **Unregistered                    Sales of Equity Securities and Use of                    Proceeds.**** **………………………………………………………………………………………..…………..                                                                                       | 15       |
| **    Item                    3.**                        | **Defaults                    Upon Senior                    Securities.**** **………………………………………………………………………………………………………………………..…………….                         | 15       |
| **    Item                    4.**                        | **Submission                    of Matters to a Vote of Security                    Holders.**** **…………………………….…………………………………………………………………..…………….                                                                   | 15       |
| **    Item                    5.**                        | **Other                    Information.**** **…………………………………………………………………..…………………………………………………………………..……………….              | 15       |
| **    Item                    6.**                        | **Exhibits.**** **…………………………………………………………………………………………………………………………………………………..………………..        | 15       |
| **                           Signatures.** | ……………………………………………………………………………………………………………………………………………………………..……………….    | 16       |

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**PART      I**

**FINANCIAL      INFORMATION**

**Item      1. Financial Statements.**

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

**BALANCE      SHEETS**

|                                                                   |   | **March                31,****2007****(Unaudited)** |       |   | **December                31, 2006****(Audited)** |   |
|------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|--------|---------------------------------------------------|--------|
| **Assets:**                                                            |   |                                                |       |   |                                              |   |
|                                                                   |   |                                                |       |   |                                              |   |
| Cash                and cash equivalents                               |   | $                                                   | 214,713    |   |                                              | $      | 672,107 |   |
| Restricted                cash                                         |   |                                                | 1,371,870  |   |                                              |   | 588,516 |   |
| Accrued receivable                - related party                 |   |                                                | 170,195    |   |                                              |   | 6,241 |   |
| Mortgage                notes receivable, net                          |   |                                                | 25,755,733 |   |                                              |   | 11,422,063 |   |
| Mortgage                notes receivable - related party, net          |   |                                                | 8,682,424  |   |                                              |   | 6,328,010 |   |
| Partnership                interest subscriptions receivable           |   |                                                | 100        |   |                                              |   | 100 |   |
| Deferred                offering costs                                 |   |                                                | 2,307,004  |   |                                              |   | 2,047,133 |   |
| Other                assets                                            |   |                                                | 151,849    |   |                                              |   | 167,484 |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| **Total                assets**                                        |   | $                                                   | 38,653,888 |   |                                              | $      | 21,231,654 |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| **Liabilities                and Partners' Capital:**                  |   |                                                |       |   |                                              |   |   |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| **Liabilities:**                                                       |   |                                                |       |   |                                              |   |   |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| Accounts                payable                                        |   | $                                                   | 1,844      |   |                                              | $      | 2,413 |   |
| Accrued                liabilities                                     |   |                                                | 43,387     |   |                                              |   | 66,927 |   |
| Accrued                liabilities - related party                     |   |                                                | 2,782,011  |   |                                              |   | 2,238,805 |   |
| Escrow                payable                                          |   |                                                | 1,371,870  |   |                                              |   | 588,516 |   |
| Line                of credit                                          |   |                                                | 7,353,746  |   |                                              |   | 6,436,402 |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| **Total                liabilities**                                   |   |                                                | 11,552,858 |   |                                              |   | 9,333,063 |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| Commitments                and contingencies                           |   |                                                | -          |   |                                              |   | - |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| **Partners'                Capital:**                                  |   |                                                |       |   |                                              |   |   |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| Limited                partners' capital: 17,500,000 units authorized; |   |                                                |       |   |                                              |   |   |   |
| 1,494,403                units issued and outstanding at March 31,     |   |                                                |       |   |                                              |   |   |   |
| 2007                and 661,191 units issued and outstanding at        |   |                                                |       |   |                                              |   |   |   |
| December                31, 2006                                       |   |                                                | 27,020,733 |   |                                              |   | 11,879,843 |   |
| General                partner's capital                               |   |                                                | 80,297     |   |                                              |   | 18,748 |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| **Total                partners' capital**                             |   |                                                | 27,101,030 |   |                                              |   | 11,898,591 |   |
|                                                                   |   |                                                |       |   |                                              |   |   |   |
| **Total                liabilities and partners' capital**             |   | $                                                   | 38,653,888 |   |                                              | $      | 21,231,654 |   |

