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 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
                          -----------------                                
                                     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 0-14350
                       -------
                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)

           Illinois                                      36-3333344
-------------------------------                      ------------------- 
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                       Identification No.)

2355 Waukegan Rd.
Bannockburn, IL                                             60015
----------------------------------------             -------------------   
(Address of principal executive offices)                  (Zip Code)    

Registrant's telephone number, including area code (847) 267-1600
                                               
    --------------
Securities registered pursuant to Section 12(b) of the Act:  None
                                                             ----
Securities registered pursuant to Section 12(g) of the Act:

                         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]
<PAGE>
                                    PART I

Item 1. Business
----------------

Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Registrant") is a limited partnership formed in 1984 under the laws of the
State of Illinois. The Registrant raised $59,092,000 from sales of Limited
Partnership Interests. The Registrant has retained cash reserves from the sale
of its real estate investments for contingencies which exist or may arise. The
Registrant's operations currently consist of interest income earned on
short-term investments and the payment of administrative expenses.

The Registrant utilized the net offering proceeds to acquire eight real
property investments and a minority joint venture interest in one additional
real property, and has since disposed of all of these investments. The
Partnership Agreement generally provides that the proceeds of any sale or
refinancing of the Registrant's properties will not be reinvested in new
acquisitions.

The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Registrant sold its final real estate investment in September
1997. The Registrant has retained a portion of the cash from the property sales
to satisfy obligations of the Registrant as well as establish a reserve for
contingencies. The timing of the termination of the Registrant and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Registrant
including, but not limited to, the lawsuits discussed in "Item 3. Legal
Proceedings". Due to this litigation, the Registrant will not be dissolved and
reserves will be held by the Registrant until the conclusion of all
contingencies. There can be no assurances as to the time frame for conclusion
of these contingencies.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for information regarding the
Registrant's Year 2000 readiness.

The Registrant no longer has an ownership interest in any real estate. The
General Partner is not aware of any material potential liability relating to
environmental issues or conditions affecting real estate formerly owned by the
Registrant.

The officers and employees of Balcor Partners-XVIII, the General Partner of the
Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.

Item 2. Properties
------------------

As of December 31, 1998, the Registrant did not own any properties.
<PAGE>
In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage for property liability and property damage matters.

See Notes to Financial Statements for other information regarding former real
estate property investments.

Item 3. Legal Proceedings
-------------------------

Klein, et al. vs. Lehman Brothers, Inc., et al.
-----------------------------------------------

On August 30, 1996, a proposed class action complaint was filed, Lenore Klein,
et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey, Law
Division, Union County, Docket No. Unn-L-5162-96). The complaint was amended on
each of October 18, 1996, December 5, 1997 and January 15, 1998. The
Registrant, additional limited partnerships which were sponsored by The Balcor
Company (together with the Registrant, the "Affiliated Partnerships"), The
Balcor Company, American Express Company, Lehman Brothers, Inc., Smith Barney,
Inc., American Express Financial Advisors, and other affiliated entities and
various individuals are named defendants in the action. The most recent amended
complaint, plaintiffs' Third Amended Complaint, alleges, among other things,
common law fraud and deceit, negligent misrepresentation, breach of contract,
breach of fiduciary duty and violation of certain New Jersey statutes relating
to the disclosure of information in the offering of limited partnership
interests in the Affiliated Partnerships, the marketing of interests in the
Affiliated Partnerships and the acquisition of real properties for the
Affiliated Partnerships. The Third Amended Complaint seeks judgment for
compensatory damages equal to the amount invested in the Affiliated
Partnerships by the proposed class plus interest; general damages for injuries
arising from the defendants' alleged actions; equitable relief, including
rescission, on certain counts; punitive damages; treble damages on certain
counts; recovery from the defendants of all profits received by them as a
result of their alleged actions relating to the Affiliated Partnerships;
attorneys' fees and other costs.

In June 1998, the defendants filed a motion to dismiss the complaint for
failure to state a cause of action. Oral arguments were heard by the court on 
August 21, 1998. On September 24, 1998, the judge issued a letter opinion 
granting the defendants' motion to dismiss the complaint. On October 23, 
1998, the judge announced that he would enter an order dismissing the 
complaint without prejudice, but stated that the plaintiffs would be required
to file any new pleading in a separate action and would not be allowed 
to amend the existing complaint. The plaintiffs moved for a reconsideration of
the judge's ruling, which was denied on November 20, 1998. On December 28,
1998, plaintiffs filed a notice of appeal from both the judge's October 23 and
November 20, 1998 rulings.

On March 11, 1999, an order was entered by the Superior Court of New Jersey,
Appellate Division, dismissing the appeal in this action with prejudice.
Therefore, this will be the final report to investors regarding this matter.
<PAGE>
Masri vs. Lehman Brothers, Inc., et al.
---------------------------------------

On February 29, 1996, a proposed class action complaint was filed, Raymond
Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of
the State of New York, County of New York). The Registrant, additional limited
partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together
with the Registrant and the affiliated partnerships, the "Defendant
Partnerships"), Lehman Brothers, Inc. and Smith Barney, Inc. are defendants.
The complaint alleges, among other things, common law fraud and deceit,
negligent misrepresentation and breach of fiduciary duty relating to the
disclosure of information in the offering of limited partnership interests in
the Defendant Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Defendant Partnerships by the
proposed class plus interest accrued thereon; general damages for injuries
arising from the defendants' alleged actions; recovery from the defendants of
all profits received by them as a result of their alleged actions relating to
the Defendant Partnerships; exemplary damages; attorneys' fees and other costs.

The defendants intend to vigorously contest this action. No class has been
certified as of this date. The Registrant believes it has meritorious defenses
to contest the claims. It is not determinable at this time how the outcome of
this action will impact the remaining cash reserves of the Registrant.

Plaintiffs' lead counsel also represents the plaintiffs in the Lenore Klein
matter discussed above. Plaintiffs' counsel has indicated an intent to withdraw
this complaint. Raymond Masri has joined as an additional plaintiff in the
Lenore Klein matter discussed above.

