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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.) |

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|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.     | Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                      |   |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|        | Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008 (Audited)                                                                                                                                                                                                                                                                                                                                             | 3      |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|        | Statements of Operations for the three and six months ended June 30, 2009 and 2008 (Unaudited)                                                                                                                                                                                                                                                                                                                             | 4      |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|        | Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (Unaudited)                                                                                                                                                                                                                                                                                                                                       | 5      |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|        | Notes to Financial Statements (Unaudited)                                                                                                                                                                                                                                                                                                                                                                                  | 6      |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 2.     | Management’s Discussion and Analysis of Financial Condition and Results of Operations.                                                                                                                                                                                                                                                                                                                               | 14     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 3.     | Quantitative and Qualitative Disclosures About Market Risk.                                                                                                                                                                                                                                                                                                                                                                | 24     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 4T.    | Controls and Procedures.                                                                                                                                                                                                                                                                                                                                                                                                   | 25     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|        |                                                                     PART II |   |
|        |                                                   OTHER INFORMATION                                                                                                   |   |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 1.     | Legal Proceedings.                                                                                                                                                                                                                                                                                                                                                                                                         | 26     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 1A.    | Risk Factors.                                                                                                                                                                                                                                                                                                                                                                                                              | 26     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 2.     | Unregistered Sales of Equity Securities and Use of Proceeds.                                                                                                                                                                                                                                                                                                                                                               | 26     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 4.     | Submission of Matters to a Vote of Security Holders.                                                                                                                                                                                                                                                                                                                                                                       | 27     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 5.     | Other Information.                                                                                                                                                                                                                                                                                                                                                                                                         | 28     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Item 6.     | Exhibits.                                                                                                                                                                                                                                                                                                                                                                                                                  | 28     |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| Signatures. |                                                                                                                                                                                                                                                                                                                                                                                                                       | 29     |

----

Item 1. Financial Statements.

BALANCE SHEETS 

|                                                                                                                                                                                              |   | June 30, 2009 (Unaudited) |        |   | December 31, 2008 (Audited) |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|-------------|--------|-----------------------------|--------|
| Assets:                                                                                                                                                                                           |   |                      |        |   |                        |   |
|     Cash and cash equivalents                                                                                                                                                      |   | $                         | 6,616,628   |   |                        | $      | 15,505,910 |   |
| Restricted cash                                                                                                                                                                                   |   |                      | 2,203,119   |   |                        |   | 1,205,190 |   |
| Accrued interest receivable                                                                                                                                                                       |   |                      | 5,832,595   |   |                        |   | 2,301,525 |   |
| Accrued interest receivable – related party                                                                                                                                                 |   |                      | 3,337,836   |   |                        |   | 683,529 |   |
| Mortgage notes receivable, net                                                                                                                                                                    |   |                      | 180,540,696 |   |                        |   | 169,825,653 |   |
| Mortgage notes receivable – related party, net                                                                                                                                              |   |                      | 63,230,114  |   |                        |   | 43,311,599 |   |
| Participation interest – related party                                                                                                                                                      |   |                      | 45,825,710  |   |                        |   | 39,259,006 |   |
| Deferred offering costs                                                                                                                                                                           |   |                      | -           |   |                        |   | 612,292 |   |
| Other assets                                                                                                                                                                                      |   |                      | 14,052      |   |                        |   | 16,708 |   |
|                                                                                                                                                                                              |   |                      |        |   |                        |   |   |   |
| Total assets                                                                                                                                                                                      |   | $                         | 307,600,750 |   |                        | $      | 272,721,412 |   |
|                                                                                                                                                                                              |   |                      |        |   |                        |   |   |   |
| Liabilities and Partners’ Capital                                                                                                                                                           |   |                      |        |   |                        |   |   |   |
| Liabilities:                                                                                                                                                                                      |   |                      |        |   |                        |   |   |   |
| Accrued liabilities                                                                                                                                                                               |   | $                         | 312,906     |   |                        | $      | 416,961 |   |
|         Accrued liabilities – related party                                                                                                              |   |                      | 2,547,457   |   |                        |   | 3,346,306 |   |
| Escrow payable                                                                                                                                                                                    |   |                      | -           |   |                        |   | 517,190 |   |
|                                                                                                                                                                                              |   |                      |        |   |                        |   |   |   |
| Total liabilities                                                                                                                                                                                 |   |                      | 2,860,363   |   |                        |   | 4,280,457 |   |
|                                                                                                                                                                                              |   |                      |        |   |                        |   |   |   |
| Commitments and contingencies                                                                                                                                                                     |   |                      |        |   |                        |   |   |   |
|                                                                                                                                                                                              |   |                      |        |   |                        |   |   |   |
| Partners’ Capital:                                                                                                                                                                          |   |                      |        |   |                        |   |   |   |
| Limited partners’ capital:  17,500,000 units authorized;16,938,003 units issued and outstanding at June 30, 2009 and 15,019,292 units issued and outstanding at December 31, 2008 |   |                      | 304,357,851 |   |                        |   | 268,179,990 |   |
| General partner’s capital                                                                                                                                                                   |   |                      | 382,536     |   |                        |   | 260,965 |   |
|                                                                                                                                                                                              |   |                      |        |   |                        |   |   |   |
| Total partners’ capital                                                                                                                                                                     |   |                      | 304,740,387 |   |                        |   | 268,440,955 |   |
|                                                                                                                                                                                              |   |                      |        |   |                        |   |   |   |
| Total liabilities and partners’ capital                                                                                                                                                     |   | $                         | 307,600,750 |   |                        | $      | 272,721,412 |   |

