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, 1995
                          -----------------                                
                                     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 $59,087,000 from sales of Limited
Partnership Interests. The Registrant's operations consist exclusively of
investment in and operation of income-producing real property, and all
financial information included in this report relates to this industry segment.

The Registrant utilized the net offering proceeds to acquire eight real
property investments and a minority joint venture interest in one additional
real property. The Registrant has since disposed of three of these properties.
The five remaining properties and the minority joint venture interest held at
December 31, 1995 are described under "Properties" (Item 2). 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.

Overall, the investment real estate market saw gradual improvement over the
last year.  This improvement has taken place in an environment of generally low
interest rates and little or no new supply, parameters which may not exist in
the next few years.  Demand for real estate space, while projected to improve
in line with the overall economy, is also vulnerable to external forces. The
major challenges facing the real estate industry today include increased
international competition, corporate restructurings, new computer and
communications technologies, an aging  population and potential revisions of
the tax code.   In addition, the increased flow of capital to real estate
through new vehicles such as commercial mortgage-backed securities and REITs
could spur new construction at unsupportable levels, as well as impact existing
property values.

Operationally, existing apartment properties continued to register occupancy
percentages in the 90s, with average rents rising at an annual rate of between
3 and 4 percent.  Apartments are still considered one of the top real estate
asset classes in terms of performance.  However, some markets are experiencing
new construction of rental units which, if unrestrained, could impact the
performance of existing properties.  Most of the new construction is aimed at
the two segments of the rental market which are growing the fastest: low-income
households and upper-income households who prefer to rent rather than own.  Of
all the major asset classes, apartments typically display the least volatility
in terms of property values. 

The General Partner had previously advised the Limited Partners that its
strategy was to sell the Registrant's remaining assets over the next four to
five years. The General Partner also stated that the timing of the liquidation
could be lengthened or shortened due to changes in market conditions, economic
factors, interest rates and unforeseen events. Since November 1995, the General
Partner believes that the market for multifamily housing properties has become
increasingly favorable to sellers of these properties. This belief is based on
the results of the sales and marketing activities of the Registrant as
described below and based upon the similar results of such activities by
various other partnerships affiliated with the Registrant. These favorable
market conditions are in part attributable to the increasing strength of the
capital markets and the reentry of REITs into the acquisition market. Since
November 1995, the Registrant has begun actively marketing three of its
<PAGE>
properties and the property in which it holds a minority joint venture interest
for sale, and if the market remains favorable, intends to begin actively
marketing the two remaining properties. If the current market conditions for
sales remain favorable and the General Partner can obtain appropriate sales
prices, the Registrant's liquidation strategy may be accelerated. 

The Registrant received notice of an unsolicited offer for the purchase of
limited partnership interests ("tender offer") in November 1995. The tender
offer was made by Walton Street Capital Acquisition Co. L.L.C. ("Walton
Street"). Walton Street stated that their primary motive in making the offer
was to make a profit from the purchase of the interests. Walton Street acquired
5.86% of the total interests outstanding in the Registrant and assigned the
interests to its affiliate, WIG 85-III. The Registrant incurred administrative
costs in responding to the tender offer.

The Registrant received notice of an unsolicited offer for the purchase of
limited partnership interests ("tender offer") on March 11, 1996. The tender
offer was made by Metropolitan Acquisition VII, L.L.C. ("Metropolitan").
Metropolitan is an affiliate of Insignia Financial Group, Inc., which provides
property management services to all of the Registrant's properties.
Metropolitan has stated that their primary motive in making the offer is to
make a profit from the purchase of the interests. Metropolitan is seeking to
acquire up to 30% of the total interests outstanding in the Registrant. The
Registrant will incur administrative costs in responding to the tender offer
and may incur additional costs if additional tender offers are made in the
future. The General Partner cannot predict with any certainty what the impact
of this tender offer or any future tender offers will have on the operations or
management of the Registrant.

Lakeville Resort Apartments is owned by a joint venture consisting of the
Registrant and an affiliate. During 1995, the joint venture completed the
refinancing of the Lakeville Resort Apartments mortgage loan. See "Item 7.
Liquidity and Capital Resources" for additional information.

The Registrant, by virtue of its ownership of real estate is subject to federal
and state laws and regulations covering various environmental issues.
Management of the Registrant utilizes the services of environmental consultants
to assess a wide range of environmental issues and to conduct tests for
environmental contamination as appropriate.  The General Partner is not aware
of any potential liability due to environmental issues or conditions that would
be material to 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, 1995, the Registrant owns the five properties described
below:

Location                     Description of Property
--------                     -----------------------

Farmington Hills, Michigan   Country Ridge Apartments: a 252-unit apartment
                             complex located on approximately 22.5 acres.
<PAGE>
DeKalb County, Georgia     * North Hill Apartments: a 420-unit apartment
                             complex located on approximately 30 acres.

Plymouth, Minnesota          Park Place Apartments Phase II: a 250-unit
                             apartment complex located on approximately 14.9
                             acres.

Las Vegas, Nevada          * Shadowridge Apartments: a 312-unit apartment
                             complex located on approximately 13.6 acres.

Duluth, Georgia              Howell Station Apartments (formerly Tempo
                             Station): a 228-unit apartment complex located on
                             approximately 28.6 acres.

*  Owned by Registrant through a joint venture with an affiliated partnership.
   See Note 6 of Notes to Financial Statements for additional information.

The Registrant also holds a minority joint venture interest in Lakeville Resort
Apartments in Petaluma, California. See Note 7 of Notes to Financial Statements
for additional information. 

Each of these properties is held subject to various forms of financing.

In the opinion of the General Partner, the Registrant has provided for adequate
insurance coverage for its real estate investment properties.

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

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

Proposed class action
---------------------

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 Holdings, 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' actions; recovery from the defendants of all
profits received by them as a result of their 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. Management of each of the defendants believes they
have meritorious defenses to contest the claims. It is not determinable at this
time whether or not an unfavorable decision in this action would have a
material adverse impact on the Registrant.
<PAGE>
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 1995.

                                    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; therefore, the
market value of the Limited Partnership Interests cannot be reasonably
determined. For information regarding distributions, see Item 7. Liquidity and
Capital Resources.

As of December 31, 1995, the number of record holders of Limited Partnership
Interests of the Registrant was 5,288.

