Filed pursuant to Rule 424(b)(3)

Registration No. 333-127891

UNITED DEVELOPMENT FUNDING III, L.P.

SUPPLEMENT NO. 7 DATED MAY 30, 2008

TO THE PROSPECTUS DATED MAY 15, 2006

This Supplement No. 7 supplements, and should be read in conjunction with, the prospectus dated May 15, 2006 and Supplement No. 6 dated April 29, 2008.  Supplement No. 6 superseded and replaced Supplement No. 1 dated January 5, 2007, Supplement No. 2 dated April 30, 2007, Supplement No. 3 dated June 11, 2007, Supplement No. 4 dated August 24, 2007, and Supplement No. 5 dated December 21, 2007.  On May 15, 2008, we filed with the Securities and Exchange Commission our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008.  This Quarterly Report (excluding the exhibits thereto) is attached as Annex A to this Supplement No. 7.  Unless otherwise defined in this Supplement No. 7, capitalized terms used have the same meanings as set forth in the prospectus.

The purpose of this supplement is to describe the following:

(1) the status of the offering of units in United Development Funding III, L.P.;

(2) revised suitability standards applicable to investors in Michigan; and

(3) a revised subscription agreement.

Status of the Offering

We commenced the initial public offering of our units of limited partnership interest on May 15, 2006.  As of May 27, 2008, we had accepted subscriptions and issued an aggregate of 8,892,281 units of limited partnership interest to limited partners, consisting of 8,720,169 units that have been issued to our limited partners in exchange for gross proceeds of approximately $174 million and another 172,112 units of limited partnership interest issued to limited partners in accordance with our distribution reinvestment plan in exchange for gross proceeds of $3.4 million.

Suitability Standards

The following information should be read in conjunction with the discussion contained in the “Suitability Standards – General” section beginning on page 1 of the prospectus:

In addition to our standard suitability requirements, investors in Michigan whose initial subscription for units is accepted by us after May 15, 2008 must have a liquid net worth of at least ten times their investment in our units.  Net worth is to be determined excluding the value of a purchaser’s home, furnishings and automobiles.

EXHIBIT C

United Development Funding III, L.P.

Subscription Agreement

See pages 7 through 8 for instructions.

Total Invested: $ ______________________	Total Units: _______________	State in Which Sale Is Made: ________
	($20 per unit)
£   Registered Investment Advisor (RIA) and Wrap Fee Representation.     Please check the box if this investment is made through an RIA charging no commissions on this sale or otherwise is made pursuant to a wrap fee or other asset fee arrangement with the Investor listed below and as a result no commissions shall be paid to the participating RIA or broker.

THIS SUBSCRIPTION AGREEMENT is made and entered into between United Development Funding III, L.P., a Delaware limited partnership (the “Fund”), and the investor(s) whose signature appears below (collectively or individually, the “Investor”).

1. Purchase Information and Payment Instructions.

£ Initial Investment (Minimum $3,000 for purchases through IRA or other qualified account and $5,000 for other purchases)

£  Additional Investment (Minimum $1,000)

Investor is subscribing to acquire, upon the terms and conditions set forth in this Subscription Agreement, the number of units of limited partnership interest of the Fund (the “Units”) as set forth above upon payment for such Units. For custodial accounts, such as IRAs and other qualified plans, checks should be made payable to the custodian and sent, with a completed copy of the Subscription Agreement, directly to the custodian who will forward them as instructed below. For all other investments, checks should be made payable to “United Development Funding III, L.P.”  For non-custodial accounts, send the completed Subscription Agreement and check to:

United Development Funding III, L.P. Investor Services

1702 N. Collins Blvd., Suite 100, Richardson, Texas 75080

(800) 859-9338

Checks made payable to the Fund will be deposited upon receipt. However, you will not be admitted as a limited partner of the Fund until this Subscription Agreement has been accepted and countersigned by the Fund. The Fund may reject any subscription, in whole or in part, in its sole discretion. Subscriptions will be accepted or rejected within 30 days of their receipt. The Fund will accept groups of subscriptions on an orderly basis no less frequently than monthly, and if your subscription is accepted, you will be admitted as a limited partner of the Fund not later than the last day of the calendar month following the date your subscription was accepted. If the Fund rejects your subscription, the purchase price will be returned to you within 10 business days after the rejection of your subscription. If you provide payment that in the aggregate differs from the payment required to purchase the number of Units indicated above or if your calculations of the Units to be purchased with the amount actually submitted is incorrect, your subscription will be automatically deemed a subscription for the maximum number of Units that may be purchased for such amount.

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2. Type of Ownership.  (Note: Complete either column A or B below, but not both.)

A. Non-Custodial Ownership		B. Custodial Ownership*
£	Individual Ownership — One signature required.	£	Traditional IRA — Owner and custodian signature required.
£	Joint Tenants with Right of Survivorship — All parties must sign.	£	Roth IRA — Owner and custodian signature required.
£	Community Property — All parties must sign.	£	KEOGH Plan — Owner and custodian signature required.
£	Tenants in Common — All parties must sign.	£	Simplified Employee Pension/Trust (SEP)
£	Corporate Ownership — Authorized signature required. Include copy of corporate resolution.	£	Pension or Profit Sharing Plan — Owner and custodian signature required.
£	Partnership Ownership — Authorized signature required. Include copy of partnership agreement.	£	Other (Specify)
£	Uniform Gift to Minors Act — Owner and custodian signature required.
	State of ______ , Custodian for ____________
£	Estate — Personal representative signature required.
	Name of Executor:		Name of Custodian, Trustee or other Administrator
	Include a copy of the court appointment.
£	Qualified Pension Plan (Non-custodian)*		Mailing Address
	Include a copy of the first and last page of the plan.
	Name of Trustee:		City	State	Zip
£	Trust
	Include a copy of the first and last page of the trust.		Custodian Tax ID #
	Name of Trustee:
£	Other (Specify):		Custodian Account #
			Custodian Telephone #

* See “Investment by Tax-Exempt Entities and ERISA Considerations” in the Fund’s prospectus, as supplemented to date (the “Prospectus”) for a discussion of risks related to an investment in Units by certain tax-exempt or tax-deferred plans.

3. Registration Name and Address.  Please print name(s) in which Units are to be registered.

Name of Owner Taxpayer Identification/Social Security Number

Name of Joint Owner (if applicable) Taxpayer Identification/Social Security Number

Street Address or P.O. Box
City		State		Zip Code
Home Telephone No.	(        )	Business Telephone No	(        )
Email Address (Optional)		Country of Citizenship

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4. Distributions.  (Please check one box in either section A or B, depending on the registration type. Please note that all custodial account distributions not reinvested pursuant to the distribution reinvestment plan will be directed to the custodian. Please note that if you elect to participate in the distribution reinvestment plan, the Fund will pay commissions to the broker-dealer identified in this Subscription Agreement, as described in the Prospectus.)

A. Non-Custodial Registration

£ I elect to participate in the distribution reinvestment plan of the Fund.

£ I prefer distributions be paid to me at my address listed under Section 3.

£ I prefer distributions to be deposited directly into the following account: ____ Checking ____ Savings.

Please enclose a voided check. By enclosing a voided check, you authorize the Fund to make electronic deposits to the designated checking or savings account. This authority is to remain in force until the Fund has received written notification of its termination at such time and in such manner as to give the Fund reasonable time to act. In the event that the Fund deposits funds erroneously into the account, it is authorized to debit the account for the amount of the erroneous deposit.

£ I prefer to direct distributions (for non-custodial accounts) to a party other than the registered owner per the following instructions:

Name of Institution Account Number

ABA Routing Number Name on Account

Street Address

or P.O. Box

City State Zip Code

B. Custodial Registration

£ I elect to participate in the distribution reinvestment plan of the Fund.

£ I prefer for distributions to be sent to the custodian for the benefit of the Investor.

5. Subscriber Signatures.  Please carefully read and separately initial each of the representations below. Except in the case of fiduciary accounts, you may not grant any person a power of attorney to make such representations on your behalf.

In order to induce the Fund to accept this subscription, I hereby represent and warrant as follows:

		Owner	Joint Owner
(a)	I have received the Prospectus for the Fund, and I accept and agree to be bound by the terms and conditions of the organizational documents of the Fund.	__________ Initials	___________ Initials
(b)	I have (i) a net worth (exclusive of home, furnishings and automobiles) of $250,000 or more; or (ii) a net worth (exclusive of home, furnishings and automobiles) of at least $70,000 and had during the last tax year or estimate that I will have during the current tax year a minimum of $70,000 annual gross income, or that I meet the higher suitability requirements imposed by my state of primary residence as set forth in the Prospectus under “Suitability Standards.”	__________ Initials	___________ Initials
(c)	If I am a California, Iowa, Kentucky, Michigan, Missouri, Nebraska, New Jersey or Ohio resident, this investment does not exceed 10% of my liquid net worth, as set forth in the Prospectus.  If I am a resident of Kansas, I acknowledge the recommendation of the Kansas Office of the Securities Commissioner that my aggregate investment in the Fund and similar direct participation investments should not exceed 10% of my liquid net worth (for purposes of this recommendation of the Kansas Office of the Securities Commissioner, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.)	__________ Initials	___________ Initials
(d)	I am purchasing the Units for my own account, and I acknowledge that there is no public market for this investment.	__________ Initials	___________ Initials
(e)	I am not an Unacceptable Investor, as such term is defined in the Prospectus under “Suitability Standards — Restrictions Imposed by the USA PATRIOT Act and Related Acts.”	__________ Initials	___________ Initials
(f)	I am able to withstand a loss of my investment.	__________ Initials	___________ Initials

I declare that the information supplied above is true and correct and may be relied upon by the Fund in connection with my investment in the Fund. Under penalties of perjury, by signing this Subscription Agreement, I hereby certify that (a) I have provided herein my correct Taxpayer Identification Number, (b) I am not subject to back-up withholding as a result of a failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to back-up withholding and (c) except as otherwise expressly indicated above, I am a U.S. person (including a U.S. resident alien). The IRS does not require your consent to any provision of this document other than the certifications required to avoid backup withholding.

