UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C.  20549
                            Form 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
    EXCHANGE ACT OF 1934  (NO FEE REQUIRED)                          
                                        
For the fiscal year ended          December 31, 1996
                               or
(  )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE      
    SECURITIES EXCHANGE ACT OF 1934  (NO FEE REQUIRED)
    
For the transition period from                  to 
Commission file number             0-13772

        USAA Income Properties III Limited Partnership
    (Exact name of registrant as specified in its charter)

       Delaware                         74-2356253
(State of Organization)   (I.R.S. Employer Identification No.)

    8000 Robert F. McDermott Fwy., IH 10 West, Suite 600,
                San Antonio, Texas  78230-3884
(Address of principal executive offices)      (Zip Code)

Registrant's telephone number, including area code:  (210) 498-7391

Securities registered pursuant to Section 12(b) of the Act:

                                          Name of each exchange on 
Title of each class                           which registered
       None                                        None

Securities registered pursuant to section 12(g) of the Act:

              UNITS OF LIMITED PARTNERSHIP INTERESTS
                         (Title of class)

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    

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.    [ X ]

State the aggregate market value of the voting stock held by non-
affiliates of the registrant:  Not Applicable

<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE: 

Certain portions of the prospectus of the registrant dated May 6,
1985, as supplemented, filed pursuant to Rule 424(b) or (c) under
the Securities Act of 1933 are incorporated by reference in Parts
I and III.

<PAGE>
                        TABLE OF CONTENTS


PART I

Item 1.        Business

Item 2.        Properties

Item 3.        Legal Proceedings

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

PART II

Item 5.        Market for the Registrant's Limited Partnership
               Units and Related Security Holder Matters

Item 6.        Selected Financial Data

Item 7.        Management's Discussion and Analysis of Financial
               Condition and Results of Operations

Item 8.        Financial Statements and Supplementary Data

Item 9.        Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure


PART III

Item 10.       Directors and Executive Officers of the General Partner

Item 11.       Executive Compensation

Item 12.       Security Ownership of Certain Beneficial Owners
               and Management

Item 13.       Certain Relationships and Related Transactions


PART IV

Item 14.       Exhibits, Financial Statement Schedules
               and Reports on Form 8-K
 
Signatures

Index to Exhibits

<PAGE>
                              PART I


Item 1.  Business
                                                              

         USAA Income Properties III Limited Partnership (the
"Partnership") is a limited partnership formed February 22, 1985,
under the Uniform Limited Partnership Act of the State of
Delaware to invest in a diversified portfolio of income-producing
real properties such as shopping centers, office buildings,
apartments, industrial buildings and other similar income-
producing real property.  The Partnership has four principal
business objectives: (i) to provide the limited partners with
cash distributions which will not constitute taxable income by
reason of Partnership tax deductions and possibly tax losses
which may be used to offset other taxable income, (ii) to
preserve and protect the limited partners' capital and related
buying power, (iii) to obtain long-term appreciation in the value
of the properties, and (iv) to provide a build-up of equity
through the reduction of mortgage loans on the properties. 
Defined terms used herein shall have the meanings as set forth
under the caption "Glossary" contained at pages 71-74 of the
Prospectus, dated May 6, 1985, filed pursuant to rule 424(b),
attached as Exhibit 99.a and incorporated herein by reference.

         The Partnership sold $55,774,500 in Units of Limited
Partnership Interest (111,549 Units at $500 per Unit) from the
commencement of the offering of Units on or about June 1, 1985,
through the completion of the offering on December 31, 1985. 
Limited Partners are not required to make any additional capital
contributions.

         Proceeds available to the Partnership for investment in
properties were used to acquire the following properties in
fiscal year 1986:  Curlew Crossing (formerly Courtyard Shoppes)
Shopping Center, Manhattan Towers (formerly Parkview Plaza Office
Buildings), and Ramada World Headquarters Office Buildings. 
These properties comprise the complete portfolio of the
Partnership.  See "Item 2 Properties."

         Competitive conditions for the Partnership's properties
in 1996 were as follows:

         Curlew Crossing Shopping Center is located in Clearwater,
Florida in northern Pinellas County on North U.S. Highway 19.  At
December 31, 1996, Curlew Crossing was 92% occupied.  The
$11,000,000 mortgage on Curlew Crossing matured on March 31,
1996.  The lender, USAA Real Estate Company (the Adviser),
renewed the loan for a period of two years at an annual interest
rate of 8.25% to reflect market rates at the time of maturity. 
This rate is a decrease from the 10.25% paid in March 1996 which
was based on the lesser of 12% or prime rate plus two percent. 
Interest is payable monthly with the principal due March 31,
1998.

<PAGE>
         In April 1996, the Partnership received $220,400 as a
result of land condemned at Curlew Crossing by the Florida
Department of Transportation ("FDOT").  This represented a good
faith estimate of the value of the land actually taken.  The land
was condemned in connection with the widening of Curlew Road. 
Contrary to early concerns regarding the extent and nature of the
condemnation, no parking, access or structure at Curlew was
included in the taking.  During 1996, the tenant of two out
parcels, containing approximately 15,700 square feet, claimed the
right to terminate its respective leases based upon the FDOT
taking.  The Partnership has initiated legal action against the
defaulted tenant and is currently seeking a summary declaration
by the Court regarding the continuing nature of the leases as
well as recovery of the rent and other sums due under the leases. 
Following the adjudication of this tenant related action, a final
determination will be made regarding the total damages due from
the FDOT to the Partnership as a result of the condemnation. 
Resolution of both the tenant action and condemnation proceeding
are anticipated by the third quarter of 1997.

         Curlew Crossing is located in the North Pinellas County
retail market.  This submarket had approximately 85,000 square
feet of positive absorption for the year ended 1996 leaving the
occupancy rate at approximately 92%. Total inventory in this
submarket was approximately 11 million square feet with
approximately 881,000 square feet vacant.
         
         The Manhattan Towers (formerly Parkview Plaza Office
Buildings) are located in the city of Manhattan Beach, Los
Angeles County, California, south of the city of Los Angeles and
the Los Angeles International Airport.  The two buildings on the
site were triple net leased to Hughes Aircraft Company, a wholly-
owned subsidiary of General Motors through August 1996.  Control
of the daily operations at the property were assumed by the
Partnership upon expiration of the Hughes lease.  As part of the
marketing campaign to re-lease the property, the name of the
property was changed from Parkview Plaza to Manhattan Towers. 
Along with this name change, the property will undergo repairs
and renovations to the lobby area, corridors and parking lot, as
well as exterior landscaping and signage. The cost of these
renovations is estimated to be $2.7 million to be funded from the
working capital reserve of the Partnership.  In addition,
subterranean water damage was discovered in the parking garage. 
Engineers and other consultants were hired to assess the damage
and determine the appropriate remediation.  The cost of the
repairs to the parking garage is estimated to be $1.1 million to
be funded from the working capital reserve of the Partnership. 
Manhattan Towers will experience a significant decrease in cash
flow in 1997 as a result of the expiration of the Hughes lease
and the cash requirement for tenant improvements and lease
commissions needed to re-lease the property.  Current rental
rates in the market surrounding the property are lower than the
rate that was paid by Hughes.  Hughes provided approximately
$4,869,000 of annual rental income to the Partnership during

<PAGE>
1996, approximately $6,679,000 during 1995 and approximately
$6,241,000 during 1994 which represents approximately 62% of
total Partnership rental income for 1996, 69% for 1995 and 67%
for 1994.

         Since the expiration of the Hughes lease in August 1996,
significant leasing activity has occurred.  Hughes Aircraft
Company negotiated a one-year lease for 79,647 square feet at an
annual rental rate of $12 gross per square foot with an
expiration date of August 31, 1997.  The previous annual rental
rate was at approximately $22.64 net per square foot for the
entire 301,457 square feet of net leasable area.

         Other leases signed have terms from three to five years
at an annual rental rate of $13.80 per square foot.  One of the
five year leases provided for an allowance for tenant
improvements at $6.00 per square foot for a total of $74,274 to
be paid out of the working capital reserve of the Partnership.

         A sixty-two month lease was signed during the fourth
quarter for 11,553 square feet.  This lease commenced February
1, 1997 and ends March 31, 2002.  The lease provides for an
annual rental rate of $19.20 per square foot. An allowance for
tenant improvements was provided for a total of approximately
$404,000 to be paid from the working capital reserve of the
Partnership.

         As of December 31, 1996, these leases at Manhattan Towers
total 145,796 of the 301,457 square feet, or 48%, of the total
leasable area of property.  Rental rates for these new leases are
lower than the previous rate charged to Hughes, reflecting the
current market conditions in the area surrounding the property. 
One of the two buildings at this property remains vacant. Several
large prospects have expressed interest in leasing the vacant
building.

         The Manhattan Towers mortgage loan matured on August 31,
1996.  The lender, Las Colinas Management Company, an affiliate
of the General Partner, renewed the loan for a period of two
years at an annual interest rate of 9.57% to reflect market rates
at the time of maturity.  The loan was converted to monthly
interest only payments with the principal of $15,000,000 due
September 30, 1998.  

         Manhattan Towers is located in the El Segundo/Manhattan
Beach submarket of the South Bay office market.  Total rentable
square feet in this submarket was approximately 9.4 million
square feet with 1.9 million square feet available as of the end
of 1996.  The vacancy rate remained stable at approximately 20%
at the end of 1996 and 1995.  Total inventory in the overall
South Bay office market was approximately 29.9 million square
feet with approximately 6.8 million square feet vacant, resulting
in a vacancy rate of approximately 23% at the end of 1996.

