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 June 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>
                                                        June 30,
                                                          1997             December 31,
                                                       (Unaudited)             1996
<S>                                               <C>                         <C>       
Assets
Rental properties, net                            $       40,627,652           39,262,249
Temporary investments, at cost
   which approximates market value-
      Money market fund                                    1,390,304            9,301,147
Cash                                                       5,132,002              118,000
   Cash and cash equivalents                               6,522,306            9,419,147

Accounts receivable, net of allowance for doubtful
   accounts of $90,000                                       627,677              555,959
Deferred rent                                              2,981,111            2,882,064
Deferred charges and other assets, at
   amortized cost                                          1,871,847            1,646,751

                                                  $       52,630,593           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 $97,602 and $101,194                     420,218              414,274
Accrued expenses and other liabilities                       980,786              344,651
         Total liabilities                                27,401,004           26,758,925

Partners' equity:
   General Partner:
      Capital contribution                                     1,000                1,000
      Cumulative net income                                    1,712               14,982
      Cumulative distributions                              (273,707)            (269,199)
                                                            (270,995)            (253,217)
   Limited Partners (111,549 units):
      Capital contributions, net of offering
         costs                                            52,428,030           52,428,030
      Cumulative net income                                  169,499            1,483,181
      Cumulative distributions                           (27,096,945)         (26,650,749)
                                                          25,500,584           27,260,462
         Total Partners' equity                           25,229,589           27,007,245

                                                  $       52,630,593           53,766,170


See accompanying notes to condensed financial statements.
</TABLE>
                             2
<PAGE>
<TABLE>
             USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                   Condensed Statements of Operations
                            (Unaudited)
<CAPTION>

                                                      Three Months         Three Months
                                                          Ended                Ended
                                                        June 30,             June 30,
                                                          1997                 1996
<S>                                               <C>                           <C>           
Income
Rental income                                     $        1,311,410            2,561,957
Gain on disposal of rental property                               --              157,852
Interest income, $37,208 from affiliate for 1997              99,884              155,290
      Total income                                         1,411,294            2,875,099

Expenses
Direct expenses, $98,969 and $24,856
  to affiliate (note 1)                                      878,649              222,860
Depreciation                                                 434,031              369,781
General and administrative, $86,573 and
  $41,059 to affiliates (note 1)                             166,253               89,390
Management fee to affiliate (note 1)                          56,083              (12,685)
Interest, $584,145 and $469,845
  to affiliates (note 1)                                     584,145              555,892
      Total expenses                                       2,119,161            1,225,238
Net income (loss)                                 $         (707,867)           1,649,861

Net income (loss) per limited partnership unit    $            (6.28)               14.64
<CAPTION>
                                                       Six Months           Six Months
                                                          Ended                Ended
                                                        June 30,             June 30,
                                                          1997                 1996
<S>                                               <C>                           <C>                  
Income
Rental income                                     $        2,489,832            5,180,821
Gain on disposal of rental property                               --              157,852
Interest income, $37,208 from affiliate for 1997             205,948              322,880
      Total income                                         2,695,780            5,661,553

Expenses
Direct expenses, $192,899 and $49,359
  to affiliate (note 1)                                    1,608,039              447,299
Depreciation                                                 831,597              738,932
General and administrative, $180,764 and
  $100,584 to affiliates (note 1)                            333,719              239,313
Management fee to affiliate (note 1)                          87,506               66,137
Interest, $1,161,871 and $1,008,211
  to affiliates (note 1)                                   1,161,871            1,180,304
      Total expenses                                       4,022,732            2,671,985
Net income (loss)                                 $       (1,326,952)           2,989,568

Net income (loss) per limited partnership unit    $           (11.78)               26.53

See accompanying notes to condensed financial statements.
</TABLE>
                             3
<PAGE>
<TABLE>
                USAA INCOME PROPERTIES III LIMITED PARTNERSHIP
                      Condensed Statements of Cash Flows
                    Six months ended June 30, 1997 and 1996
                                 (Unaudited)
<CAPTION>



                                                          1997                 1996
<S>                                               <C>                          <C>      
Cash flows from operating activities:
  Net income (loss)                               $       (1,326,952)           2,989,568
  Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
     Depreciation                                            831,597              738,932
     Amortization                                            100,010               51,300
     Gain on disposal of rental property                          --             (157,852)
     Loss on early retirement of assets                           --               10,600
     Increase in accounts receivable                         (71,718)             (73,326)
     Increase in deferred charges and other assets          (424,153)            (257,717)
     Increase (decrease) in accounts payable,
       accrued expenses and other liabilities                642,079           (2,043,219)
         Cash provided by (used in) operating activities    (249,137)           1,258,286

Cash flows from investing activities:
  Additions to rental properties                          (2,197,000)            (617,415)
  Proceeds from disposal of real estate property                  --              220,400
         Cash used in investing activities                (2,197,000)            (397,015)

Cash flows from financing activities:
  Repayment of mortgages payable                                  --           (1,363,637)
  Distributions to partners                                 (450,704)            (647,885)
         Cash used in financing activities                  (450,704)          (2,011,522)

Net decrease in cash and cash equivalents                 (2,896,841)          (1,150,251)

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

Cash and cash equivalents at end of period        $        6,522,306           11,624,792

See accompanying notes to condensed financial statements.
</TABLE>
                             4
<PAGE>
Notes to Condensed Financial Statements
June 30, 1997
(Unaudited)

1.  Transactions with Affiliates
<TABLE>
  A  summary of transactions with affiliates follows for the
  six-month period ended June 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)         $          --           142,329               --           111,308
Interest income                   (37,208)          --                  --              --
Management fees                      --            87,506               --            81,591
Lease commissions                    --             --                  --            38,435
Interest expense (b)                 --           450,020           711,851             --
    Total                 $       (37,208)        679,855           711,851          231,334
</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 six months of 1997 or  any  other
  future period.

