----

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|   | x |  QUARTERLY REPORT PURSUANT TO      SECTION 13 OR 15(d) OF THE |
|--------|---|--------------------------------------------------------------------|

|   | SECURITIES EXCHANGE ACT OF    1934 |
|--------|------------------------------------|

|   | o TRANSITION REPORT PURSUANT TO      SECTION 13 OR 15(d) OF THE |
|--------|----------------------------------------------------------------------|

|   | SECURITIES EXCHANGE ACT OF    1934 |
|--------|------------------------------------|

| Delaware                                                            |   | 20-3269195                                |
|---------------------------------------------------------------------|--------|-------------------------------------------|
| (State      or other jurisdiction of incorporation or organization) |   | (I.R.S.      Employer Identification No.) |

----

----

----

|   |
|--------|

|          |                                                                                                           | Page   |
|---------------|----------------------------------------------------------------------------------------------------------------|--------|
|          | PART      I                                                                                                    |   |
|          | FINANCIAL      INFORMATION                                                                                     |   |
|          |                                                                                                           |   |
| Item      1.  | Financial      Statements.                                                                                     |   |
|          |                                                                                                           |   |
|          | Balance      Sheets as of September 30, 2008 (Unaudited) and December 31, 2007      (Audited)                  | 3      |
|          |                                                                                                           |   |
|          | Statements      of Operations for the three and nine months ended September 30, 2008 and      2007 (Unaudited) | 4      |
|          |                                                                                                           |   |
|          | Statements      of Cash Flows for the nine months ended September 30, 2008 and 2007      (Unaudited)           | 5      |
|          |                                                                                                           |   |
|          | Notes      to Financial Statements (Unaudited)                                                                 | 6      |
|          |                                                                                                           |   |
| Item      2.  | Management’s      Discussion and Analysis of Financial Condition and Results of      Operations.         | 12     |
|          |                                                                                                           |   |
| Item      3.  | Quantitative      and Qualitative Disclosures About Market Risk.                                               | 21     |
|          |                                                                                                           |   |
| Item      4T. | Controls      and Procedures.                                                                                  | 22     |
|          |                                                                                                           |   |
|          | PART      II                                                                                                   |   |
|          | OTHER      INFORMATION                                                                                         |   |
|          |                                                                                                           |   |
| Item      1.  | Legal      Proceedings.                                                                                        | 23     |
|          |                                                                                                           |   |
| Item      1A. | Risk      Factors.                                                                                             | 23     |
|          |                                                                                                           |   |
| Item      2.  | Unregistered      Sales of Equity Securities and Use of Proceeds.                                              | 26     |
|          |                                                                                                           |   |
| Item      5.  | Other      Information.                                                                                        | 27     |
|          |                                                                                                           |   |
| Item      6.  | Exhibits.                                                                                                      | 27     |
|          |                                                                                                           |   |
| Signatures.   |                                                                                                           | 28     |

----

Item 1. FinancialStatements.