<PAGE>
         Ramada World Headquarters Buildings are located in
central Phoenix, Arizona, approximately one mile north of Sky
Harbor International Airport, and four miles east of the downtown
business and financial center.  This property is comprised of a 
complex of three office buildings.  At December 31, 1996, 70% of
the property, the ten-story building, was leased to Hospitality
Franchise Systems, Inc. ("HFS").  Substantial completion of
tenant improvements for HFS occurred October 31, 1996.  The
Partnership funded approximately $1.2 million related to its
commitment for improvements from the working capital reserve of
the Partnership.  During the tenant improvement phase, the base
rent due from HFS was at a reduced rate and HFS was responsible
for all operating expenses of the property.  Upon substantial
completion of the improvements, the rental rate increased to
approximately $14.61 per square foot annually and HFS will pay
its proportionate share of operating expenses which exceed $7.00
per square foot annually.  HFS provided approximately $1,644,000
of rental income to the Partnership during 1996 and approximately
$1,246,000 during 1995, which represents approximately 21% of
total Partnership rental income for 1996 and 13% for 1995. 

         During the fourth quarter, a small parcel of land
adjacent to the Ramada property was purchased for approximately
$72,000.  The Partnership purchased the property to be used for
additional parking.  Market interest in the area surrounding the
Ramada property has been increasing.  In order to more
successfully market the vacancy, the remaining two buildings at
the Ramada property are scheduled for renovation which will begin
in March 1997.  Renovations will include improvements to comply
with the Americans With Disabilities Act, heating and air
conditioning and exterior renovations.  The total cost of
renovations will be approximately $900,000 to be paid from the
working capital reserve of the Partnership.

         Ramada is located in the East Phoenix submarket of the
Phoenix office market.  Total rentable square feet in this office
submarket was approximately 5 million square feet with
approximately 468,000 square feet available at the end of 1996. 
This equated to a vacancy rate of approximately 9%.  
         
         See "Item 2 Properties" for information pertaining to the
status of the Partnership's properties.

         The Partnership has no employees; it has, however,
entered into an Advisory Agreement with USAA Real Estate Company
("Adviser"), which is a wholly-owned subsidiary of USAA Capital
Corporation, which is a wholly-owned subsidiary of United
Services Automobile Association ("USAA").  The Adviser is
responsible for managing the day-to-day operations of the
Partnership.

<PAGE>
         The General Partner ("General Partner") of the
Partnership is USAA Properties III, Inc., a Texas corporation and
a subsidiary of the Adviser.  The General Partner has the general
responsibility for management of the Partnership's business and
oversees the activities of the Adviser.

<PAGE>
Item 2.  Properties

         The Partnership owns the properties described below as of
December 31, 1996:

      Location                         Description of Property

Clearwater, Florida         Curlew Crossing Shopping Center:  A
                            shopping center containing
                            approximately 207,090 net rentable
                            square feet, situated on 22.32 acres
                            including the ground under lease to
                            Home Depot.  At December 31, 1996,
                            the property was 92% occupied and
                            average monthly cash rental was
                            approximately $78,000.  The mortgage
                            payable on this property is
                            $11,000,000.  The Partnership has
                            100% fee-simple ownership.

Manhattan Beach, California Manhattan Towers Office Buildings: 
                            Two office buildings containing, in
                            the aggregate, 301,457 net rentable
                            square feet, situated on
                            approximately 5.13 acres of land. 
                            At December 31, 1996, the property
                            was 48% leased and average monthly
                            cash rental was approximately
                            $423,000.  The mortgage payable on
                            this property is $15,000,000.  The
                            Partnership has 100% fee-simple
                            ownership.

Phoenix, Arizona            Ramada World Headquarters Buildings: 
                            Three office buildings containing,
                            in the aggregate, 142,696 net
                            rentable square feet, situated on
                            approximately 7.4 acres of land.  At
                            December 31, 1996 the property was
                            70% leased and average monthly cash
                            rental was approximately $70,000. 
                            There is no debt on this property. 
                            The Partnership has 100% fee-simple
                            ownership.

See notes 3, 4, 5, 6, 7, and 10 of Notes to Financial Statements
in Item 8, for further discussion relating to the properties and
encumbrances thereon.

<PAGE>
Item 3.  Legal Proceedings

         There are no material legal proceedings pending to which
the General Partner or the Partnership is a party or to which any
of the Partnership's properties are subject.


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

         No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
report through the solicitation of proxies or otherwise.


                          PART II


Item 5.  Market for the Registrant's Limited Partnership Units
         and Related Security Holder Matters

         There is no established public trading market for the
Limited Partnership Units ("the Units"), and it is not
anticipated that a public market will develop.  Upon request,
Real Estate Limited Partnership Investor Services, a department
in USAA Real Estate Company, may assist a Limited Partner
desiring to transfer his Units.  The purchase price for the Units
upon resale and all other terms of a resale transaction are
subject to negotiation between the buyer and the seller.  The
limited market for the Units may adversely affect the value of
the Units.  

         As of December 31, 1996, there were 7,717 Limited
Partners of the Partnership, owning an aggregate of 111,549
Units.

         During the year ended December 31, 1996, quarterly
distributions totaling $1,087,603 and $10,985 were distributed to
the Limited Partners and General Partner, respectively, for a
total of $1,098,588 in cash distributions.

         During the year ended December 31, 1995, quarterly
distributions totaling $1,673,236 and $16,902 were distributed to
the Limited Partners and General Partner, respectively, for a
total of $1,690,138 in cash distributions.
         
         Future cash distributions to Limited Partners are
currently anticipated.

<PAGE>
Item 6.  Selected Financial Data
<TABLE>
                    USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                                SELECTED FINANCIAL DATA
               Years Ended December 31, 1996, 1995, 1994, 1993 and 1992
<CAPTION>
                               1996         1995         1994         1993         1992
<S>                       <C>            <C>          <C>          <C>          <C>      
Rental Income             $  7,930,447    9,694,383    9,249,018    9,173,668    8,837,842
Interest Income                592,123      648,218      343,378      176,617      198,482
Net Income(Loss)             3,280,065    5,298,841    1,742,181   (9,269,345)    (182,374)
Net Income(Loss) per Limited
  Partnership Unit (1)           29.11        47.03        15.46       (82.27)       (1.62)
Taxable Income (Loss)         (379,232)   3,641,563   20,548,728      413,731   (5,712,232)
Taxable Income (Loss) per
  Limited Partnerhip
  Unit (1)                       (3.37)       32.32       182.37         3.67       (50.70)
Cash Distributions           1,098,588    1,690,138    1,690,137    2,230,981    2,811,261
Cash Distributions per
  Limited Partnership
  Unit (2)                        9.75        15.00        15.00        19.80        24.95
Total Assets at Period End  53,766,170   56,380,807   51,924,359   75,037,620   86,531,424
Total Mortgages Payable
  at Period End             26,000,000   27,818,182   30,545,455   51,800,000   51,800,000



     (1)  Based on limited partnership units issued at period end and net income (loss)/
          taxable income (loss) allocated to Limited Partners.

     (2)  Based on limited partnership units issued at each quarter end and cash
          distributions allocated to Limited Partners.

     The above selected financial data should be read in conjunction with the financial
     statements and related notes appearing elsewhere in this report.
</TABLE>

<PAGE>
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  
         CONDITION AND RESULTS OF OPERATIONS


Liquidity and Capital Resources

At December 31, 1996, the Partnership had cash of $118,000 and
temporary investments of $9,301,147.  Included in the
Partnership's cash and cash equivalents were the working capital
reserve and funds held for current obligations of the
Partnership.  Accounts receivable consisted of tenant
receivables.  Deferred charges and other assets included deferred
rent resulting from recognition of income as required by
generally accepted accounting principles, lease commissions and
prepaid expenses.  Accounts payable included amounts due to
affiliates for reimbursable expenses and management fees, and
amounts due to third parties for expenses incurred for
operations.  Accrued expenses and other liabilities consisted
primarily of security deposits, prepaid rent and accrued property
taxes.

The $11,000,000 mortgage on Curlew Crossing matured on March 31,
1996.  The lender, USAA Real Estate Company ("the Adviser"),
renewed the loan for a period of two years at an annual interest
rate of 8.25% to reflect market rates at the time of maturity. 
This rate is a decrease from the 10.25% paid in March 1996 which
was based on the lesser of 12% or prime rate plus two percent. 
Interest is payable monthly with the principal due March 31,
1998.

In April 1996, the Partnership received $220,400 as a result of
land condemned at Curlew Crossing by the Florida Department of
Transportation ("FDOT").  This represented a good faith estimate
of the value of the land actually taken.  The land was condemned
in connection with the widening of Curlew Road.  Contrary to
early concerns regarding the extent and nature of the
condemnation, no parking, access or structure at Curlew was
included in the taking.  During 1996, the tenant of two out
parcels, containing approximately 15,700 square feet, has claimed
the right to terminate its respective leases based upon the FDOT
taking.  The Partnership has initiated legal action against the
defaulted tenant and is currently seeking a summary declaration
by the Court regarding the continuing nature of the leases as
well as recovery of the rent and other sums due under the leases. 
Following the adjudication of this tenant related action, a final
determination will be made regarding the total damages due from
the FDOT to the Partnership as a result of the condemnation. 
Resolution of both the tenant action and condemnation proceeding
are anticipated by the third quarter of 1997.

Substantial completion of the improvements for Hospitality
Franchise Systems, Inc. ("HFS") at the Ramada property in
Phoenix, Arizona occurred October 31, 1996.  The Partnership
funded approximately $1.2 million related to its commitment for
improvements from the working capital reserve of the Partnership. 

<PAGE>
During the tenant improvement phase, the base rent due from HFS
was at a reduced rate and HFS was responsible for all operating
expenses of the property.  Upon substantial completion of the
improvements, the rental rate increased to approximately $14.61
per square foot annually and HFS will pay its proportionate share
of operating expenses which exceed $7.00 per square foot
annually.

During the fourth quarter, a small parcel of land adjacent to the
Ramada property was purchased for approximately $72,000.  The
Partnership purchased the property to be used for additional
parking.  Market interest in the area surrounding the Ramada
property has been increasing.  As a result of this interest, the
remaining two buildings at the Ramada property are scheduled for
renovation which will begin in March 1997.  Renovations will
include improvements to comply with the Americans With
Disabilities Act, and heating, air conditioning and exterior
renovations.  The total cost of renovations will be approximately
$900,000 to be paid from the working capital reserve of the
Partnership.  

