UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549
                            FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the quarterly period ended September 30, 1996 
                                or
[  ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the transition period from              to 

Commission File Number:  0-13772 

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

Delaware                                   74-2356253 
(State or other jurisdiction of          (I.R.S. Employer
incorporation or organization)           Identification No.)

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

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

N/A
(Former name, former address and former fiscal year, if changed
since last report.)


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

                              1
<PAGE>
                              PART I

                  Item 1.  Financial Statements

<TABLE>
USAA Income Properties III Limited Partnership
Condensed Balance Sheets
<CAPTION>



                                                      September 30,
                                                          1996         December 31,
                                                       (Unaudited)         1995
<S>                                                 <C>                 <C> 
Assets
Rental properties, net                              $   39,168,084       39,125,747
Temporary investments, at cost 
   which approximates market value-
      Money market fund                                  9,982,325       12,202,023
Cash                                                        88,212          573,020
   Cash and cash equivalents                            10,070,537       12,775,043

Accounts receivable, including amount due from 
   affiliate of $12,496 for 1996 and net of allowance
   for doubtful accounts of $60,000 and $12,000          1,676,030          419,871
Deferred charges and other assets, at
   amortized cost                                        3,651,026        3,305,650

                                                    $   54,565,677       55,626,311


Liabilities and Partners' Equity
Mortgages payable to affiliates                     $   26,000,000       27,818,182
Accounts payable, including amounts due
   to affiliates of $2,806 and $65,139                     129,500          138,535
Accrued expenses and other liabilities                     686,954        2,843,826
         Total liabilities                              26,816,454       30,800,543

Partners' equity
   General Partner:
      Capital contribution                                   1,000            1,000
      Cumulative net income (loss)                          20,148          (17,819)
      Cumulative distributions                            (266,946)        (258,214)
                                                          (245,798)        (275,033)
   Limited Partners (111,549 units):
      Capital contributions, net of offering
         costs                                          52,428,030       52,428,030
      Cumulative net income (loss)                       1,994,642       (1,764,083)
      Cumulative distributions                         (26,427,651)     (25,563,146)
                                                        27,995,021       25,100,801
         Total Partners' equity                         27,749,223       24,825,768

                                                    $   54,565,677       55,626,311


See accompanying notes to condensed financial statements.
</TABLE>
                             2

<PAGE>
<TABLE>
USAA Income Properties III Limited Partnership
Condensed Statements of Income
(Unaudited)
<CAPTION>

                                                      Three Months     Three Months
                                                          Ended            Ended
                                                      September 30,    September 30,
                                                          1996             1995
<S>                                                 <C>                   <C>
Income
Rental income                                       $    1,893,051        2,473,316
Less direct expenses, including depre-
   ciation of $369,800 and $369,151                       (602,317)        (432,159)
      Net operating income                               1,290,734        2,041,157
Interest income                                            140,421          172,577
      Total income                                       1,431,155        2,213,734

Expenses
General and administrative (note 1)                        104,501           70,748
Management fee (note 1)                                    (46,611)          35,367
Interest (note 1)                                          566,142          687,699
      Total expenses                                       624,032          793,814
Net income                                          $      807,123        1,419,920

Net income per limited partnership unit             $         7.16            12.60


                                                       Nine Months      Nine Months
                                                          Ended            Ended
                                                      September 30,    September 30,
                                                          1996             1995
<S>                                                 <C>                  <C>
Income
Rental income                                       $    6,824,309        7,251,811
Less direct expenses, including depre-
   ciation of $1,108,732 and $1,108,287                 (1,538,984)      (1,315,825)
Gain on disposal of rental property                        157,852               --
      Net operating income                               5,443,177        5,935,986
Interest income                                            463,301          475,320
      Total income                                       5,906,478        6,411,306

Expenses
General and administrative (note 1)                        343,814          278,340
Management fee (note 1)                                     19,526          128,309
Interest (note 1)                                        1,746,446        2,094,045
      Total expenses                                     2,109,786        2,500,694
Net income                                          $    3,796,692        3,910,612

Net income per limited partnership unit             $        33.70            34.71


See accompanying notes to condensed financial statements.
</TABLE>
                             3

<PAGE>
<TABLE>
USAA Income Properties III Limited Partnership
Condensed Statements of Cash Flows
Nine months ended September 30, 1996 and 1995
(Unaudited)
<CAPTION>



                                                          1996             1995
<S>                                                 <C>                  <C>
Cash flows from operating activities:
   Net income                                       $    3,796,692        3,910,612
   Adjustments to reconcile net income to net
      cash provided by operating activities:
         Depreciation                                    1,108,732        1,108,287
         Amortization                                       77,448           58,821
         Loss on early retirement of assets                 10,600
         Increase in accounts receivable                (1,256,159)        (110,377)
         Increase in deferred charges
            and other assets                              (422,824)        (189,338)
         Increase (decrease) in accounts payable, 
            accrued expenses and other liabilities      (2,165,907)       2,407,120
         Gain on disposal of rental property              (157,852)
         Other adjustments                                      --            7,119
              Cash provided by operating activities        990,730        7,192,244