BALANCE SHEETS

|                                               |                                                                          |   | September      30, 2008 (Unaudited) |        |   | December      31, 2007 (Audited) |        |
|----------------------------------------------------|-------------------------------------------------------------------------------|--------|-------------------------------------|-------------|--------|----------------------------------|-------------|
| Assets:                                            |                                                                          |   |                                |        |   |                             |        |
|                                               | Cash      and cash equivalents                                                |   | $                                   | 27,217,819  |   |                             | $           | 586,642 |   |
|                                               | Restricted      cash                                                          |   |                                | 2,653,812   |   |                             |        | 665,174 |   |
|                                               | Accrued      interest receivable                                              |   |                                | 3,253,477   |   |                             |        | 437,324 |   |
|                                               | Accrued      interest receivable – related party                        |   |                                | 705,936     |   |                             |        | 676,716 |   |
|                                               | Mortgage      notes receivable, net                                           |   |                                | 123,682,962 |   |                             |        | 76,858,885 |   |
|                                               | Mortgage      notes receivable – related party, net                     |   |                                | 50,743,934  |   |                             |        | 23,190,872 |   |
|                                               | Participation      interest – related party                             |   |                                | 24,386,207  |   |                             |        | - |   |
|                                               | Deferred      offering costs                                                  |   |                                | 2,074,840   |   |                             |        | 2,605,788 |   |
|                                               | Other      assets                                                             |   |                                | 12,238      |   |                             |        | 71,032 |   |
|                                               |                                                                          |   |                                |        |   |                             |        |   |   |
| Total      assets                                  |                                                                          | $      | 234,731,225                         |        |   | $                                | 105,092,433 |   |
|                                               |                                                                          |   |                                |        |   |                             |        |   |   |
| Liabilities      and Partners’ Capital       |                                                                          |   |                                |        |   |                             |        |   |
| Liabilities:                                       |                                                                          |   |                                |        |   |                             |        |   |
|                                               | Accounts      payable                                                         |   | $                                   | 363,426     |   |                             | $           | 37,253 |   |
|                                               | Accrued      liabilities                                                      |   |                                | 128,493     |   |                             |        | 86,668 |   |
|                                               | Accrued      liabilities – related party                                |   |                                | 4,267,145   |   |                             |        | 2,892,774 |   |
|                                               | Escrow      payable                                                           |   |                                | 2,653,812   |   |                             |        | 665,174 |   |
|                                               | Line      of credit                                                           |   |                                | -           |   |                             |        | 2,325,028 |   |
|                                               |                                                                          |   |                                |        |   |                             |        |   |   |
| Total      liabilities                             |                                                                          |   | 7,412,876                           |        |   |                             | 6,006,897   |   |
|                                               |                                                                          |   |                                |        |   |                             |        |   |   |
| Commitments      and contingencies                 |                                                                          |   |                                |        |   |                             |        |   |
|                                               |                                                                          |   |                                |        |   |                             |        |   |   |
| Partners’      Capital:                      |                                                                          |   |                                |        |   |                             |        |   |
|                                               | Limited      partners’ capital:  17,500,000 units authorized; |   |                                |        |   |                             |        |   |   |
|                                               | 12,708,392      units issued and outstanding at                               |   |                                |        |   |                             |        |   |   |
|                                               | September      30, 2008 and 5,509,316 units issued and                        |   |                                |        |   |                             |        |   |   |
|                                               | outstanding      at December 31, 2007                                         |   |                                | 227,083,085 |   |                             |        | 98,978,590 |   |
|                                               | General      partner’s capital                                          |   |                                | 235,264     |   |                             |        | 106,946 |   |
|                                               |                                                                          |   |                                |        |   |                             |        |   |   |
| Total      partners’ capital                 |                                                                          |   | 227,318,349                         |        |   |                             | 99,085,536  |   |
|                                               |                                                                          |   |                                |        |   |                             |        |   |   |
| Total      liabilities and partners’ capital |                                                                          | $      | 234,731,225                         |        |   | $                                | 105,092,433 |   |

----

STATEMENTS OFOPERATIONS

|                                                                          |   | Three      Months Ended |       |   | Nine      Months Ended |   |
|-------------------------------------------------------------------------------|--------|-------------------------|------------|--------|------------------------|--------|
|                                                                          |   | September      30,      |       |   | September      30,     |   |
|                                                                          |   | 2008                    |       |   | 2007                   |   |   | 2008 |   |   | 2007 |   |
| Revenues:                                                                     |   |                    |       |   |                   |   |   |   |   |   |   |   |
| Interest      income                                                          |   | $                       | 6,736,945  |   |                   | $      | 2,195,552 |   |   | $ | 15,762,577 |   |   | $ | 4,522,154 |   |
| Credit      enhancement fees – related party                            |   |                    | -          |   |                   |   | 142,553 |   |   |   | - |   |   |   | 438,946 |   |
| Mortgage      and transaction service revenues                                |   |                    | 557,197    |   |                   |   | 236,884 |   |   |   | 1,339,887 |   |   |   | 483,991 |   |
| Total      revenues                                                           |   |                    | 7,294,142  |   |                   |   | 2,574,989 |   |   |   | 17,102,464 |   |   |   | 5,445,091 |   |
|                                                                          |   |                    |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Expenses:                                                                     |   |                    |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Interest      expense                                                         |   |                    | -          |   |                   |   | 2,853 |   |   |   | 1,500 |   |   |   | 195,122 |   |
| General      and administrative                                               |   |                    | 1,098,972  |   |                   |   | 449,674 |   |   |   | 2,850,643 |   |   |   | 954,737 |   |
| Total      expenses                                                           |   |                    | 1,098,972  |   |                   |   | 452,527 |   |   |   | 2,852,143 |   |   |   | 1,149,859 |   |
|                                                                          |   |                    |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                                               |   | $                       | 6,195,170  |   |                   | $      | 2,122,462 |   |   | $ | 14,250,321 |   |   | $ | 4,295,232 |   |
|                                                                          |   |                    |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings      allocated to limited partners                                   |   | $                       | 5,552,100  |   |                   | $      | 1,902,140 |   |   | $ | 12,771,096 |   |   | $ | 3,849,363 |   |
|                                                                          |   |                    |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings      per limited partnership unit, basic and diluted                 |   | $                       | 0.50       |   |                   | $      | 0.54 |   |   | $ | 1.48 |   |   | $ | 1.73 |   |
|                                                                          |   |                    |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted      average limited partnership units outstanding                   |   |                    | 11,189,937 |   |                   |   | 3,497,625 |   |   |   | 8,643,331 |   |   |   | 2,228,133 |   |
|                                                                          |   |                    |       |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Distributions      per weighted average limited partnership units outstanding |   | $                       | 0.45       |   |                   | $      | 0.53 |   |   | $ | 1.36 |   |   | $ | 1.25 |   |