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

                                      Year ended December 31,                 
                    ----------------------------------------------------------
                       1995        1994        1993        1992        1991   
                    ----------  ----------  ----------  ----------  ----------

Total  income      $12,060,495 $11,194,480 $11,489,788 $12,706,318 $12,021,222
Loss before 
  extraordinary
  items                (17,476)   (471,133) (1,079,762) (2,009,380) (2,607,265)
Net (loss) income      (27,411)    (70,139)  2,213,346  (2,009,380) (2,607,265)
Net (loss) income
  per Limited
  Partnership     
  Interest                (.46)      (1.18)      37.08      (33.66)     (43.68)
Total assets        46,399,416  47,696,255  48,168,158  60,949,491  63,108,896
Mortgage notes
  payable           50,428,070  50,987,329  51,850,501  65,816,872  65,800,830
Distributions per
  Limited Part-
  nership Interest (A)    7.50        None        None        None        None

(A) No distributions of original capital were made in any of the last five     
    years.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------------
Results of Operations
---------------------

Operations
----------

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

Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Partnership") experienced improved operations during 1995 as a result of
increased rental income at all of the Partnership's properties. In addition,
the Partnership recognized  gains on forgiveness of debt in 1995, 1994 and 1993
and a gain related to the foreclosure of the Oakland Hills Apartments in 1993.
The 1993 gains are the primary reasons the Partnership generated net income
during 1993 as compared to a net loss for 1995 and 1994. Further discussion of
the Partnership's operations is summarized below.

1995 Compared to 1994
---------------------

Rental and service income and, consequently, property management fees increased
during 1995 as compared to 1994 as a result of higher average rental rates and
stable occupancy at each of the Partnership's five remaining properties.

During December 1994, the North Hill Apartments mortgage loan was refinanced
and the remaining deferred expenses relating to the previous mortgage loan were
fully amortized. As a result, amortization expense decreased during 1995 as
compared to 1994.

As a result of exterior painting costs at the Country Ridge, North Hill and
Shadowridge apartment complexes and costs related to structural repairs at
Shadowridge Apartments, property operating expense increased during 1995 as
compared to 1994.

Real estate tax expense decreased during 1995 as compared to 1994 as a result
of lower tax rates at the Country Ridge and Park Place - Phase II apartment
complexes.  An increase in the assessed value at the North Hill Apartments
partially offset this decrease.

The Partnership incurred higher legal, consulting, printing and postage costs
in connection with a tender offer during the fourth quarter of 1995. As a
result, administrative expenses increased during 1995 as compared to 1994.

The Partnership holds a minority interest in the Lakeville Resort Apartments.
The loss from joint venture with an affiliate decreased during 1995 as compared
to 1994 due to improved property operations, which was partially offset by
higher interest expense. In June 1995, the mortgage note was refinanced with a
new lender. In connection with this transaction, the Partnership recognized an
extraordinary debt extinguishment expense of $58,521.

The Shadowridge and North Hill apartment complexes are both owned by joint
ventures consisting of the Partnership and an affiliate. As a result of
increased exterior painting costs at both properties, affiliates' participation
in loss from joint venture increased in 1995 as compared to 1994.
<PAGE>
In connection with a settlement reached with the seller of the Shadowridge
Apartments, the Partnership recognized an extraordinary gain on forgiveness of
debt in 1995 of $69,409, of which $20,823 represents the affiliate's share. 

In connection with the December 1994 North Hill Apartments' mortgage loan
refinancing, the joint venture received a refund of the escrow account held by
the trustee representing the amount which would have been paid to Mutual
Benefit Life Insurance Company as its 1% guarantee fee on the original North
Hill Apartments' mortgage loan. As a result, the Partnership recognized a
$534,659 extraordinary gain on forgiveness of debt in 1994, of which $133,665
represents the affiliate's share.

1994 Compared to 1993
---------------------

Due to the foreclosure of Oakland Hills Apartments in June 1993, rental and
service income, interest on mortgage notes payable, depreciation expense,
amortization expense, property operating expense and property management fees
decreased for 1994 as compared to 1993.

Increased rental rates and/or occupancy at all of the Partnership's remaining
properties partially offset the decrease in rental and service income due to
the Oakland Hills Apartments foreclosure.

Interest income on short-term investments increased during 1994 as compared to
1993 due to higher average cash balances in 1994 as a result of cash flow from
property operations, as well as an increase in short term interest rates. In
addition, interest income was recognized in 1994 on the funds held in escrow
relating to the previous North Hill Apartments mortgage bond financing. (See
Note 10 of Notes to Financial Statements for additional information.)

During December 1993, the Howell Station Apartments mortgage loan was
refinanced. The new loan bears interest at a rate of 7.94% per annum whereas
the previous loan had a rate of 10%. The Howell Station loan refinancing, the
Oakland Hills Apartments foreclosure and an interest rate adjustment in 1993 in
accordance with the mortgage loan agreement on Shadowridge Apartments all
contributed to the decrease in interest expense on mortgage notes payable for
1994 as compared to 1993.  

During 1993, the Park Place - Phase II and the Howell Station Apartments
mortgage loans were refinanced and the remaining deferred expenses relating to
the previous mortgage loans were written-off. This, along with the decrease due
to the foreclosure of Oakland Hills Apartments during 1993, resulted in a
decrease in the amortization of deferred expenses for 1994 as compared to 1993.

The decrease in property operating expense as a result of the Oakland Hills
foreclosure was partially offset by increases in insurance expense at all of
the Partnership's properties, an increase in contract services at Park Place -
Phase II Apartments, increases in utilities and payroll expense at Shadowridge
Apartments and an increase in exterior repairs at North Hill Apartments. As a
result, property operating expense decreased during 1994 as compared to 1993.

Real estate tax expense decreased during 1994 as compared to 1993 primarily as
a result of a decrease in the tax rate at the Country Ridge and Park Place -
Phase II apartment complexes. This decrease was partially offset by an increase
in the tax rate at the Howell Station Apartments.
<PAGE>
Administrative expense increased for 1994 as compared to 1993 primarily due to
an increase in accounting, portfolio management, and data processing expenses.
A decrease in legal fees partially offset the increase in administrative
expense for 1994 as compared to 1993.

The Partnership holds a minority interest in the Lakeville Resort Apartments.
Increased exterior painting and carpet replacement expenses at the Lakeville
Resort Apartments resulted in the Partnership recognizing a loss from joint
venture with an affiliate in 1994 as compared to income in 1993.