YOU DO NOT WAIVE ANY RIGHTS YOU MAY HAVE UNDER THE SECURITIES ACT OF 1933, THE SECURITIES EXCHANGE ACT OF 1934 OR ANY STATE SECURITIES LAW BY EXECUTING THIS AGREEMENT. A SALE OF UNITS MAY NOT BE COMPLETED UNTIL YOU HAVE BEEN IN RECEIPT OF THE PROSPECTUS (AT LEAST FIVE BUSINESS DAYS).

Signature of Investor or Trustee Signature of Joint Owner, Trustee or Custodian, if applicable Date

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6. Financial Advisor.  (TO BE COMPLETED BY BROKER-DEALER OR AUTHORIZED REPRESENTATIVE)

The undersigned broker-dealer or authorized representative warrants that it is a duly licensed broker-dealer (or non-commission based financial advisor) and may lawfully offer the Units in the state designated as the Investor’s address or the state in which the sale is to be made, if different. The broker-dealer or authorized representative warrants that he or she has (a) reasonable grounds to believe this investment is suitable for the Investor as defined by Rule 2310 of the NASD Conduct Rules, (b) informed the Investor of all aspects of liquidity and marketability of this investment as required by Rule 2810 of the NASD Conduct Rules, (c) delivered the Prospectus to the Investor the requisite number of days prior to the date that the Investor will deliver this Subscription Agreement to the Fund as specified under the laws of the Investor’s state of residence, (d) verified the identity of the Investor through appropriate methods and will retain proof of such verification process as required by applicable law, and (e) verified that the Investor and the registered owner do not appear on the Office of Foreign Assets Control list of foreign nations, organizations and individuals subject to economic and trade sanctions.

Broker-Dealer Name	Telephone No.	(      )
Street Address or
P.O. Box

City	State	Zip Code
Account Number

Representative Name	Telephone No.	(      )
Street Address or
P.O. Box

City	State	Zip Code
Email Address (please provide if you would like to receive confirmation of receipt via email)

Financial Advisor Signature Date

If you need additional assistance in completing this Subscription Agreement, please call United

Development Funding III, L.P. Investor Services at (800) 859-9338

For Internal Use Only
Accepted by: ____________________________	Date: _____________	Amount: __________	Check No.: __________

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SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY:

CONDITIONS RESTRICTING TRANSFER OF UNITS

260.141.11 Restrictions on Transfer.

(a)       The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 of the Rules (the “Rules”) adopted under the California Corporate Securities Law (the “Code”) shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee.

(b)       It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of the Rules), except:

(1)       to the issuer;

(2)       pursuant to the order or process of any court;

(3)       to any person described in subdivision (i) of Section 25102 of the Code or Section 260.105.14 of the Rules;

(4)       to the transferor’s ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor’s ancestors, descendants or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee’s ancestors, descendants or spouse;

(5)       to holders of securities of the same class of the same issuer;

(6)       by way of gift or donation inter vivos or on death;

(7)       by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities laws of the foreign state, territory or country concerned;

(8)       to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group;

(9)       if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner’s written consent is obtained or under this rule not required;

(10)     by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification;

(11)     by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation;

(12)     by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification;

(13)     between residents of foreign states, territories or countries who are neither domiciled or actually present in this state;

(14)     to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state;

(15)     by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (1) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (2) delivers to each purchaser a copy of this rule, and (3) advises the Commissioner of the name of each purchaser;

(16)     by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; or

(17)     by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section.

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(c)       The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows:

“IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER’S RULES.”

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INSTRUCTIONS FOR

UNITED DEVELOPMENT FUNDING III, L.P.

SUBSCRIPTION AGREEMENT

Please follow these instructions carefully for each section. Failure to do so may result in the rejection of your subscription. All information in the Subscription Agreement should be completed as follows:

Registered Investment Advisor (RIA) and Wrap Fee Representation.

• Please check the box to indicate if the subscription was solicited or recommended by a Registered Investment Advisor or other wrap fee representative.

Purchase Information and Payment Instructions. (Section 1 of Subscription Agreement)

• You must purchase at least 150 units (for $3,000) if you are purchasing through an individual retirement account or other qualified account. If you are not purchasing through a qualified account, you must purchase at least 250 units (for $5,000). Please indicate the number of units to be purchased and the purchase price for those units.

• Units may be purchased only by persons meeting the standards set forth under the section of the Prospectus entitled “Suitability Standards.”

• Please indicate the state in which the sale is to be made at the top of the Subscription Agreement.

Type of Ownership. (Section 2 of Subscription Agreement)

• Please check the appropriate box to indicate the type of entity or type of individuals subscribing.

Registration Name and Address. (Section 3 of Subscription Agreement)

• Please enter the exact name in which the Units are to be held.

• For joint tenants with right of survivorship or tenants in common, include the names of both investors.

• In the case of partnerships or corporations, include the name of an individual to whom correspondence will be addressed.

• Trusts should include the name of the trustee (include a copy of the trust agreement).

• All investors must complete the space provided for taxpayer identification number or social security number. In the case of a qualified plan or trust, enter both the investor’s social security number (for identification purposes) and the custodian or trustee’s taxpayer identification number (for tax purposes).

• By signing the Subscription Agreement, the investor is certifying that this number is correct.

• Enter the mailing address and telephone numbers of the registered owner of this investment. In the case of a qualified plan or trust, this will be the address of the custodian or trustee.

Distributions. (Section 4 of Subscription Agreement)

• Each investor who elects to have distributions reinvested agrees to notify the Fund and the broker-dealer named in the Subscription Agreement in writing if at any time he or she fails to meet the applicable suitability standards or he or she is unable to make any other representations and warranties as set forth in the Prospectus or Subscription Agreement.

• If cash distributions are to be sent to an address other than that provided in Section 3 (i.e., a bank, brokerage firm or savings and loan, etc.), please provide the name, account number and address and a voided check. For custodial accounts, distributions not reinvested pursuant to the distribution reinvestment plan will be directed to the custodian.

• The investor acknowledges that the broker-dealer named in the Subscription Agreement may receive commissions not to exceed 1.0% of reinvested distributions, less any discounts authorized by the Prospectus, unless the investor instructs otherwise in writing; provided, however, that no commissions will be paid with respect to reinvested distributions by residents of Kentucky or Massachusetts.

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Subscriber Signatures. (Section 5 of Subscription Agreement)

• Please separately initial each representation where indicated.

• If title is to be held jointly, all parties must date and sign this Section as follows:

• Individual:  One signature required.

• Joint Tenants with Right of Survivorship:  All parties must sign.

• Tenants in Common:  All parties must sign.

• Community Property:  All parties must sign.

• Pension or Profit-Sharing Plans:  The trustee signs the Signature Page.

• Trust:  The trustee signs. Provide the name of the trust, the name of the trustee and the name of the beneficiary (include a copy of the trust agreement).

• Partnership:  Identify whether the entity is a general or limited partnership. The general partners must be identified and each must sign. In the case of an investment by a general partnership, all partners must sign (unless a “managing partner” has been designated for the partnership, in which case he or she may sign on behalf of the partnership if a certified copy of the document granting him authority to invest on behalf of the partnership is submitted).

• Corporation:  The Subscription Agreement must be accompanied by (1) a certified copy of the resolution of your board of directors designating the officer(s) of the corporation authorized to sign on behalf of the corporation and (2) a certified copy of the Board’s resolution authorizing the investment.

• IRA and IRA Rollovers:  Requires signature of authorized signer (e.g., an officer) of the bank, trust company, or other fiduciary. The address of the trustee must be provided in order for the trustee to receive checks and other pertinent information regarding the investment.

• Keogh (HR 10):  Same rules as those applicable to IRAs.

• Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA):  The required signature is that of the custodian, not of the parent (unless the parent has been designated as the custodian). Only one child is permitted in each investment under UGMA or UTMA. In addition, designate the state under which the gift is being made.

PLEASE NOTE THAT SIGNATURES DO NOT HAVE TO BE NOTARIZED.

Financial Advisor. (Section 6 of Subscription Agreement)

• This Section is to be completed by the investor’s financial advisor. Please complete all financial advisor information contained in Section 6 of the Subscription Agreement, including suitability certification.

• Include documentation completed by the broker-dealer that the investor(s) and registered owner(s) do not appear on the Office of Foreign Assets Control list of foreign nations, organizations and individuals subject to economic and trade sanctions. This could include a screen print from the FINRA Anti-Money Laundering web site if an electronic check is performed, a signed attestation from the person performing a manual check if this method is used, or a screen-print and written attestation if some other database is used.

Only original, completed copies of Subscription Agreements can be accepted. Photocopied or otherwise duplicated Subscription Agreements cannot be accepted by the Fund.

IF YOU NEED FURTHER ASSISTANCE IN COMPLETING THE SUBSCRIPTION

AGREEMENT, PLEASE CALL UNITED DEVELOPMENT FUNDING III, L.P.

INVESTOR SERVICES AT (800) 859-9338.