Cash flows from investing activities:
   Additions to rental properties                       (1,224,217)              --
   Proceeds from disposal of real estate property          220,400               --
              Cash used in investing activities         (1,003,817)              --

Cash flows from financing activities:
   Repayment of mortgages payable                       (1,818,182)      (2,045,455)
   Distributions to partners                              (873,237)      (1,267,603)
              Cash used in financing activities         (2,691,419)      (3,313,058)

Net increase (decrease) in cash and cash equivalents    (2,704,506)       3,879,186

Cash and cash equivalents at beginning of period        12,775,043        8,173,815

Cash and cash equivalents at end of period          $   10,070,537       12,053,001


See accompanying notes to condensed financial statements.
</TABLE>
                             4
<PAGE>
Notes to Condensed Financial Statements
September 30, 1996
(Unaudited)

1.  Transactions with Affiliates

  A summary of transactions with affiliates follows for the
  nine-month period ended September 30, 1996:

                                                  Quorum
                         USAA      Las Colinas  Real Estate
                      Real Estate  Management    Services
                        Company     Company     Corporation
Reimbursement
  of expenses (a)   $    158,008           --       57,359
Management fees           19,526           --       29,224
Lease commissions             --           --       11,838
Interest expense (b)     736,414      779,313           --
    Total           $    913,948      779,313       98,421


     (a)  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. 

     (b)  Represents interest expense at market rate on a mortgage
          loan.


2.   Other

     Reference is made to the financial statements in the Annual
     Report filed as part of the Form 10-K for the year ended
     December 31, 1995 with respect to significant accounting and
     financial reporting policies as well as to other pertinent
     information concerning the Partnership.  Information furnished
     in this report reflects all normal recurring adjustments which
     are, in the opinion of management, necessary for a fair
     presentation of the results for the interim periods presented.
     Further, the operating results presented for these interim
     periods are not necessarily indicative of the results which
     may occur for the remaining three months of 1996 or any other
     future period.

     The financial information included in this interim report as
     of September 30, 1996 and for the three months and nine months
     ended September 30, 1996 and 1995 has been prepared by
     management without audit by independent certified public
     accountants who do not express an opinion thereon. The
     Partnership's annual report includes audited financial
     statements.

                             5
<PAGE>

                            PART I

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

Liquidity and Capital Resources

At September 30, 1996, the Partnership had cash of $88,212 and
temporary investments of $9,982,325.  These funds were held in the
working capital reserve for the payment of obligations of the
Partnership.  Accounts receivable consisted of amounts due from
tenants and affiliates.  Deferred charges and other assets included
deferred rent resulting from recognition of income as required by
generally accepted accounting principles and lease commissions. 
Accounts payable included amounts due to affiliates for
reimbursable expenses and amounts payable to third parties for
expenses incurred for operations.  Accrued expenses and other
liabilities consisted primarily of accrued property taxes and
security deposits.

During the quarter ended September 30, 1996, the Partnership
distributed $223,098 to Limited Partners and $2,254 to the General
Partner for a total of $225,352.  Due to the expiration of the
Hughes lease in August 1996 and the commencement of the lease with
Hospitality Franchise Systems, Inc. ("HFS") in 1995, tenant
improvements and lease commissions will be required at both the
Parkview Plaza and HFS properties, and will be funded from the
Partnership's working capital reserve.  Based on current
projections of the decrease in expected future cash flows that will
result from payment for tenant improvements and lease commissions,
distributions to Partners were reduced in May 1996.

The $11,000,000 mortgage on Curlew Crossing matured March 31, 1996. 
The lender, USAA Real Estate Company (the Adviser), renewed the
loan for a period of two years at an 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.  Interest is payable
monthly with the principal due March 31, 1998.

In April, the Partnership received $220,400 as a result of land
condemned at Curlew Crossing by the Florida Department of
Transportation ("FDOT").  The amount received from the FDOT is a
good faith deposit to the Partnership; however, the compensation to
be recovered as a result of the condemnation is yet to be
determined in a pending eminent domain proceeding.  This land was
condemned for the purpose of widening Curlew Road.  As a result of
the condemnation, two tenants defaulted on their leases due to a
dispute over whether they have a right to terminate their leases as
a result of the condemnation which caused parking problems.

                             6

<PAGE>
The Parkview Plaza 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 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 August 31, 1998.  This change in
payment terms of the loan will result in a decrease in monthly debt
service payments of approximately $190,000.
 
The Hughes lease at Parkview Plaza expired August 31, 1996.  As
part of the marketing campaign to re-lease the property, the name
of the property has been changed to Manhattan Towers.  Along with
this name change, the property will undergo repairs and renovations
to the lobby area as well as exterior landscaping and signage.  The
cost of these renovations is estimated between $2 - $3 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 have been hired to assess
the damage and determine the appropriate remediation.