----

UNITED DEVELOPMENTFUNDING III, L.P.

STATEMENTS OF CASHFLOWS

|                                                                      |   | Nine      Months Ended |         |
|---------------------------------------------------------------------------|--------|------------------------|--------------|
|                                                                      |   | September      30,     |         |
|                                                                      |   | 2008                   |         |   | 2007 |   |
| Operating      Activities                                                 |   |                   |         |   |   |   |
|                                                                      |   |                   |         |   |   |   |
|  Net      income                                                     |   | $                      | 14,250,321   |   |   | $ | 4,295,232 |   |
| Adjustment      to reconcile net income to net cash provided              |   |                   |         |   |   |   |   |   |
| by      operating activities:                                             |   |                   |         |   |   |   |   |   |
| Provision      for loan losses                                            |   |                   | 157,626      |   |   |   | 45,222 |   |
| Amortization                                                              |   |                   | 44,186       |   |   |   | 44,941 |   |
| Changes      in operating assets and liabilities:                         |   |                   |         |   |   |   |   |   |
| Accrued      interest receivable                                          |   |                   | (2,816,153   | ) |   |   | (30,058 | ) |
| Accrued      interest receivable – related party                    |   |                   | (29,221      | ) |   |   | (593,215 | ) |
| Other      assets                                                         |   |                   | 14,610       |   |   |   | 38,040 |   |
| Accounts      payable                                                     |   |                   | 326,172      |   |   |   | 438 |   |
| Accrued      liabilities                                                  |   |                   | 41,825       |   |   |   | (54,944 | ) |
| Net      cash provided by operating activities                            |   |                   | 11,989,366   |   |   |   | 3,745,656 |   |
|                                                                      |   |                   |         |   |   |   |   |   |
|  Investing      Activities                                           |   |                   |         |   |   |   |   |   |
|  Investments      in mortgage notes receivable                       |   |                   | (106,613,512 | ) |   |   | (48,317,280 | ) |
|  Investments      in mortgage notes receivable – related party |   |                   | (47,495,486  | ) |   |   | (12,893,499 | ) |
|  Investments      in participation interest – related party    |   |                   | (24,386,207  | ) |   |   | - |   |
|  Receipts      from mortgage notes receivable                        |   |                   | 59,631,809   |   |   |   | 4,044,399 |   |
|  Receipts      from mortgage notes receivable – related party  |   |                   | 19,942,424   |   |   |   | 85,786 |   |
| Net      cash used in investing activities                                |   |                   | (98,920,972  | ) |   |   | (57,080,594 | ) |
|                                                                      |   |                   |         |   |   |   |   |   |
| Financing      Activities                                                 |   |                   |         |   |   |   |   |   |
|  Net      payments on line of credit                                 |   |                   | (2,325,028   | ) |   |   | (4,586,402 | ) |
|  Limited      partner contributions                                  |   |                   | 141,529,952  |   |   |   | 68,040,878 |   |
|  Limited      partner distributions                                  |   |                   | (11,738,864  | ) |   |   | (2,774,546 | ) |
|  Limited      partner distribution reinvestment                      |   |                   | 4,283,631    |   |   |   | 846,280 |   |
|  Limited      partner redemption                                     |   |                   | (1,764,523   | ) |   |   | - |   |
|  General      partner distributions                                  |   |                   | (1,350,908   | ) |   |   | (379,202 | ) |
|  Escrow      payable                                                 |   |                   | 1,988,638    |   |   |   | 1,091,689 |   |
|  Restricted      cash                                                |   |                   | (1,988,638   | ) |   |   | (1,091,689 | ) |
|  Payments      of offering costs                                     |   |                   | (16,976,797  | ) |   |   | (8,118,083 | ) |
|  Deferred      offering costs                                        |   |                   | 530,948      |   |   |   | (594,869 | ) |
|  Accrued      liabilities – related party                      |   |                   | 1,374,372    |   |   |   | 479,192 |   |
| Net      cash provided by financing activities                            |   |                   | 113,562,783  |   |   |   | 52,913,248 |   |
|                                                                      |   |                   |         |   |   |   |   |   |
| Net      increase (decrease) in cash and cash equivalents                 |   |                   | 26,631,177   |   |   |   | (421,690 | ) |
| Cash      and cash equivalents at beginning of period                     |   |                   | 586,642      |   |   |   | 672,107 |   |
|                                                                      |   |                   |         |   |   |   |   |   |
| Cash      and cash equivalents at end of period                           |   | $                      | 27,217,819   |   |   | $ | 250,417 |   |
| Supplemental      Disclosure of Cash Flow Information                     |   |
| Cash      paid during the period for interest                             |   | $                      | -            |   |   | $ | 196,694 |   |