----

STATEMENTS OF OPERATIONS

|                                                                     | Three Months Ended                                                                                                              |   | Six Months Ended                                                              |
|--------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
|                                                                     | June 30,                                                                                                                        |   | June 30,                                                                      |
|                                                                     |  2009                                                                                                                      |   |  2008                                                                    |   |  2009 |   |  2008 |
| Revenues:                                                                |                                                                                                                            |   |                                                                          |   |   |   |   |
| Interest income                                                          |  $  10,307,416                                                                                                   |   |  $  5,102,717                                                  |   |  $19,848,847 |   |  $   9,025,632 |
| Mortgage and transaction service revenues                                |           971,243                                                             |   |         500,859                       |   |         1,474,688 |   |          782,690 |
| Total revenues                                                           |        11,278,659                                                                            |   |      5,603,576                                       |   |      21,323,535 |   |       9,808,322 |
|                                                                     |                                                                                                                            |   |                                                                          |   |   |   |   |
| Expenses:                                                                |                                                                                                                            |   |                                                                          |   |   |   |   |
| Interest expense                                                         |                      - |   | -                                                                             |   |        - |   |          1,500 |
| General and administrative                                               |        928,219                                                                               |   |   1,068,819                                                         |   |      1,780,687 |   |       1,751,671 |
| Total expenses                                                           |        928,219                                                                               |   |         1,068,819                     |   |      1,780,687 |   |          1,753,171 |
|                                                                     |                                                                                                                            |   |                                                                          |   |   |   |   |
| Net income                                                               |  $  10,350,440                                                                                                   |   |  $  4,534,757                                                  |   |  $19,542,848 |   |  $   8,055,151 |
|                                                                     |                                                                                                                            |   |                                                                          |   |   |   |   |
| Earnings allocated to limited partners                                   |  $    9,276,028                                                                                        |   |  $  4,062,688                                                  |   |  $17,514,232 |   |  $   7,218,996 |
|                                                                     |                                                                                                                            |   |                                                                          |   |   |   |   |
| Earnings per limited partnership unit, basic and diluted                 |  $             0.55                                       |   |  $           0.48 |   |  $           1.07 |   |  $            0.98 |
|                                                                     |                                                                                                                            |   |                                                                          |   |   |   |   |
| Weighted average limited partnership units outstanding                   |        16,871,993                                                                            |   |      8,518,469                                       |   |      16,421,752 |   |       7,356,036 |
|                                                                     |                                                                                                                            |   |                                                                          |   |   |   |   |
| Distributions per weighted average limited partnership units outstanding |  $             0.49                                       |   |  $           0.46 |   |  $           0.95 |   |  $            0.91 |

----

UNITED DEVELOPMENT FUNDING III, L.P. 