Improved operations at the North Hill and Shadowridge apartment complexes, as
well as a reduction in interest expense at both properties, resulted in a
decrease in affiliates' participation in loss from joint venture in 1994 as
compared to 1993.

In June 1993, title to the Oakland Hills Apartments was relinquished through
foreclosure and the Partnership recognized a $3,101,599 extraordinary gain for
financial statement purposes.

The Partnership refinanced the Howell Station Apartments mortgage loan in 1993,
received a discount on the prepayment of the previous mortgage note and
recognized a $191,509 extraordinary gain on debt forgiveness in 1993.

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

The cash position of the Partnership increased as of December 31, 1995 when
compared to December 31, 1994. The Partnership's operating activities consisted
primarily of cash flow generated from the operations of the properties and
interest income on short-term investments, which were partially offset by the
payment of administrative expenses. Investing activities consisted of a net
contribution to joint venture with an affiliate. The Partnership's financing
activities consisted of a distribution to Limited Partners, distributions to
joint venture partners - affiliates and principal payments on mortgage notes
payable. 

The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments unless otherwise indicated. A deficit is
considered to be significant if it exceeds $250,000 annually or 20% of the
property's rental and service income. The Partnership defines cash flow
generated from its properties as an amount equal to the properties' revenue
receipts less property related expenditures, which include debt service
payments. During 1995 and 1994, the Country Ridge, Howell Station, North Hill
and Park Place - Phase II apartment complexes generated positive cash flow.
Shadowridge Apartments generated a marginal cash flow deficit in 1995 as
compared to positive cash flow in 1994 primarily as a result of exterior
painting costs. In addition, Lakeville Resort Apartments, in which the
Partnership holds a minority joint venture interest, generated positive cash
flow in 1995 as compared to a marginal cash flow deficit in 1994 as a result of
improved property operations. As of December 31, 1995, the occupancy rates of
the Partnership's properties ranged from 92% to 99%.  

While the cash flow of certain of the Partnership's properties has improved,
the General Partner continues to pursue a number of actions aimed at improving
the cash flow of the Partnership's properties, including, improving operating
performance and seeking rent increases where market conditions allow.
<PAGE>
The General Partner had previously advised the Limited Partners that its
strategy was to sell the Partnership's remaining assets over the next four to
five years. The General Partner also stated that the timing of the liquidation
could be lengthened or shortened due to changes in market conditions, economic
factors, interest rates and unforeseen events. Since November, 1995, the
General Partner believes that the market for multifamily housing properties has
become increasingly favorable to sellers of these properties. This belief is
based on the results of the sales and marketing activities of the Partnership
as described below and based upon the similar results of such activities by
various other partnerships affiliated with the Partnership. These favorable
market conditions are in part attributable to the increasing strength of the
capital markets and the reentry of REITs into the acquisition market. Since
November 1995, the Partnership has begun actively marketing three of its
properties and the property in which it holds a minority joint venture interest
for sale, and if the market remains favorable, intends to begin actively
marketing the two remaining properties. If the current market conditions for
sales remain favorable and the General Partner can obtain appropriate sales
prices, the Partnership's liquidation strategy may be accelerated. 

Each of the Partnership's properties is owned through the use of third party
mortgage loan financing and, therefore, the Partnership is subject to the
financial obligations required by such loans. See Note 4 of Notes to Financial
Statements for information concerning outstanding balances, maturity dates,
interest rates and other items related to each of these mortgage loans. In
certain instances, it may be difficult for the Partnership to refinance a
property in an amount sufficient to retire in full the current mortgage
financing with respect to the property. In the event negotiations with the
existing lender for a loan modification or with new lenders for a refinancing
are unsuccessful, the Partnership may sell the collateral property or other
properties to satisfy an obligation, or may relinquish title to the collateral
property in satisfaction of the outstanding mortgage loan balance. The
third-party financing of approximately $8,765,000 on Country Ridge Apartments
matures in 1996 and the General Partner expects to be able to refinance this
mortgage loan or sell the property.  

The Lakeville Resort Apartments is owned by a joint venture consisting of the
Partnership and an affiliate. In June 1995 the mortgage note was refinanced
with a new lender. The interest rate decreased from a variable rate of
approximately 10.4% to a fixed rate of 8.2%, the maturity date was extended
from April 1997 to July 2030 and the monthly payment of principal and interest
decreased from a variable payment which was $208,555 at the time of the
refinancing to a fixed payment of $151,727. A portion of the proceeds from the
new $20,932,600 first mortgage loan was used to repay the existing mortgage
note of $18,728,280, as well as pay loan fees of $499,868 and fund an
improvement escrow of $1,604,551.   

During January 1996, the Partnership paid $443,190 ($7.50 per Interest) to
holders of Limited Partnership Interests for the fourth quarter of 1995. During
October 1995, the Partnership commenced distributions and paid $443,190 to the
holders of Limited Partnership Interests for the third quarter of 1995. The
General Partner expects to continue quarterly distributions to Limited Partners
based on the current performance of the Partnership's properties. However, the
level of future distributions, if available, will depend on cash flow from the
Partnership's remaining properties and proceeds from future property sales, as
to all of which there can be no assurances. In light of results to date and
current market conditions, the General Partner does not anticipate that
investors will recover all of their original investment.
<PAGE>
In 1995, the Financial Accounting Standards Board issued Statement No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" which establishes accounting standards for impairment of
long-lived assets and long-lived assets to be disposed of. This statement has
been adopted by the Partnership as of January 1, 1995, and did not have a
material impact on the financial position or results of operations of the
Partnership.

Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sales prices,
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.

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

See Index to Financial Statements and Financial Statement Schedule 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, 1995         December 31, 1994    
                      -----------------------  -------------------------
                      Financial        Tax       Financial        Tax
                      Statements     Returns    Statements      Returns 
                      ----------    ---------   ----------     ---------

Total assets         $46,399,416   $33,253,424  $47,696,255  $35,256,710
Partners' deficit
  accounts:
    General Partner     (574,525)     (846,053)    (574,251)    (838,192)
    Limited Partners  (4,743,765)  (15,632,680)  (4,273,438) (14,411,474)
Net loss:
    General Partner         (274)       (7,861)        (701)      (7,231)
    Limited Partners     (27,137)     (778,016)     (69,438)    (717,504)
    Per Limited Part-
      nership Interest       (.46)      (13.17)        (1.18)      (12.14)
                                                

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 Vice President                   Josette V. Goldberg
Senior Vice President                   Alan G. Lieberman
Senior Vice President, Chief            Brian D. Parker
   Financial Officer, Treasurer
   and Assistant Secretary                           
Senior Vice President                   John K. Powell, Jr.


