<PAGE>
                         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, 1997
                               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,
                                                                 1997         December 31,
                                                             (Unaudited)          1996
<S>                                                      <C>                    <C>
Assets
Rental properties, net                                   $      40,667,918       39,262,249
Temporary investments, at cost
   which approximates market value-
      Money market fund                                          5,780,791        9,301,147
Cash                                                               570,992          118,000
   Cash and cash equivalents                                     6,351,783        9,419,147

Accounts receivable, net of allowance for doubtful
   accounts of $90,000                                             239,509          555,959
Deferred rent                                                    3,020,432        2,882,064
Deferred charges and other assets, at
   amortized cost                                                1,975,498        1,646,751

                                                         $      52,255,140       53,766,170


Liabilities and Partners' Equity
Mortgages payable to affiliates                          $      26,000,000       26,000,000
Accounts payable, including amounts due
   to affiliates of $66,025 and $101,194                           247,744          414,274
Accrued expenses and other liabilities                           1,044,958          344,651
         Total liabilities                                      27,292,702       26,758,925

Partners' equity:
   General Partner:
      Capital contribution                                           1,000            1,000
      Cumulative net income                                          1,294           14,982
      Cumulative distributions                                    (275,960)        (269,199)
                                                                  (273,666)        (253,217)
   Limited Partners (111,549 units):
      Capital contributions, net of offering
         costs                                                  52,428,030       52,428,030
      Cumulative net income                                        128,117        1,483,181
      Cumulative distributions                                 (27,320,043)     (26,650,749)
                                                                25,236,104       27,260,462
         Total Partners' equity                                 24,962,438       27,007,245

                                                         $      52,255,140       53,766,170
</TABLE>

See accompanying notes to condensed financial statements.

                                        2

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

                                                             Three Months     Three Months
                                                                Ended             Ended
                                                            September 30,     September 30,
                                                                 1997             1996
<S>                                                      <C>                      <C>
Income
Rental income                                            $       2,220,223        2,124,366
Interest income, $62,880 from affiliate for 1997                    83,367          140,421
      Total income                                               2,303,590        2,264,787

Expenses
Direct expenses, $110,306 and $37,223
  to affiliate (note 1)                                          1,129,290          463,832
Depreciation                                                       455,233          369,800
General and administrative, $57,972 and
  $69,262 to affiliates (note 1)                                   160,430          104,501
Management fee to affiliate (note 1)                                 9,872          (46,611)
Interest, $590,565 and $507,517
  to affiliates (note 1)                                           590,565          566,142
      Total expenses                                             2,345,390        1,457,664
Net income (loss)                                        $         (41,800)         807,123

Net income (loss) per limited partnership unit           $           (0.37)            7.16

<CAPTION>

                                                             Nine Months       Nine Months
                                                                Ended             Ended
                                                            September 30,     September 30,
                                                                 1997             1996
<S>                                                      <C>                      <C>
Income
Rental income                                            $       4,710,055        7,305,187
Gain on disposal of rental property                                    --           157,852
Interest income, $100,088 from affiliate for 1997                  289,315          463,301
      Total income                                               4,999,370        7,926,340

Expenses
Direct expenses, $303,205 and $86,583
  to affiliate (note 1)                                          2,737,329          911,130
Depreciation                                                     1,286,830        1,108,732
General and administrative, $238,736 and
  $169,846 to affiliates (note 1)                                  494,149          343,814
Management fee to affiliate (note 1)                                97,378           19,526
Interest, $1,752,436 and $1,515,727
  to affiliates (note 1)                                         1,752,436        1,746,446
      Total expenses                                             6,368,122        4,129,648
Net income (loss)                                        $      (1,368,752)       3,796,692

Net income (loss) per limited partnership unit           $          (12.15)           33.70

</TABLE>

See accompanying notes to condensed financial statements.

                                        3

<PAGE>
<TABLE>
USAA Income Properties III Limited Partnership
Condensed Statements of Cash Flows
Nine months ended September 30, 1997 and 1996
(Unaudited)
<CAPTION>

                                                                 1997             1996
<S>                                                      <C>                     <C> 
Cash flows from operating activities:
   Net income (loss)                                     $      (1,368,752)       3,796,692
   Adjustments to reconcile net income (loss) to net
      cash provided by operating activities:
         Depreciation                                            1,286,830        1,108,732
         Amortization                                              183,665           77,448
         Gain on disposal of rental property                        --             (157,852)
         Loss on early retirement of assets                         --               10,600
         Decrease (increase) in accounts receivable                316,450       (1,256,159)
         Increase in deferred charges and other assets            (650,780)        (422,824)
         Increase (decrease) in accounts payable,
            accrued expenses and other liabilities                 533,777       (2,165,907)
              Cash provided by operating activities                301,190          990,730