Bruss et al. vs. Lehman Brothers, Inc., et al.
----------------------------------------------

On January 25, 1999, a proposed class action complaint was filed, Dorothy
Bruss, et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey,
Law Division, Essex County, Docket No. L-000898-99). The Registrant,
additional limited partnerships which were sponsored by The Balcor Company
(together with the Registrant, the Affiliated Partnerships), The Balcor
Company, American Express Company, Lehman Brothers, Inc., Smith Barney, Inc.,
American Express Financial Corporation, and other affiliated entities and
various individuals are named defendants in the action. Lead counsel
representing the plaintiffs in this case is the same counsel representing the
plaintiffs in each of the Lenore Klein and Raymond Masri cases discussed above.
The complaint relates largely to the same issues as those raised in the Lenore
Klein and the Raymond Masri cases. The complaint alleges, among other things,
common law fraud and deceit, negligent misrepresentation, breach of contract,
breach of fiduciary duty and violation of certain New Jersey and other similar
state statutes relating to the disclosure of information in the offering of
limited partnership interests in the Affiliated Partnerships, the marketing of
interests in the Affiliated Partnerships and the acquisition of real property
for the Affiliated Partnerships. The complaint seeks judgment for compensatory
damages equal to the amount invested in the Affiliated Partnerships by the
proposed class plus interest; general damages for injuries arising from the
<PAGE>
defendants' alleged actions; equitable relief, including rescission on certain
counts; punitive damages; treble damages on certain counts; recovery from the
Defendants of all profits received by them as a result of their alleged actions
relating to the Affiliated Partnerships; and attorneys' fees and other costs.

The defendants intend to vigorously contest this action. No class has been
certified as of this date. The Registrant believes that it has meritorious
defenses to contest the claims. It is not determinable at this time how the
outcome of this action will impact the remaining cash reserves of the
Registrant.

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

No matters were submitted to a vote of the Limited Partners of the Registrant
during 1998.
<PAGE>
                                    PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------------------
Matters
-------

There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding distributions, See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources".

As of December 31, 1998, the number of record holders of Limited Partnership
Interests of the Registrant was 4,679.

Item 6. Selected Financial Data
-------------------------------

                                      Year ended December 31,                 
                    ----------------------------------------------------------
                       1998        1997        1996        1995        1994   
                    ----------  ----------  ----------  ----------  ----------
Total income          $94,015   $3,144,396$14,299,834 $12,057,899  $11,089,861
(Loss) income before 
  gain on sales, 
  affiliates' 
  participation in
  joint ventures
  and extraordinary
  items             (115,364)     (386,939) 4,798,662    (87,295)     (487,293)
Net (loss) income   (115,364)    9,546,094 22,556,310    (27,411)      (70,139)
Net (loss) income
  per Limited
  Partnership
  Interest - Basic
  and Diluted           (1.95)      160.86     377.90        (.46)       (1.18)
Total assets        1,653,365    2,472,953 27,755,377  45,259,656   46,571,333
Mortgage notes
  payable                None         None 24,324,028  50,428,070   50,987,329
Distributions per
  Limited Part-
  nership Interest (A)  12.18       174.02     230.00        7.50         None

(A) These amounts include distributions of original capital of $4.93, $159.02
and $200.00 per Limited Partnership Interest for 1998, 1997 and 1996,
respectively.

Item 7. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------------
Results of Operations
---------------------
<PAGE>
Operations
----------

Summary of Operations
---------------------

Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Partnership") sold its two remaining properties during 1997 and three
properties during 1996, and recognized gains in connection with these sales.   
During 1998, administrative and property operating expenses were higher than
interest income earned on short-term investments which resulted in a net loss
during 1998 as compared to net income during 1997. As a result of the higher
gains recognized from the property sales in 1996, net income decreased during
1997 as compared to 1996. Further discussion of the Partnership's operations is
summarized below.

1998 Compared to 1997
---------------------

The Partnership sold the Howell Station and North Hill apartment complexes
during 1997 and recognized gains of $6,569,949 and $4,846,446, respectively, in
connection with these sales. As a result, rental and service income, interest
expense on mortgage notes payable, depreciation, amortization, real estate
taxes and property management fees ceased during 1997.

Due to higher average cash balances in 1997 as a result of the investment of
proceeds received in connection with the property sales prior to distribution
to Limited Partners, interest income on short-term investments decreased during
1998 as compared to 1997.

The Partnership recognized other income during 1998 in connection with a refund
of state income taxes relating to the gain on the 1996 sale of the Country
Ridge Apartments and during 1997 primarily in connection with a partial refund
of prior years' insurance premiums relating to the Partnership's properties.

Property operating expense decreased during 1998 as compared to 1997 due to the
sales of the Partnership's two remaining properties in 1997. The Partnership
paid its share of final payroll expenditures during 1998 relating to North Hill
Apartments, which was owned by a joint venture consisting of the Partnership
and an affiliate and was sold in 1997.

Due primarily to lower accounting, data processing and portfolio management
fees as a result of prior years' property sales, administrative expenses
decreased during 1998 as compared to 1997.

The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. Due to the sale of this property in 1997,
affiliate's participation in income from joint venture ceased during 1997.

In connection with the sale of the Howell Station Apartments during 1997, the
Partnership wrote-off the remaining unamortized deferred financing fees of
$95,822 and paid a prepayment penalty of $283,458. In connection with the sale
of the North Hill Apartments during 1997, the joint venture wrote off the
remaining unamortized deferred financing fees of $617,919 of which $154,480
represents the North Hill Apartments minority joint venture partner's share.
<PAGE>
Additionally, in connection with the sale of the property, the remaining
unamortized balance of a bond discount fee of $61,894 was written off, of which
$15,473 was the minority joint venture partner's share. These amounts were
recognized as debt extinguishment expense and classified as extraordinary items
for financial statement purposes.

As a result of the 1997 sale of the North Hill Apartments, the joint venture
recognized an extraordinary gain on forgiveness of debt of $1,350,000, of which
$337,500 represents the North Hill Apartments' minority joint venture partner's
share. 

1997 Compared to 1996
---------------------

During 1996, the Partnership sold the Country Ridge, Shadowridge and Park
Place-Phase II apartment complexes and recognized gains in connection with
these sales totaling $19,528,414. These property sales as well as the 1997
property sales resulted in decreases in rental and service income, interest
expense on mortgage notes payable, depreciation, amortization of deferred
expenses, property operating expense, real estate taxes and property management
fees during 1997 as compared to 1996.

Due to higher average cash balances resulting from the investment of the
proceeds from the 1996 property sales prior to distribution to Limited Partners
in 1997, interest income on short-term investments decreased during 1997 as
compared to 1996.