STATEMENTS OF CASH FLOWS 

|                                                                              |   | Six Months Ended |        |
|-----------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                              |   | June 30,         |        |
|                                                                              |   | 2009             |        |   | 2008 |   |
| Operating Activities                                                              |   |             |        |   |   |   |
| Net income                                                                        |   | $                | 19,542,848  |   |   | $ | 8,055,151 |   |
| Adjustments to reconcile net income to net cash provided by operating activities: |   |             |        |   |   |   |   |   |
| Provision for loan losses                                                         |   |             | 258,309     |   |   |   | 90,256 |   |
| Depreciation and amortization                                                     |   |             | 792         |   |   |   | 29,688 |   |
| Changes in operating assets and liabilities:                                      |   |             |        |   |   |   |   |   |
| Accrued interest receivable                                                       |   |             | (3,531,070  | ) |   |   | (1,328,922 | ) |
| Accrued interest receivable – related party                                 |   |             | (2,654,307  | ) |   |   | 445,145 |   |
| Other assets                                                                      |   |             | 1,864       |   |   |   | 8,734 |   |
| Accounts payable                                                                  |   |             | -           |   |   |   | 134,846 |   |
| Accrued liabilities                                                               |   |             | (104,055    | ) |   |   | 18,951 |   |
| Net cash provided by operating activities                                         |   |             | 13,514,381  |   |   |   | 7,453,849 |   |
|                                                                              |   |             |        |   |   |   |   |   |
| Investing Activities                                                              |   |             |        |   |   |   |   |   |
| Investments in mortgage notes receivable                                          |   |             | (35,914,077 | ) |   |   | (66,972,948 | ) |
| Investments in mortgage notes receivable – related party                    |   |             | (30,002,728 | ) |   |   | (36,669,059 | ) |
| Investments in participation interest – related party                       |   |             | (6,566,704  | ) |   |   | - |   |
| Receipts from mortgage notes receivable                                           |   |             | 17,821,249  |   |   |   | 31,555,692 |   |
| Receipts from mortgage notes receivable – related party                     |   |             | 17,203,689  |   |   |   | 15,715,153 |   |
| Net cash used in investing activities                                             |   |             | (37,458,571 | ) |   |   | (56,371,162 | ) |
|                                                                              |   |             |        |   |   |   |   |   |
| Financing Activities                                                              |   |             |        |   |   |   |   |   |
| Net payments on line of credit                                                    |   |             | -           |   |   |   | (2,325,028 | ) |
| Limited partner contributions                                                     |   |             | 35,370,573  |   |   |   | 86,552,893 |   |
| Limited partner distributions                                                     |   |             | (15,586,078 | ) |   |   | (6,696,013 | ) |
| Limited partner distribution reinvestment                                         |   |             | 6,011,998   |   |   |   | 2,370,590 |   |
| Limited partner redemption                                                        |   |             | (2,852,502  | ) |   |   | (1,057,677 | ) |
| General partner distributions                                                     |   |             | (1,907,045  | ) |   |   | (786,302 | ) |
| Escrow payable                                                                    |   |             | (517,190    | ) |   |   | 746,816 |   |
| Restricted cash                                                                   |   |             | (997,929    | ) |   |   | (2,368,731 | ) |
| Payments of offering costs                                                        |   |             | (4,280,362  | ) |   |   | (10,110,230 | ) |
| Deferred offering costs                                                           |   |             | 612,292     |   |   |   | 1,534,072 |   |
| Accrued liabilities – related party                                         |   |             | (798,849    | ) |   |   | (1,118,898 | ) |
| Net cash provided by financing activities                                         |   |             | 15,054,908  |   |   |   | 66,741,492 |   |
|                                                                              |   |             |        |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                              |   |             | (8,889,282  | ) |   |   | 17,824,179 |   |
| Cash and cash equivalents at beginning of period                                  |   |             | 15,505,910  |   |   |   | 586,642 |   |
|                                                                              |   |             |        |   |   |   |   |   |
| Cash and cash equivalents at end of period                                        |   | $                | 6,616,628   |   |   | $ | 18,410,821 |   |