Thomas E. Meador (July 1947) 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 Director 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.

Alexander J. Darragh (February 1955) joined Balcor in September 1988 and is
responsible for due diligence analysis and real estate advisory services for
Balcor and American Express Company. He also has supervisory responsibility for
Balcor's environmental matters.  Mr. Darragh received masters' degrees in Urban
Geography from Queen's University and in Urban Planning from Northwestern
University.

Josette V. Goldberg (April 1957) joined Balcor in January 1985 and has primary
responsibility for all human resources matters. In addition, she has
supervisory responsibility for Balcor's MIS functions. Ms. Goldberg has been
designated as a Senior Human Resources Professional (SHRP).

Alan G. Lieberman (June 1959) joined Balcor in May 1983 and is responsible for
Balcor's property sales and capital markets functions. Mr. Lieberman is a
Certified Public Accountant.

Brian D. Parker (June 1951) joined Balcor in March 1986 and, as Chief Financial
Officer and Chief Accounting Officer, is responsible for Balcor's financial,
legal and treasury functions. He is a Director of The Balcor Company.  Mr.
Parker is a Certified Public Accountant and holds an M.S. degree in Accountancy
from DePaul University.
<PAGE>
John K. Powell Jr. (June 1950) joined Balcor in September 1985 and is
responsible for portfolio and asset management matters relating to
Balcor'spartnerships. Mr. Powell also has supervisory responsibility for
Balcor's risk management and investor services functions.  He received a Master
of Planning degree from the University of Virginia.  Mr. Powell has been
designated a Certified Real Estate Financier by the National Society for Real
Estate Finance and is a full member of the Urban Land Institute.

(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 1995.

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. Certain of these
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 9 of Notes to Financial
Statements for the information relating to transactions with affiliates.

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

(a)  The following entity is the sole Limited Partner which owns 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          3,461.5        5.86%
Partnership         Partners            Limited
Interests           Chicago,            Partnership
                    Illinois            Interests

(b) Balcor Partners-XVIII and its officers and partners own as a group the
following Limited Partnership Interests of the Registrant:

                                  Amount
                               Beneficially
         Title of Class            Owned       Percent of Class
         --------------        -------------   ----------------
         Limited Partnership
           Interests          1,180 Interests    Less than 2%

Relatives and affiliates of the officers and partners of the General Partner
own an additional 35 Interests.
<PAGE>
(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 3 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.

See Note 9 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.

                                    PART IV

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

(a)
(1 & 2) See Index to Financial Statements and Financial Statement Schedule 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 (Commission File No. 0-14350) are
incorporated herein by reference.

(27) Financial Data Schedule of the Registrant for 1995 is attached hereto.

(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended December 31, 1995.

(c) Exhibits: See Item 14(a)(3) above.

(d) Financial Statement Schedules: See Index to Financial Statements and
Financial Statement Schedule attached to this Form 10-K.
<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/Brian D. Parker                      
                             ---------------------------------

                             Brian D. Parker
                             Senior Vice President, and Chief 
                             Financial Officer (Principal
                             Accounting and Financial Officer)
                             of Balcor Partners-XVIII, the 
                             General Partner

Date: March 28, 1996
      --------------

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,
/s/Thomas E. Meador      the General Partner                March 28, 1996
----------------------                                      --------------
  Thomas E. Meador

                         Senior Vice President, and Chief
                         Financial Officer (Principal 
                         Accounting and Financial
                         Officer) of Balcor Partners-XVIII,
/s/Brian D. Parker       the General Partner                March 28, 1996
--------------------                                        --------------
  Brian D. Parker
<PAGE>
        INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE



Report of Independent Accountants

Financial Statements:

Balance Sheets, December 31, 1995 and 1994

Statements of Partners' Deficit, for the years ended December 31, 1995, 1994
and 1993

Statements of Income and Expenses, for the years ended December 31, 1995, 1994
and 1993

Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993

Notes to Financial Statements

Financial Statement Schedule:

III - Real Estate and Accumulated Depreciation, as of December 31, 1995


Financial Statement Schedules, other than that listed, 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:

We have audited the financial statements and the financial statement schedule
of Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (An
Illinois Limited Partnership) as listed in the index of this Form 10-K. These
financial statements and the financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Balcor Realty Investors
85-Series III A Real Estate Limited Partnership at December 31, 1995 and 1994,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.










                                   COOPERS & LYBRAND L.L.P.


Chicago, Illinois
March 23, 1996
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                                BALANCE SHEETS
                          December 31, 1995 and 1994

                                    ASSETS

                                                  1995            1994
                                             ------------    ------------
Cash and cash equivalents                    $  2,310,596    $  1,965,737
Escrow deposits                                 1,400,287       1,371,141
Accounts and accrued interest receivable           89,717           5,712
Prepaid expenses                                  361,640         227,783
Deferred expenses, net of accumulated
  amortization of $362,375 in 1995 and
  $221,054 in 1994                              1,227,709       1,369,030
                                              ------------   ------------
                                                5,389,949       4,939,403
                                              ------------   ------------
Investment in real estate:
  Land                                          6,536,422       6,536,422
  Buildings and improvements                   56,884,371      56,884,371
                                              ------------   ------------
                                               63,420,793      63,420,793
  Less accumulated depreciation                22,411,326      20,663,941
                                              ------------   ------------
Investment in real estate, net of
  accumulated depreciation                     41,009,467      42,756,852
                                              ------------   ------------
                                             $ 46,399,416    $ 47,696,255
                                              ============   ============
LIABILITIES AND PARTNERS' DEFICIT

Accounts payable                             $     96,080    $    129,946
Due to affiliates                                  19,310          64,125
Security deposits                                 334,467         295,948
Loss in excess of investment in joint
  venture with an affiliate                     1,139,760       1,124,922
Mortgage notes payable                         50,428,070      50,987,329
                                             ------------    ------------
    Total liabilities                          52,017,687      52,602,270

Affiliates' participation in joint ventures      (299,981)        (58,326)
                                              ------------    ------------
                                               51,717,706      52,543,944
Limited Partners' deficit (59,092 
  Interests issued and outstanding)            (4,743,765)     (4,273,438)
General Partner's deficit                        (574,525)       (574,251)
                                              ------------    ------------
Total partners' deficit                        (5,318,290)     (4,847,689)
                                              ------------    ------------
                                             $ 46,399,416    $ 47,696,255
                                             ============    ============