The Manhattan Towers Buildings in Manhattan Beach, California
were 100% leased to Hughes Aircraft Company until August 31,
1996.  Control of the daily operations was assumed upon
expiration of the Hughes lease.  As part of the marketing
campaign to re-lease the property, the name of the property was 
changed from Parkview Plaza to Manhattan Towers.  Along with this
name change, the property will undergo repairs and renovations to
the lobby area, corridors and parking lot, as well as exterior
landscaping and signage.  The cost of these renovations is
estimated to be $2.7 million to be funded from the working
capital reserve of the Partnership.  In addition, subterranean
water damage was discovered in the parking garage.  Engineers and
other consultants were hired to assess the damage and determine
the appropriate remediation.  The cost of the repairs to the
parking garage is estimated to be $1.1 million and will be funded
from the working capital reserve of the Partnership.     

Since the expiration of the Hughes lease in August 1996,
significant leasing activity has occurred.  Hughes Aircraft
Company negotiated a one-year lease for 79,647 square feet at an
annual rate of $12 gross per square foot with an expiration date
of August 31, 1997.  The previous annual rental rate was
approximately $22.64 net per square foot for the entire 301,457
square feet of net leasable area.  

Other leases signed have terms from three to five years at an
annual rental rate of $13.80 per square foot.  One of the five
year leases provided for an allowance for tenant improvements at
$6.00 per square foot for a total of $74,274 to be paid out of
the working capital reserve of the Partnership.

<PAGE>
A sixty-two month lease was signed during the fourth quarter for
11,553 square feet.  This lease commenced February 1, 1997 and
ends March 31, 2002.  The lease provides for an annual rental
rate of $19.20 per square foot.  An allowance for tenant
improvements was provided for a total of approximately $404,000
to be paid from the working capital reserve of the Partnership.

As of December 31, 1996, these leases at Manhattan Towers total
145,796 of the 301,457 square feet, or 48%, of the total leasable
area of the property.  Rental rates for these new leases are
lower than the previous rate charged to Hughes, reflecting the
current market conditions in the area surrounding the property. 
One of the two buildings at this property remains vacant. Several
large tenant prospects have expressed interest in leasing the
vacant building.

The Manhattan Towers mortgage loan matured on August 31, 1996. 
The lender, Las Colinas Management Company, an affiliate of the
General Partner, renewed the loan for a period of two years at an
annual interest rate of 9.57% to reflect market rates at the time
of maturity.  The loan was converted to monthly interest only
payments with the principal of $15,000,000 due September 30,
1998.  This change in payment terms of the mortgage loan resulted
in a decrease in monthly debt service payments of approximately
$190,000.

During the year ended December 31, 1996, quarterly distributions
totaling $1,087,603 and $10,985 were distributed to the Limited
Partners and General Partner, respectively, for a total of
$1,098,588 in cash distributions.  Total cash distributions to
Partners for the year ended December 31, 1996 decreased as
compared to the year ended December 31, 1995 to reserve cash for
the renovations, tenant improvements and lease commissions
required to re-lease Manhattan Towers upon expiration of the
Hughes lease.  Due to the expiration of the Hughes lease in
August 1996, the two remaining vacant buildings at Ramada and the
vacancy at Curlew Crossing, tenant improvements and lease
commissions will be required at all of the Partnership properties
and will be funded from the Partnership's working capital
reserve.  Management evaluates reserves and the availability of
funds for distribution to Partners on a continuing basis based on
anticipated leasing activity and cash flows available from the
Partnership investments.

Future liquidity is expected to result from cash generated from
operations of the properties, interest on temporary investments
and ultimately through the sale of the properties. 


Results of Operations

For the three-year period ended December 31, 1996, income was
generated from rental income from the income-producing real
estate properties and interest income earned on the funds in
temporary investments.

<PAGE>
Expenses incurred during the same period were associated with the
operation of the Partnership's properties, interest on the
mortgages payable and various other costs required for
administration of the Partnership.

During 1995 and 1994, lease agreements between the Partnership
and tenants at two properties were absolute triple net leases. 
Under an absolute triple net lease, the lessee is required to
make all payments for expenses related to the use and occupation
of the leased premises, including real estate taxes and
assessments, property and liability insurance, repairs and
maintenance, utilities and other operating costs associated with
the property.  Accordingly, the Partnership receives rental
income and the lessee absorbs all such expenses.

Rental properties increased at December 31, 1996 as compared to
December 31, 1995 due primarily to improvements at Ramada for
HFS, offset by depreciation.  The decrease in cash and cash
equivalents was due to payment for tenant improvements for HFS. 
Deferred charges and other assets decreased at December 31, 1996
primarily due to amortizing deferred charges.  Other deposits
held decreased as a result of using the deposit held as a
contribution toward tenant improvements for HFS.  Accrued
expenses and other liabilities decreased at December 31, 1996 due
to a decrease in prepaid rent.

Rental income decreased for the year ended December 31, 1996 as
compared to December 31, 1995 primarily as a result of the
expiration of the Hughes lease at Manhattan Towers.  Hughes
provided monthly rent revenue of $568,748.  Rental income
increased for the year ended December 31, 1995 as compared to
December 31, 1994 due to the write-down of a deferred rent
receivable on Manhattan Towers in 1993.  Rental income is
recognized under the operating method, whereby aggregate rentals
are reported on a straight-line basis as income over the life of
the lease.  The deferred rent receivable remaining after the
original maturity date of the mortgage loan (March 31, 1995) was
written off in 1993; therefore, income recognized after March 31,
1995 was actual rent received. 

Depreciation expense increased for the year ended December 31,
1996 due to two months of depreciation on the tenant improvements
for HFS.  The write-down on Manhattan Towers in 1994 caused the
decrease in depreciation as of December 31, 1995.  Other direct
expenses increased for 1996 as compared to 1995 as a result of
assuming control of the operations at both Manhattan Towers and
Ramada.  Prior to the Hughes lease expiration on August 31, 1996,
at Manhattan Towers, Hughes was responsible for all operating
expenses under their triple net lease.  Prior to substantial
completion of the tenant improvements at Ramada for HFS on
October 31, 1996, HFS was responsible for all operating expenses. 
Operating expenses for Manhattan Towers accounted for
approximately $500,000 of the increase in other direct expenses
at December 31, 1996.  Operating expenses for the Ramada property
accounted for approximately $100,000 of the increase.  The
default by a tenant at Curlew Crossing caused an increase in 

<PAGE>
property taxes and bad debt expense.  Other direct expenses were
higher for 1995 as compared to 1994.  Contributing to this
increase was an increase in property insurance expense at
Manhattan Towers and an increase in bad debt expense at Curlew
Crossing.  Property tax expense was also higher at Curlew
Crossing due to a credit in 1994 resulting from a tax protest.
The gain on disposal of rental property at December 31, 1996 was
a result of the land condemnation at Curlew Crossing. See
"Liquidity and Capital Resources".  An investment property
write-down was recognized on Manhattan Towers in 1994.

Interest income decreased for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 due to lower cash
balances.  An increase in interest rates and a higher cash
reserve accounted for the increase in interest income for the
year ended December 31, 1995.

General and administrative expenses increased for the year ended
1996 as compared to the year ended 1995.  An increase in legal
expenses accounted for approximately half of the increase.  Legal
fees were incurred as a result of the default by a tenant and the
land condemnation at Curlew Crossing and new leases at Manhattan
Towers. Lease commissions at Manhattan Towers accounted for the
remaining increase in general and administrative expenses. 
General and administrative expenses decreased in 1995 as compared
to 1994 due to a decrease in printing charges and legal fees. 
The management fee is based on cash flow from operations of the
Partnership adjusted for cash reserves and fluctuated
accordingly.  The decrease in management fees for the year ended
1996 was primarily caused by the expiration of the Hughes lease
at Manhattan Towers.

Interest expense decreased for the year ended December 31, 1996
as compared to the year ended December 31, 1995.  The interest
rate on the Curlew Crossing mortgage loan was decreased to 8.25%
as compared to the 10.5% paid December 31, 1995.  Interest
expense on the Manhattan Towers loan decreased due to principal
balance reductions through August 31, 1996.  The decrease in
interest expense for 1995 as compared to 1994 reflected a
decrease in the interest rate charged on the Manhattan Towers
mortgage loan attributable to the loan modifications in 1994 and
a decrease in the loan balance from forgiveness of debt and
principal payments.  Slightly offsetting this decrease was an
increase in interest paid on the Curlew Crossing mortgage.  The
Curlew Crossing mortgage is based on the prime rate and the
changes in expense for this mortgage were a result of changes in
the prime rate.

<PAGE>
Inflation

An increase in inflation could affect the Partnership's
investments through increases in the costs of operating and
maintaining the properties and in various administrative costs of
Partnership operations.  The adverse effect inflation may have on
operating expenses would be offset to some extent by increases in
rental rates charged tenants at the Partnership's properties.  If
high occupancy levels are maintained at the properties, increases
in rental income should offset increasing property operating
expenses with minimal effect on operating income. 