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ANNEX A

QUARTERLY REPORT ON FORM 10-Q

FOR THE

QUARTERLY PERIOD ENDED MARCH 31, 2008

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

[Mark One]

x QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

o 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: 000-53159

United Development Funding III, L.P.

(Exact Name of Registrant as Specified in Its Charter)

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

1702 N. Collins Boulevard, Suite 100, Richardson, Texas75080

(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)

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No  o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                                                                                                                                              Accelerated filer o

Non-accelerated filer x (Do not check if a smaller reporting company)                                                                         Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No x

UNITED DEVELOPMENT FUNDING III, L.P.

FORM 10-Q

Quarter Ended March 31, 2008

PART I

FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements.
	Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007 (Audited).	3
	Statements of Operations for the three months ended March 31, 2008 and 2007 (Unaudited).	4
	Statements of Cash Flows for the three months ended March 31, 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.	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	18
Item 4T.	Controls and Procedures.	18
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings.	20
Item 1A.	Risk Factors.	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	20
Item 5.	Other Information.	21
Item 6.	Exhibits.	21
Signatures.		22

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

UNITED DEVELOPMENT FUNDING III, L.P.

BALANCE SHEETS

		March 31, 2008 (Unaudited)		December 31, 2007 (Audited)
Assets:
	Cash and cash equivalents	$	9,364,580	$	586,642
	Restricted cash		1,996,183		665,174
	Accrued interest receivable – related party		627,295		676,716
	Mortgage notes receivable, net		81,289,495		76,858,885
	Mortgage notes receivable – related party, net		38,425,152		23,190,872
	Partnership interest subscriptions receivable		100		100
	Deferred offering costs		1,979,328		2,605,788
	Other assets		1,325,942		508,256
Total assets		$	135,008,075	$	105,092,433
Liabilities and Partners’ Capital
Liabilities:
	Accounts payable	$	142,065	$	37,253
	Accrued liabilities		106,704		86,668
	Accrued liabilities – related party		2,347,573		2,892,774
	Escrow payable		1,996,183		665,174
	Line of credit		-		2,325,028
Total liabilities			4,592,525		6,006,897
Commitments and contingencies			-		-
Partners’ Capital:
	Limited partners’ capital:  17,500,000 units authorized;
	7,257,350 units issued and outstanding at
	March 31, 2008 and 5,509,316 units issued and
	outstanding at December 31, 2007		130,287,846		98,978,590
	General partner’s capital		127,704		106,946
Total partners’ capital			130,415,550		99,085,536
Total liabilities and partners’ capital		$	135,008,075	$	105,092,433

See accompanying notes to financial statements (unaudited).

UNITED DEVELOPMENT FUNDING III, L.P.

STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	March 31,
	2008		2007
Revenues:
Interest income	$	3,922,915	$	813,219
Credit enhancement fees – related party		-		142,187
Mortgage and transaction service revenues		281,831		86,783
Total revenues		4,204,746		1,042,189
Expenses:
Interest expense		1,500		100,746
General and administrative		682,854		168,852
Total expenses		684,354		269,598
Net income	$	3,520,392	$	772,591
Earnings allocated to limited partners	$	3,156,308	$	692,394
Earnings per limited partnership unit, basic and diluted	$	0.51	$	0.69
Weighted average limited partnership units outstanding		6,193,417		1,001,588
Distributions per weighted average limited partnership units outstanding	$	0.44	$	0.10

See accompanying notes to financial statements (unaudited).

UNITED DEVELOPMENT FUNDING III, L.P.

STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	March 31,
	2008			2007
Operating Activities
Net income	$	3,520,392		$	772,591
Adjustment to reconcile net income to net cash provided
by operating activities:
Provision for loan losses		39,229			8,132
Amortization		15,016			14,693
Changes in operating assets and liabilities:
Accrued interest receivable – related party		49,421			(163,954	)
Other assets		(832,702	)		942
Accounts payable		104,812			(569	)
Accrued liabilities		20,036			(23,540	)
Net cash provided by operating activities		2,916,204			608,295
Investing Activities
Investments in mortgage notes receivable		(5,144,738	)		(14,414,781	)
Investments in mortgage notes receivable – related party		(16,730,582	)		(2,440,200	)
Receipts from mortgage notes receivable		674,899			72,979
Receipts from mortgage notes receivable – related party		1,496,302			85,786
Net cash used in investing activities		(19,704,119	)		(16,696,216	)
Financing Activities
Net proceeds from (payments on) line of credit		(2,325,028	)		917,344
Limited partner contributions		34,168,376			14,646,170
Limited partner distributions		(2,746,949	)		(276,292	)
Limited partner distribution reinvestment		945,176			78,618
Limited partner redemption		(145,250	)		-
General partner distributions		(343,327	)		(18,648	)
Escrow payable		1,331,009			783,354
Restricted cash		(1,331,009	)		(783,354	)
Payments of offering costs		(4,068,404	)		(259,871	)
Payments of deferred offering costs		626,460			-
Accrued liabilities – related party		(545,201	)		543,206
Net cash provided by financing activities		25,565,853			15,630,527
Net increase (decrease) in cash and cash equivalents		8,777,938			(457,394	)
Cash and cash equivalents at beginning of period		586,642			672,107
Cash and cash equivalents at end of period	$	9,364,580		$	214,713
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	-		$	105,171

See accompanying notes to financial statements (unaudited).
 

UNITED DEVELOPMENT FUNDING III, L.P.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

A. Nature of Business

United Development Funding III, L.P. (which may be referred to as the “Partnership,” “we,” “us,” “our” or “UDF III”) was organized on June 13, 2005 as a Delaware limited partnership.  Our principal business purpose is to originate, acquire, service, and otherwise manage, either alone or in association with others, a diversified portfolio of mortgage loans that are secured by real property or equity interests that hold real property already subject to other mortgages (including mortgage loans that are not first in priority and participation interests in mortgage loans) and to issue or acquire an interest in credit enhancements to borrowers, such as guaranties or letters of credit.  Our offices are located in Richardson, Texas.

Our general partner is UMTH Land Development, L.P., a Delaware limited partnership (“Land Development”) that is responsible for our overall management, conduct, and operation.  Our general partner has authority to act on our behalf in all matters respecting us, our business and our property.  The limited partners shall take no part in the management of our business or transact any business for us and shall have no power to sign for or bind us; provided, however, that the limited partners, by a majority vote and without the concurrence of the general partner, have the right to:  (a) amend the Partnership Agreement governing the partnership, (b) dissolve the Partnership, (c) remove the general partner or any successor general partner, (d) elect a new general partner, and (e) approve or disapprove a transaction entailing the sale of all or substantially all of our real properties acquired by the Partnership.

B. Basis of Presentation

The accompanying unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, with the instructions to Form 10-Q and with Regulation S-X.  They do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  However, except as disclosed herein, there has been no material change to the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission.  The interim unaudited financial statements should be read in conjunction with the financial statements filed in our most recent Annual Report.  In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting solely of normal recurring adjustments, considered necessary to present fairly our financial position as of March 31, 2008, operating results for the three months ended March 31, 2008 and 2007 and cash flows for the three months ended March 31, 2008 and 2007.  Operating results and cash flows for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

Impact of Recently Issued Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”).  SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value.  SFAS 157 does not expand or require any new fair value measures; however the application of this statement may change current practice.  The requirements of SFAS 157 are first effective for us for the fiscal year beginning January 1, 2008.  However, in February 2008 the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year.  Accordingly, the Partnership’s adoption of this standard on January 1, 2008 is limited to financial assets and liabilities.  The Partnership’s adoption of SFAS 157 has not had a material impact on the financial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS 159”).  The fair value option permits entities to choose to measure eligible financial instruments at fair value at specified election dates.  The entity will report unrealized gains and losses on the items on which it has elected the fair value option in earnings.  The Partnership’s adoption of SFAS 159 has not had a material impact on the Partnership’s results of operations or financial condition.

Reclassification

Certain prior year amounts have been reclassified to conform to current presentation.

C. Registration Statement

On May 15, 2006, our Registration Statement on Form S-11, covering a public offering of up to 12,500,000 units of limited partnership interest at a price of $20 per unit (the “Offering”), was declared effective under the Securities Act of 1933, as amended.  The Registration Statement also covers up to 5,000,000 units of limited partnership interest to be issued pursuant to our distribution reinvestment plan (“DRIP”) at a price of $20 per unit.  As of March 31, 2008, we had issued an aggregate of 7,257,350 units of limited partnership interest in the Offering, consisting of 7,137,740 units that have been issued to our limited partners pursuant to our primary offering in exchange for gross proceeds of approximately $142.8 million (approximately $125.7 million, net of costs associated with the Offering) and 126,873units of limited partnership interest issued to limited partners in accordance with our DRIP in exchange for gross process of approximately $7.1 million, minus 7,263 units of limited partnership interest that have been repurchased pursuant to our unit redemption program for approximately $145,000.As of December 31, 2007, we had issued an aggregate of 5,509,316 units of limited partnership interest in the Offering, consisting of 5,429,702 units that had been issued to our limited partners pursuant to our primary offering in exchange for gross proceeds of approximately $108.6 million (approximately $95.6 million, net of costs associated with the Offering) and another 79,614 units of limited partnership interest issued to limited partners in accordance with our DRIP in exchange for gross proceeds of approximately $1.6 million.