----

NOTES TO FINANCIALSTATEMENTS

----

----

----

|                  |                                           |   | For      the Nine Months Ended |      |
|-----------------------|------------------------------------------------|--------|--------------------------------|-----------|
| Payee                 | Purpose                                        |   | September      30, 2008        |      |   | September      30, 2007 |   |
| Land      Development |                                           |   |                           |      |   |   |   |
|                  | Organization      &                        |   |                           |      |   |   |   |
|                  |     Offering      Expenses |   | $                              | 2,118,000 |   |   | $ | 1,109,900 |   |
|                  | Due      Diligence Fees                        |   |                           | 706,000   |   |   |   | 340,000 |   |
|                  | Wholesaler      Reimbursement                  |   |                           | 152,000   |   |   |   | 153,600 |   |
|                  | Acquisition      & Origination             |   |                           |      |   |   |   |   |   |
|                  |     Expenses      and Fees |   |                           | 3,735,000 |   |   |   | 1,830,500 |   |
|                  | Promotional      Interest                      |   |                           | 1,178,000 |   |   |   | 330,600 |   |
|                  | Carried      Interest                          |   |                           | 173,000   |   |   |   | 83,200 |   |
|                  | Mortgage      Servicing Fee                    |   |                           | 271,000   |   |   |   | 48,600 |   |
| Funding      Services |                                           |   |                           |      |   |   |   |   |   |
|                  | Marketing      Support Fees                    |   |                           | 1,795,000 |   |   |   | 820,600 |   |
|                  | Operating      Expense                         |   |                           |      |   |   |   |   |   |
|                  |     Reimbursement          |   |                           | 318,000   |   |   |   | 66,000 |   |

----

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Off-Balance Sheet Arrangements

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----

Item 4T. Controls andProcedures.

----

PART II

Item 1. LegalProceedings.

Item 1A. RiskFactors.

| ·   | employment      levels and job growth; |
|--------------------|----------------------------------------|

| ·   | demographic      trends, including population increases and decreases and household      formation; |
|--------------------|-----------------------------------------------------------------------------------------------------|

| ·   | availability      of financing for homebuyers; |
|--------------------|------------------------------------------------|

| ·   | interest      rates; |
|--------------------|----------------------|

| ·   | affordability      of homes; |
|--------------------|------------------------------|

| ·   | consumer      confidence; |
|--------------------|---------------------------|

| ·   | levels      of new and existing homes for sale, including foreclosed      homes; and |
|--------------------|-------------------------------------------------------------------------------------------|

| ·   | housing      demand.   |
|--------------------|-----------------------------|

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----

| ·   | 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 mortgage loans; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | lack      of liquidity in the secondary mortgagemarket; |
|--------------------|---------------------------------------------------------|

| ·   | tighter      credit standards for home buyers; |
|--------------------|------------------------------------------------|

| ·   | general      unavailability of commercial credit;and |
|--------------------|------------------------------------------------------|

| ·   | illiquidity      of financial institutions.  |
|--------------------|---------------------------------------------------|

Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.