<PAGE>
Item 8.  Financial Statements and Supplementary Data
<TABLE>
                   USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                                  BALANCE SHEETS
                            DECEMBER 31, 1996 AND 1995
<CAPTION>

                                                         1996          1995
<S>                                                <C>             <C> 
ASSETS

Rental properties, net (notes 3, 4 and 7)          $  39,262,249    39,125,747
Temporary investments, at cost which approximates 
     market value -
     Money market fund                                 9,301,147    12,202,023
Cash                                                     118,000       573,020
   Cash and cash equivalents                           9,419,147    12,775,043

Accounts receivable, net of allowance for doubtful
  accounts of $90,000 and $12,000                        555,959       419,871
Deferred rent                                          2,882,064     1,841,535
Deferred charges and other assets, at amortized cost   1,646,751     2,218,611

                                                   $  53,766,170    56,380,807


LIABILITIES AND PARTNERS' EQUITY

Mortgages payable to affiliates (notes 7 and 8)    $  26,000,000    27,818,182
Accounts payable, including amounts due
   to affiliates of $101,194 and $65,139                 414,274       138,535
Other deposits held                                       18,485     2,761,130
Accrued expenses and other liabilities                   326,166       837,192
         Total liabilities                            26,758,925    31,555,039

Partners' equity:
   General Partner:
      Capital contribution                                 1,000         1,000
      Cumulative net earnings                             14,982       (17,819)
      Cumulative distributions                          (269,199)     (258,214)
                                                        (253,217)     (275,033)
   Limited Partners (111,549 units):
      Capital contributions, net of offering costs    52,428,030    52,428,030
      Cumulative net earnings                          1,483,181    (1,764,083)
      Cumulative distributions                       (26,650,749)  (25,563,146)
                                                      27,260,462    25,100,801
         Total Partners' equity                       27,007,245    24,825,768

                                                   $  53,766,170    56,380,807


See accompanying notes to financial statements.
</TABLE>
 

<PAGE>
<TABLE>
                        USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                                    STATEMENTS OF INCOME
                         Years Ended December 31, 1996, 1995 and 1994
<CAPTION>

                                                         1996          1995          1994
<S>                                                <C>              <C>          <C>    
INCOME

Rental income                                      $   7,930,447     9,694,383     9,249,018
Less direct expenses, including
   depreciation of $1,509,109
   $1,477,439 and $2,324,394                          (2,543,615)   (1,743,046)   (2,533,232)
Gain on disposal of rental property                      157,852            --            --
Provision for investment property write-down (note 4)         --            --   (21,164,478)

     Net operating income (loss) (note 6)              5,544,684     7,951,337   (14,448,692)
Interest income (note 8)                                 592,123       648,218       343,378

         Total income (loss)                           6,136,807     8,599,555   (14,105,314)


EXPENSES

General and administrative (note 8)                      459,834       366,291       412,691
Management fee (note 8)                                   60,523       168,389       149,216
Interest (note 8)                                      2,336,385     2,766,034     4,390,598
         Total expenses                                2,856,742     3,300,714     4,952,505
Income (loss) before extraordinary item                3,280,065     5,298,841   (19,057,819)
Extraordinary gain on debt forgiveness (note 4)               --            --    20,800,000
Net income                                         $   3,280,065     5,298,841     1,742,181

Net income (loss) per limited partnership unit
  before extraordinary item                        $       29.11         47.03       (169.14)
Extraordinary item                                            --            --        184.60
Net income per limited partnership unit            $       29.11         47.03         15.46

See accompanying notes to financial statements.
</TABLE>


<PAGE>
<TABLE>
                       USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                                STATEMENTS OF PARTNERS' EQUITY
                        Years Ended December 31, 1996, 1995 and 1994
<CAPTION>

                                                       General       Limited
                                                       Partner       Partners       Total
<S>                                                <C>              <C>           <C>    
Balances at December 31, 1993                      $    (311,640)   21,476,661    21,165,021

Net income                                                17,422     1,724,759     1,742,181

Distributions                                            (16,901)   (1,673,236)   (1,690,137)

Balances at December 31, 1994                           (311,119)   21,528,184    21,217,065

Net income                                                52,988     5,245,853     5,298,841

Distributions                                            (16,902)   (1,673,236)   (1,690,138)

Balances at December 31, 1995                           (275,033)   25,100,801    24,825,768

Net income                                                32,801     3,247,264     3,280,065

Distributions                                            (10,985)   (1,087,603)   (1,098,588)

Balances at December 31, 1996                      $    (253,217)   27,260,462    27,007,245



See accompanying notes to financial statements.
</TABLE>



<PAGE>
<TABLE>
                        USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                                 STATEMENTS OF CASH FLOWS
                         Years Ended December 31, 1996, 1995 and 1994
<CAPTION>

                                                         1996          1995          1994
<S>                                                <C>              <C>          <C>                         
Cash flows from operating activities:
   Net income                                      $   3,280,065     5,298,841     1,742,181
   Adjustments to reconcile net income to net
      cash provided by operating activities:
         Depreciation                                  1,509,109     1,477,439     2,324,394
         Amortization                                    105,325        84,471        57,759
         Provision for investment property write-down         --            --    21,164,478
         Gain on debt forgiveness                             --            --   (20,800,000)
         Decrease (increase) in accounts receivable     (136,088)     (335,001)      169,410
         Decrease (increase) in deferred charges 
           and other assets                             (573,994)     (334,751)       91,275
         Increase (decrease) in accounts payable,
           accrued expenses and other liabilities     (2,977,932)    2,820,522    (1,910,760)
         Gain on disposal of rental property            (157,852)           --            --
         Loss on early retirement of fixed assets         10,598            --            --
         Other adjustments                                    --         7,118            --

           Cash provided by operating activities       1,059,231     9,018,639     2,838,737

Cash flows from investing activities:
   Additions to rental properties                     (1,718,757)           --       (22,771)
   Proceeds from disposal of rental properties           220,400            --            --

           Cash used in investing activities          (1,498,357)           --       (22,771)

Cash flows from financing activities:
   Repayment of mortgages payable                     (1,818,182)   (2,727,273)     (454,545)
   Distributions to partners                          (1,098,588)   (1,690,138)   (1,690,137)

           Cash used in financing activities          (2,916,770)   (4,417,411)   (2,144,682)

Net increase (decrease) in cash and cash equivalents  (3,355,896)    4,601,228       671,284

Cash and cash equivalents at beginning
   of year                                            12,775,043     8,173,815     7,502,531

Cash and cash equivalents at end of year           $   9,419,147    12,775,043     8,173,815


See accompanying notes to financial statements.
</TABLE>


<PAGE>
          USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                  NOTES TO FINANCIAL STATEMENTS
                 December 31, 1996, 1995 and 1994


1. Organization, Summary of Significant Accounting Policies and  
   Other

  USAA Income Properties III Limited Partnership is engaged
  solely in the business of real estate investment; therefore,
  presentation of information about industry segments is not
  applicable.

  The Partnership owns a shopping center in Clearwater, Florida
  and office buildings in Phoenix, Arizona and Manhattan Beach,
  California.  The Partnership's revenue is subject to changes
  in the economic environments of these areas.

  The General Partner, USAA Properties III, Inc., is a wholly-
  owned subsidiary of USAA Real Estate Company (Realco), which
  is a wholly-owned subsidiary of USAA Capital Corporation,
  which is a wholly-owned subsidiary of United Services
  Automobile Association (USAA).

  The preparation of financial statements in conformity with
  generally accepted accounting principles requires management
  to make estimates and assumptions that affect the reported
  amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of the
  financial statements and the reported amounts of revenues and
  expenses during the reporting  period.  Actual results could
  differ from those estimates.

  Rental properties are valued at cost.  The carrying amount of
  a property is not changed for temporary fluctuations in value
  unless the carrying value is believed to be permanently
  impaired.  In 1995, the Partnership adopted the provisions of
  Financial Accounting Standards Board Statement No. 121,
  "Accounting for Impairment of Long-Lived Assets and for Long-
  Lived Assets to Be Disposed Of," ("Statement 121"). 
  Statement 121 provides guidance for determining impairment of
  long-lived assets utilizing undiscounted future cash flows. 
  The assessment for and measurement of impairment is based
  upon the undiscounted cash flows and fair value,
  respectively, of the individual properties.  Based on the
  provisions of Statement 121, the Partnership's long-lived
  assets, real estate and improvements are not considered
  impaired.  The adoption of Statement 121 had no financial
  statement impact.

  Depreciation is provided over the estimated useful lives of
  the properties using the straight-line method.  The estimated
  useful lives of the buildings and improvements are 30 years
  (19 - 39 years for Federal income tax purposes).

<PAGE>
  Rental income is recognized under the operating method,
  whereby aggregate rentals are reported on a straight-line
  basis as income over the life of the lease.  Rental income
  recognized was $1,048,477 more, $874,036 more and $399,737
  less than the amount due per the lease agreements for the
  years ended December 31, 1996, 1995 and 1994, respectively.
 
  Deferred rent results from recognition of income as required
  by generally accepted accounting principles.

  A land lease receivable, arising from the sale of
  improvements at a rental property, was accounted for in
  accordance with generally accepted accounting principles,
  whereby the carrying amount of the receivable was reduced by
  a portion of the payment received on the ground lease.  

  No provision or credit for income taxes has been made as the
  liability for such taxes is that of the Partners rather than
  the Partnership.  The Partnership files its tax return on an
  accrual basis.

  For the purposes of the Statements of Cash Flows, all highly
  liquid marketable securities that have a maturity at purchase
  of three months or less, and money market mutual funds are
  considered to be cash equivalents.  

  For financial reporting purposes, net income (loss) is
  allocated 1% to the General Partner and 99% to the Limited
  Partners.  Net income (loss) per limited partnership unit is
  based upon the limited partnership units outstanding at the
  end of each year and the net income (loss) allocated to the
  Limited Partners.

  Cash distributions per limited partnership unit were $9.75
  for 1996 and $15.00 for 1995 and 1994, and were based on the
  limited partnership units outstanding at each quarter end and
  the cash distributions allocated to Limited Partners.

  Certain 1995 balances have been reclassified to conform to
  the 1996 presentation.


2. Partnership Agreement

  Pursuant to the terms of the Partnership Agreement, all
  Distributable Cash shall be distributed in the ratio of 1% to
  the General Partner and 99% to the Limited Partners within 60
  days after the close of each fiscal quarter.

  Generally, net taxable income or losses not arising from the
  sale or refinancing of properties of the Partnership and
  Distributable Cash are allocated 99% to the Limited Partners
  and 1% to the General Partner.  Cash Distributions from the
  sale or refinancing of property are allocated first to the
  Limited Partners until the Limited Partners shall receive an

<PAGE>
  amount equal to their adjusted capital contributions; second,
  to the Limited Partners until the Limited Partners shall
  receive a cumulative amount from cash distributions from 
  operations, sales or refinancings equal to 6% per annum of
  their adjusted capital contributions; third, to all Partners,
  in an amount equal to their respective positive capital
  account balances to the extent such balances exceed the
  amounts provided for in the Partnership Agreement; and
  fourth, the balance, 90% to the Limited Partners and 10% to
  the General Partner.