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

**STATEMENTS      OF OPERATIONS**

**(Unaudited)**

|                                                               |   |  **Three                Months Ended****March                31, 2007** |      |   |  **Three                Months Ended****March                31, 2006** |   |
|--------------------------------------------------------------------|--------|------------------------------------------------------------------------------|-----------|--------|------------------------------------------------------------------------------|--------|
| **Revenues:**                                                      |   |                                                                         |      |   |                                                                         |   |
|                                                               |   |                                                                         |      |   |                                                                         |   |
| Interest                income                                     |   | $                                                                            | 813,219   |   |                                                                         | $      | - |   |
| Credit                enhancement fees - related party             |   |                                                                         | 142,187   |   |                                                                         |   | - |   |
| Mortgage                and transaction service revenues           |   |                                                                         | 86,783    |   |                                                                         |   | - |   |
| Total                revenues                                      |   |                                                                         | 1,042,189 |   |                                                                         |   | - |   |
|                                                               |   |                                                                         |      |   |                                                                         |   |   |   |
| **Expenses:**                                                      |   |                                                                         |      |   |                                                                         |   |   |   |
|                                                               |   |                                                                         |      |   |                                                                         |   |   |   |
| Interest                expense                                    |   |                                                                         | 100,746   |   |                                                                         |   | - |   |
| General                and administrative                          |   |                                                                         | 168,852   |   |                                                                         |   | 522 |   |
| Total                expenses                                      |   |                                                                         | 269,598   |   |                                                                         |   | 522 |   |
|                                                               |   |                                                                         |      |   |                                                                         |   |   |   |
| Net                income (loss)                                   |   | $                                                                            | 772,591   |   |                                                                         | $      | (522 | ) |
|                                                               |   |                                                                         |      |   |                                                                         |   |   |   |
| Earnings                per unit, basic and diluted                |   | $                                                                            | 0.77      |   |                                                                         | $      | - |   |
|                                                               |   |                                                                         |      |   |                                                                         |   |   |   |
| Weighted                average units outstanding                  |   |                                                                         | 1,001,588 |   |                                                                         |   | - |   |
|                                                               |   |                                                                         |      |   |                                                                         |   |   |   |
| Distributions                declared per limited partnership unit |   | $                                                                            | 0.28      |   |                                                                         | $      | - |   |

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

**STATEMENTS      OF CASH FLOWS**

**(Unaudited)**

|                                                                                 |   | **For                the Three** |                |   | **For                the Three** |    |
|--------------------------------------------------------------------------------------|--------|----------------------------------|---------------------|--------|----------------------------------|---------|
|                                                                                 |   | **Months                Ended**  |                |   | **Months                Ended**  |    |
|                                                                                 |   | **March                31,**     |                |   | **March                31,**     |    |
|                                                                                 |   | **2007**                         |                |   | **2006**                         |    |
| **Operating                Activities**                                              |   |                             |                |   |                             |    |
|                                                                                 |   |                             |                |   |                             |    |
|  Net                income (loss)                                               |   | $                                | 772,591             |   |                             | $       | (522 | ) |
|  Changes                in operating assets and liabilities:                    |   |                             |                |   |                             |    |   |   |
|                  Accrued receivable - related party                             |   |                             | (163,954            | )      |                             |    | - |   |
|                  Other assets                                                   |   |                             | 15,635              |   |                             |    | (140,403 | ) |
|                  Accounts payable                                               |   |                             | (569                | )      |                             |    | - |   |
|                  Accrued liabilities                                            |   |                             | (23,540             | )      |                             |    | - |   |
|  Net                cash provided by (used in) operating activities             |   |                             | 600,163             |   |                             |    | (140,925 | ) |
|                                                                                 |   |                             |                |   |                             |    |   |   |
| ** Investing                Activities**                                        |   |                             |                |   |                             |    |   |   |
|                                                                                 |   |                             |                |   |                             |    |   |   |
|                   Investments in mortgage notes receivable                 |   |                             | (14,406,649         | )      |                             |    | - |   |
|                   Receipts from mortgage notes receivable                  |   |                             | 72,979              |   |                             |    | - |   |
|                   Investments in mortgage notes receivable - related party |   |                             | (2,440,200          | )      |                             |    | - |   |
|                   Receipts from mortgage notes receivable - related party  |   |                             | 85,786              |   |                             |    | - |   |
|  Net                cash used in investing activities                           |   |                             | (16,688,084         | )      |                             |    | - |   |
|                                                                                 |   |                             |                |   |                             |    |   |   |
| **Financing                Activities**                                              |   |                             |                |   |                             |    |   |   |
|                                                                                 |   |                             |                |   |                             |    |   |   |
|                   Net proceeds from line of credit                         |   |                             | 917,344             |   |                             |    | - |   |
|                   Limited partner contributions                            |   |                             | 14,646,170          |   |                             |    | - |   |
|                   Limited partner distributions                            |   |                             | (276,292            | )      |                             |    | - |   |
|                   Limited partner distribution reinvestment                |   |                             | 78,618              |   |                             |    | - |   |
|                   General partner distributions                            |   |                             | (18,648             | )      |                             |    | - |   |
|                   Escrow payable                                           |   |                             | 783,354             |   |                             |    | - |   |
|                   Restricted cash                                          |   |                             | (783,354            | )      |                             |    | - |   |
|                   Payments of offering costs                               |   |                             | (259,871            | )      |                             |    | - |   |
|                   Accrued liabilities - related party                      |   |                             | 543,206             |   |                             |    | 140,925 |   |
|  Net                cash provided by financing activities                       |   |                             | 15,630,527          |   |                             |    | 140,925 |   |
|                                                                                 |   |                             |                |   |                             |    |   |   |
|  Net decrease                in cash and cash equivalents                  |   |                             | (457,394            | )      |                             |    | - |   |
|  Cash                and cash equivalents at beginning of period                |   |                             | 672,107             |   |                             |    | - |   |
|                                                                                 |   |                             |                |   |                             |    |   |   |
|  Cash                and cash equivalents at end of period                      |   | $                                | 214,713             |   |                             | $       | - |   |
|                                                                                 |   |                             |                |   |                             |    |   |   |
|  **Supplemental              Disclosure of Cash Flow Information**              |   |                             |                |   |                             |    |   |   |
| Cash                paid during the period for interest                              |   |  $                          | 105,171   |   |                             |  $ | -  |   |