Cash flows from investing activities:
    Additions to rental properties                              (2,692,499)      (1,224,217)
    Proceeds from disposal of real estate property                   --             220,400
              Cash used in investing activities                 (2,692,499)      (1,003,817)

Cash flows from financing activities:
   Repayment of mortgages payable                                    --          (1,818,182)
   Distributions to partners                                      (676,055)        (873,237)
              Cash used in financing activities                   (676,055)      (2,691,419)

Net decrease in cash and cash equivalents                       (3,067,364)      (2,704,506)

Cash and cash equivalents at beginning of period                 9,419,147       12,775,043

Cash and cash equivalents at end of period               $       6,351,783       10,070,537

</TABLE>

See accompanying notes to condensed financial statements.

                                         4
<PAGE>
<TABLE>
USAA Income Properties III Limited Partnership
Notes to Condensed Financial Statements
September 30, 1997
(Unaudited)

1.Transactions with Affiliates

  A  summary of transactions with affiliates follows for the
  nine-month period ended September 30, 1997:

<CAPTION>
                                                                             Quorum
                              USAA             USAA        Las Colinas     Real Estate
                             Capital       Real Estate     Management       Services
                           Corporation       Company         Company       Corporation
<S>                    <C>                      <C>          <C>                <C> 

Reimbursement of 
     expenses (a)      $          --            176,165           --            158,929
Interest income                (100,088)          --              --              --
Management fees                   --             97,378           --            144,276
Lease commissions                 --              --              --             62,571
Interest expense (b)              --            678,760      1,073,676            --
    Total              $       (100,088)        952,303      1,073,676          365,776

</TABLE>

  (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,  1996 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 1997 or any  other
  future period.

                            5
<PAGE>
  The  financial information included in this interim  report  as
  of  September 30, 1997 and for the three months and nine months
  ended  September  30,  1997  and  1996  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.

  Certain 1996 balances have been reclassified to conform to  the
  1997 presentation.
                     
                                        6
<PAGE>
                            PART I

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


Liquidity and Capital Resources

At  September 30, 1997, the Partnership had cash of $570,992  and
temporary  investments of $5,780,791.  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.   Deferred rent resulted from recognition of  income  as
required  by generally accepted accounting principles.   Deferred
charges  and other assets included lease commissions and  prepaid
expenses. 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,
prepaid rent and security deposits.

During  the  quarter  ended September 30, 1997,  the  Partnership
distributed  $223,098  to  Limited Partners  and  $2,253  to  the
General  Partner  for a total of $225,351.  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.   Based  on the amount of funds  needed  for  tenant
improvements, lease commissions and renovation costs at Manhattan
Towers   and  Skygate  Commons,  future  distributions   may   be
suspended.  In addition, the Partnership may need to borrow funds
to cover any shortage in the working capital reserve.

As  of  September  30,  1997, Curlew  Crossing  was  91%  leased;
however,  Color Tile is in the process of vacating  approximately
5,200  square  feet.  This space is currently being marketed  for
lease.  During the second quarter, the Partnership was awarded  a
favorable summary judgment against the defaulted tenant  for  one
of  the  two out parcels vacated by the tenant at Curlew Crossing
in  1996.   The  summary judgment was granted  in  favor  of  the
Partnership  with  respect  to one  of  the  out  parcel  leases,
declaring  the lease to be valid and existing, and  granting  the
judgment  against the tenant.  The tenant has resumed payment  of
its  rent  obligations  under  the  lease.   The  Partnership  is
awaiting a ruling by the court on the other out parcel.

During  the  third quarter, the Partnership received a settlement
of  $295,000  from  a previous anchor tenant at Curlew  Crossing.
The  tenant  vacated approximately 78,000 square feet in  October
1990   in  conjunction  with  reorganization  under  Chapter   11
bankruptcy proceedings.

                                         7
<PAGE>
As  of  September  30,  1997, Manhattan Towers  was  99%  leased.
During the second quarter, a fifty-six month lease was signed  at
Manhattan Towers with TRW, Inc. for 155,118 square feet at a  net
monthly base rent of $141,200 that commenced in August 1997.   In
addition,  TRW will pay its pro rata share of operating  expenses
of  the  property.  TRW will occupy one of the two towers at  the
property.    The   Partnership  provided  a  tenant   improvement
allowance   for  a  total  of  approximately  $2.7  million,   or
approximately $17 per square foot, to be paid out of the  working
capital reserve of the Partnership.