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' DEFICIT
             for the years ended December 31, 1995, 1994 and 1993





                                Partners' Deficit Accounts
                                -----------------------------------------
                                                  General       Limited
                                     Total        Partner       Partners
                                -------------- ------------- ------------

Balance at December 31, 1992    $  (6,990,896)$    (595,683)$  (6,395,213)

Net income for the year
  ended December 31, 1993           2,213,346        22,133     2,191,213
                                -------------- ------------- ------------
Balance at December 31, 1993       (4,777,550)     (573,550)   (4,204,000)

Net loss for the year
  ended December 31, 1994             (70,139)         (701)      (69,438)
                                -------------- ------------- ------------
Balance at December 31, 1994       (4,847,689)     (574,251)   (4,273,438)

Cash distributions to Limited
  Partners  (A)                      (443,190)                   (443,190)
Net loss for the year
  ended December 31, 1995             (27,411)         (274)      (27,137)
                                -------------- ------------- ------------
Balance at December 31, 1995    $  (5,318,290)$    (574,525)$  (4,743,765)
                                ============== ============= ============



(A) Represents a distribution paid in the fourth quarter of 1995 of
    $7.50 per Limited Partnership Interest.




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, 1995, 1994 and 1993

                                      1995          1994          1993
                                -------------- ------------- ------------ 
Income:
  Rental and service            $  11,889,557 $  11,036,707 $  11,437,845
  Interest on short-term
    investments                       170,938       157,773        51,943
                                -------------- ------------- ------------
    Total income                   12,060,495    11,194,480    11,489,788
                                -------------- ------------- ------------
Expenses:
  Interest on mortgage
    notes payable                   4,259,221     4,099,437     4,767,770
  Depreciation                      1,747,385     1,747,384     1,908,944
  Amortization of deferred
    expenses                          141,321       210,353       291,383
  Property operating                3,859,285     3,421,828     3,662,907
  Real estate taxes                 1,028,753     1,136,617     1,180,830
  Property management fees            593,254       550,710       573,228
  Administrative                      515,975       410,825       340,827
  Participation in loss
    (income) of joint venture
    with an affiliate                   2,596       104,619       (13,140)
                                -------------- ------------- ------------
    Total expenses                 12,147,790    11,681,773    12,712,749
                                -------------- ------------- ------------
Loss before affiliates'
  participation in joint
  ventures and extraordinary items    (87,295)     (487,293)   (1,222,961)
Affiliates' participation in
  loss from joint ventures
  before extraordinary items           69,819        16,160       143,199
                                -------------- ------------- ------------
Loss before extraordinary items       (17,476)     (471,133)   (1,079,762)
                                -------------- ------------- ------------
Extraordinary items:
  Gain on foreclosure of
    property                                                    3,101,599
  Gain on forgiveness of debt          69,409       534,659       191,509
  Affiliate's participation in
    gain on forgiveness of debt       (20,823)     (133,665)
  Participation in debt 
    extinguishment expense of 
    joint venture with an 
    affiliate                         (58,521)
                                -------------- ------------- ------------
Total extraordinary items              (9,935)      400,994     3,293,108
                                -------------- ------------- ------------
Net (loss) income               $     (27,411)$     (70,139)$   2,213,346
                                ============== ============= ============
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, 1995, 1994 and 1993
                                  (Continued)


                                     1995          1994          1993
                                -------------- ------------- ------------
Loss before extraordinary items
  allocated to General Partner  $        (175)$      (4,711)$     (10,798)
                                ============== ============= ============
Loss before extraordinary items
  allocated to Limited Partners $     (17,301)$    (466,422)$  (1,068,964)
                                ============== ============= ============
Loss before extraordinary items
  per Limited Partnership
  Interest (59,092 issued and
  outstanding)                  $       (0.29)$       (7.90)$      (18.09)
                                ============== ============= ============
Extraordinary items allocated
  to General Partner            $         (99)$       4,010 $      32,931
                                ============== ============= ============
Extraordinary items allocated
  to Limited Partners           $      (9,836)$     396,984 $   3,260,177
                                ============== ============= ============
Extraordinary items per Limited
  Partnership Interest (59,092
  issued and outstanding)       $       (0.17)$        6.72 $       55.17
                                ============== ============= ============
Net (loss) income allocated to
  General Partner               $        (274)$        (701)$      22,133
                                ============== ============= ============
Net (loss) income allocated to 
  Limited Partners              $     (27,137)$     (69,438)$   2,191,213
                                ============== ============= ============
Net (loss) income per Limited
  Partnership Interest (59,092
  issued and outstanding)       $       (0.46)$       (1.18)$       37.08
                                ============== ============= ============














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, 1995, 1994 and 1993

                                      1995          1994          1993
                                -------------- ------------- ------------
Operating activities:
  Net (loss) income             $     (27,411)$     (70,139)$   2,213,346
  Adjustments to reconcile net
    (loss) income to net cash 
    provided by operating 
    activities:
      Gain on foreclosure of
        property                                               (3,101,599)
      Gain on forgiveness of debt     (69,409)     (534,659)     (191,509)
      Release of escrow deposits                    534,659
      Affiliate's participation
        in gain on forgiveness
        of debt                        20,823       133,665
      Participation in debt
        extinguishment expense         58,521
      Affiliates' participation
        in loss from joint
        ventures                      (69,819)      (16,160)     (143,199)
      Participation in loss
        (income) of joint 
        venture with an affiliate       2,596       104,619       (13,140)
      Depreciation of properties    1,747,385     1,747,384     1,908,944
      Amortization of deferred
        expenses                      141,321       210,353       291,383
      Net change in:
        Escrow deposits               (29,146)     (266,569)      (95,754)
        Accounts and accrued
          interest receivable         (84,005)                    495,423
        Prepaid expenses             (133,857)     (118,266)       (2,229)
        Accounts payable              (33,866)       74,025       (94,259)
        Due to affiliates             (44,815)        6,148       (16,006)
        Accrued liabilities                         (11,687)      (50,823)
        Security deposits              38,519        (2,477)       13,497
                                -------------- ------------- ------------
  Net cash provided by
    operating activities            1,516,837     1,790,896     1,214,075
                                -------------- ------------- ------------
Investing activities:

  Contributions to joint venture
    with an affiliate                (374,657)      (47,041)     (123,638)
  Distributions from joint 
    venture with an affiliate         328,378       131,556
                                -------------- ------------- ------------
  Net cash used in or provided
    by investing activities           (46,279)       84,515      (123,638)
                                -------------- ------------- ------------
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, 1995, 1994 and 1993
                                  (Continued)


                                      1995          1994          1993
                                -------------- ------------- ------------
Financing activities:

  Distributions to Limited 
    Partners                         (443,190)
  Distributions to joint venture
    partners - affiliates            (192,659)     (163,551)      (54,171)
  Contributions from joint 
    venture partner - affiliate                     252,311
  Repayment of mortgage notes
    payable                                     (18,700,000)  (14,744,366)
  Proceeds from issuance of 
    mortgage notes payable                       16,795,600    15,820,400
  Proceeds from issuance of
    note payable                                  1,350,000
  Funding of capital improvement
    escrows                                        (209,445)     (444,382)
  Payment of deferred expenses                     (842,617)     (512,912)
  Principal payments on mortgage
    notes payable                    (489,850)     (308,772)     (281,956)
                                -------------- ------------- ------------
  Net cash used in financing
    activities                     (1,125,699)   (1,826,474)     (217,387)
                                -------------- ------------- ------------
Net change in cash and cash
  equivalents                         344,859        48,937       873,050
Cash and cash equivalents at
  beginning of year                 1,965,737     1,916,800     1,043,750
                                -------------- ------------- ------------
Cash and cash equivalents at
  end of year                   $   2,310,596 $   1,965,737 $   1,916,800
                                ============== ============= ============












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 is
engaged principally in the operation of residential real estate located in
various markets within the United States.

2. 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 is computed using the straight-line method. Rates used
in the determination of depreciation are based upon the following estimated
useful lives:
                                                    Years
                                                    -----
               Buildings and improvements             30
               Furniture and fixtures                  5

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

Interest incurred while properties were under construction was capitalized.

As properties are sold, the related costs and accumulated depreciation are
removed from the respective accounts. Any gain or loss on disposition is
recognized in accordance with generally accepted accounting principles.

(c) Effective January 1, 1995 the Partnership adopted Statement of Financial
Accounting Standards, No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of". Under SFAS 121, the
Partnership records its investments in real estate at the lower of cost or fair
value, and periodically assesses, but not less than on an annual basis,
possible impairment to the value of its properties. The General Partner
estimates the fair value of its properties by dividing the property's expected
net operating income by a risk adjusted rate of return which considers economic
and demographic conditions in the market. In the event the General Partner
determines an impairment in value has occurred, and the carrying amount of the
real estate asset will not be recovered, a provision is recorded to reduce the
carrying basis of the property to its estimated fair value. The General Partner
considers  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
indicate otherwise.

(d) Deferred expenses consist of loan financing and modification fees which are
amortized over the terms of the respective agreements.
<PAGE>
(e) The Financial Accounting Standard Board's Statement No. 107, "Disclosures
About Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. Since quoted market prices are not available for the Partnership's
financial instruments, fair values have been based on estimates using present
value techniques. These techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, may not be realized in
immediate settlement of the instrument. Statement No. 107 does not apply to all
balance sheet items and excludes certain financial instruments and all
non-financial instruments such as real estate and investment in joint ventures
from its disclosure requirements.

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

(g) Loss in excess of investment in joint venture with an affiliate represents
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 records its initial investment at cost and adjusts
its investment account for additional capital contributions, distributions and
its share of joint venture income or loss. Depreciation recognized in
connection with the ownership of real estate by the joint venture has resulted
in the Partnership's share of cumulative losses exceeding the net amounts
invested in the joint venture. This has resulted in the classification of the
investment as "Loss in excess of investment in joint venture with an affiliate"
in the accompanying financial statements.

(h) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less.

(i) 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.

(j) Several reclassifications have been made to the previously reported 1994
and 1993 statements to conform with the classifications used in 1995. These
reclassifications have not changed the 1994 and 1993 results.

3. 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 losses will be allocated 99%
to the Limited Partners and 1% to the General Partner. One hundred percent of
Net Cash Receipts available for distribution shall be distributed to the
holders of Interests in proportion to their participating percentages as of the
record date for such distributions. In addition, there shall be accrued for the
General Partner as its distributive share from operations an amount equal to
approximately 1% of the total Net Cash Receipts being distributed which will
bepaid only out of distributed Net Cash Proceeds. The accrued amount will be
<PAGE>
paid as a part of the General Partner's share of distributed Net Cash Proceeds
and will be paid only out of distributed Net Cash Proceeds in excess of total
Original Capital plus a 6% Cumulative Distribution. Under certain
circumstances, the General Partner may participate in the Net Cash Proceeds of
the sale or refinancing of Partnership properties. The General Partner's
participation is limited to 15% of Net Cash Proceeds and is 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.

4. Mortgage Notes Payable:

Mortgage notes payable at December 31, 1995 and 1994 consisted of the
following:

                     Carrying    Carrying Current  Final
Property            Amount of   Amount of  Inter-  Matur- Current   Estimated
Pledged as           Notes at    Notes at   est     ity   Monthly    Balloon
Collateral           12/31/95    12/31/94   Rate    Date  Payment    Payment 
--------------     ----------   ---------- ------  ------ -------   ---------
Apartment Complexes:
  
Country Ridge     $8,798,060  $8,859,773   10.875%  1996   $85,183  $8,765,000
                                                       
Howell Station     6,532,938   6,593,783    7.940%  2001    48,517   6,153,000
                                                                               
                             
North Hill (A)    16,657,089  16,795,600    8.090%  2024   124,920  14,859,981
                   1,350,000   1,350,000       (A)   (A)       (A)         (A)
                                          
Park Place -
  Phase II         9,030,058   9,084,774    8.700%  2028    66,470        None
                                                                  
Shadowridge        8,059,925   8,303,399    7.750%  1998    65,826   7,655,000
                 ----------- -----------

    Total        $50,428,070 $50,987,329
                 =========== ===========

A) North Hill Apartments is owned by a joint venture ("Joint Venture")
consisting of the Partnership and an affiliate. In December 1994, the bonds
which funded the previous North Hill Apartments mortgage loan were repaid. In
connection with the refinancing, the interest rate increased from 6.75% to
8.09% and the maturity date was extended from December 1994 to December 2024.
As a condition of the new agreement, on January 1, 2005, at the discretion of
both the Joint Venture and the lender, the new bonds will either be repaid or
remarketed. Under the terms of the loan, monthly payments increased from
$105,188 to $124,920.