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

**NOTES        TO FINANCIAL STATEMENTS**

**A.        Nature of Business**

**B.        Basis of Presentation**

**C.        Registration Statement**

**D.  Line        of Credit**

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**E.  Partners’        Capital**

**F.  Commitments        and Contingencies**

**G.        Related Party Transactions**

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|                                |   |                                                           |       | **For                the Three** | ** ** |
|-------------------------------------|--------|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                          |   | ** **                                                     | ** ** | **Months                Ended**  | ** ** |
| **Payee**                           |   | **Purpose**                                                    | ** ** | **March                31,2007** |       |
| **Land                Development** |   |                                                           |       |                             |       |
|                                |   | Organization                & Offering Expenses            |       | $                                | 248,600    |   |
|                                |   | Due                Diligence Fees                              |       |                             | 82,900     |   |
|                                |   | Wholesaler                Reimbursement                        |       |                             | 111,000    |   |
|                                |   | Acquisition                & Origination Expenses and Fees |       |                             | 376,500    |   |
|                                |   | Promotional                Interest                            |       |                             | 16,300     |   |
|                                |   | Carried                Interest                                |       |                             | 2,400      |   |
|                                |   | Mortgage                Servicing Fee                          |       |                             | 16,400     |   |
| **Funding                Services** |   |                                                           |       |                             |       |   |
|                                |   | Marketing                Support Fees                          |       |                             | 159,400    |   |

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**H.  Subsequent        Events**

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

***Forward-Looking        Statements***

***Overview***

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***Critical        Accounting Policies and Estimates***

*Revenue        Recognition*

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

*Determination        of the Allowance for Loan Losses*

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*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 escrow condition*
* in connection with*
*the Offering*
*.*
*  As        a result,*
*our*
* results of operations for the three months ended March        31,        2007 are not comparable to the results of operations for the three months        ended        March 31, 2006.  As there was no operational activity for the three        months ended March 31, 2006*
* the only results presented are for the        three*
* months ended March 31,        2007.*
** **

*Revenues*

*Expenses*

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***Cash        Flow Analysis***

*We        commenced active operations *
*on July 3, 2006, *
*after*
*we*
* satisfied the escrow condition*
* in connection        with*
* the Offering*
*.*
*  As a result,*
*our*
* cash flows for the three        months ended March 31, 2007 are        not comparable to the cash flows for the three months ended March 31,        2006.  As there was no active operations from the three months ended        March 31, 2006, the only cash flows presented are for the three months ended        March 31, 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        3. Defaults Upon Senior        Securities.**

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

**Item        5. Other Information.**

**Item        6. Exhibits.**

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**SIGNATURES**

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

|                                        |   |                                                                                                                                                                                 |
|---------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                        |   |                                                                                                                                                                                 |   |
| Dated: May                    15, 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) |   |

----

**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 | Subsription                  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 | Note                  Purchase, Assignment and Assumption Agreement by and between McDougal                  Family Partnership, LTD. and United Development Funding III,                  L.P. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | 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 |
|-------|----------------------------------------------|