  The  financial information included in this interim  report  as
  of  June 30, 1997 and for the three months and six months ended
  June  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.
                                
                             5
<PAGE>                                
                         PART I

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

Liquidity and Capital Resources

At  June  30,  1997, the Partnership had cash of  $5,132,002  and
temporary  investments of $1,390,304.  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  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,
prepaid rent and security deposits.

During   the   quarter  ended  June  30,  1997,  the  Partnership
distributed  $223,098  to  Limited Partners  and  $2,254  to  the
General  Partner  for a total of $225,352.  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.

During  the second quarter, the Partnership was awarded favorable
summary judgement against the defaulted tenant for one of the two
out  parcels  vacated by the tenant at Curlew Crossing  in  1996.
The other will go to trial in the third quarter.

As of June 30, 1997, Manhattan Towers was 98% 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 to commence 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.

Also  at  Manhattan  Towers,  the  parking  garage  water  damage
remediation  work is in progress and is scheduled to be  complete
during  the third quarter.  The cost of the repairs is  estimated
to  be  approximately $1.1 million and will be  funded  from  the
working capital reserve of the Partnership.  Renovations  at  the
property  are  also  in  progress,  which  include  lobby   area,

                              6
<PAGE>
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.

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   will   be
approximately  $900,000  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 $95,000 to  be  funded
from the working capital reserve of the Partnership.

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.  As of June 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 31.8% of the outstanding shares of the Trust.

On  July  7,  1997, the Trust signed definitive merger agreements
with  the  RELPs pursuant to which the RELPs will be merged  into
the Trust (the "Merger").   The Trust will issue an aggregate  of
22,064,147 shares of beneficial interest at $2.625 per share (for
a  total  value  of  $57,918,385) in  exchange  for  the  limited
partnership interests in the RELPs.  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  $2.625.
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.

                              7
<PAGE>
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
shareholders of the Trust and the limited partners of each of the
RELPs.  Accordingly,  there can be no assurance  that  definitive
merger  agreements  will  be reached or  that  the  mergers  will
ultimately  be consummated.  The Merger is a taxable  transaction
to  the  partners  in  the  RELPs and  will  be  subject  to  the
completion of a joint proxy statement/prospectus filed on Form S-
4  with the Securities and Exchange Commission.  No date has been
scheduled  for the shareholder meeting for the Trust  or  limited
partner  meetings for each of the RELPs to vote on  the  proposed
transaction.  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.

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 six-month periods ended June 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 June 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 June 30,  1997  was
due to payment for renovations and tenant improvements.  Accounts
receivable  increased  at  June 30,  1997  primarily  due  to  an
increase  in  receivables from tenants at Skygate  Commons.   The
increase  in deferred charges and other assets at June  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.

Rental income was lower for the three-month and six-month periods
ended  June 30, 1997 as compared to the three-month and six-month
periods ended June 30, 1996.  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,

                              8
<PAGE>
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  six-month
periods  ended June 30, 1997 as compared to the  three-month  and
six-month periods ended June 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  six-month
periods  ended  June 30, 1997 as compared to the three-month  and
six-month  periods  ended June 30, 1996 as a result  of  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 for the periods ended June
30,  1997  accounted  for approximately 63% of  the  increase  in
operating  expenses.   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 June 30, 1997 accounted for
the  remaining  increase in direct expenses.  Operating  expenses
included   utilities,   cleaning,   landscaping,   repairs    and
maintenance, property taxes, property insurance, management  fees
and other building service expenses.

Depreciation expense increased for the three-month and  six-month
periods  ended  June 30, 1997 as compared to the three-month  and
six-month periods ended June 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  six-month periods ended June 30, 1997 as compared  to
the three-month and six-month periods ended June 30, 1996.  Legal
fees  at Curlew Crossing related to the 1996 default by a  tenant
of  two  out  parcels  accounted for  approximately  40%  of  the
increase  for  the  three-month period ended June  30,  1997  and
approximately 24% of the increase for the six-month period  ended
June  30,  1997.   Lease commission expense at  Manhattan  Towers
accounted   for   the   remaining   increase   in   general   and
administrative expenses.

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

                              9
<PAGE>
Interest expense increased for the three-month period ended  June
30,  1997  as compared to the three-month period ended  June  30,
1996.  The  payment terms of the Manhattan Towers  loan  for  the
three  months and six months ended June 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  three  months  and six months ended June 30,  1996  included
monthly  principal payments in the set amount of $227,272.72  and
interest  payments  set monthly at the London  Interbank  Offered
Rate  (LIBOR) plus .625% which was approximately 6% for the  June
1996  interest payment.  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 six-month period ended  June  30,
1997 decreased by approximately $58,000 offset by the increase in
interest  expense for the Manhattan Towers loan of  approximately
$40,000.

                             10
<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                       13


(b)  A  Current  Report  on  Form 8-K was  filed  June  13,  1997
     regarding  the agreement signed between the Partnership  and
     American    Industrial   Properties   REIT   (the   "Trust")
     contemplating a merger of the Partnership into the Trust.
                              
                              11
<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

August 12, 1997        BY:  /s/Edward B. Kelley
                            Edward B. Kelley
                            Chairman, President and
                            Chief Executive Officer

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


                             12