The Partnership owned a minority joint venture interest in the Lakeville Resort
Apartments. As a result of the 1996 sale of the property, participation in
income of joint venture with an affiliate ceased during 1996.

The North Hill and Shadowridge apartment complexes were both owned by joint
ventures consisting of the Partnership and an affiliate. Primarily as a result
of the higher gain recognized in connection with the 1997 sale of the North
Hill Apartments as compared to the gain recognized in connection with the 1996
sale of the Shadowridge Apartments, affiliates' participation in income from
joint ventures increased during 1997 as compared to 1996.

During 1996, the Partnership wrote-off the remaining unamortized deferred
financing fees of $440,081 in connection with the sales of the Country Ridge,
Shadowridge and Park Place - Phase II apartment complexes, of which $7,165
represents the Shadowridge Apartments minority joint venture partner's share.
These amounts were recognized as debt extinguishment expense and classified as
extraordinary items for financial statement purposes.

Liquidity and Capital Resources
-------------------------------

The cash position of the Partnership decreased by approximately $768,000 as of
December 31, 1998 when compared to December 31, 1997 primarily due to the
distribution paid to Limited Partners during January 1998. The Partnership used
cash of approximately $48,000 in its operating activities to pay administrative
and property operating expenses relating to sold properties which were
partially offset by the receipt of interest income on short-term investments
<PAGE>
and a refund of state income taxes relating to the gain on the sale of the
Country Ridge Apartments during 1996. Financing activities consisted of the
payment of a distribution to Limited Partners of approximately $720,000. 

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in September
1997. The Partnership has retained a portion of the proceeds from the property
sales to satisfy obligations of the Partnership, as well as establish a reserve
for contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in "Item 3. Legal
Proceedings". Due to this litigation, the Partnership will not be dissolved and
reserves will be held by the Partnership until the conclusion of all
contingencies. There can be no assurances as to the time frame for conclusion
of these contingencies.

The Partnership made distributions in 1998, 1997 and 1996 totaling $12.18,
$174.02 and $230.00 per Limited Partnership Interest, respectively. See
Statements of Partners' Capital (Deficit) for additional information.
Distributions were comprised of $7.25 per Interest of Net Cash Receipts and
$4.93 per Interest of Net Cash Proceeds in 1998, $15.00 per Interest of Net
Cash Receipts and $159.02 per Interest of Net Cash Proceeds in 1997, and $30.00
per Interest of Net Cash Receipts and $200.00 per Interest of Net Cash Proceeds
in 1996.

Limited Partners have received cumulative distributions of Net Cash Receipts of
$59.75 per $1,000 Interest and Net Cash Proceeds of $363.95 per $1,000
Interest, totaling $423.70 per $1,000 Interest. No additional distributions are
anticipated to be made prior to the termination of the Partnership. However,
after paying final partnership expenses, any remaining cash reserves will be
distributed. Limited Partners will not recover a substantial portion of their
original investment.

The Partnership sold all of its remaining real property investments and
distributed a majority of the proceeds from these sales to Limited Partners in
1996 and 1997. Since the Partnership no longer has any operating assets, the
number of computer systems and programs necessary to operate the Partnership
has been significantly reduced. The Partnership relies on third party vendors
to perform most of its functions and has implemented a plan to determine the
Year 2000 compliance status of these key vendors. The Partnership is within its
timeline for having these plans completed prior to the year 2000.

The Partnership's plan to determine the Year 2000 compliance status of its key
vendors involves the solicitation of information from these vendors through the
use of surveys, follow-up discussions and review of data where needed. The  
Partnership has sent out surveys to these vendors and received back a majority
of these surveys. While the Partnership cannot guarantee Year 2000 compliance
by its key vendors, and in many cases will be relying on statements from these
vendors without independent verification, preliminary surveys indicate that the
key vendors performing services for the Partnership are aware of the issues and
are working on a solution to achieve compliance before the year 2000. The
<PAGE>
Partnership is in the process of developing a contingency plan in the event any
of its key vendors are not Year 2000 compliant prior to the year 2000. As part
of its contingency plan, the Partnership will identify replacement vendors in
the event that current vendors are not substantially Year 2000 compliant by
June 30, 1999. The Partnership does not believe that failure by any of its key
vendors to be Year 2000 compliant by the year 2000 would have a material effect
on the business, financial position or results of operations of the
Partnership.

Certain statements in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may include statements regarding income or losses as well as
assumptions relating to the foregoing.

The forward-looking statements made by the Partnership are subject to known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Partnership to differ from any
future results, performance or achievements expressed or implied by the
forward-looking statements. 

Item 7a. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------

The supplemental financial information specified by Item 305 of Regulation S-K
is not applicable.

Item 8. Financial Statements and Supplementary Data
---------------------------------------------------

See Index to Financial Statements in this Form 10-K.

The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.

The net effect of the differences between the financial statements and the tax
returns is summarized as follows:

                         December 31, 1998         December 31, 1997    
                      -----------------------  -------------------------
                      Financial        Tax       Financial        Tax
                      Statements     Returns    Statements      Returns 
                      ----------    ---------   ----------     ---------
Total assets          $1,653,365   $8,167,967   $2,472,953    $8,984,257
Partners' Capital
  (deficit)
  accounts:
    General Partner     (308,517)    (307,663)    (308,517)     (308,517)
    Limited Partners   1,882,994    8,397,003    2,718,136     9,247,017
Net (loss) income:
    General Partner         None          854       40,445       160,555
    Limited Partners    (115,364)    (130,236)   9,505,649    16,285,494
    Per Limited Part-
      nership Interest     (1.95)(A)    (2.20)      160.86(A)     275.60
<PAGE>
(A) Amount represents basic and diluted net (loss) income per Limited
Partnership Interest.

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

There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
<PAGE>
                                   PART III

Item 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------

(a) Neither the Registrant nor Balcor Partners-XVIII, its General Partner, has
a Board of Directors.

(b, c & e) The names, ages and business experience of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:

            TITLE                              OFFICERS

Chairman, President and Chief                  Thomas E. Meador
   Executive Officer
Senior Vice President                          Alexander J. Darragh
Senior Managing Director, Chief                Jayne A. Kosik
   Financial Officer, Treasurer
   and Assistant Secretary                           

Thomas E. Meador (age 51) joined Balcor in July 1979.  He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a member of the board of directors of
The Balcor Company. He is also Senior Vice President of American Express
Company and is responsible for its real estate operations worldwide. Prior to
joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in
the commercial real estate division where he was involved in various lending
activities. Mr. Meador received his M.B.A. degree from the Indiana University
Graduate School of Business. 