  Generally, all items of income, gain, loss, deduction and
  credit from operations will be allocated 99% to the Limited
  Partners and 1% to the General Partner.  Net gain or net loss
  from the sale or other disposition of a property shall be
  allocated as described in the Partnership Agreement.


3. Rental Properties

  Rental properties at December 31 consisted of the following:

                                        1996         1995

     Buildings and improvements      $54,041,957   52,405,717
     Land                              8,970,396    8,961,025
                                      63,012,353   61,366,742
     Less accumulated depreciation   (23,750,104) (22,240,995)
                                     $39,262,249   39,125,747

4. Provision for Investment Property Write-Down
         
  On October 31, 1994, after lengthy negotiations with the
  third-party lender, the $40,800,000 non-recourse loan was
  purchased from the lender for $20,000,000 by Las Colinas
  Management Company ("LCMC"), an affiliate of the General
  Partner.  Effective with the loan acquisition, LCMC modified
  the terms of the loan to the Partnership whereby $20,800,000
  of the loan balance was forgiven, resulting in a loan
  principal balance of $20,000,000.  The Partnership recognized
  an extraordinary income item for the gain on debt forgiveness
  in the amount of $20,800,000.  Other modifications in loan
  terms included extension of the loan maturity date from March
  15, 1995 to August 31, 1996, the date of expiration of the
  single-tenant lease at Manhattan Towers.  Payment terms were
  revised from semi-annual payments of interest-only to monthly
  payments including principal of approximately $227,000 plus
  interest at a floating rate based on the London Interbank
  Offered Rate ("LIBOR") plus .625%.  On October 31, 1994, the
  Partnership reimbursed LCMC for fees paid to the third-party
  lender, legal fees and filing fees of approximately $693,000,
  in addition to accrued interest of approximately $309,000 for
  the period from September 16, 1994, the date of the previous
  semi-annual interest payment, to October 31, 1994.

<PAGE>
  Under generally accepted accounting principles, a review of
  an asset's value is required when events indicate that the
  carrying amount of the asset may not be recoverable.
  Acquisition of the loan by an affiliate of the General
  Partner at a $20,800,000 discount resulted in a review of
  value of the Manhattan Towers property.  Through analysis it
  was determined that a permanent impairment of value had
  occurred on Manhattan Towers.  Accordingly, a provision for
  investment property write-down was recorded at December 31,
  1994 for $21,164,478, the amount by which the carrying value
  of the asset exceeded $20,000,000, the amount determined to
  be the fair value of the property.


5. Minimum Future Rentals

  Operating leases with tenants have remaining terms from eight
  months to 26 years.  Minimum future rentals are cash payments
  to be received under non-cancelable leases over the lease
  terms and do not necessarily represent rental income under
  generally accepted accounting principles.  Rental income
  reported in the Statements of Income is recognized under the
  operating method, whereby aggregate rentals are reported on a
  straight-line basis as income over the life of the lease. 
  Approximate minimum future rentals are as follows:
         
                   1997         $ 4,076,000
                   1998           3,600,000     
                   1999           3,411,000
                   2000           3,049,000 
                   2001           3,039,000
                   Thereafter    20,979,000         
                                $38,154,000 


6. Triple Net Leases

  During 1995 and 1994, lease agreements between the
  Partnership and tenants at two properties were absolute
  triple net lease arrangements whereby the lessee was required
  to make all payments for expenses related to the use and
  occupation of the leased premises including real estate taxes
  and assessments, property and liability insurance, repairs
  and maintenance, utilities and other operating costs
  associated with the property.  Accordingly, net operating
  income for 1995 and 1994 reflects only rental income and
  excludes all expenses directly related to the operations of
  the properties as payments for such expenses are made
  directly by the respective lessees.

<PAGE>
7. Mortgages Payable

  Mortgages payable to affiliates at December 31 consisted of
  the following:

                                          1996          1995    
    First mortgage note payable, 
      interest at 8.25%, due March 31,
      1998, interest only payable
      monthly; secured by rental property 
      with a depreciated cost of 
      approximately $7,590,000.        $11,000,000    11,000,000   
          
    First mortgage note payable,
      interest at 9.57%, due September 30,
      1998, interest only payable monthly;
      secured by rental property with a 
      depreciated cost of approximately 
      $18,842,000.                      15,000,000    16,818,182  
                                       $26,000,000    27,818,182

         
  Cash payments for interest expense were $2,105,667,
  $2,420,902 and $5,422,625 for 1996, 1995 and 1994,
  respectively.


8. Transactions with Affiliates

  USAA Real Estate Company (the Adviser) may receive property
  acquisition fees of up to 4% of the gross offering proceeds,
  real estate brokerage commissions of up to 1% of the
  aggregate selling prices of property sold and management
  fees equal to 4% of Cash Receipts from Operations not to
  exceed 9% of adjusted cash flow from the Partnership.

  Through January 1995, the Partnership had funds invested in
  USAA Mutual Fund, Inc. and earned interest thereon at market
  rates.

  An affiliate of the General Partner, Las Colinas Management
  Company, received monthly payments of principal of
  $227,272.72 plus interest at one-month LIBOR plus .625%
  through August 31, 1996.  The mortgage loan was converted to
  interest only payments at an interest rate of 9.57%.

<PAGE>
  Quorum Real Estate Services Corporation (also known as USAA
  Realty Company), an affiliate of the General Partner,
  provides property management and leasing services for the
  properties and may receive fees of up to 6% of the property
  cash receipts for those services.  

  A summary of transactions with affiliates follows:

<TABLE>
<CAPTION>
                      Reimbursement   Interest   Management     Lease      Interest
                     of Expenses (1)   Income       Fees     Commissions  Expense (2)    Total
<S>                <C>                 <C>         <C>           <C>       <C>         <C>   
USAA Mutual
Fund, Inc.:
  1996             $             --         --          --           --           --          --
  1995                           --     (1,262)         --           --           --      (1,262)
  1994                           --    (36,253)         --           --           --     (36,253)

USAA Real Estate
Company:
  1996                      200,417         --      60,523           --      964,529   1,225,469
  1995                      162,493         --     168,389           --    1,191,014   1,521,896
  1994                      174,407         --     149,216           --    1,005,973   1,329,596

Las Colinas
Management
Company:
  1996                           --         --          --           --    1,141,138   1,141,138
  1995                           --         --          --           --    1,229,888   1,229,888
  1994                           --         --          --           --      208,656     208,656

Quorum Real Estate
Services Corporation:
  1996                       85,876         --      63,446       30,541           --     179,863
  1995                       47,548         --      46,628       22,816           --     116,992
  1994                       41,652         --      46,501       24,824           --     112,977


(1)  Reimbursement of expenses represents amounts paid or accrued as reimbursement of expenses 
     incurred on behalf of the Partnership at actual cost and does not include any mark-up or
     items normally considered as overhead.
(2)  Represents interest expense at market rate on mortgage loans (note 7).
</TABLE>


<PAGE>
9. Income Taxes

  A reconciliation of financial statement net income to taxable
  income (loss) follows:

                                      1996        1995         1994

  Net income -
     financial statement basis   $ 3,280,065     5,298,841   1,742,181
  Adjusted by:
     Excess tax depreciation 
       over financial statement    
       depreciation               (2,677,702)   (2,695,639) (1,849,019)
     Increase (decrease) in
       prepaid rent                 (521,993)      569,123    (687,208)
     Decrease (increase) in deferred
       rent and land costs          (557,275)      525,592     147,025
     Investment property write-down     --            --    21,164,478
     Book bad debt expense in      
       excess of tax bad debt
       expense                        78,000        12,000        --
     Other reconciling items          19,673       (68,354)     31,271
  Taxable income (loss)           $ (379,232)    3,641,563  20,548,728


10. Major Customer Information

  During 1996, the Partnership recorded approximately
  $1,644,000 and $4,869,000 of rental income from two major
  tenants which represented approximately 21% and 62%
  respectively of total rental income for 1996.

  During 1995, the Partnership recorded approximately
  $1,246,000 and $6,679,000 of rental income from two major
  tenants which represented approximately 13% and 69%
  respectively of total rental income for 1995.

  During 1994, the Partnership recorded approximately
  $1,652,000 and $6,241,000 of rental income from two major
  tenants which represented approximately 18% and 67%
  respectively of total rental income for 1994.


11. Fair Value of Financial Instruments

  The carrying amount of cash and cash equivalents approximates
  fair value because of the short maturities of these
  instruments.

<PAGE>
  The carrying amount of the mortgages payable at December 31,
  1996 approximates fair value since these two mortgages
  payable were re-negotiated during 1996 to interest rates
  currently being offered for mortgage loans with similar
  characteristics and maturities.

  The current fair value of the mortgages payable at December
  31, 1995 was approximately $27,395,000, estimated by
  discounting the future cash flows using interest rates
  currently being offered for mortgage loans with similar
  characteristics and maturities.

<PAGE>
                   Independent Auditors' Report


The Partners
USAA Income Properties III Limited Partnership:

  We have audited the accompanying balance sheets of USAA
Income Properties III Limited Partnership as of December 31, 1996
and 1995, and the related statements of income, partners' equity,
and cash flows for each of the years in the three-year period
ended December 31, 1996.  These financial statements are the
responsibility of the Partnership's management.  Our
responsibility is to express an opinion on these financial
statements based on our audits.

  We conducted our audits in accordance with generally accepted
auditing standards.  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for our opinion.

  In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of USAA Income Properties III Limited Partnership as of December
31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted
accounting principles.



                                         /S/KPMG PEAT MARWICK LLP
                                         KPMG PEAT MARWICK LLP
  
San Antonio, Texas
February 3, 1997
 

<PAGE>
Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure
        
     Not applicable.