During  the  third  quarter, TRW signed  a  five-year  lease  for
approximately 81,000 square feet at a net monthly  base  rent  of
$81,360 to commence January 1, 1998.  This lease represents 52.7%
of the first tower at Manhattan Towers.  Upon commencement of the
lease,  TRW will pay its pro rata share of operating expenses  of
the  property.   The  Partnership provided a  tenant  improvement
allowance  for a total of approximately $1.7 million to  be  paid
out of the working capital reserve of the Partnership.

At  Manhattan  Towers, the property renovations are approximately
95%  complete with a scheduled completion date by year-end.   The
parking garage water damage remediation work is estimated  to  be
approximately  $1.1 million and will be funded from  the  working
capital  reserve of the Partnership.  Renovations at the property
include lobby area, corridors and parking lot as well as exterior
landscaping  and signage.  The cost for renovations is  estimated
to  be  approximately $1.4 million and will be  funded  from  the
working capital reserve of the Partnership.

In  September, a settlement agreement was negotiated with  Hughes
Electronics, the previous single tenant at Manhattan Towers,  for
deferred   maintenance   items.   The   Partnership   anticipates
receiving $575,000 from Hughes during the fourth quarter.

As part of a marketing campaign to lease the two vacant buildings
of  the  three building complex at the Phoenix, Arizona property,
the  name  of  the  property has been changed from  Ramada  World
Headquarters Building to Skygate Commons. Renovation to  the  two
vacant  buildings began during the first quarter  of  1997  which
includes   improvements  to  comply  with  the   Americans   With
Disabilities  Act,  and  heating, air conditioning  and  exterior
renovations.  The total cost of the renovations has been  revised
to include parking lot improvements, signage and landscaping with
the new estimate to be approximately $1.2 million to be paid from
the working capital reserve of the Partnership.  In addition, the
construction  of  additional parking  on  the  adjacent  land  is
planned  in an attempt to increase the property's competitiveness
in  the  market.   The cost for the parking lot is  estimated  at
$120,000  to  be funded from the working capital reserve  of  the
Partnership.   The  property renovations  are  approximately  70%
complete  with final completion anticipated to occur  during  the
fourth quarter.

                                       8
<PAGE>
During  April,  a  five-year lease was signed at Skygate  Commons
with  FHP  International Corporation for one of  the  two  vacant
buildings,  or  22,120  square feet, at  an  annual  rental  rate
beginning  at  $14.75 per square foot.  The lease commenced  July
1997 and terminates June 2002.  The Partnership provided a tenant
improvement  allowance of $331,800 to be paid  from  the  working
capital reserve of the Partnership.   Negotiations have commenced
with  a  current tenant at Skygate Commons to lease the remaining
vacancy at the property, which totals approximately 27,000 square
feet.  As of September 30, 1997, Skygate Commons was 89% leased.

On  June 10, 1997, the Partnership signed a letter of intent with
American  Industrial Properties REIT [NYSE:  IND]  (the  "Trust")
contemplating   the   merger   of  four   real   estate   limited
partnerships,  including the Partnership, into  the  Trust.   The
four real estate limited partnerships are USAA Real Estate Income
Investments  I  Limited  Partnership,  USAA  Real  Estate  Income
Investments  II  Limited Partnership, USAA Income Properties  III
Limited   Partnership  and  USAA  Income  Properties  IV  Limited
Partnership  (collectively, the "RELPs").  Each of the  RELPs  is
affiliated  with USAA Real Estate Company, which  currently  owns
approximately 13.74% of the outstanding shares of the Trust.

On  July  7,  1997, the Trust signed definitive merger agreements
with each of the RELPs pursuant to which the RELPs will be merged
into   the  Trust  (the  "Merger").   According  to  the   Merger
Agreements, the Trust will issue an aggregate of 4,412,829 shares
of beneficial interest at $13.125 per share (for a total value of
$57,918,385) in exchange for the limited partnership interests in
the  RELPs.  The number of Shares and per Share amount have  been
restated to reflect the impact of the one for five reverse  Share
split  approved  by the Trust shareholders on October  15,  1997.
The  number of Shares to be issued to each RELP will be equal  to
the  net  asset value for each RELP (as agreed by the  Trust  and
each  RELP)  divided  by $13.125.  The number  of  Shares  to  be
received  by  a Limited Partner in each RELP will be computed  in
accordance with such partner's percentage interest in  the  RELP.
The general partner of each RELP has waived any right it may have
to receive Shares to which it may be entitled in exchange for its
general   partnership  interest.   The  Merger   is   a   taxable
transaction to the partners in the RELPs.  Prudential Securities,
Inc., on behalf of the Trust, and Houlihan, Lokey, Howard & Zukin
on   behalf  of  the  RELPs,  have  rendered  opinions  to  their
respective parties that the transaction is fair from a  financial
point of view.