Leasing activity during the quarter resulted in the execution of
three leases.  Hughes Aircraft Company has negotiated a one-year
lease for 79,647 square feet at an annual rental rate of $12 per
square foot which expires August 31, 1997.  The previous annual
rental rate was approximately $22.64 per square foot for the
entire 301,457 square foot building.  

A three-year lease was signed with a previous subtenant of Hughes
for 16,440 square feet at an annual rental rate of $13.80 per
square foot.  The tenant paid one month's rent as a security
deposit with no allowance for tenant improvements provided.  In
addition, a five-year lease was signed for 12,379 square feet at an
annual rental rate beginning at $13.80 per square foot. This five-
year lease commences December 1, 1996.  The Partnership has
provided a tenant improvement allowance at $6.00 per square foot
for a total of $74,274.  The tenant will pay its proportionate
share of operating expenses over its base year of 1997.

The Hughes lease and the three-year and five-year leases resulted
in 108,466 square feet of the total leasable area of 301,457 square
foot building to be leased during the quarter.  Rental rates for
these leases are lower than the previous rate charged to Hughes,
reflecting the current market conditions in the area surrounding
the property.

Substantial completion of the 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 basic rent due from HFS was at a reduced rate and HFS was
responsible for all operating expenses.  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. 

                              7
<PAGE>
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-month and nine-month periods ended September 30, 1996
and 1995, income was generated from rental income from the income-
producing real estate properties and interest income earned on the
funds in temporary investments.

Expenses incurred during the same periods 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.

Rental properties increased as of September 30, 1996 as compared to
December 31, 1995 due to tenant improvements at HFS offset by
depreciation.  The decrease in cash and cash equivalents at
September 30, 1996 was due to payment for the tenant improvements
at HFS.  Accounts receivable increased at September 30, 1996
primarily due to an increase in  receivables at Manhattan Towers
from Hughes for property taxes for the months of July and August
and for utilities for the month of August.  Deferred charges and
other assets increased at September 30, 1996 primarily due to
deferred rent offset by a decrease in deferred land costs at Curlew
Crossing.

Rental income for the three-month and nine-month periods ended
September 30, 1996 decreased compared to the three-month and nine-
month periods ended September 30, 1995 as a result of the August
31, 1996 Hughes lease expiration at Manhattan Towers.  Hughes
provided monthly rent revenue of $568,748.

Direct expenses reflected an increase for the three-month and nine-
month periods ended September 30, 1996 as compared to the three-month
and nine-month periods ended September 30, 1995 as a result
of the Partnership now paying operating expenses at Manhattan
Towers formerly paid by Hughes as part of their triple net lease. 
The gain on disposal of rental property was a result of the land
condemnation at Curlew Crossing.  See "Liquidity and Capital
Resources".

Interest income decreased for the three-month and nine-month
periods ended September 30, 1996 as compared to the three-month and
nine-month periods ended September 30, 1995 as a result of lower
cash balances.

General and administrative expenses increased for the three months
and nine months ended September 30, 1996 as compared to the three
months and nine months ended September 30, 1995 primarily due to an
increase in legal fees at Curlew Crossing as a result of the land
condemnation.

                              8
<PAGE>
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 three-month and nine-month
periods ended September 30, 1996 as compared to the three-month and
nine-month periods ended September 30, 1995 was primarily caused by
the expiration of the Hughes lease at Manhattan Towers.

The decrease in interest expense for the three-month and nine-month
periods ended September 30, 1996 as compared to the three-month and
nine-month periods ended September 30, 1995 reflected the decrease
in the interest rate charged on the Curlew Crossing mortgage loan. 
The interest rate on this mortgage loan at September 30, 1996 was
8.25% compared to 10.75% at September 30, 1995.  Interest expense
on the Manhattan Towers mortgage loan decreased also due to
principal balance reductions through August 1996.

                             9
<PAGE>
PART II


Item 6.  Exhibits and Reports on Form 8-K.

(a) Exhibits
                                                     Sequentially
Exhibit                                                Numbered
  No.                   Description                        Page

 4.1   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) Registration No. 2-96113, and 
       incorporated herein by this reference.             --

 4.2   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) to the Partnership's Annual Report
       on Form 10-K for the year ended December 31,
       1989, Registration No. 2-96113, and incorporated
       herein by this reference.                           --

 27    Financial Data Schedule                             12


(b) During the quarter ended September 30, 1996, there were
    no Current Reports on Form 8-K filed.

                              10
<PAGE>

                           FORM 10-Q
                           SIGNATURES
         USAA INCOME PROPERTIES III LIMITED PARTNERSHIP


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


USAA INCOME PROPERTIES III
LIMITED PARTNERSHIP (Registrant)

BY:  USAA PROPERTIES III, Inc.,
     General Partner

November 12, 1996      BY:  /s/Edward B. Kelley
                            Edward B. Kelley
                            Chairman, President and
                            Chief Executive Officer

November 12, 1996      BY:  /s/Martha J. Barrow
                            Martha J. Barrow
                            Vice President -
                            Administration and
                            Finance/Treasurer

                             11