Mr. Meador is on the Board of Directors of Grubb & Ellis Company, a publicly
traded commercial real estate firm. Mr. Meador was elected to the Board of
Grubb & Ellis Company in May 1998. Mr. Meador is also a director of AMLI
Commercial Properties Trust, a private real estate investment trust that owns
office and indutrial buildings in the Chicago, Illinois area. Mr. Meador was
elected to the Board of AMLI Commercial Properties Trust in August 1998. 

Alexander J. Darragh (age 44) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.

Jayne A. Kosik (age 41) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. Ms Kosik is also a member of the board of directors of the Balcor
Company. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant. 
<PAGE>
(d) There is no family relationship between any of the foregoing officers.

(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1998.

Item 11. Executive Compensation
-------------------------------

The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of the General Partner. The executive officers
receive compensation from The Balcor Company (but not from the Registrant) for
services performed for various affiliated entities, which may include services
performed for the Registrant. However, the General Partner believes that any
such compensation attributable to services performed for the Registrant is
immaterial to the Registrant. See Note 10 of Notes to Financial Statements for
information relating to transactions with affiliates.

Item 12. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

(a)  The following entities are the sole Limited Partners which own
beneficially more than 5% of the outstanding Limited Partnership Interests of
the Registrant:      

                    Name and            Amount and
                    Address of          Nature of      Percent 
                    Beneficial          Beneficial     of
Title of Class      Owner               Ownership      Class
---------------     -----------       ------------    ------------
Limited             WIG 85-III          3,456.50       5.85%
Partnership         Partners            Limited
Interests           Chicago,            Partnership
                    Illinois            Interests

Limited             Metropolitan        2,567.00       4.34%
Partnership         Acquisition VII,    Limited
Interests           L.L.C. Greenville,  Partnership
                    South Carolina      Interests

While Metropolitan Acquisition VII, L.L.C. individually owns less than 5% of
the Interests, for purposes of this Item 12, Metropolitan Acquisition VII,
L.L.C. is an affiliate of WIG 85-III Partners and, collectively, they own
10.19% of the Interests.

(b) Balcor Partners-XVIII and its officers and partners own as a group the
following Limited Partnership Interests of the Registrant:
<PAGE>
                                  Amount
                               Beneficially
         Title of Class            Owned       Percent of Class
         --------------        -------------   ----------------
         Limited Partnership
           Interests               None              None

As of December 31, 1998 the relatives of the officers and affiliates of the
partners of the General Partner owned an additional 1,180 Interests.

In addition, Balcor LP Corp., an affiliate of the General Partner, holds title
to 35 Limited Partnership Interests in the Partnership due exclusively to
instances in which Limited Partners abandoned title to their Limited
Partnership Interests. Balcor LP Corp. is a nominee holder only of such
Interests and has disclaimed any economic or beneficial ownership in said
Interests. All distributions of cash payable with respect to such Interests
held by Balcor LP Corp. are returned to the Partnership for distribution to
other Limited Partners in accordance with the Partnership Agreement.

(c)  The Registrant is not aware of any arrangements, the operation of which
may result in a change of control of the Registrant.

Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------

(a & b) See Note 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.

See Note 10 of Notes to Financial Statements for additional information
relating to transactions with affiliates.

(c) No management person is indebted to the Registrant.

(d) The Registrant has no outstanding agreements with any promoters.
<PAGE>
                                    PART IV

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

(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.

(3) Exhibits:

(3) The Amended and Restated Agreement and Certificate of Limited Partnership,
set fourth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 dated August 2, 1985 (Registration No. 2-97249), is
incorporated herein by reference.

(4) Form of Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1
to the Registrant's Registration Statement on Form S-11 dated August 2, 1985
(Registration No. 2-97249), and Form of Confirmation regarding Interests in the
Partnership set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q
for the quarter ended June 30, 1992 are incorporated herein by reference.

(10) Material Contracts:

(a)(i) Agreement of Sale relating to the sale of North Hill Apartments, DeKalb
County, Georgia, previously filed as Exhibit (2) to the Registrant's Current
Report on Form 8-K dated May 22, 1997, is incorporated herein by reference.

(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(ii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(iii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(iv) Third Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(iv) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(v) Fourth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(v) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(vi) Fifth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(vi) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
<PAGE>
(vii) Sixth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(vii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(viii) Letter Agreement dated June 30, 1997 relating to the sale of North Hill
Apartments, DeKalb County, Georgia, previously filed as Exhibit (10)(e)(viii)
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, is incorporated herein by reference.

(ix) Seventh Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(ix) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(x) Eighth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia,  previously filed as
Exhibit (10)(e)(x) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, is incorporated herein by reference.

(27) Financial Data Schedule of the Registrant for 1998 is attached hereto.

(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended December 31, 1998.

(c) Exhibits: See Item 14(a)(3) above.
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

                         BALCOR REALTY INVESTORS 85-SERIES III
                           A REAL ESTATE LIMITED PARTNERSHIP


                         By: /s/ Jayne A. Kosik
                             ---------------------------------

                             Jayne A. Kosik
                             Senior Managing Director and Chief 
                             Financial Officer (Principal
                             Accounting and Financial Officer)
                             of Balcor Partners-XVIII, the 
                             General Partner

Date: March 19, 1999             
      --------------

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.

       Signature                     Title                       Date    
----------------------  -------------------------------     --------------
                         President and Chief Executive
                         Officer (Principal Executive
                         Officer) of Balcor Partners-XVIII,
                         the General Partner
/s/ Thomas E. Meador                                        March 19, 1999
---------------------                                       --------------
    Thomas E. Meador

                         Senior Managing Director and Chief
                         Financial Officer (Principal 
                         Accounting and Financial Officer) of 
                         Balcor Partners-XVIII,
                         the General Partner
/s/ Jayne A. Kosik                                          March 19, 1999
--------------------                                        --------------
    Jayne A. Kosik
<PAGE>
                         INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants

Financial Statements:

Balance Sheets, December 31, 1998 and 1997

Statements of Partners' Capital (Deficit), for the years ended December 31,
1998, 1997 and 1996

Statements of Income and Expenses, for the years ended December 31, 1998, 1997
and 1996

Statements of Cash Flows, for the years ended December 31, 1998, 1997 and 1996

Notes to Financial Statements

Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
Balcor Realty Investors 85-Series III A Real Estate Limited Partnership

In our opinion, the accompanying balance sheets and the related statements of
partners' capital (deficit), of income and expenses and of cash flows present
fairly, in all material respects, the financial position of Balcor Realty
Investors 85-Series III A Real Estate Limited Partnership (An Illinois Limited
Partnership, "the Partnership") at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. As of December 31, 1998, the Partnership no longer has
an ownership interest in any real estate investment. Upon resolution of the
litigation described in Note 14 to the financial statements, the Partnership
intends to cease operations and dissolve.