The Merger, which has been approved by the Trust's Board of Trust
Managers  and  the  Board of Directors of  each  of  the  general
partners  of  the  RELPs, is subject to  due  diligence  by  both
parties and certain other conditions, including approval  by  the
Limited Partners of each of the RELPs and the shareholders of the
Trust.  Accordingly, there can be no assurance that  the  mergers
will  ultimately  be consummated.  There has been  a  meeting  of
Limited Partners tentatively scheduled for early January 1998  to
consider a vote on the proposed transaction.

                                         9
<PAGE>
Curlew  Crossing  will  not be part of the  merger  but  will  be
purchased  by USAA Real Estate Company ("Realco") or an affiliate
of Realco for $11,200,000 if the Merger is approved.

On  August  20,  1997,  a  purported class  action  lawsuit  (the
"Lawsuit"), which was filed in the Superior Court of the State of
Arizona,   was  served  upon  USAA  Real  Estate  Company,   USAA
Properties I, Inc. ("RELP GP I"), USAA Properties II, Inc. ("RELP
GP  II"),  USAA  Properties  III,  Inc.  ("RELP  GP  III"),  USAA
Properties IV, Inc. ("RELP GP IV", together with RELP GP I,  RELP
GP  II and RELP GP III, the "RELP GPs"), certain other affiliated
entities and the individual members of the boards of directors of
each  of  the RELP GPs.  The Trust was also named as a defendant.
The  Lawsuit  was subsequently removed to federal court  and  has
been  transferred to the Western District of Texas,  San  Antonio
Division.   The  suit  alleges among other  things,  breaches  of
fiduciary  duty in connection with the transactions  contemplated
by  merger  agreements entered into by the RELPs and  the  Trust,
dated as of June 30, 1997, whereby each RELP would be merged with
and into the Trust.

The Lawsuit seeks, among other things, to enjoin the consummation
of   the  Merger  and  damages,  including  attorneys'  fees  and
expenses.  The defendants believe that the plantiffs' claims  are
without  merit  and  intend  to  defend  vigorously  against  the
Lawsuit.

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,
1997  and 1996, 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, 1997 as compared
to   December  31,  1996  due  to  renovation  costs  and  tenant
improvements  at Manhattan Towers and Skygate Commons  offset  by
depreciation.   The  decrease in cash  and  cash  equivalents  at
September 30, 1997 was due to payment for renovations and  tenant
improvements.   Accounts receivable decreased  at  September  30,
1997  primarily due to receipts from tenants at Skygate  Commons.
The  increase  in deferred charges and other assets at  September
30,  1997  was due to lease commissions paid at Manhattan  Towers
and  Skygate Commons.  The decrease in accounts payable reflected
timing  in  the payment of renovation costs at Manhattan  Towers.
The  increase  in  accrued expenses and other liabilities  was  a
result of an increase in prepaid rent, property tax accruals  and
security deposits.
 
                                      10
<PAGE>
The  changes in rental income for the three-month and  nine-month
periods  ended September 30, 1997 as compared to the same periods
ended September 30, 1996 were the result of the following changes
at  each  property.   The  increase in rental  income  at  Curlew
Crossing  of approximately $630,000 and $454,000 for  the  three-
month  and  nine-month periods, respectively was due to receiving
1996  and  1997 rent on one of the two outparcels as a result  of
the  summary  judgement  awarded against  the  defaulted  tenant.
Also, part of this increase was the receipt of $295,000 from  the
Ames  lawsuit.  Skygate Commons had an increase in rental  income
for  the periods ended September 30, 1997 as compared to the same
periods  ended  September 30, 1996 of approximately  $98,000  and
$47,000, respectively due to an increase in occupancy. Offsetting
these  increases  was  a decrease in rental income  at  Manhattan
Towers  of  approximately $632,000 and $3,096,000 for the  three-
month and nine-month  periods  ended  September  30, 1997  as   a
result  of  a decrease in occupancy after the expiration  of  the
Hughes  lease.   Rental  rates for the new  leases  at  Manhattan
Towers  since the expiration of the Hughes lease in  August  1996
are  lower  than  the rate charged to Hughes,  reflecting  market
conditions in the area surrounding the property.