D.  Line of Credit

In December 2006, we entered into a revolving credit facility (the “Revolving Credit Facility”) with Premier Bank, a Missouri banking association d/b/a Premier Bank of Texas, permitting us to borrow up to an aggregate outstanding principal amount of $10 million.  The Revolving Credit Facility is secured by a first priority lien upon all of the Partnership’s existing and future acquired assets.  The Revolving Credit Facility’s maturity date is December 29, 2008.  In consideration for the origination of the Revolving Credit Facility, we paid an origination fee in the amount of approximately $113,000, which is being amortized over the initial two-year term of the Revolving Credit Facility.  The annual interest rate on the Revolving Credit Facility is equal to the prime rate of interest as quoted in the Wall Street Journal (5.25% at March 31, 2008 and 7.25% at December 31, 2007), payable monthly.  The Revolving Credit Facility requires that we comply with various covenants, including maintaining at least $5 million in eligible first lien promissory notes and maintaining, as of December 31, 2006, at least $7 million in aggregate partners’ equity and, as of January 31, 2007, at least $10 million in aggregate partners’ equity.  As of March 31, 2008 and December 31, 2007, the Partnership had approximately $130.4 million and $99.1 million, respectively, in aggregate partners’ equity and was in compliance with the other operating covenants required by the Revolving Credit Facility.

If a default occurs, the Revolving Credit Facility may be declared due and payable immediately.  In such event, Premier Bank may foreclose on our assets or exercise any other rights or remedies it may have, including foreclosure of our assets.  Any such event may materially impair our ability to conduct business.

We intend to utilize the Revolving Credit Facility as transitory indebtedness to provide liquidity and to reduce and avoid the need for large idle cash reserves, including usage to fund identified investments pending receipt of proceeds from the sale of our units.  Certain proceeds from the sale of our units are used to repay the Revolving Credit Facility.  We intend to use the Revolving Credit Facility as a portfolio administration tool and not to provide long-term or permanent leverage on our investments.  As of March 31, 2008, no balance was outstanding on the Revolving Credit Facility, and interest expense related to the borrowings under this facility was approximately $1,500 and $100,700 for the three months ended March 31, 2008 and 2007, respectively.

E.  Partners’ Capital

As of March 31, 2008, we had accepted subscriptions for 7,137,740 units of limited partnership interest pursuant to the primary offering portion of the Offering, which represented gross proceeds of approximately $142.8 million to us.  Monthly limited partners’ distributions for three months ended March 31, 2008 totaled approximately $2.7 million, consisting of approximately $1.8 million paid in cash and approximately $945,000 distributed in the form of 47,259 limited partnership units issued in accordance with our DRIP, pursuant to which limited partners may elect to have a portion of their distributions from us reinvested in additional units.  We had repurchased approximately $145,000 in the form of 7,263 units of limited partnership as of March 31, 2008.  As of December 31, 2007, we had issued an aggregate of 5,509,316 units of limited partnership interest in the Offering, consisting of 5,429,702 units that have been issued to our limited partners pursuant to the primary offering in exchange for gross proceeds of approximately $108.6 million (approximately $95.6 million, net of costs associated with the Offering), and another 79,614 units of limited partnership interest issued to limited partners in accordance with our DRIP in exchange for gross proceeds of approximately $1.6 million.  In addition to the monthly DRIP distributions, we also distributed approximately $3.3 million in cash during 2007, for total monthly distributions of approximately $5 million.Distributions to our general partner are more fully discussed in Note G.

F.  Commitments and Contingencies

In October 2006, UDF III entered into a limited guaranty effective as of September 1, 2006 for the benefit of United Mortgage Trust, an affiliated real estate investment trust organized under the laws of the state of Maryland, or its permitted successors and assigns (the “UDF III Guarantee”), and entered into a letter agreement with respect to a credit enhancement fee related to the UDF III Guarantee by and between United Development Funding, L.P. (“UDF I”), a Nevada limited partnership and related party, and UDF III (the “UDF III Credit Enhancement Fee Agreement”).  Pursuant to the UDF III Guarantee, the Partnership guaranteed the repayment of an amount up to $30 million with respect to that certain Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF I.  In exchange for that guarantee, and pursuant to the UDF III Credit Enhancement Fee Agreement, UDF I pays UDF III each month in arrears an amount equal to 0.25% of the maximum liability amount, which is included in credit enhancement fees – related party income.  UDF I negotiated the release of the UDF III Guarantee effective January 1, 2008.  See Note H for further discussion.

An affiliate of our general partner serves as the advisor to United Mortgage Trust.  In addition, our general partner serves as the asset manager for UDF I.

The Partnership has no other outstanding debt or contingent payment obligations, other than certain loan guaranties or letters of credit that we may make to or for the benefit of third-party lenders.  There are approximately $75.2 million of commitments to be funded under the terms of mortgage notes receivable as of March 31, 2008.  Included in such amount is approximately $62.3 million of commitments for mortgage notes receivable – related party.  As of December 31, 2007, there are approximately $75.7 million of commitments to be funded under the terms of mortgage notes receivable.  Included in such amount is approximately $65.8 million of commitments for mortgage notes receivable – related party.

G. Related Party Transactions

Our general partner, Land Development, and certain of its affiliates receive fees in connection with the Offering and in connection with the acquisition and management of our assets.  Land Development also receives reimbursement of certain costs of the Partnership.

Land Development receives up to 1.5% of the gross offering proceeds (excluding proceeds from our DRIP) for reimbursement of organization and offering expenses.  We have a related party payable to Land Development of approximately $2.0 million and $2.6 million as of March 31, 2008 and December 31, 2007, respectively, for organization and offering costs paid by Land Development related to the Offering.

Land Development is also paid 3% of the net amount available for investment in mortgages for fees and expenses associated with the selection and origination of mortgages, including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, and title insurance funded by us.  Such costs are amortized into interest income over the life of the development mortgage notes receivable.

We also reimburse Land Development up to 0.5% of the gross offering proceeds for expenses related to bona fide due diligence expenses incurred by unaffiliated selling group members and paid by us through Land Development (except that no such due diligence expenses shall be paid with respect to sales under the DRIP).

Our general partner pays a wholesaling fee of up to 1.2% of the gross offering proceeds (excluding proceeds from sales under the DRIP) to IMS Securities, Inc., an unaffiliated third party, and we reimburse our general partner for such payments.  From such amount, IMS Securities, Inc. reallows up to 1% of the gross offering proceeds to wholesalers that are employed by an affiliate of Land Development.

Land Development currently receives a promotional interest equal to 10% of cash available for distribution prior to the return to the limited partners of all of their capital contributions plus an 8% annual cumulative (non-compounded) return on their net capital contributions.  After the limited partners receive a return of their net capital contributions and an 8% annual cumulative (non-compounded) return on their net capital contributions, Land Development will receive a subordinated promotional interest of 15% of remaining cash available for distribution (including net proceeds from a capital transaction or pro rata portion thereof).

Land Development receives a carried interest, which is an equity interest in us to participate in all distributions, other than distributions attributable to its promotional interest of cash available for distribution and net proceeds from a capital transaction.  If Land Development enters into commitments to investments in mortgages in excess of 82% of the gross offering proceeds, it will be entitled to a carried interest equal to (a) 1% for the first 2.5% of commitments to investments in mortgages above 82% of the gross offering proceeds (or if commitments to investments in mortgages are above 82% but no more than 84.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 82%), (b) 1% for the next 2% of additional commitments to investments in mortgages above 84.5% of the gross offering proceeds (or if commitments to investments in mortgages are above 84.5% but no more than 86.5%, 1% multiplied by the fractional amount of commitments to investments in mortgages above 84.5%) and (c) 1% for each additional 1% of additional commitments to investments in mortgages above 86.5% of the gross offering proceeds (or a fractional percentage equal to the fractional amount of any 1% of additional commitments to investments in mortgages).

For services rendered in connection with the servicing of our loans, we pay a monthly mortgage servicing fee to Land Development equal to one-twelfth of 0.25% of our aggregate outstanding development mortgage notes receivable balance as of the last day of the month.  Such fees are included in general and administrative expenses.

UMTH Funding Services, LP (“Funding Services”), an affiliate of Land Development, receives 0.8% of the gross offering proceeds (excluding proceeds from sales under our DRIP) as a marketing support fee for marketing and promotional services provided to selling group members.  Funding Services also is reimbursed for operating expenses incurred in assisting Land Development in our management.  An additional marketing support fee is paid directly to unaffiliated participating selected dealers in an amount to be determined in the sole discretion of Land Development, but which shall not exceed 1% of the gross offering proceeds (excluding proceeds from sales under our DRIP).  

The chart below summarizes the payment of related party fees and reimbursements associated with the Offering and origination and management of assets for the three months ended March 31, 2008 and 2007:

		For the Three Months Ended
Payee	Purpose	March 31, 2008		March 31, 2007
Land Development
	Organization &
	Offering Expenses	$	512,200	$	248,600
	Due Diligence Fees		171,700		82,900
	Wholesaler Reimbursement		26,400		111,000
	Acquisition & Origination
	Expenses and Fees		901,200		376,500
	Promotional Interest		299,300		16,300
	Carried Interest		44,000		2,400
	Mortgage Servicing Fee		68,100		16,400
Funding Services
	Marketing Support Fees		453,100		159,400

In December 2006, the Partnership originated a secured promissory note to UDF I in the principal amount of approximately $6.9 million.  In connection with the origination of this promissory note, and as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, we obtained an opinion from an independent advisor stating that the loan is fair and at least as reasonable to us as a loan or credit enhancement to an unaffiliated borrower in similar circumstances.  UDF I’s obligations under the note are secured by a first lien deed of trust filed on 190 developed single-family home lots located in Thornton, Colorado.  The note bears interest at a base rate equal to 12% per annum and interest payments are due monthly.  The note matures on December 31, 2008.  For the three months ended March 31, 2008 and 2007, UDF III had recognized approximately $208,000 and $185,000, respectively, of interest income related to this note.