PricewaterhouseCoopers LLP

Chicago, Illinois
March 17, 1999
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                                BALANCE SHEETS
                          December 31, 1998 and 1997

                                    ASSETS


                                                   1998           1997
                                             -------------- --------------
Cash and cash equivalents                    $   1,646,332  $   2,414,280
Accounts and accrued interest receivable             7,033         58,673
                                             -------------- --------------
                                             $   1,653,365  $   2,472,953
                                             ============== ==============

                       LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                             $      57,724  $      33,961
Due to affiliates                                   21,164         29,373
                                             -------------- --------------
    Total liabilities                               78,888         63,334
                                             -------------- --------------
Commitments and contingencies

Limited Partners' capital  (59,092 
  Limited Partnership Interests issued
  and outstanding)                               1,882,994      2,718,136
General Partner's deficit                         (308,517)      (308,517)
                                             -------------- --------------
    Total partners' capital                      1,574,477      2,409,619
                                             -------------- --------------
                                             $   1,653,365  $   2,472,953
                                             ============== ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                   STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
             for the years ended December 31, 1998, 1997 and 1996


                                   Partners' Capital (Deficit) Accounts
                               ------------- -------------- --------------
                                                 General        Limited
                                   Total         Partner       Partners
                               ------------- -------------  -------------
Balance at December 31, 1995   $ (5,318,290) $    (574,525) $  (4,743,765)

Cash distributions to Limited
  Partners  (A)                 (13,591,160)                  (13,591,160)
Net income for the year
  ended December 31, 1996        22,556,310        225,563     22,330,747
                               ------------- -------------- --------------
Balance at December 31, 1996      3,646,860       (348,962)     3,995,822

Cash distributions to Limited
  Partners  (A)                 (10,283,190)                  (10,283,190)
Deemed distribution (B)            (500,145)                     (500,145)
Net income for the year
  ended December 31, 1997         9,546,094         40,445      9,505,649
                               ------------- -------------- --------------
Balance at December 31, 1997      2,409,619       (308,517)     2,718,136

Cash distributions to Limited
  Partners  (A)                    (719,778)                     (719,778)
Net loss for the year
  ended December 31, 1998          (115,364)                     (115,364)
                               ------------- -------------- --------------
Balance at December 31, 1998   $  1,574,477  $    (308,517) $   1,882,994
                               ============= ============== ==============

(A) Summary of cash distributions paid per Limited Partnership Interest:

                                    1998          1997           1996
                                ------------  -------------  -------------
         First Quarter         $      12.18  $       74.50  $        7.50
         Second Quarter                None          11.52           7.50
         Third Quarter                 None          50.00         122.50
         Fourth Quarter                None          38.00          92.50

(B) This amount represents state withholding taxes paid on behalf of the 
    Limited Partners relating to the gain on the sales of the North Hill
    and Howell Station apartment complexes.

The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1998, 1997 and 1996


                                   1998          1997            1996
                               ------------- -------------- --------------
Income:
  Rental and service                         $   2,895,058  $   9,176,157
  Interest on short-term
    investments                $     86,043        223,352        248,586
  Participation in income
    of joint venture 
    with an affiliate                                           4,875,091
  Other income                        7,972         25,986
                               ------------- -------------- --------------
    Total income                     94,015      3,144,396     14,299,834
                               ------------- -------------- --------------
Expenses:
  Interest on mortgage
    notes payable                                1,109,915      3,306,963
  Depreciation                                     505,448      1,373,849
  Amortization of deferred
    expenses                                        90,088        131,305
  Property operating                 17,455      1,023,498      2,946,970
  Real estate taxes                                259,058        884,257
  Property management fees                         147,902        466,268
  Administrative                    191,924        395,426        391,560
                               ------------- -------------- --------------
    Total expenses                  209,379      3,531,335      9,501,172
                               ------------- -------------- --------------
(Loss) income before gain on 
  sales, affiliates' 
  participation in joint 
  ventures and extraordinary
  items                            (115,364)      (386,939)     4,798,662
Gain on sales of properties                     11,416,395     19,528,414
Affiliates' participation
  in income from
  joint ventures before
  extraordinary items                           (1,606,722)    (1,144,318)
                               ------------- -------------- --------------
(Loss) income before 
  extraordinary items              (115,364)     9,422,734     23,182,758
                               ------------- -------------- --------------

The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1998, 1997 and 1996
                                  (Continued)


                                   1998          1997            1996
                               ------------- -------------- --------------
Extraordinary items:
  Debt extinguishment expense                   (1,059,093)      (440,081)
  Affiliate's participation in 
    in debt extinguishment
    expense                                        169,953          7,165
  Gain on forgiveness of debt                    1,350,000
  Affiliate's participation in
    gain on forgiveness 
    of debt                                       (337,500)
  Participation in debt 
    extinguishment expense of 
    joint venture with an 
    affiliate                                                    (193,532)
                                             -------------- --------------
Total extraordinary items                          123,360       (626,448)
                               ------------- -------------- --------------
Net (loss) income              $   (115,364) $   9,546,094  $  22,556,310
                               ============= ============== ==============
Income before extraordinary
 items allocated to
 General Partner                       None  $      39,922  $     231,827
                               ============= ============== ==============
(Loss) income before 
  extraordinary items
  allocated to Limited Partners$   (115,364) $   9,382,812  $  22,950,931
                               ============= ============== ==============
(Loss) income before 
  extraordinary items per  
  Limited Partnership Interest 
  (59,092 issued and
  outstanding) - Basic
  and Diluted                  $      (1.95) $      158.78  $      388.39
                               ============= ============== ==============
Extraordinary items allocated
  to General Partner                   None  $         523  $      (6,264)
                               ============= ============== ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1998, 1997 and 1996
                                  (Continued)


                                   1998          1997            1996
                               ------------- -------------- --------------