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NOTES TO FINANCIAL STATEMENTS

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|             |   |                                      |   | For the Six Months Ended                                                                    |
|------------------|--------|-------------------------------------------|--------|---------------------------------------------------------------------------------------------|
| Payee            |   | Purpose                                   |   |  June 30, 2009                                                                         |   | June 30, 2008 |
| Land Development |   |                                      |   |                                                                                        |   |   |
|             |   | Organization &                        |   |                                                                                        |   |   |
|             |   |     Offering Expenses |   |  $           533,000            |   | $          1,302,000 |
|             |   | Due Diligence Fees                        |   |               178,000 |   |                434,000 |
|             |   | Wholesaler Reimbursement                  |   |               127,000 |   |                  78,000 |
|             |   | Acquisition & Origination             |   |                                                                                        |   |   |
|             |   |     Expenses and Fees |   | 1,112,000                                                                                   |   | 2,293,000 |
|             |   | Promotional Interest                      |   | 1,663,000                                                                                   |   |                822,000 |
|             |   | Carried Interest                          |   |               244,000 |   | 121,000 |
|             |   | Mortgage Servicing Fee                    |   |               343,000 |   | 157,000 |
| Funding Services |   |                                      |   |                                                                                        |   |   |
|             |   | Marketing Support Fees                    |   |               360,000 |   | 1,124,000 |
|             |   | Operating Expense                         |   |                                                                                        |   |   |
|             |   |    Reimbursement           |   | 486,000                                                                                     |   | 178,000 |

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Item 4T. Controls and Procedures.

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PART II 

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

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

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| 2009  |   |  Total number of units of limited partnership interest repurchased                                                                    |   | 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 |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------|
| April |   |                       30,029 |   |  $           18.46 |   | 30,029                                                                                                                                                                   |   | (1)                                                                                              |
| May   |   |                       30,161 |   |  $           18.43 |   |                            30,161 |   | (1)                                                                                              |
| June  |   |                       13,125 |   |  $           19.12 |   |                            13,125 |   | (1)                                                                                              |
| Total |   |                       73,315 |   |  $           18.57 |   |                            73,315 |   | (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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|  Amendment      |   | Votes For(in units) |   | Votes Against(in units) |   | Abstentions(in units) |   | Total Votes(in units) |
|----------------------|--------|---------------------|--------|-------------------------|--------|-----------------------|--------|-----------------------|
| Sections 8.5 and 8.6 |   | 8,612,764           |   | 67,703                  |   | 171,038               |   | 8,851,505             |
| Section 8.9          |   | 8,606,193           |   | 116,658                 |   | 128,654               |   | 8,851,505             |
| Section 13.5         |   | 8,613,786           |   | 110,387                 |   | 127,332               |   | 8,851,505             |

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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. 12 to prospectus dated May 15, 2006, contained within Post-Effective Amendment No. 4 to Registrant’s Registration Statement on Form S-11, Commission File No. 333-127891, filed on May 12, 2009) |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3.4 | Second Amendment to Second Amended and Restated Agreement of Limited Partnership of Registrant (previously filed in and incorporated by reference to Form 8-K filed on June 10, 2009) |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4.1 | Subscription Agreement (previously filed in and incorporated by reference to Exhibit C to Supplement No. 12 to prospectus dated May 15, 2006, contained within Post-Effective Amendment No. 4 to Registrant’s Registration Statement on Form S-11, Commission File No. 333-127891, filed on May 12, 2009) |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4.2 | Amended and Restated Distribution Reinvestment Plan (previously filed in and incorporated by reference to Registrant’s Registration Statement on Form S-3, Commission File No. 333-159939, filed on June 12, 2009) |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 specificallyincorporates it by reference. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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