In January 2007, we originated a secured promissory note to OU Land Acquisition II, L.P., a Texas limited partnership of which UDF I has a 50% partner interest, in the principal amount of approximately $1.6 million, and in connection therewith as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, we obtained an opinion from an independent advisor stating that the loan is fair and at least as reasonable to us as a loan or credit enhancement to an unaffiliated borrower in similar circumstances.  The secured promissory note, which bears interest at a rate of 15% per annum, is collateralized by a second lien deed of trust on approximately 101 acres of land located in Texas and is payable on June 14, 2010.  For the three months ended March 31, 2008 and 2007, we had recognized approximately $57,000 and $45,000, respectively, of interest income related to this note.

In March 2007, we originated a secured promissory note to Buffington JV Fund II, Ltd. (“Buff JV”), a Texas limited partnership of which UDF I has a 50% partner interest, in the principal amount of approximately $5.3 million, and in connection therewith as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, we obtained an opinion from an independent advisor stating that the loan is fair and at least as reasonable to us as a loan or credit enhancement to an unaffiliated borrower in similar circumstances.  The secured promissory note, which bears an interest rate of 13% per annum and is payable on June 30, 2009, is collateralized by a pledge of the 1% ownership interests from Buffington JV Fund Management, LLC, a Texas limited liability company and the general partner of Buff JV, and a pledge of the 49% ownership interests from Buffington Asset Group, Ltd., a Texas limited partnership and a limited partner of Buff JV.  For the three months ended March 31, 2008, we had recognized approximately $260,000 of interest income related to this note.  No interest income had been recognized for the three months ended March 31, 2007.

In September 2007, we originated a secured promissory note to UDF PM, LLC, a Texas limited liability company and wholly-owned subsidiary of UDF I, in the principal amount of approximately $6.4 million, and in connection therewith as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, we obtained an opinion from an independent advisor stating that the loan is fair and at least as reasonable to us as a loan or credit enhancement to an unaffiliated borrower in similar circumstances.  The secured promissory note, which bears an interest rate of 15% per annum, is collateralized by a second lien deed of trust on approximately 335 finished lots and 15 acres of land located in Texas and is payable on September 4, 2010.  For the three months ended March 31, 2008, we had recognized approximately $83,000 of interest income related to this note.

In November 2007, we originated a secured promissory note to United Development Funding X, L.P. (“UDF X”), a Delaware limited partnership and wholly-owned subsidiary of our general partner, in the principal amount of approximately $70 million, and in connection therewith as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, we obtained an opinion from an independent advisor stating that the loan is fair and at least as reasonable to us as a loan or credit enhancement to an unaffiliated borrower in similar circumstances.  The secured promissory note, which bears an interest rate of 15% per annum, is collateralized by a pledge of 100% of the ownership interests in UDF X and is payable on November 11, 2012.  For the three months ended March 31, 2008, we had recognized approximately $72,000 of interest income related to this note.

In December 2007, we originated a secured promissory note to UDF Northpointe, LLC, a Texas limited liability company and wholly-owned subsidiary of UDF I, in the principal amount of approximately $6 million, and in connection therewith as required by our Partnership Agreement and the NASAA Mortgage Program Guidelines, we obtained an opinion from an independent advisor stating that the loan is fair and at least as reasonable to us as a loan or credit enhancement to an unaffiliated borrower in similar circumstances.  The secured promissory note, which bears an interest rate of 12% per annum, is collateralized by a second lien deed of trust on 255 finished lots and 110 acres of land in Texas and is payable on December 28, 2010.  For the three months ended March 31, 2008, we had recognized approximately $151,000 of interest income related to this note.

As of March 31, 2007, we had recognized approximately $142,000 as credit enhancement fees – related party.  As discussed below in Note H, this credit enhancement was released effective January 1, 2008, thus, no such credit enhancement fees – related party have been recognized for the three months ended March 31, 2008.

On April 25, 2007, we entered into a letter of engagement with Funding Services.  Pursuant to this letter of engagement, we have agreed to pay Funding Services a debt financing fee of 1% of the amount made available to us pursuant to the origination, extension or amendment of any line of credit or other debt financing procured for us by Funding Services.  In no event will such debt financing fee be paid more than once in respect of the same debt financing.  As of March 31, 2008, no debt placement has been procured by Funding Services and no debt financing fees have been paid.

H. Subsequent Events

In April 2008, UDF I negotiated the release of the UDF III Guarantee.  This limited guaranty was terminated and our contingent repayment obligation relieved effective January 1, 2008.

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

The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes thereto:

Forward-Looking Statements

This section of the quarterly report contains forward-looking statements, including discussion and analysis of us, our financial condition, amounts of anticipated cash distributions to our limited partners in the future and other matters.  These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.  These statements are not guaranties of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false.  We caution you not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results to differ materially from any forward-looking statements made in this Form 10-Q include changes in general economic conditions, changes in real estate conditions, development costs that may exceed estimates, development delays, increases in interest rates, residential lot take down or purchase rates or inability to sell residential lots experienced by our borrowers, and the potential need to fund development costs not completed by the initial borrower or other capital expenditures out of operating cash flows.  The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission, and the discussion of material trends affecting our business elsewhere in this report.

Overview

On May 15, 2006, our Registration Statement on Form S-11, covering the Offering of up to 12,500,000 units of limited partnership interest at a price of $20 per unit, was declared effective under the Securities Act of 1933, as amended.  The Registration Statement also covers up to 5,000,000 units of limited partnership interest to be issued pursuant to our DRIP for $20 per unit.  

We will experience a relative increase in liquidity as subscriptions for units are received and accepted and as the Revolving Credit Facility is used to provide transitory indebtedness.  We will experience a relative decrease in liquidity as offering proceeds are expended in connection with the funding and acquisition of mortgage loans, as amounts drawn under our Revolving Credit Facility are repaid, and as we pay or reimburse selling commissions and other organization and offering expenses.

The net proceeds of the Offering will provide funds to enable us to fund or acquire loans.  In addition, we may utilize the Revolving Credit Facility to fund investments pending receipt of net proceeds from the Offering and use the net proceeds of the Offering to repay the Revolving Credit Facility.  The number of loans we fund or acquire will depend upon the number of units sold and the resulting amount of the net proceeds available for investment in loans.  In the event that the Offering is not fully sold, our ability to diversify our investments may be diminished.

Until required for the funding or acquisition of loans or the repayment of our Revolving Credit Facility, net offering proceeds will be kept in short-term, liquid investments.  Our general partner, although not required to, has established a retained earnings reserve from gross offering proceeds out of cash flow generated by loans.  Further, our general partner may establish reserves from gross offering proceeds, cash flow generated by loans or out of net proceeds from loan repayments.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.   We have identified our most critical accounting policies to be the following:

Revenue Recognition

Interest income on the mortgage notes receivable is recognized over the life of the loan and recorded on the accrual basis.  Income recognition is suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful.  Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.  As of March 31, 2008 and 2007, we were accruing interest on all mortgage notes receivable.

Credit enhancement fee – related party income is generated by a limited guaranty agreement with United Mortgage Trust, an affiliate of our general partner, whereby we agree to guaranty the repayment of an amount up to $30 million with respect to a secured line of credit between United Mortgage Trust and UDF I, another affiliate of our general partner.  Such income is recognized on a monthly basis as collectibility is deemed probable as of March 31, 2007.  However, as of March 31, 2008, we were no longer recognizing credit enhancement fee – related party income on the limited guaranty as UDF I has negotiated the release of the UDF III Guarantee.  See “ – Off-Balance Sheet Arrangements” and “– Subsequent Events” below for further discussion.

The Partnership generates mortgage and transaction service revenues by originating mortgage notes receivable and other loans.  In accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, the Partnership defers recognition of income from nonrefundable commitment fees paid by the borrowers and recognizes such income on a straight-line basis over the expected life of such notes.  The Partnership also expenses a 3% acquisition and origination fee (“placement fee”) paid to the general partner to provide for processing and origination costs associated with mortgage notes receivable held by the Partnership on a straight-line basis over the expected life of such notes.  As of March 31, 2008 and December 31, 2007, approximately $627,000 and $637,000, respectively, of these net deferred fees have been offset against mortgage notes receivable.

Determination of the Allowance for Loan Losses

The allowance for loan losses is our estimate of incurred losses in our portfolio of mortgage notes receivable and mortgage notes receivable – related party.  We periodically perform detailed reviews of our portfolio of mortgage notes and other loans to determine if impairment has occurred and to assess the adequacy of the allowance for loan losses based on historical and current trends and other factors affecting credit losses.  We charge additions to the allowance for loan losses to current period earnings through the provision for loan losses.  Amounts determined to be uncollectible are charged directly against (and decrease) the allowance for loan losses (“charged off”), while amounts recovered on previously charged off accounts increase the allowance.  We exercise significant judgment in estimating the timing, frequency and severity of losses, which could materially affect the provision for loan losses and, therefore, net income.As of March 31, 2008 and December 31, 2007, approximately $117,000 and $78,000, respectively, of allowance for loan losses have been offset against mortgage notes receivable.

Mortgage Notes Receivable and Mortgage Notes Receivable – Related Party

Mortgage notes receivable and mortgage notes receivable – related party are recorded at the lower of cost or estimated net realizable value.  The mortgage investments are collateralized by land and related improvements to residential property owned by the borrowers and/or the ownership interests of the borrower.  Currently, the mortgage notes receivable have a term ranging from three to 60 months.  None of such mortgages is insured or guarantied by a federally owned or guarantied mortgage agency.  We originate and/or acquire all mortgage notes receivable and intend to hold the mortgage notes receivable and other loans for the life of the notes.