Extraordinary items allocated
  to Limited Partners                  None  $     122,837  $    (620,184)
                               ============= ============== ==============
Extraordinary items per Limited
  Partnership Interest
 (59,092  issued and 
  outstanding) - Basic
  and Diluted                          None  $        2.08  $      (10.49)
                               ============= ============== ==============
Net income allocated to
  General Partner                      None  $      40,445  $     225,563
                               ============= ============== ==============
Net (loss) income allocated to 
  Limited Partners             $   (115,364) $   9,505,649  $  22,330,747
                               ============= ============== ==============
Net (loss) income per Limited
  Partnership Interest (59,092
  issued and outstanding) -
  Basic and Diluted            $      (1.95) $      160.86  $      377.90
                               ============= ============== ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                             STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1998, 1997 and 1996


                                    1998          1997           1996
                               ------------- -------------- --------------
Operating activities:
  Net (loss) income            $   (115,364) $   9,546,094  $  22,556,310
  Adjustments to reconcile net
    (loss) income to net cash
    (used in) or provided by  
    operating activities:
      Gain on sales of
        properties                             (11,416,395)   (19,528,414)
      Debt extinguishment 
        expense                                    775,635        440,081
      Gain on forgiveness of
        debt                                    (1,350,000)
      Affiliate's participation 
        in debt extinguishment
        expense                                   (169,953)        (7,165)
      Affiliate's participation
        in gain on forgiveness
        of debt                                    337,500
      Participation in debt
        extinguishment expense                                    193,532
      Affiliates' participation
        in income from 
        joint ventures                           1,606,722      1,144,318
      Participation in income
        of joint venture with
        an affiliate                                           (4,875,091)
      Depreciation of
        properties                                 505,448      1,373,849
      Amortization of deferred
        expenses                                    90,088        131,305
      Net change in:
        Escrow deposits                            338,176         64,933
        Accounts and accrued
          interest receivable        51,640         34,518         (3,474)
        Prepaid expenses                            59,888        301,752
        Accounts payable             23,763         (5,045)       (57,074)
        Due to affiliates            (8,209)       (56,131)        66,194
        Security deposits                         (159,650)      (174,817)
                               ------------- -------------- --------------

The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                             STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1998, 1997 and 1996
                                  (Continued)

                                    1998          1997           1996
                               ------------- -------------- --------------
  Net cash (used in) or
    provided by operating 
    activities                      (48,170)       136,895      1,626,239
                               ------------- -------------- --------------
Investing activities:
  Proceeds from sales of 
    properties                                  14,529,476     31,678,988
  Payment of selling costs                        (899,132)      (700,889)
  Distributions from joint 
    ventures with affiliates                     1,046,660      2,495,139
                                             -------------- --------------
  Net cash provided by 
    investing activities                        14,677,004     33,473,238
                                             -------------- --------------
Financing activities:
  Distributions to Limited 
    Partners                   $   (719,778) $ (10,283,190) $ (13,591,160)
  Deemed distribution to 
    Limited Partners                              (595,459)
  Distributions to joint
    venture partners - 
    affiliates                                  (1,179,284)    (1,399,775)
  Contributions from joint 
    venture partners - 
    affiliates                                                     62,932
  Repayment of mortgage notes
    payable                                     (6,443,945)   (16,731,937)
  Release of capital 
    improvement escrows                            358,178        639,000
  Payment of deferred expenses                                   (125,000)
  Principal payments on                        
    mortgage notes payable                        (143,959)      (376,093)
                               ------------- -------------- --------------
  Net cash used in financing
    activities                     (719,778)   (18,287,659)   (31,522,033)
                               ------------- -------------- --------------
Net change in cash and cash
  equivalents                      (767,948)    (3,473,760)     3,577,444
Cash and cash equivalents at
  beginning of year               2,414,280      5,888,040      2,310,596
                               ------------- -------------- --------------
Cash and cash equivalents at
  end of year                  $  1,646,332  $   2,414,280  $   5,888,040
                               ============= ============== ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                         NOTES TO FINANCIAL STATEMENTS

1. Nature of the Partnership's Business:

Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Partnership") has retained cash reserves from the sale of its real estate
investments for contingencies which exists or may arise. The Partnership's
operations currently consist of interest income earned on short-term
investments and the payment of administrative expenses.

2. Partnership Termination:

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in September
1997. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership, as well as establish a reserve
for contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in Note 14 of Notes to
Financial Statements. Due to this litigation, the Partnership will not be
dissolved and reserves will be held by the Partnership until the conclusion of
all contingencies. There can be no assurances as to the time frame for
conclusion of these contingencies.

3. Accounting Policies:

(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner 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 vary from those estimates.

(b) Depreciation expense was computed using the straight-line method. Rates
used in the determination of depreciation were based upon the following
estimated useful lives:

               Buildings and improvements          30 years
               Furniture and fixtures              5 years

Maintenance and repairs were charged to expense when incurred. Expenditures for
improvements were charged to the related asset account.

As properties were sold, the related costs and accumulated depreciation were
removed from the respective accounts. Any gain or loss on disposition was
recognized in accordance with generally accepted accounting principles.
<PAGE>
(c) The Partnership recorded its investments in real estate at the lower of
cost or fair value, and periodically assessed, but not less than on an annual
basis, possible impairment to the value of its properties. The General Partner
estimated the fair value of its properties based on the current sales price
less estimated closing costs. The General Partner determined that no impairment
in value had occurred prior to the sales of the properties. The General Partner
considered the method referred to above to result in a reasonable measurement
of a property's fair value, unless other factors affecting the property's value
indicated otherwise.

(d) Deferred expenses consisted of loan financing and modification fees which
were amortized over the terms of the respective agreements. Upon sale, any
remaining unamortized balance was recognized as debt extinguishment expense and
classified as an extraordinary item.

(e) The Partnership calculates the fair value of its financial instruments
based on estimates using present value techniques. The Partnership includes
this additional information in the notes to the financial statements when the
fair value is different than the carrying value of those financial instruments.
When the fair value reasonably approximates the carrying value, no additional
disclosure is made.

(f) For financial statement purposes, prior to 1997, the partners were
allocated income and loss in accordance with the provisions in the Partnership
Agreement. In order for the capital account balances to more accurately reflect
the partners' remaining economic interests in the Partnership Agreement, the
income (loss) allocations have been adjusted.

(g) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested in one financial institution.

(h) The Partnership is not liable for Federal income taxes and each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.