<PAGE>
                             Part III


Item 10. Directors and Executive Officers of the Registrant

       The General Partner of the Partnership is USAA Properties
III, Inc., a Texas corporation.

       As of January 1, 1997, the directors and executive
officers of the General Partner were as follows:


                                   POSITION WITH 
           NAME                   GENERAL PARTNER


       Edward B. Kelley          Chairman, President,
                                 Chief Executive Officer and
                                 Director

       T. Patrick Duncan         Vice Chairman
                                 Senior Vice President -
                                 Real Estate Operations and
                                 Director

       Randal R. Seewald         Vice President, Secretary,
                                 Legal Counsel and Director

       Martha J. Barrow          Vice President -
                                 Administration and
                                 Finance/Treasurer

       S. Wayne Peacock          Vice President -
                                 Portfolio Management

       David A. Rosales          Assistant Vice President - 
                                 Controller 

       Susan T. Wallace          Assistant Vice President - 
                                 Acquisitions and Dispositions

       David M. Holmes           Assistant Vice President -
                                 Capital Investments

       Stephen S. King           Assistant Vice President -
                                 Western Region

       All of the foregoing directors and executive officers
have been elected to serve one-year terms until the annual
meeting of the General Partner.

<PAGE>
       There are no arrangements or understandings between or
among any of said directors or executive officers to be elected
or selected as such, nor are there any family relationships among
any of the foregoing directors and executive officers.  The
foregoing directors and executive officers are also officers
and/or directors of various affiliated companies of the General
Partner.

       The age and business experience of each of the directors
and executive officers of the General Partner is as follows:

       Edward B. Kelley, 56, joined USAA in April 1989 and is
Vice Chairman, President, Chief Executive Officer and Director of
USAA Real Estate Company and Chairman, President, Chief Executive
Officer and Director of USAA Real Estate Development Company,
USAA Real Estate Management Company, Quorum Real Estate Services
Corporation, USAA Properties Fund, Inc., USAA Investors I, Inc.,
USAA Investors II, Inc., USAA Properties II, Inc., USAA
Properties III, Inc., USAA Properties IV, Inc., La Paz, Inc.,
USAA Real Estate Equities, Inc., Alhambra Gables One, Inc., L. A.
Wilshire One, Inc., USAA Real Estate - Midwest, Inc., and Las
Colinas Management Company.  He also serves as Chief Executive
Officer, President and Director of Fiesta Texas Showpark, Inc.,
La Cantera Development Company and La Cantera Hospitality, Inc. 
Mr. Kelley is also Chairman of the Board, Chief Executive Officer
and Director of USAA Equity Advisors, Inc.  Mr. Kelley serves as
President and Director of USAA Health Services, Inc.  All of the
previously named companies are affiliates of the General Partner. 
He graduated from St. Mary's University of San Antonio, Texas
with a Bachelor of Business Administration Degree in Finance in
1964 and was awarded a Master of Business Administration Degree,
in Finance, by Southern Methodist University, Dallas, Texas in
1967.  Mr. Kelley was employed by Barshop Enterprises, Inc., of
San Antonio, Texas from July 1980 until April 1989 where he was
President and an Advisory Director of Barshop Enterprises, Inc.
and its corporate subsidiaries.  The Barshop group of companies
is engaged in the development, management and ownership of
commercial real estate properties in San Antonio and other Texas
cities.  He is past Chairman of the Board and a member of the
Executive Committee of the Greater San Antonio Chamber of
Commerce; past member of the Board of Directors, Executive
Committee, and past President of the San Antonio chapter of the
National Association of Industrial and Office Parks; past member
of the Board of Directors of the San Antonio Economic Development
Foundation, and past Chairman of the Board of Trustees of St.
Mary's University and its Executive Committee.  Mr. Kelley is a
member of the Board of Directors and Executive Committee, Vice
President of the Board of Directors, and Chairman of the 1994
Friends of Scouting Bexar County Campaign, as well as the
President of the Alamo Area Council of Boy Scouts of America;
member of the Board of Trustees of St. Mary's University; member
of the Board of Trustees of the Baptist Children's Home of San
Antonio; member of the Board of Directors of the San Antonio
Economic Development Foundation; member of Board of Trustees for
the United Way of San Antonio and Bexar County; and a member of
the Board of Directors of the American Industrial Properties REIT
(AIP).

<PAGE>
       T. Patrick Duncan, 47, is Senior Vice President - Real
Estate Operations and Director of USAA Real Estate Company, USAA
Real Estate Equities, Inc. and USAA Health Services, Inc.  He
also serves as Senior Vice President, Director and Vice Chairman
of USAA Real Estate Development Company, USAA Real Estate
Management Company, Quorum Real Estate Services Corporation, USAA 
Properties Fund, Inc., USAA Investors I, Inc., USAA Investors II,
Inc., USAA Properties II, Inc., USAA Properties III, Inc., USAA
Properties IV, Inc., La Paz, Inc., USAA Equity Advisors, Inc.,
Alhambra Gables One, Inc., L. A. Wilshire One, Inc., USAA Real
Estate-Midwest, Inc., and Las Colinas Management Company.  All of
the previously named companies are affiliates of the General
Partner.  He is a 1972 graduate of the University of Arizona and
was awarded the Bachelor of Science Degree with a dual major in
Accounting and Finance.  Prior to joining USAA in 1986, Mr.
Duncan was an audit manager with Deloitte Touche and Company and
Comptroller of Trammell Crow Company in Dallas, Texas.  Mr.
Duncan is a Certified Public Accountant and holds a Texas Real
Estate Brokers License.  He holds memberships in the Texas and
Arizona State Boards of Accounting, the Texas and Arizona State
Societies of Certified Public Accountants, the International
Council of Shopping Centers, the Urban Land Institute, The
National Association of Real Estate Investment Managers and the
Pension Real Estate Association.  Mr. Duncan serves on the Board
of Trustees and is Chairman of the Finance Committee of the
Daughters of Charity; and Board member of the North San Antonio
Chamber of Commerce, as well as Chairman of its Governmental
Affairs Council.  Mr. Duncan is a Board member of Meridian
Industrial Trust and American Industrial Trust, two public REITs
traded on the New York Stock Exchange.  Mr. Duncan serves on
various committees of these two entities.

       Randal R. Seewald, 43, began his career with USAA in
1976, and is currently Vice President, Director, Secretary and
Legal Counsel of USAA Real Estate Development Company, USAA Real
Estate Management Company, USAA Properties Fund, Inc., USAA
Properties II, Inc., USAA Properties III, Inc., USAA Properties
IV, Inc., USAA Investors I, Inc., USAA Investors II, Inc.,
Alhambra Gables One, Inc., L. A. Wilshire One, Inc., Quorum Real
Estate Services Corporation, USAA Real Estate-Midwest, Inc., La
Paz, Inc., USAA Equity Advisors, Inc., USAA Health Services,
Inc., and Las Colinas Management Company.  He is also Vice
President, Secretary and Legal Counsel of USAA Real Estate
Company and USAA Real Estate Equities, Inc.  Mr. Seewald serves
as Vice President, Legal Counsel, Treasurer and Secretary of
Fiesta Texas Showpark, Inc., La Cantera Development Company and
La Cantera Hospitality, Inc.  All of the previously named
companies are affiliates of the General Partner.  Mr. Seewald
holds a Bachelor of Business Administration from Texas A&M
University and a J.D. from St. Mary's University School of Law. 
He is a member of the State Bar of Texas, the American Bar
Association, the San Antonio Bar Association, and the American
Corporate Counsel Association.

<PAGE>
       Martha J. Barrow, 49, is Vice President, Administration
and Finance, and Treasurer of USAA Real Estate Company, Alhambra
Gables One, Inc., L.A. Wilshire One, Inc., La Paz, Inc., Las
Colinas Management Company, Quorum Real Estate Services
Corporation, USAA Health Services, Inc., USAA Investors I, Inc.,
USAA Investors II, Inc., USAA Properties Fund, Inc., USAA
Properties II, Inc., USAA Properties III, Inc., USAA Properties
IV, Inc., USAA Real Estate-Midwest, Inc., USAA Real Estate 
Development Company, USAA Real Estate Equities, Inc., and USAA
Real Estate Management Company.  Ms. Barrow serves as President
of USAA Equity Advisors, Inc.  All of the previously named
companies are affiliates of the General Partner.  Ms. Barrow
joined USAA in June 1983.  Prior to her joining USAA, she served
as a Tax Accountant of La Quinta Motor Inns, Inc. and as Senior
Accountant with NL Industries.  She is a Certified Public
Accountant in the state of Texas and is a member of the Texas
Society of Certified Public Accountants and the American
Institute of Certified Public Accounts.  She is a license holder
for Securities Registration Series 7, Series 63, and Series 24. 
Ms. Barrow holds a Bachelor of Business Administration in
Accounting from Pan American University and an Master of Business
Administration from St. Mary's University.  She is a member of
the National Association of Real Estate Investment Managers
(NAREIM), the National Council of Real Estate Investment
Fiduciaries (NCREIF), and the American Real Estate Society
(ARES).

       S. Wayne Peacock, 38, is Vice President, Portfolio
Management of USAA Real Estate Company, USAA Properties Fund,
Inc., USAA Properties II, Inc., USAA Properties III, Inc., USAA
Properties IV, Inc., USAA Investors I, Inc., USAA Investors II,
Inc., Quorum Real Estate Services Corporation, USAA Real Estate
Equities, Inc., Alhambra Gables One, Inc., L. A. Wilshire One,
Inc., USAA Equity Advisors, Inc., USAA Real Estate Development
Company, and USAA Real Estate-Midwest, Inc.  He is also a
Director of Quorum Real Estate Services Corporation.  All of the
previously named companies are affiliates of the General Partner. 
Mr. Peacock joined USAA in January 1992.  Mr. Peacock has
previous real estate experience with Coldwell Banker and Merrill
Lynch.  He graduated in 1981 from Tulane University, New Orleans,
Louisiana, where he received a Bachelor of Arts degree in
Economics.  Mr. Peacock is a Certified Commercial Investment
Manager (CCIM).  He holds memberships in the San Antonio Board of
Realtors and CCIM.