Cash Flow Distributions

Cash available for distributions represents the funds received by us from operations (other than proceeds from a capital transaction or a liquidating distribution), less cash used by us to pay our expenses, debt payments, and amounts set aside to create a retained earnings reserve (currently at 9.5%of our net income; the retained earnings reserve is intended to recover some of the organization and offering expenses incurred in connection with the Offering).  Our general partner receives a monthly distribution for promotional and carried interest from the cash available for distributions.  Monthly distributions are currently paid to the limited partners at a 9.75% annualized return on a pro rata basis based on the number of days in the Partnership.  Retained earnings would contain a surplus if the cash available for distributions less the 9.5% reserve exceeded the monthly distribution to the general and limited partners.  Retained earnings would contain a deficit if cash available for distributions less the 9.5% reserve is less than the monthly distribution to general and limited partners.  It is the intent of management to monitor and distribute such surplus, if any, on an annual basis.  As of March 31, 2008 and December 31, 2007, we had an approximately $176,000 deficit in retained earnings and $189,000 surplus in retained earnings, respectively, which is included in our limited partners’ capital account.

Results of Operations

The three months ended March 31, 2008 as compared to the three months ended March 31, 2007.

Revenues

Interest income for the three months ended March 31, 2008 and 2007 was approximately $3.9 million and $813,000, respectively.  The increase in interest income for the three months ended March 31, 2008 is primarily the result of our increased mortgage notes receivable portfolio (including related party transactions) of approximately $119.7 million as of March 31, 2008, compared to $34.4 million as of March 31, 2007.

Credit enhancement fees – related party for the three months ended March 31, 2007 was approximately $142,000.  There were no such credit enhancement fees – related party for the three months ended March 31, 2008.  UDF I has negotiated the release of the UDF III Guarantee that was entered into in October 2006 for the benefit of United Mortgage Trust  (which is further discussed in “ – Off-Balance Sheet Arrangements” and “– Subsequent Events,” below).  There were no credit enhancement fees – related party prior to this transaction.

Mortgage and transaction service revenues for the three months ended March 31, 2008 and 2007 were approximately $282,000 and $87,000, respectively.  The Partnership generates mortgage and transaction service revenues by originating and acquiring mortgage notes receivable and other loans.  In accordance with SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, we defer recognition of income from nonrefundable commitment fees and recognize such income on a straight-line basis over the expected life of such notes.  The increase in mortgage and transaction service revenues for the three months ended March 31, 2008 is primarily the result of our increased mortgage notes receivable portfolio (including related party transactions) of approximately $119.7 million as of March 31, 2008, compared to $34.4 million as of March 31, 2007.

We expect revenues to increase in the near future as we continue to raise proceeds from the Offering and invest proceeds in additional loans.

Expenses

Interest expense for the three months ended March 31, 2008 and 2007 was approximately $1,500 and $101,000, respectively.  Interest expense represents interest associated with the Revolving Credit Facility.  We utilize the Revolving Credit Facility as transitory indebtedness to provide liquidity and to reduce and avoid the need for large idle cash reserves, including usage to fund identified investments pending receipt of proceeds from the sale of our units.  We use the Revolving Credit Facility as a portfolio administration tool and not to provide long-term or permanent leverage on our investments.  We entered into the Revolving Credit Facility in December 2006.

General and administrative expense for the three months ended March 31, 2008 and 2007 was approximately $683,000 and $169,000, respectively.  The increase in general and administrative expense primarily relates to increased costs associated with our directors’ and officers’ insurance premiums, placement fees, as well as legal and accounting fees.

We intend to grow our portfolio in conjunction with the increase in proceeds raised in the Offering and by utilizing the Revolving Credit Facility.  We intend to deploy such proceeds in a diversified manner to the borrowers and markets in which we have experience and as markets dictate in accordance with the economic factors conducive for a stable residential market.  We expect interest expense, placement fees to related parties and general and administrative expense to increase commensurate with the growth of our portfolio.

   Cash Flow Analysis

Cash flows provided by operating activities for the three months ended March 31, 2008 were approximately $2.9 million and were comprised primarily of net income, offset slightly with other assets.  During the three months ended March 31, 2007, cash provided by operating activities was approximately $608,000 and was comprised primarily of net income, offset slightly with accrued interest receivable – related party.

Cash flows used in investing activities for the three months ended March 31, 2008 were approximately $19.7 million, resulting from the origination of mortgage notes receivable.  Cash flows for the three months ended March 31, 2007 were approximately $16.7 million, resulting from the origination of mortgage notes receivable.

Cash flows provided by financing activities for the three months ended March 31, 2008 were approximately $25.6 million, and were primarily the result of funds received from the issuance of limited partnership units, offset with payments of offering costs.  Cash flows provided by financing activities for the three months ended March 31, 2007 were approximately $15.6 million, and were primarily the result of funds received from the issuance of limited partnership units.

Our cash and cash equivalents were approximately $9.4 million and $215,000 as of March 31, 2008 and 2007, respectively.

Liquidity and Capital Resources

Our liquidity requirements will be affected by (1) outstanding loan funding obligations, (2) our administrative expenses, (3) debt service on senior indebtedness required to preserve our collateral position and (4) utilization of the Revolving Credit Facility.  We expect that our liquidity will be provided by (1) loan interest, transaction fees and credit enhancement fee payments, (2) loan principal payments, (3) proceeds from the sale of units of our limited partnership interest, (4) sale of loan pools through securitization and direct sale of loans, (5) proceeds from our DRIP, and (6) credit lines available to us.

In most cases, loan interest payments will be funded by an interest reserve and are due at the maturity of the loan.  Interest reserve accounts are funded as loan proceeds and are intended to provide cash for monthly interest payments until such time that revenue from the sale of land or developed lots is sufficient to meet the debt service obligations.  In the event that interest reserves are exhausted prior to realization of sufficient cash from land or lot sales, interest is due and payable monthly, and if the required payments are not made, a loan default may occur.  Payment defaults and decreasing land and lot sales may result in less liquidity and affect our ability to meet our obligations and make distributions.  The inability to sell additional units of partnership interest may result in our inability to fund loans, and the inability to sell loan pools may result in longer periods to return principal to our investors.  Limited credit facilities may impact our ability to meet our obligations or expand our loan portfolio when other sources of cash are not sufficient.

Increased liquidity needs could result in the liquidation of loans to raise cash, thereby reducing the number and amount of loans outstanding and the resultant earnings realized.  We have secured the Revolving Credit Facility that is utilized as transitory indebtedness to provide liquidity and to reduce the need for large idle cash reserves.

Subscription proceeds are held in escrow until investors are admitted as limited partners.  We intend to continue to admit new limited partners at least monthly.  Amounts associated with non-admitted subscriptions are reflected as “Restricted cash” and “Escrow payable” on our balance sheets.

Material Trends Affecting Our Business

We are a real estate finance limited partnership and derive a substantial portion of our income by originating, purchasing, participating in and holding for investment mortgage loans made directly by us to persons and entities for the acquisition and development of real property as single-family residential lots that will be marketed and sold to home builders. We intend to concentrate our lending activities in the southeast and southwest sections of the United States, particularly in Texas, Colorado, and Arizona.  We believe these areas continue to experience demand for new construction of single-family homes; however, the U.S. housing market has suffered declines in recent months, particularly in geographic areas that had experienced rapid growth, steep increases in property values and speculation.  Additionally, we intend to concentrate our lending activities with national homebuilders and regional homebuilders and developers who sell single-family residential home lots to such national and regional homebuilders.  National and regional homebuilders are expected to reduce the number of new homes constructed in 2008 as compared to 2007.  However, we expect to see continued healthy demand for our products as the supply of finished new homes and land is once again aligned with our market demand.

Nationally, the number of new single-family residential homes sold has been declining, and average and median sales prices have been falling.  The sales of new single-family residential homes in December 2007 were at a seasonally adjusted annual rate of 605,000 units, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development.  This is approximately 41% below the December 2006 estimate of 1,019,000 units.  According to the same sources, the average sales price of new houses sold in December 2007 was $267,300; the median sales price was $219,200. This is approximately 14.2% below the December 2006 average sales price of $311,600 and approximately 11% below the December 2006 median sales price of $246,900.  The seasonally adjusted estimate of new houses for sale at the end of December was 493,000, which represents a supply of 9.5 months at the December sales rate.  The seasonally adjusted estimate of new houses for sale at the end of December 2006 was 535,000, which represents a supply of 6.2 months at the December 2006 sales rate.

According to the same sources, new single-family residential home permits and starts have also declined nationally, as a result and in anticipation of a rising supply of new single-family residential homes and a declining demand for new single-family residential homes.  Single-family homes authorized by building permits in December 2007 were at a seasonally adjusted annual rate of 702,000 units.  This is 26.5% below the December 2006 estimate of 1,181,000 units.   Single-family home starts were at a seasonally adjusted annual rate of 784,000 units.  This is 36.8% below the December 2006 estimate of 1,241,000 units.

Housing markets generally remain difficult and generally are declining on a national basis with those declines and difficulties most pronounced in those markets that had experienced rapid growth, steep increases in property values and speculation, such as in California, Florida, Arizona and Nevada.  However, a few markets, such as Texas, are continuing to remain fairly healthy, compared to what has been occurring nationally.  The table below illustrates the recent declines in home price appreciation nationally, as well as in California and Florida, while showing that Texas has not experienced such declines.