(i) Revenue was recognized on an accrual basis in accordance with generally
accepted accounting principles.

(j) Investment in joint venture with an affiliate represented the Partnership's
40.25% interest, under the equity method of accounting, in a joint venture with
an affiliated partnership. Under the equity method of accounting, the
Partnership recorded its initial investment at cost and adjusted its investment
account for additional capital contributions, distributions and its share of
joint venture income or loss. 

(k) Statement of Financial Accounting Standards, No. 128, "Earnings per Share"
was adopted by the Partnership effective for the year ended December 31, 1997
and has been applied to the prior earnings period presented in the financial
statements. Since the Partnership has no dilutive securities, there is no
difference between basic and diluted net income (loss) per Limited Partnership
Interest.
<PAGE>
(l) Certain reclassifications of prior years information were made to conform
to the 1998 presentation.

4. Partnership Agreement:

The Partnership was organized on October 25, 1984. The Partnership Agreement
provides for Balcor Partners-XVIII to be the General Partner and for the
admission of Limited Partners through the sale of up to 70,000 Limited
Partnership Interests at $1,000 per Interest, 59,092 of which were sold on or
prior to December 31, 1985, the termination date of the offering.

Pursuant to the Partnership Agreement, Partnership income and losses were to be
allocated 99% to the Limited Partners and 1% to the General Partner. For
financial statement purposes, prior to 1997, the partners were allocated income
and loss in accordance with the provisions in the Partnership Agreement. In
order for the capital account balances to more accurately reflect the partners'
remaining economic interests in the Partnership Agreement, the income (loss)
allocations have been adjusted.

Pursuant to the Partnership Agreement, one hundred percent of Net Cash Receipts
available for distribution was distributed to the holders of Interests in
proportion to their participating percentages as of the record date for such
distributions. Under certain circumstances, the General Partner would have
participated in the Net Cash Proceeds of the sale or refinancing of Partnership
properties. The General Partner's participation was limited to 15% of excess
Net Cash Proceeds and was subordinated to the return of Original Capital plus
any deficiency in a Cumulative Distribution of 6% on Adjusted Original Capital
to the holders of Interests. Since the required subordination levels were not
met, the General Partner has not received any distributions of Net Cash
Receipts or Net Cash Proceeds during the lifetime of the Partnership.

5. Mortgage Notes Payable:

During 1997 and 1996, the Partnership incurred interest expense on mortgage
notes payable of $1,109,915 and $3,306,963 and paid interest expense of
$1,122,982 and $3,306,963, respectively.

6. Management Agreements:

The Partnership's properties were managed by a third party management company
prior to the sale of the properties. These management agreements provided for
annual fees of 5% of gross operating receipts.

7. Affiliates' Participation in Joint Ventures:

The North Hill and Shadowridge apartment complexes were owned by joint ventures
consisting of the Partnership and affiliated partnerships. The Shadowridge and
North Hill apartment complexes were sold in 1996 and 1997, respectively.
Profits and losses were allocated 75% to the Partnership and 25% to the
affiliate for North Hill Apartments, and 70% to the Partnership and 30% to the
affiliate for Shadowridge Apartments. All assets, liabilities, income and
<PAGE>
expenses of the joint ventures were included in the financial statements of the
Partnership with the appropriate adjustment to profit or loss for each
affiliate's participation. Net distributions of $1,274,598 and $1,336,843 were
made to joint venture partners during 1997, 1996, respectively. See Notes 11
and 12 of Notes to Financial Statements for additional information.

8. Investment in Joint Venture with an Affiliate:

The Lakeville Resort Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 40.25% and 59.75%,
respectively. In October 1996, the joint venture sold the property in an all
cash sale for $27,200,000, and the purchaser took title subject to the existing
first mortgage loan in the amount of $20,795,872. From the proceeds of the
sale, the joint venture paid $355,000 in selling costs. The joint venture
recognized a gain of $11,761,791 from the sale of this property, of which
$4,734,121 was the Partnership's share. For financial statement purposes, the
Partnership's share of the gain is included in participation in income of joint
venture with affiliate in 1996. The following information has been summarized
from the December 31, 1996 financial statements of the joint venture:

    Total liabilities                 $    201,250
    Total income                         3,487,495
    Net loss before gain on sale
       and extraordinary item           (4,688,425)
    Gain on sale                        11,761,791
    Extraordinary item:                  
       Debt extinguishment expense         480,825
    Net income                           6,592,542


During 1996, the Partnership received distributions from the joint venture for
property operations of $261,615 and received a distribution of $2,233,524
representing its share of net proceeds available for distribution from the sale
of the property. Pursuant to the sale agreement, the joint venture was required
to withhold $500,000 of the sale proceeds until February 1997 at which time the
funds were released in full. The Partnership's share of the funds was $201,250.
The Partnership also received a distribution from the joint venture of $845,410
principally consisting of its share of repair escrows released during 1997.

9. Tax Accounting:

The Partnership keeps its books in accordance with the Internal Revenue Code,
rules and regulations promulgated thereunder and existing interpretations
thereof. The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, will differ from the
tax returns due to the different treatment of various items as specified in the
Internal Revenue Code. The net effect of these accounting differences is that
the net loss for 1998 in the financial statements is $14,018 less than the tax
loss of the Partnership for the same period.
<PAGE>
10. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates are:

                            Year Ended       Year Ended       Year Ended
                             12/31/98         12/31/97         12/31/96   
                          --------------   --------------   --------------
                           Paid  Payable    Paid  Payable    Paid  Payable
                          ------ -------   ------ -------   ------ -------
Reimbursement of expenses
  to the General Partner,
  at cost:
    Accounting             $6,029  $4,081  $31,829  $6,337  $14,290 $14,417
    Data processing         2,328     872    3,991   1,456    2,789    None
    Legal                   4,417   3,001   20,483   6,950   11,001  11,098
    Portfolio management   19,347  13,210   75,807  13,598   40,620  40,977
    Property sales
      administration        1,032    None   70,769   1,032   18,846  19,012

Prior to May 1995, the Partnership participated in an insurance deductible
program with other affiliated partnerships in which the program paid claims up
to the amount of the deductible under the master insurance policy for its
properties. The program was administered by an affiliate of the General Partner
which received no fee for administering the program. However, the General
Partner was reimbursed for program expenses. The Partnership paid premiums to
the deductible insurance program relating to claims prior to May 1, 1995 of
$16,999 in 1996.