The  gain on disposal of rental property in 1996 was a result  of
the land condemned by the Florida Department of Transportation in
connection with the widening of Curlew Road.

Interest  income  decreased  for the three-month  and  nine-month
periods  ended September 30, 1997 as compared to the same periods
ended September 30, 1996 due to lower cash balances.  During  the
second  quarter of 1997, the Partnership invested  in  short-term
commercial  paper with USAA Capital Corporation, an affiliate  of
the General Partner.

Direct  expenses were higher for the three-month  and  nine-month
periods  ended September 30, 1997 as compared to the same periods
ended  September 30, 1996 as a result of the Partnership assuming
control  of  the  daily operations at both Manhattan  Towers  and
Skygate Commons.  Prior to the Hughes lease expiration on  August
31,  1996  at  Manhattan Towers, Hughes was responsible  for  all
operating  expenses  under  terms  of  their  triple  net  lease.
Operating   expenses   at   Manhattan   Towers   accounted    for
approximately $181,000 and $917,000 of the increase for the three-
month   and   nine-month  periods  ended  September   30,   1997,
respectively.   Prior  to substantial completion  of  the  tenant
improvements for Hospitality Franchise Systems, Inc.  ("HFS")  at
Skygate Commons on October 31, 1996, HFS was responsible for  all
operating expenses. Operating expenses at Skygate Commons for the
periods  ended  September  30, 1997 accounted  for  approximately
$377,000 and $805,000, respectively.  Operating expenses included
utilities,   cleaning,  landscaping,  repairs  and   maintenance,
property  taxes, property insurance, management  fees  and  other
building  service  expenses.  The remaining  increase  in  direct
expenses resulted from higher legal fees related to the defaulted
tenants  at  Curlew  Crossing. Also,  during  the  quarter  ended
September  30,  1997,  the parking lot  at  Curlew  Crossing  was
restriped and resealed.

                                        11
<PAGE>
Depreciation expense increased for the three-month and nine-month
periods  ended September 30, 1997 as compared to the  three-month
and   nine-month  periods  ended  September  30,  1996   due   to
depreciation on the tenant improvements at Manhattan  Towers  and
at Skygate Commons for HFS.

General  and administrative expenses were higher for  the  three-
month and nine-month periods ended September 30, 1997 as compared
to  the  same  periods  ended September 30,  1996  due  to  lease
commission expense at Manhattan Towers and Skygate Commons.

The  management fee is based on cash flow from operations of  the
Partnership   adjusted   for   cash   reserves   and   fluctuated
accordingly.

Interest  expense  increased for the three-month  and  nine-month
periods  ended September 30, 1997 as compared to the same periods
ended  September  30, 1996. The payment terms  of  the  Manhattan
Towers  loan for the three months and nine months ended September
30,  1997  included monthly interest only payments at an interest
rate  of  9.57% on a principal balance of $15,000,000.  Terms  of
the  mortgage  loan for the first eight months of  1996  included
monthly  principal payments in the set mount of  $227,272.72  and
interest  payments  set monthly at the London  Interbank  Offered
Rate  (LIBOR)  plus  .625%.   The interest  rate  on  the  Curlew
Crossing  mortgage  loan was decreased to  8.25%  in  April  1996
compared to 10.25% paid in March 1996.   Interest expense on  the
Curlew  Crossing  mortgage loan for the nine-month  period  ended
September  30, 1997 decreased by approximately $58,000 offset  by
the increase in interest expense for the Manhattan Towers loan of
approximately $64,000.

                                        12
<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                     15



(b)  A  Current  Report  on  Form 8-K was  filed  July  21,  1997
      regarding the signed definitive merger agreements between the
      Partnership and American Industrial Properties REIT (the "Trust")
      pursuant to which the Partnership will be merged into the Trust.

      A  Current Report on Form 8-K was filed September  2,  1997
      regarding a purported class action lawsuit served upon  the
      Partnership  seeking  to  enjoin the  consummation  of  the
      Merger with the Trust.

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<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, 1997      BY:  /s/Edward B. Kelley
                            Edward B. Kelley
                            Chairman, President and
                            Chief Executive Officer

November 12, 1997      BY:  /s/Martha J. Barrow
                            Martha J. Barrow
                            Vice President -
                            Administration and
                            Finance/Treasurer



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