The Joint Venture repaid the existing mortgage loan of $18,700,000 with
proceeds from the new mortgage loan of $16,795,600, which was net of a discount
of $84,400, proceeds of a $1,350,000 note from an unaffiliated party, and Joint
Venture cash reserves, which included amounts previously held in escrow by the
trustee which were refunded to the Joint Venture in conjunction with the
refinancing. See Note 10 of Notes to Financial Statements for additional
information.
<PAGE>
The $1,350,000 note to an unaffiliated party is non-interest bearing and is not
collateralized by the North Hill Apartments. It will be repaid only to the
extent North Hill Apartments' net sales proceeds exceed a certain predetermined
level. The note is included with Mortgage Notes Payable due to its relationship
to the North Hill Apartments.

During 1995, 1994 and 1993, the Partnership incurred interest expense on
mortgage notes payable of $4,259,221, $3,564,778 and $4,767,770 and paid
interest expense of $4,259,221, $3,576,465 and $4,756,083, respectively.

The Partnership's loans described above require current monthly payments of
principal and interest.

Real estate with an aggregate carrying value of $41,009,467 at December 31,
1995 was pledged as collateral for repayment of mortgage loans.

Future annual maturities of the above notes payable during each of the next
five years are approximately as follows:

                         1996          $ 9,245,000
                         1997              483,000
                         1998            8,027,000
                         1999              351,000       
                         2000              380,000

5. Management Agreements:

As of December 31, 1995, all of the properties owned by the Partnership are
under management agreements with a third-party management company. These
management agreements provide for annual fees of 5% of gross operating
receipts.

6. Affiliates' Participation in Joint Ventures:

The North Hill and Shadowridge apartment complexes are each owned by the
Partnership and an affiliated partnership. Profits and losses are
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 expenses of
the joint ventures are included in the financial statements of the
Partnership with the appropriate adjustment to profit or loss for each
affiliate's participation. Distributions of $192,659 and $54,171 were made
to joint venture partners during 1995 and 1993, respectively. In addition,
a net contribution of $88,760 was received in 1994.

7. Investment in Joint Venture with an Affiliate:

The Partnership owns a 40.25% joint venture interest in Lakeville Resort
Apartments. The joint venture partner is an affiliate with investment
objectives similar to those of the Partnership. During 1995 and 1993, the
Partnership made net capital contributions of $46,279 and $123,638,
respectively, and received a net distribution from property operations of
$84,515 in 1994.
<PAGE>
8. 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 1995 in the financial statements is $758,466 less than the tax
loss of the Partnership for the same period.

9. Transactions with Affiliates:

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

                            Year Ended       Year Ended       Year Ended
                             12/31/95         12/31/94         12/31/93   
                          --------------   --------------   --------------
                           Paid  Payable    Paid  Payable    Paid  Payable
                          ------ -------   ------ -------   ------ -------

Property management fees     None    None $500,733    None $593,008 $44,310
Reimbursement of expenses
  to the General Partner,
  at cost:
    Accounting            $40,855  $2,792   64,274 $23,131   44,684   3,694
    Data processing        26,055   2,074   36,034   9,534   21,877   4,438
    Investor communica-
      tions                 4,926    None   12,306   4,134   10,189     842
    Legal                  19,064   2,828    8,561   3,118    5,270     436
    Portfolio management   81,974  10,952   45,636  20,651   44,898   3,712
    Property sales admin-
      istration             3,006     577     None    None     None    None
    Other                   5,665      87   13,887   3,557    6,591     545

Allegiance Realty Group, Inc., an affiliate of the General Partner, managed all
of the Partnership's properties until the affiliate was sold to a third party
in November 1994.

The Partnership participates in an insurance deductible program with other
affiliated partnerships in which the program pays claims up to the amount of
the deductible under the master insurance policies for its properties. The
program is administered by an affiliate of the General Partner who receives no
fee for administering the program; however, the General Partner is reimbursed
for program expenses. The Partnership paid premiums to the deductible insurance
program of $82,931, $104,139 and $71,202 for 1995, 1994 and 1993, respectively.

10. Extraordinary Items:

(a) Shadowridge Apartments is owned by a joint venture consisting of the
Partnership and an affiliate. During 1995, the joint venture recognized an
extraordinary gain on forgiveness of debt of $69,409 in connection with the
settlement reached with the seller, of which $20,823 represents the affiliate's
share.

(b) The Partnership owns a minority joint venture interest in Lakeville Resort
Apartments. In June 1995, the mortgage note was refinanced with a new lender.
<PAGE>
In connection with this transaction, the Partnership recognized an
extraordinary debt extinguishment expense of $58,521.

(c) North Hill Apartments is owned by a joint venture consisting of the
Partnership and an affiliate. In connection with the December 1994 North Hill
Apartments mortgage loan refinancing, the joint venture received a refund of
the escrow account held by the trustee representing the amount which would have
been paid to Mutual Benefit Life Insurance Company as its 1% guaranty fee on
the original North Hill Apartments' mortgage loan. As a result, the Partnership
recognized a $534,659 extraordinary gain on forgiveness of debt in 1994, of
which $133,665 represents the affiliate's share.

(d) During 1993, title to the Oakland Hills Apartments was relinquished through
foreclosure. The Partnership wrote-off the first mortgage loan of $12,842,863,
<PAGE>
an equity note balance of $67,928, a second mortgage loan of $1,658,149,
accrued real estate taxes of $514,988, security deposits of $31,581 and the
property basis of $12,013,910, net of accumulated depreciation of $4,816,560.
An extraordinary gain on foreclosure of $3,101,599 was recognized in 1993.

(e) During 1993, the Partnership completed the refinancing of the $6,385,403
Howell Station Apartments first mortgage loan and obtained a $6,650,000 new
first mortgage loan from an unaffiliated lender. The Partnership received a
$191,509 discount from the previous lender for prepayment of the mortgage note,
which was recorded as an extraordinary gain on debt forgiveness in 1993.  

11. Fair Value of Financial Instruments:

The carrying amounts and fair values of the Partnership's financial instruments
at December 31, 1995 are as follows:

The carrying value of cash and cash equivalents, accounts and accrued interest
receivable and accounts payable approximates fair value.