11. Property Sales:

(a) In May 1997, the Partnership sold the Howell Station Apartments in an all
cash sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$6,443,945 to the third party mortgage holder in full satisfaction of the first
mortgage loan, $283,458 of prepayment penalties and $272,478 in selling costs.
In addition, the Partnership paid a state withholding tax of $214,203 on behalf
of the Limited Partners relating to the gain on sale of the property which has
been recorded as a deemed distribution for financial statement purposes. The
basis of the property was $4,881,076, which is net of accumulated depreciation
of $3,209,515. For financial statement purposes, the Partnership recognized a
gain of $4,846,446 from the sale of this property.

(b) The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 75% and 25%, respectively. In
September 1997, the joint venture sold the property for a sales price of
$21,000,000. The purchaser of the property took title subject to the existing
first mortgage loan in the amount of $16,470,524, which represents a noncash
transaction to the Partnership. Accordingly, the noncash aspect of this
transaction is not presented in the Partnership's Statements of Cash Flows.
From the proceeds of the sale, the joint venture paid $164,705 in fees relating
to the assumption of the mortgage loan by the purchaser and $461,949 in selling
<PAGE>
costs. In addition, a state withholding tax of $381,256 was paid relating to
the gain on sale of the property which has been recorded as a deemed
distribution for financial statement purposes, of which $95,314 was the
minority joint venture partner's share. The basis of the property was
$13,803,397, which is net of accumulated depreciation of $9,035,587. For
financial statement purposes, the joint venture recognized a gain of $6,569,949
from the sale of this property, of which $1,642,542 is the minority joint
venture partner's share.

(c) In June 1996, the Partnership sold the Country Ridge Apartments in an all
cash sale for $15,950,000. From the proceeds of the sale, the Partnership paid
$8,770,310 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $134,625 in selling costs. The basis of the property
was $6,741,814, which is net of accumulated depreciation of $3,705,963. For
financial statement purposes, the Partnership recognized a gain of $9,073,561
from the sale of this property.

(d) The Shadowridge Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 70% and 30%, respectively. In
August 1996, the joint venture sold the property in an all cash sale for
$12,600,000. From the proceeds of the sale, the joint venture paid $7,961,627
to the third party mortgage holder in full satisfaction of the first mortgage
loan, and paid $384,545 in selling costs. The basis of the property was
$8,151,131, which is net of accumulated depreciation of $4,406,663. For
financial statement purposes, the Partnership recognized a gain of $4,064,324
from the sale of this property, of which $1,219,297 is the minority joint
venture partner's share.

(e) In September 1996, the Partnership sold the Park Place Apartments - Phase
II in an all cash sale for $12,125,000. The purchaser of the property took
title subject to the existing first mortgage loan in the amount of $8,996,012
which represents a noncash transaction to the Partnership. Accordingly, the
noncash aspect of this transaction is not presented in the Partnership's
Statements of Cash Flows. From the proceeds of the sale, the Partnership paid
$181,719 in selling costs. The basis of the property was $5,552,752, which is
net of accumulated depreciation of $3,932,895. For financial statement
purposes, the Partnership recognized a gain of $6,390,529 from the sale of this
property.

12. Extraordinary Items:

(a) In connection with the sale of the Howell Station Apartments during 1997,
the Partnership wrote off the remaining unamortized financing fees of $95,822
and paid a prepayment penalty of $283,458. In connection with the sale of the
North Hill Apartments during 1997, the joint venture wrote off the remaining
unamortized deferred financing fees of $617,919, of which $154,480 represents
the North Hill Apartments minority joint venture partner's share. Additionally,
in connection with the 1994 bond refinancing of the North Hill Apartments, the
joint venture paid a bond discount fee of $84,400 which was recorded as a
reduction of the underlying mortgage balance.  In connection with the 1997 sale
of the property, the remaining unamortized balance of the discount fee of
<PAGE>
$61,894 was written off. The minority joint venture partner's share of this
amount was $15,473. These amounts were recognized as extraordinary items and
classified as debt extinguishment expense for financial statement purposes.

(b) In connection with the 1994 bond refinancing of the North Hill Apartments,
the joint venture was obligated under a $1,350,000 non-interest bearing note
from an unaffiliated party, which was to be repaid only to the extent that net
sales proceeds exceeded a certain predetermined level. The net proceeds
received from the sale of the property did not meet the required level.
Therefore, the note was not repaid and has been forgiven, which resulted in an
extraordinary gain on forgiveness of debt of $1,350,000 for financial statement
purposes, of which $337,500 represents the minority joint venture partner's
share.

(c) In connection with the sales of the Country Ridge, Shadowridge and Park
Place - Phase II apartment complexes during 1996, the Partnership wrote off the
remaining unamortized deferred expenses in the amount of $440,081. This amount
was recognized as an extraordinary item and classified as debt extinguishment
expense, of which $7,165 represents the Shadowridge Apartments minority joint
venture partner's share.

(d) The Partnership owned a minority joint venture interest in Lakeville Resort
Apartments. In connection with the sale during October 1996, the joint venture
wrote off the remaining unamortized deferred expenses. These amounts were
recognized as an extraordinary item and classified as debt extinguishment
expense. The Partnership's share of the extraordinary item was $193,532.

13. Other Income:

The Partnership recognized other income during 1998 in connection with a refund
of state income taxes relating to the gain on the 1996 sale of the Country
Ridge Apartments and during 1997 primarily in connection with a partial refund
of prior years' insurance premiums relating to the Partnership's properties.

14. Contingencies:

The Partnership is currently involved in two related lawsuits, Masri vs. 
Lehman Brothers, Inc., et al. and Bruss, et al. vs. Lehman Brothers, Inc., et 
al., whereby the Partnership and certain affiliates have been named as 
defendants alleging substantially similar claims involving certain state 
securities and common law violations with regard to the property acquisition 
process of the Partnership, and to the adequacy and accuracy of disclosures 
of information concerning, as well as marketing efforts related to, the 
offering of the Limited Partnership Interests of the Partnership. The 
defendants continue to vigorously contest these actions. A plaintiff class 
has not been certified in either action. With respect to the Masri case, no
determinations upon any significant issues have been made. The Bruss complaint
was filed on January 25, 1999. It is not determinable at this time how
theoutcome of either action will impact the remaining cash reserves of
the Partnership. The Partnership believes it has meritorious defenses to
contest the claims. 
<PAGE>