       David A. Rosales, 40, is Assistant Vice President -
Controller for USAA Real Estate Company, Alhambra Gables One,
Inc., L.A. Wilshire One, Inc., La Paz, Inc., Las Colinas
Management Company, USAA Equity Advisors, Inc., USAA Investors I,
Inc., USAA Investors II, Inc., USAA Properties Fund, Inc., USAA
Properties II, Inc., USAA Properties III, Inc., USAA Properties
IV, Inc., USAA Real Estate - Midwest, Inc., USAA Real Estate

<PAGE>
Development Company, USAA Real Estate Equities, Inc., and USAA
Real Estate Management Company.  He is also Assistant Vice
President, Controller of Quorum Real Estate Services Corporation. 
All of the previously named companies are affiliates of the
General Partner.  Mr. Rosales joined USAA in September 1983.  He
holds a Bachelor of Business Administration from St. Mary's
University and an Master of Business Administration from Our Lady
of the Lake University.  He is a Certified Public Accountant in
the state of Texas and holds memberships in the Texas Society of
CPAs, the San Antonio chapter of CPAs and the American Institute 
of CPAs.  Mr. Rosales also holds memberships in the National
Association of Real Estate Companies and the National Council of
Real Estate Investments Fiduciaries.  He serves as Chairman of
the Board of Communities in Schools-San Antonio, Inc.

       Susan T. Wallace, 42, is Assistant Vice President, Real
Estate Investments for USAA Real Estate Company, USAA Properties
Fund, Inc., USAA Properties II, Inc., USAA Properties III, Inc.,
USAA Properties IV, Inc., USAA Investors I, Inc., USAA Investors
II, Inc., USAA Equity Advisors, Inc., Alhambra Gables One, Inc.,
L. A. Wilshire One, Inc., USAA Real Estate-Midwest, Inc., and
USAA Real Estate Equities, Inc.  All of the previously named
companies are affiliates of the General Partner.  Ms. Wallace
attended Bowling Green State University in Bowling Green, Ohio
and the University of Cincinnati in Cincinnati, Ohio.  From
December 1983 until September 1988 she served as Director with
USAA Real Estate Company where she was responsible for the
identification of equity investments and acquisition of the
identified investments.  Prior to joining USAA Real Estate
Company, she was Project Director and Division Manager for
Gibraltar Savings Association of Houston, Texas.  Ms. Wallace
holds a Texas Real Estate License, is a graduate of the Realtors
Institute and is a member of the San Antonio and Texas Board of
Realtors, the National Association of Realtors, the National
Association of Real Estate Investment Managers and the
International Association of Corporate Real Estate Executives. 
Ms. Wallace serves on the Board of Governors for the Affordable
Housing Investors Council.

         David M. Holmes, 36, is Assistant Vice President,
Capital Investments for USAA Real Estate Company, USAA Properties
Fund, Inc., USAA Properties II, Inc., USAA Properties III, Inc.,
USAA Properties IV, Inc., USAA Investors I, Inc., USAA Investors
II, Inc., USAA Equity Advisors, Inc., Alhambra Gables One, Inc.,
L.A. Wilshire One, Inc., and USAA Real Estate-Midwest, Inc.  All
of the previously named companies are affiliates of the General
Partner.  Mr. Holmes joined USAA in May 1985.  His
responsibilities include new property acquisition and capital
market activities.  Mr. Holmes currently oversees over 2 million
square feet of office and industrial development.  He also acts
as the primary contact for real estate securitization
transactions and coordinates contact with banking relationships,
alliance partners and other third party development or financing
sources.  Prior to joining USAA, Mr. Holmes was a tax consultant

<PAGE>
for Touche Ross & Company in San Antonio.  He is a 1982 graduate
of Trinity University, San Antonio, Texas, where he received a
Bachelor of Business Administration with a concentration in
Accounting and Finance and is a Certified Public Accountant.  He
has served on the Board of Directors of Big Brothers and Sisters
of San Antonio and as a member of the Finance Committee of the
San Antonio Public Library.

       Stephen S. King, 40, is Assistant Vice President -
Western Region of USAA Real Estate Company, L.A. Wilshire One,
Inc., La Paz, Inc., USAA Investors I, Inc., USAA Properties III,
Inc., and USAA Properties IV, Inc.  All of the previously named
companies are affiliates of the General Partner.  Mr. King joined
USAA in July 1993.  Prior to joining USAA, Mr. King had fifteen
years of professional real estate development, construction and
management experience.  He graduated in 1978 from Texas A&M
University, where he received a Bachelor of Arts in Economics. 
Mr. King is a licensed California Broker, a member of the
Institute of Real Estate Management (IREM), the Building Owners
and Managers Association (BOMA), the National Association of
Realtors, and the Lincoln Club of Orange County.

<PAGE>
Item 11. Executive Compensation

       The directors and officers of the General Partner of the
Partnership receive no current or proposed remuneration from the
Partnership or the General Partner.

       The General Partner is entitled to receive a share of
cash distributions, profits and losses and sales and refinancing
proceeds as described under the caption "Compensation and Fees"
at pages 11-14 and "Profits and Losses and Cash Distributions" at
pages 33-36 of the Prospectus, dated May 6, 1985, filed pursuant
to Rule 424(b).  Copies of these pages are attached hereto as
Exhibit 99.b and incorporated herein by reference.  For the year
ended December 31, 1996, the General Partner received cash
distributions of $10,985.


Item 12. Security Ownership of Certain Beneficial Owners and
         Management

(a)  Security Ownership of Certain Beneficial Owners

                Name and
               Address of         Amount and 
 Title of      Beneficial     Nature of Beneficial    Percent of
  Class          Owner           Ownership(1)            Class   

Units of     USAA Properties      6,323 Units              5.7%
Limited      III, Inc.            of Limited
Partnership  (General Partner)    Partnership
Interests    (2)
             8000 Robert F. McDermott
             Fwy., IH 10 West, 
             Suite 600
             San Antonio, Texas

  (1)    The Amended and Restated Agreement of Limited Partnership
         provides that the General Partner will vote such Units in
         the same proportion as all other Limited Partners in the
         event a vote of Limited Partners is taken.

  (2)    USAA Properties III, Inc. is a wholly-owned subsidiary of
         USAA Real Estate Company, which is a wholly-owned
         subsidiary of USAA Capital Corporation, which is a
         wholly-owned subsidiary of USAA.

(b)  Security Ownership of Management

     None of the officers and directors of the General Partner
of the Partnership beneficially own equity securities of the
registrant or any of its parents.
 
     No arrangements are known to the Partnership which may
result in a change of control of the Partnership.

<PAGE>
Item 13. Certain Relationships and Related Transactions

     The Partnership is permitted to engage in various
transactions involving the General Partner or its affiliates.

     Pursuant to an Advisory Agreement, the Adviser, an
affiliate of the General Partner, can receive, in the aggregate,
property acquisition fees of up to 4% of the gross offering
proceeds; real estate brokerage commissions of up to 1% of the
selling prices of the properties sold and management fees equal
to 4% of Cash Receipts from Operations not to exceed 9% of
adjusted cash flow from the Partnership.

     An affiliate of the General Partner, USAA Investment
Management Company, received selling commissions equal to 4% of
the gross proceeds from sales of limited partnership units and an
expense allowance equal to 2% of the gross offering proceeds for
organizational and offering expenses.  USAA Investment Management
Company may receive a maximum annual advisory fee of 1/2 of 1% of
the amount of any temporary investment in a money market fund or
mutual fund sponsored by USAA or any affiliate of USAA.  A
portion of the Partnership's working capital reserve and other
available funds were invested in USAA Mutual Fund, Inc.

     An affiliate of the General Partner, Las Colinas
Management Company, received monthly payments of principal of
$227,272.72 plus interest at the one-month London Interbank
Offered Rate (LIBOR) plus .625%, in connection with the Manhattan
Towers note payable through August 1996.  The mortgage loan was
then converted to interest only payments at an annual interest
rate of 9.57% with the principal of $15,000,000 due September 30,
1998.

     An affiliate of the General Partner, Quorum Real Estate
Services Corporation (also known as USAA Realty Company),
provides property management and leasing services for the
properties and may receive fees of up to 6% of property cash
receipts for those services.

<PAGE>
     A summary of transactions with affiliates follows for the
years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
                      Reimbursement   Interest   Management     Lease      Interest
                     of Expenses (1)   Income       Fees     Commissions  Expense (2)    Total
<S>                <C>                 <C>         <C>           <C>       <C>         <C>  
USAA Mutual
Fund, Inc.:
  1996             $             --         --          --           --           --          --
  1995                           --     (1,262)         --           --           --      (1,262)
  1994                           --    (36,253)         --           --           --     (36,253)

USAA Real Estate
Company:
  1996                      200,417         --      60,523           --      964,529   1,225,469
  1995                      162,493         --     168,389           --    1,191,014   1,521,896
  1994                      174,407         --     149,216           --    1,005,973   1,329,596

Las Colinas
Management
Company:
  1996                           --         --          --           --    1,141,138   1,141,138
  1995                           --         --          --           --    1,229,888   1,229,888
  1994                           --         --          --           --      208,656     208,656

Quorum Real Estate
Services Corporation:
  1996                       85,876         --      63,446       30,541           --     179,863
  1995                       47,548         --      46,628       22,816           --     116,992
  1994                       41,652         --      46,501       24,824           --     112,977


(1)  Reimbursement of expenses represents amounts paid or accrued as reimbursement of expenses 
     incurred on behalf of the Partnership at actual cost and does not include any mark-up or
     items normally considered as overhead.
(2)  Represents interest expense at market rate on mortgage loans.
</TABLE>

<PAGE>
                             PART IV


Item 14. Exhibits, Financial Statement Schedules and Reports on
         Form 8-K 

         The following documents are filed as part of this report. 
         