10 Year Home Price Appreciation

Source: Office of Federal Housing Enterprise Oversight

As of March 31, 2008, substantially all of our loans, over 92% of our portfolio, were with respect to single-family residential development projects in Texas.  Our Texas loans were in the markets of Austin, Houston, Dallas, San Antonio and Lubbock.  Our remaining loans were made with respect to single-family residential development projects in Denver, Colorado (6% of our portfolio) and Kingman, Arizona (2%).

While housing woes beleaguer the national economy, Texas housing markets have held up as some of the best in the country.  We believe the Texas markets have remained fairly healthy due to strong demographics, economies and housing affordability ratios.  The National Association of Homebuilders estimates that the median new home prices for 2007 in the metropolitan areas of Austin, Houston, Dallas, San Antonio and Lubbock are $188,025, $204,895, $207,076, $160,764 and $97,199, respectively.  These amounts are below the December 2007 national median sales price of new homes sold of $219,500.  Using the Department of Housing and Urban Development’s estimated 2007 median family income for the respective metropolitan areas of Austin, Houston, Dallas, San Antonio and Lubbock, the median income earner in those areas has 1.32 times, 1.00 times, 1.08 times, 1.20 times and 1.80 times the income required to qualify for a mortgage to purchase the median priced new home in the respective metropolitan area.  Using the U.S. Census Bureau’s income data to project estimated median income for the United States for 2007 of $59,000 and the December 2007 national median sales prices of new homes sold of $219,500, we conclude that the national median income earner has 0.97 times the income required to qualify for a mortgage loan to purchase the median priced new home in the United States.  We further conclude that the aforementioned Texas metropolitan areas have new home housing affordability ratios that are 1.03 to 1.86 times the national new home housing affordability ratio.  The above housing affordability is determined as the ratio of median family income to the income required to qualify for a 90 percent, 30-year fixed-rate mortgage to purchase the median-priced new home, assuming an annual mortgage insurance premium of 50 basis points for private mortgage insurance and a cost that includes estimated property taxes and insurance for the home.

The United States Department of Labor reports that as of December 2007, Texas led the nation with the largest job gains over the past twelve months with 218,600 new jobs created.  This is over 2.5 times greater than the number of jobs created during this period in the nation’s second largest state for job growth, Florida, and more than 2.75 times the jobs created during this period in the nation’s third largest state for job growth, California.  The United States Department of Labor reports that the largest over-the-year percentage increases in employment in the country’s large metropolitan areas were recorded in the four top metropolitan areas of Texas:  Austin-Round Rock (+4.2%), Houston-Sugar Land-Baytown, (+3.9%), San Antonio (+3.0%), and Dallas-Fort Worth-Arlington, (+2.9%), The Texas metropolitan areas of Austin, Houston, Dallas, San Antonio and Lubbock experienced, during the last twelve months, the creation of 22,700, 94,200, 66,500, 18,800 and 3,800 new jobs, respectively.

The United States Census Bureau reported in its 2007 Estimate of Population Change July 1, 2006 to July 1, 2007 that Texas led the country in population growth during that period.  The estimate concluded that Texas grew by 496,751 people, or 2.12%, a number which was 1.6 times greater than the next closest state in terms of raw population growth, California, and more than 2.5 times the second closest state in terms of raw population growth, Georgia.  The United States Census Bureau also reported that among the 10 counties that added the largest number of residents between July 1, 2006 and July 1, 2007, half were in Texas (Harris (Houston), Tarrant (Fort Worth), Bexar (San Antonio), Collin (North Dallas) and Travis (Austin).  On June 28, 2007, the United States Census Bureau reported that Texas’ five major cities – Austin, Houston, San Antonio, Dallas and Fort Worth – were among the top ten in the nation for population growth from 2005 to 2006.  San Antonio was second in the nation with a population change of 33,084 from July 1, 2005 to July 1, 2006, Fort Worth was third in the nation with a population change of 30,201 during that period, Houston was fourth in the nation with a population change of 26,554 during that period, Austin was sixth in the nation with population change of 18,630 during that period, and Dallas was eighth in the nation with a population change of 16,676 during that period.

The Winter 2008 U.S. Market Risk Index, a study prepared by PMI Mortgage Insurance Co., the U.S. subsidiary of The PMI Group, Inc., which ranks the nation’s 50 largest metropolitan areas according to the likelihood that home prices will be lower in two years, reported that Texas cities lead the nation in home price stability.  The San Francisco-based company recently analyzed housing price trends in 50 U.S. metropolitan areas for its quarterly report, released January 15, 2008.  The index also considers the impact of foreclosure rates and excess housing supply and the consequential impact on home prices.  The study predicts there is less than a 1% chance that the Dallas/Fort Worth-area, Houston area, San Antonio, and Austin area home prices will fall during the next two years.  All Texas metropolitan areas included in the report are in the Top 10 least likely areas to experience a decline in home prices in two years of the nation’s 50 largest metropolitan areas.  Fort Worth-Arlington, Texas is the nation’s least likely metropolitan area included in the study to see a price decline in the next two years, Dallas-Plano-Irving, Texas is second-least likely, Houston-Sugar Land-Baytown, Texas isfourth-least likely,  San Antonio, Texas isfifth-least likely and Austin, Texas is ninth-least likely.

In Texas markets, home builders and developers remain disciplined on new home construction and project development.  New home starts have been declining year-on-year and are outpaced by new home sales in all of our Texas markets where such data is readily available.  Inventories of finished new homes and finished lot supplies are healthy, with the exception of Dallas-Fort Worth, where homebuilders have slowed housing starts as the market had become slightly oversupplied with finished new homes and finished lot supplies.  Management anticipates the annual new home start pace will decline another 10% to 20% from 2007 levels in Texas markets as the Texas economy reverts to more moderate economic growth.  The Federal Reserve Bank Dallas has stated that although the Texas economy has weakened in thefourth quarter of 2007, the Texas economy “is still quite healthy and stronger than the national economy.”

Austin continues to be one of the strongest homebuilding markets in the country. Annual new home sales in Austin outpace starts 14,810 versus 13,896, with annual new home sales declining year-on-year by approximately 10%.  Finished housing inventory and finished lot supplies remain at healthy levels of 2.5 months and 22 months, respectively.  San Antonio is also a strong homebuilding market.  Annual new home sales in San Antonio outpace starts 15,564 versus 12,625, with annual new home sales declining year-on-year by approximately 8.5%.  Finished housing inventory and finished lot supplies remain at healthy levels of 2.3 months and 26.1 months, respectively.  Houston is also a healthy homebuilding market.  Annual new home sales in Houston outpace starts 42,960 versus 38,117, with annual new home sales declining year-on-year by approximately 11%.  Finished housing inventory has been increasing to a 2.8 month supply, slightly above the considered equilibrium of 2 to 2.5 months supply.  Finished lot supplies remain at very healthy levels of 22.3 months.  All numbers are as publicly released by Metrostudy, a leading provider of primary and secondary market information.

The Real Estate Center at Texas A&M University has reported that the sales of existing homes remain healthy in our Texas markets, as well.  The number of months of home inventory for sale in Austin, San Antonio, Houston, Dallas, Fort Worth and Lubbock is 4.2 months, 6.0 months, 6.0 months, 5.8 months, 5.8 months, and 5.4. months, respectively.  A 6-month supply of inventory is considered a balanced market with more than 6 months of inventory generally being considered a buyer’s market and less than 6 months of inventory generally being considered a seller’s market. As of December 2007, the number of existing homes sold year-to-date in (a) Austin is 27,974, down 7.6% year-on-year; (b) San Antonio is 23,820, down 9% year-on-year; (c) Houston is 77,581, down 4.2% year-on-year, (d) Dallas is 57,332, down 7.5% year-on-year, (e) Fort Worth is 11,415, down 4.6% year-on-year, and (f) Lubbock is 3,485, up 4.5% year-on-year.

The Office of Federal Housing Enterprise Oversight (“OFHEO”) reports that Texas had healthy existing home price appreciation between the fourth quarter of 2006 and the fourth quarter of 2007 of 5.21%.  That same report provides that existing home price appreciation between the fourth quarter of 2006 and the fourth quarter of 2007 for (a) Austin is 7.95%, (b) San Antonio is 8.25%, (c) Houston is 4.79%, (d) Dallas is 2.95%, (e) Fort Worth is 2.89%, and (f) Lubbock is 0.34%.  The OFHEOtracks average house price changes in repeat sales or refinancings of the same single-family properties utilizing conventional, conforming mortgage transactions.

In managing and understanding the markets and submarkets in which we make loans, we monitor the fundamentals of supply and demand.  We monitor the economic fundamentals in each of the markets in which we make loans, analyzing demographics, household formation, population growth, job growth, migration, immigration and housing affordability.  We also monitor movements in home prices and the presence of market disruption activity, such as investor or speculator activity that can create false demand and an oversupply of homes in a market.  Further, we study new home starts, new home closings, finished home inventories, finished lot inventories, existing home sales, existing home prices, foreclosures, absorption, prices with respect to new and existing home sales, finished lots and land, and the presence of sales incentives, discounts, or both, in a market.

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing for acquisition, construction and permanent mortgages, interest rate levels and demand for housing.  Sales of new homes are also affected by the condition of the resale market for used homes, including foreclosed homes.  Housing demand is, in general, adversely affected by increases in interest rates, housing costs and unemployment and by decreases in the availability of mortgage financing.

We face a risk of loss resulting from adverse changes in interest rates.  Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make.  In most instances, the loans we make will be junior in the right of repayment to senior lenders, who will provide loans representing 70% to 80% of total project costs.  As senior lender interest rates available to our borrowers increase, demand for our mortgage loans may decrease, and vice versa.