Mortgage Notes Payable: Based on borrowing rates available to the Partnership
at the end of 1995 for mortgage loans with similar terms and maturities, the
fair value of the mortgage notes payable approximates the carrying value.

12. Subsequent Events:

(a) In January 1996, the Partnership made a distribution of $443,190 ($7.50 per
Interest) to the holders of Limited Partnership Interests for the fourth
quarter of 1995.

(b) 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 Partnership, additional limited
partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc. (together
with the Partnership and the affiliated partnerships, the "Defendant
Partnerships"), Lehman Brothers, Inc. and Smith Barney Holdings, 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' actions; recovery from the defendants of all
profits received by them as a result of their 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. Management of each of the defendants believes they
have meritorious defenses to contest the claims. It is not determinable at this
time whether or not an unfavorable decision in this action would have a
material adverse impact on the Partnership.
<PAGE>
                                 BALCOR REALTY INVESTORS 85-SERIES III
                                   A REAL ESTATE LIMITED PARTNERSHIP
                                   (An Illinois Limited Partnership)
<TABLE>
                        SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                        as of December 31, 1995
<CAPTION>
        Col. A                 Col. B          Col. C                        Col. D 
---------------------         --------  --------------------   ---------------------------------
                                            Initial Cost                Cost Adjustments
                                           to Partnership          Subsequent to Acquisition
                                        --------------------   ---------------------------------
                                                  Buildings               Carrying     Reduction 
                               Encum-              and Im-     Improve-    Costs        of Basis
     Description              brances     Land    provements    ments       (a)   
---------------------         -------   -------- ------------ ---------  ---------     ---------
<S>                             <C>  <C>          <C>          <C>      <C>           <C>
Country Ridge Apts.,
  a 252 unit complex in
  Farmington Hills, MI          (d)   $  756,000   $9,089,000      None  $  602,777        None
Howell Station Apts.,
  a 228 unit complex in
  Duluth, GA                    (d)      765,000    7,314,000      None      93,803    $(82,212) (f)
North Hill Apts.,
  a 420 unit complex in
  DeKalb County, GA             (d)    2,460,000   20,903,000      None      20,235    (544,251) (f)
Park Place Phase II,
  Apts., a 250 unit com-
  plex in Plymouth, MN          (d)      475,000    8,645,000   $25,800     339,847        None
Shadowridge Apts.,
  a 312 unit complex in
  Las Vegas, NV                 (d)    2,141,417   10,416,377      None        None        None
                                     -----------  -----------   -------  ----------    ---------
    Total                            $ 6,597,417  $56,367,377   $25,800  $1,056,662    $(626,463)
                                     ===========  ===========   =======  ==========    =========
</TABLE>
<PAGE>
                                 BALCOR REALTY INVESTORS 85-SERIES III
                                   A REAL ESTATE LIMITED PARTNERSHIP
                                   (An Illinois Limited Partnership)
<TABLE>
                        SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                        as of December 31, 1995
                                              (Continued)
<CAPTION>
       Col. A                          Col. E                 Col. F      Col. G   Col. H     Col. I
 ------------------       --------------------------------   --------    --------  ------ --------------
                               Gross Amounts at Which                                        Life Upon
                             Carried at Close of Period                                    Which Depre- 
                           -------------------------------                                  ciation in   
                                    Buildings               Accumulated    Date     Date   Latest Income
                                     and Im-       Total     Deprecia-   of Con-    Acq-     Statement
    Description             Land    provements     (b)(c)      tion(c)   struction uired    is Computed
-------------------       --------  ----------   ----------   ---------  --------- ------ --------------
<S>                    <C>         <C>         <C>          <C>             <C>    <C>          <C>
Country Ridge Apts.,
  a 252 unit complex in
  Farmington Hills, MI  $  757,315  $9,690,462  $10,447,777  $3,575,615     1986    9/85        (e)
Howell Station Apts.,
  a 228 unit complex in
  Duluth, GA               757,168   7,333,423    8,090,591   2,904,668     1985    8/85        (e)
North Hill Apts.,
  a 420 unit complex in
  DeKalb County, GA      2,404,824  20,434,160   22,838,984   7,970,976     1985    7/85        (e)
Park Place Phase II,
  Apts., a 250 unit com-
  plex in Plymouth, MN     475,698   9,009,949    9,485,647   3,754,854     1986    9/85        (e)
Shadowridge Apts.,
  a 312 unit complex
  in Las Vegas, NV       2,141,417  10,416,377   12,557,794   4,205,213     1984    9/85        (e)
                       ----------- -----------  ----------- -----------
    Total              $ 6,536,422 $56,884,371  $63,420,793 $22,411,326
                       =========== ===========  =========== ===========
</TABLE>
<PAGE>
                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                             NOTES TO SCHEDULE III

(a) Consists of legal fees, appraisal fees, title costs, other related
professional fees and capitalized construction-period interest.

(b) The aggregate cost of land for Federal income tax purposes is $5,950,267
and the aggregate cost of buildings and improvements for Federal income tax
purposes is $54,036,831. The total of these is $59,987,098.

(c)                        Reconciliation of Real Estate
                           -----------------------------

                                       1995         1994         1993   
                                    ----------   ----------   ----------
    Balance at beginning of year   $63,420,793  $63,420,793  $80,251,263

    Deductions during year:
      Foreclosure of investment
        property                                             (16,830,470)    
                                   -----------  -----------  -----------
    Balance at close of year       $63,420,793  $63,420,793  $63,420,793
                                   ===========  ===========  ===========

                  Reconciliation of Accumulated Depreciation
                  ------------------------------------------

                                       1995         1994         1993   
                                    ----------   ----------   ----------
    Balance at beginning of year   $20,663,941  $18,916,557  $21,824,173

    Depreciation expense for
      the year                       1,747,385    1,747,384    1,908,944

    Accumulated depreciation of
      foreclosed investment
      property                                                (4,816,560)     
                                   -----------  -----------  -----------
    Balance at close of year       $22,411,326  $20,663,941  $18,916,557
                                   ===========  ===========  ===========

(d) See description of Mortgage Notes Payable in Note 4 of Notes to Financial
Statements.

(e) Depreciation expense is computed based upon the following estimated useful
lives:
                                                    Years
                                                    -----
               Buildings and improvements             30
               Furniture and fixtures                  5

(f) Guaranteed income earned on properties under the terms of certain
management and guarantee agreements was recorded by the Partnership as a
reduction of the basis of the property to which the guaranteed income related.
<PAGE>