----

| 2008      |   |  Total      number of units of limited partnership interestrepurchased                                                                                                                       |   | Average      price paid per unit of limited partnership interest                                                     |   | Total      number of units of limited partnership interest repurchased as part of      publicly announced plan                                                                                          |   | Maximum      number of units of limited partnership interest that may yet be purchased      under the plan |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|
| July      |   |                       17,771                                                        |   |  $           18.49                                       |   |                        17,771                                                        |   | (1)                                                                                                        |
| August    |   |                                 - |   |  $                  - |   |                                  - |   | (1)                                                                                                        |
| September |   |                       17,546                                                        |   |  $           18.70                                       |   |                        17,546                                                        |   | (1)                                                                                                        |
|      |   |                       35,317                                                        |   |  $           18.59                                       |   |                        35,317                                                        |   | (1)                                                                                                        |

| (1) | A      description of the maximum number of units of limited partnership interest      that may be purchased under our redemption program is included in the      narrative preceding this table. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 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) |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.3 | First      Amendment to Second Amended and Restated Agreement of Limited Partnership      of Registrant (previously filed in and      incorporated by reference to Exhibit B to Supplement No. 6 to prospectus      dated May 15, 2006, contained within Post-Effective Amendment No. 3 to      Registrant’s Registration Statement on Form S-11, Commission File      No. 333-127891, filed on April 29,  2008) |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.1 | Subscription      Agreement (previously filed in and      incorporated by reference to Exhibit C to Supplement No. 6 to prospectus      dated May 15, 2006, contained within Post-Effective Amendment No. 3 to      Registrant’s Registration Statement on Form S-11, Commission File      No. 333-127891, filed on April 29,  2008) |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Secured Line of Credit Promissory Note by United      Development Funding, L.P. for the benefit of United Development Funding      III, L.P. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------|

| 10.2 | Secured Line of Credit Promissory Note by United      Development Funding Land Opportunity Fund, L.P. for the benefit United      Development Funding III,L.P. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.3 | Security Agreement by United Development Funding,      L.P in favor of United Development Funding III,  L.P. |
|------|--------------------------------------------------------------------------------------------------------------|

| 10.4 | Security Agreement by United Development Funding      Land Opportunity Fund, L.P. in favor of United Development Funding III,      L.P. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------|

| 10.5 | First Amendment to Secured Line of Credit      Promissory Note by United Development Funding X, L.P. for the benefit of      United Development Funding III,L.P. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.6 | Economic Interest Participation Agreement and      Purchase Option between United Mortgage Trust and United Development      Funding III, L.P. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.7 | Fairness Opinion with respect to Secured Line of      Credit Promissory Note by United Development Funding, L.P.for the benefit      of United Development Funding III,L.P. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.8 | Fairness Opinion with respect to Economic Interest      Participation Agreement and Purchase Option between United Mortgage Trust      and United Development Funding III,L.P. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.9 | Fairness Opinion with respect to First Amendment      to Secured Line of Credit Promissory Note by United Development Funding X,      L.P. for the benefit of United Development Funding III,      L.P. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.10 | Fairness Opinion with respect to Secured Line of      Credit Promissory Note by United Development Funding Land Opportunity      Fund, L.P. for the benefit United Development Funding III,      L.P. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

| 32.1* | Section 1350 Certifications (furnished      herewith) |
|-------|-------------------------------------------------------|

| * | In accordance with Item 601(b)(32) of Regulation      S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the      Exchange Act or otherwise subject to the liabilities of that      section.  Such certifications will not be deemed incorporated by      reference into any filing under the Securities Act of 1933, as amended, or      the Exchange Act, except to the extent that the registrant specifically      incorporates it byreference. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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