Developers to whom we make mortgage loans use the proceeds of such loans to develop raw real estate into residential home lots.  The developers obtain the money to repay these development loans by selling the residential home lots to home builders or individuals who will build single-family residences on the lots, and by obtaining replacement financing from other lenders.  If interest rates increase, the demand for single-family residences may decrease.  Also, if mortgage financing underwriting criteria become more strict, demand for single-family residences may decrease.  In such an interest rate and/or mortgage financing climate, developers may be unable to generate sufficient income from the resale of single-family residential lots to repay loans from us, and developers’ costs of funds obtained from lenders in addition to us may increase, as well.  Accordingly, increases in single-family mortgage interest rates or decreases in the availability of mortgage financing could increase the number of defaults on development loans made by us.

Our general partner is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate and interest rates generally, that it reasonably anticipates to have a material impact on either the income to be derived from our investments in mortgage loans, or entities that make mortgage loans, other than those referred to in our Annual Report on Form 10-K.  The recent disruption of mortgage markets, in combination with a significant amount of negative national press discussing chaos in mortgage markets and the poor condition of the national housing industry, including declining home prices, have made potential new home purchasers and real estate lenders very cautious.  We anticipate that this may result in a slowing of the sales of finished lots developed by our clients in certain markets; however, we believe that the prices of those lots should not change materially.

Off-Balance Sheet Arrangements

In October 2006, we entered into the UDF III Guarantee, effective as of September 1, 2006, for the benefit of United Mortgage Trust, and entered into the UDF III Credit Enhancement Fee Agreement related to the UDF III Guarantee.  Pursuant to the UDF III Guarantee, we guarantied the repayment of an amount up to $30 million with respect to that certain Second Amended and Restated Secured Line of Credit Promissory Note between United Mortgage Trust and UDF I.  In exchange for that guaranty, and pursuant to the UDF III Credit Enhancement Fee Agreement, UDF I pays UDF III each month in arrears an amount equal to 0.25% of the maximum liability amount, which is included in our commitment fee income.  UDF I has negotiated the release of the UDF III Guarantee effective January 1, 2008.  See “– Subsequent Events” below for further discussion.

Contractual Obligations

As of March 31, 2008, we had funded 32 loans, including five loans that have been repaid by the respective borrower in full, totaling approximately $154 million.  We have approximately $75.2 million of commitments to be funded under the terms of mortgage notes receivable, including $62.3 million of mortgage notes receivable – related party.  As of December 31, 2007, we had funded 32 loans, including five loans that have been repaid by the respective borrower in full, totaling approximately $132 million.  As of December 31, 2007, we had approximately $75.7 million of commitments to be funded under the terms of mortgage notes receivable, including $65.8 million of mortgage notes receivable – related party.

       Subsequent Events

In April 2008, UDF I negotiated the release of the UDF III Guarantee.  This limited guaranty was terminated and our contingent repayment obligation relieved effective January 1, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the exposure to loss resulting from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices.  A significant market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control.  Changes in interest rates may impact both demand for our real estate finance products and the rate of interest on the loans we make.  Another significant market risk is the market price of finished lots.  The market price of finished lots is driven by the demand for new single-family homes and the supply of unsold homes and finished lots in a market.  The change in one or both of these factors can have a material impact on the cash realized by our borrowers and resulting collectibility of our loans and interest.

Demand for our mortgage loans and the amount of interest we collect with respect to such loans depends on the ability of borrowers of real estate development loans to sell single-family lots developed with the proceeds of the loans to homebuilders.

The single-family lot and residential homebuilding market is highly sensitive to changes in interest rate levels.  As interest rates available to borrowers increase, demand for mortgage loans decreases, and vice versa.  Housing demand is also adversely affected by increases in housing prices and unemployment and by decreases in the availability of mortgage financing.  In addition, from time to time, there are various proposals for changes in the federal income tax laws, some of which would remove or limit the deduction for home mortgage interest.  If effective mortgage interest rates increase and/or the ability or willingness of prospective buyers to purchase new homes is adversely affected, the demand for new homes may also be negatively affected.  As a consequence, demand for and the performance of our real estate finance products may also be adversely impacted.

As of March 31, 2008, our mortgage notes receivable and mortgage notes receivable – related party of approximately $81.3 million and $38.4 million, respectively, were all at fixed interest rates, and thus, such mortgage notes receivable are not subject to change in future earnings, fair values or cash flows. As of December 31, 2007, our mortgage notes receivable and mortgage notes receivable – related party of approximately $76.9 million and $23.2 million, respectively, were all at fixed interest rates, and thus, such mortgage notes receivable are not subject to change in future earnings, fair values or cash flows.

We seek to mitigate our single-family lot and residential homebuilding market risk by closely monitoring economic, project market, and homebuilding fundamentals.  We review a variety of data and forecast sources, including public reports of homebuilders, mortgage originators and real estate finance companies; financial statements of developers; project appraisals; proprietary reports on primary and secondary housing market data, including land, finished lot, and new home inventory and prices and concessions, if any; and information provided by government agencies, the Federal Reserve Bank, the National Association of Home Builders, the National Association of Realtors, public and private universities, corporate debt rating agencies, and institutional investment banks regarding the homebuilding industry and the prices of and supply and demand for single-family residential homes

In addition, we further seek to mitigate our single-family lot and residential homebuilding market risk by assigning an asset manager to each mortgage note.  This asset manager is responsible for monitoring the progress and performance of the borrower and the project as well as assessing the status of the marketplace and value of our collateral securing repayment of our mortgage loan.

See the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Q for further discussion regarding our exposure to market risks.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the management of Land Development, our general partner, including its principal executive officer and principal financial officer, evaluated, as of March 31, 2008, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e).  Based on that evaluation, the principal executive officer and the principal financial officer of our general partner concluded that our disclosure controls and procedures, as of March 31, 2008, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the principal executive officer and the principal financial officer of our general partner, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, can only provide reasonable assurance, and not absolute assurance, that the objectives of the controls system are met, and an evaluation of controls can provide only reasonable assurance, and not absolute assurance, that all control issues and instances of fraud or error, if any, within a partnership have been detected.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the three months ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to, and none of our assets are subject to, any material pending legal proceedings.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

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

Use of Proceeds from Registered Securities

We did not have any unregistered sales of securities during the three months ended March 31, 2008.  On May 15, 2006, our Registration Statement on Form S-11 (Registration No. 333-127891), covering a public offering of up to 12,500,000 units of limited partnership interest at a price of $20 per unit, was declared effective under the Securities Act of 1933, as amended.  The Registration Statement also covers up to 5,000,000 units of limited partnership interest to be issued pursuant to our DRIP for $20 per unit.  The aggregate offering price for the units is $350 million.

The units are being offered by select members of the Financial Industry Regulatory Authority on a “best efforts” basis, which means the selling group members will only be required to use their best efforts to sell the units and have no firm commitment or obligation to purchase any of the units.  We admit, and intend to continue to admit, new investors at least monthly.

As of March 31, 2008, we had issued an aggregate of 7,257,350 units of limited partnership interest in the Offering, consisting of 7,137,740 units that have been issued to our limited partners pursuant to our primary offering in exchange for gross proceeds of approximately $142.8 million (approximately $125.7 million, net of costs associated with the Offering) and 126,873 units of limited partnership interest issued to limited partners in accordance with our DRIP in exchange for gross process of approximately $7.1 million, minus 7,263 units of limited partnership interest that have been repurchased pursuant to our unit redemption program for approximately $145,000. The net offering proceeds to us, after deducting approximately $17.1 million of offering costs, are approximately $125.7 million.  Of the offering costs, approximately $5.0 million was paid to our general partner or affiliates of our general partner for organization and offering expenses and $12.1 million was paid to non-affiliates for selling commissions and other offering fees.  As of March 31, 2008, we had funded 32 loans, including five loans that have been repaid by the respective borrower in full, totaling approximately $154 million.  We have approximately $75.2 million of commitments to be funded under the terms of mortgage notes receivable, including $62.3 million of mortgage notes receivable – related party.  We paid our general partner approximately $3.8million for acquisition and origination fee expenses associated with the mortgage notes receivable.

Unit Redemption Program

Our general partner has adopted a unit redemption program for our investors.  The purchase price for the redeemed units is set forth in the prospectus for the Offering, as supplemented.  Our general partner reserves the right in its sole discretion at any time and from time to time to (1) waive the one-year holding period in the event of the death or bankruptcy of a limited partner or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend and/or reestablish our unit redemption program.  Under the terms of the program, we will not redeem in excess of 5% of the weighted average number of units outstanding during the twelve-month period immediately prior to the date of redemption.  Our general partner will determine from time to time whether we have sufficient excess cash from operations to repurchase units.  Generally, the cash available for redemption will be limited to 1% of the operating cash flow from the previous fiscal year, plus any net proceeds from our distribution reinvestment plan.  The following table sets forth information relating to units of limited partnership interest that have been repurchased during the quarter ended March 31, 2008:

2008	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
January	2,750	$           19.85	2,750	(1)
February	4,013	$           18.40	4,013	(1)
March	500	$           18.40	500	(1)
	7,263	$           18.95	7,263	(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.

Item 5.  Other Information.

None.

Item 6. Exhibits.

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Index to Exhibits attached hereto.

SIGNATURES

                Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

United Development Funding III, L.P.

By:           UMTHLand Development, L.P.

                 Its General Partner

Dated:  May 15, 2008                                                                           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)

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)

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 by reference.