(a)   1. Financial Statements

         The following financial statements, notes to financial
statements and independent auditors' report are included in Part
II Item 8:

         Balance Sheets as of December 31,
           1996 and 1995

         Statements of Income for the 
           Years Ended December 31, 1996,
           1995 and 1994

         Statements of Partners' Equity for 
           the Years Ended December 31, 
           1996, 1995 and 1994

         Statements of Cash Flows for the 
           Years Ended December 31, 1996,
           1995 and 1994
                                                               
         Notes to Financial Statements

         Independent Auditors' Report                            


   2.    Financial Statement Schedules

         Valuation and Qualifying Accounts
           for the Years Ended December 31, 
           1996, 1995 and 1994 (Schedule II)

         Real Estate and Accumulated
           Depreciation as of December 31,
           1996 (Schedule III)

         Independent Auditors' Report                         

         All other schedules have been omitted as the schedules
are not required under the related instructions, are not
applicable, or the information required thereby is set forth in
the financial statements or the notes thereto.       

<PAGE>
Item 14.(a) 3. Exhibits

 Exhibit
   No.              Description

  3(a)   Restated Certificate and Agreement of Limited
         Partnership dated as of May 6, 1985, attached as
         Exhibit A to the Partnership's Prospectus dated May 6,
         1985, filed pursuant to Rule 424(b) (Regis. No. 2-96113),
         and incorporated herein by this reference.

  3(b)   Certificate of Amendment to Restated Certificate and
         Agreement of Limited Partnership of USAA Income
         Properties III Limited Partnership dated February 14,
         1990, attached as Exhibit 3(b) (Regis. No. 2-96113) to
         the Partnership's Annual Report on Form 10-K for the
         year ended December 31, 1989, and incorporated herein
         by this reference.

  27     Financial Data Schedule

  99(a)  "Glossary" (pages 71-74) contained in the Prospectus
         dated May 6, 1985, filed as a part of Amendment No. 1
         to the Registration Statement on Form S-11 (Regis. No.
         2-96113).

  99(b)  "Compensation and Fees" (pages 11-14) and "Profits and
         Losses and Cash Distributions" (pages 33-36) of the
         Prospectus, dated May 6, 1985, filed as part of
         Amendment No. 1 to the Registration Statement on Form
         S-11 (Regis. No. 2-96113).



Item 14. (b)  Reports filed on Form 8-K

         No Current Reports on Form 8-K have been filed during the
last quarter covered by this Form 10-K.

<PAGE>
<TABLE>

SCHEDULE II      USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                       Valuation and Qualifying Accounts
                  Years Ended December 31, 1996, 1995 and 1994
<CAPTION>

                        Balance          Additions                       Balance
                     at Beginning    charged to costs                     at end
     Description       of period       and expenses       Deductions    of period
<S>                 <C>                    <C>                 <C>        <C>
Allowance for doubtful
       accounts

         1996       $   12,000             78,387              387        90,000

         1995       $       --             12,118              118        12,000

         1994       $       --                131              131            -- 

</TABLE>

<PAGE>
<TABLE>

SCHEDULE III      USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                     Real Estate and Accumulated Depreciation
                                December 31, 1996
<CAPTION>

                                                                                     Cost Capitalized
                                                         Initial Cost to               Subsequent to
                                                           Partnership                   Acquisition
                                                                Buildings
  Year of         Date                                             and         Improve-       Carrying
Construction    Acquired         Description         Land      Improvements      ments         Costs

<S>           <C>            <C>                 <C>            <C>              <C>             <C>           
    1985      Mar. 31, 1986  Curlew Crossing
                             Shopping Center
                             Clearwater, FL      $ 3,700,000    15,717,762       2,394,250       --

    1985      Nov. 24, 1986  Manhattan Towers
                             Office Bldg.
                             Complex
                             Manhattan Beach, CA   6,500,000    60,062,552         432,558       --

    1964-     Dec. 5, 1986   Ramada World
    1973                     Headquarters Office
                             Bldg. Complex
                             Phoenix, AZ           4,000,000    11,443,225       1,213,637       --
                                                 $14,200,000    87,223,539       4,040,445       --

<CAPTION>
                                                        Gross Amount at Which
                                                         Carried at Close of
                                                                Period
                                                                Buildings   Total Investment Accumulated     Related
  Year of         Date                                             and        Properties    Depreciation   Mortgages
Construction    Acquired         Description         Land      Improvements    (2)(4)(6)       (1)(3)     Payable (5)

<S>           <C>            <C>                   <C>          <C>             <C>          <C>            <C>           
    1985      Mar. 31, 1986  Curlew Crossing
                             Shopping Center
                             Clearwater, FL        2,339,065     7,807,193      10,146,258    2,556,035     11,000,000

    1985      Nov. 24, 1986  Manhattan Towers
                             Office Bldg.
                             Complex
                             Manhattan Beach, CA   2,580,438    33,577,902      36,158,340   17,316,013     15,000,000

   1964-      Dec. 5, 1986   Ramada World
   1973                      Headquarters Office
                             Bldg. Complex
                             Phoenix, AZ           4,050,893    12,656,862      16,707,755    3,878,056            --
                                                   8,970,396    54,041,957      63,012,353   23,750,104     26,000,000

<PAGE>
SCHEDULE III (continued)

NOTES:
(1) Depreciation is based on a 30 year life, straight-line method for buildings and 5 year life,
    straight-line method for personal property.  Tenant improvements are amortized over the life
    of the related lease using the straight-line method.
<S>                                                          <C>           <C>                
(2) Reconciliation of real estate:
    Balance at December 31, 1993                                           $    82,577,687
      Additions during period-improvements                                          22,771
      Deductions during period
        Retirements                                          $      (4,158)
        Investment property write-down (7)                     (21,164,478)    (21,168,636)
    Balance at December 31, 1994                                                61,431,822
      Deductions during period-retirements                                         (65,080)
    Balance at December 31, 1995                                                61,366,742
      Additions during period-improvements                                       1,718,757
      Deductions during period-retirements                                         (73,146)
    Balance at December 31, 1996                                           $    63,012,353

(3) Reconciliation of accumulated depreciation:
    Balance at December 31, 1993                                           $    18,501,282
      Depreciation during period                                                 2,324,394
      Deductions during period-retirements                                          (4,158)
    Balance at December 31, 1994                                                20,821,518
      Depreciation during period                                                 1,477,439
      Deductions during period-retirements                                         (57,962)
    Balance at December 31, 1995                                                22,240,995
      Depreciation during period                                                 1,509,109
    Balance at December 31, 1996                                           $    23,750,104

(4) The aggregate cost of real estate owned by the Partnership at December 31, 1996 for Federal
    income tax purposes is $95,052,180.
(5) The investment property is pledged as security for the mortgage payable for which there is no
    recourse to the Partnership.
(6) During 1994, it was determined that a permanent impairment of value was sustained at Manhattan Towers
    and the property was written down.   See note 4 in the Notes to Financial Statements.
</TABLE>

<PAGE>
                  INDEPENDENT AUDITORS' REPORT 


THE PARTNERS
USAA INCOME PROPERTIES III LIMITED PARTNERSHIP:

Under date of February 3, 1997, we reported on the balance sheets
of USAA Income Properties III Limited Partnership as of December
31, 1996 and 1995, and the related statements of income,
partners' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996.  In connection with
our audits of the aforementioned financial statements, we also
have audited the related financial statement schedules as listed
in Item 14(a)2.  These financial statement schedules are the
responsibility of the Partnership's management.  Our
responsibility is to express an opinion on these financial
statement schedules based on our audits.

In our opinion, such financial statement schedules, when
considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.




                                      /s/KPMG PEAT MARKWICK LLP
                                      KPMG PEAT MARWICK LLP    

San Antonio, Texas
February 3, 1997

<PAGE>
                           SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, USAA INCOME PROPERTIES III
LIMITED PARTNERSHIP has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized:

USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
(Registrant)

By: USAA INCOME PROPERTIES III, INC.,
General Partner

By: /s/Edward B. Kelley
Edward B. Kelley
Chairman, President,
Chief Operating Officer
and Director

Date: March 25, 1997

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.


/s/Edward B. Kelley                    Date: March 25, 1997
Edward B. Kelley                       
Director, Chairman of the Board,
President and Chief Operating Officer
of the General Partner


/s/T. Patrick Duncan                   Date: March 25, 1997
T. Patrick Duncan
Director, Vice Chairman,
Senior Vice President - Real Estate
Operations of the General Partner


/s/Randal R. Seewald                   Date: March 25, 1997
Randal R. Seewald
Director, Vice President,
Secretary and Legal Counsel

                                
<PAGE>
            USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                                
                       INDEX TO EXHIBITS


                                                  Sequentially
Exhibit                                             Numbered
   No.            Description                         Page

  3(a)      Restated Certificate and Agreement
            of Limited Partnership dated as
            of May 6, 1985, attached as
            Exhibit A to the Partnership's
            Prospectus dated May 6, 1985, filed
            pursuant to Rule 424(b) (Regis. No.
            2-96113), and incorporated herein by
            this reference.                           --    

  3(b)      Certificate of Amendment to Restated
            Certificate and Agreement of Limited 
            Partnership of USAA Income Properties
            III Limited Partnership dated 
            February 14, 1990, attached as Exhibit 
            3(b) (Regis. No. 2-96113) to the 
            Partnership's Annual Report on Form 10-K
            for the year ended December 31, 1989, and 
            incorporated herein by this reference.    --


  27        Financial Data Schedule

  99(a)     "Glossary" (pages 71-74) contained in the
            Prospectus dated May 6, 1985, filed as
            a part of Amendment No. 1 to the
            Registration Statement on Form S-11 
            (Regis. No. 2-96113).

  99(b)     "Compensation and Fees" (pages 11-14) and
            "Profits and Losses and Cash Distributions" 
            (pages 33-36) of the Prospectus, dated 
            May 6, 1985, filed as part of Amendment 
            No. 1 to the Registration Statement on 
            Form S-11 (Regis. No. 2-96113).