<PAGE>1
                                   FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended     December 31, 1998
                              ------------------

Commission file number             1-11059
                              -----------------

        AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
-----------------------------------------------------------------
       (Exact name of registrant as specified in charter)

             California                          13-3257662
-------------------------------------      ----------------------
  (State or other jurisdiction of           (I.R.S. Employer
  incorporation or organization)            Identification No.)

11200 Rockville Pike, Rockville, Maryland           20852
-----------------------------------------  ----------------------
(Address of principal executive offices)          (Zip Code)

                          (301) 816-2300
-----------------------------------------------------------------
       (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

                                        Name of each exchange on
    Title of each class                      which registered
--------------------------------      ---------------------------
 Depositary Units of Limited            American Stock Exchange
   Partnership Interest

           Securities registered pursuant to Section 12(g) of the Act:

                          NONE
-----------------------------------------------------------------
                    (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
                                             ----     ----


<PAGE>2

         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]

         As of March 5, 1999, 12,079,514 Depositary Units of Limited Partnership
Interest were  outstanding and the aggregate  market value of such units held by
non-affiliates of the Registrant on such date was $138,868,411.


<PAGE>3

                       AMERICAN INSURED MORTGAGE INVESTORS

                         1998 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                     PART I
                                     ------
                                                                   Page
                                                                   ----
Item 1.    Business................................................  4
Item 2.    Properties..............................................  6
Item 3.    Legal Proceedings.......................................  6
Item 4.    Submission of Matters to a Vote of
             Security Holders......................................  6

                                     PART II
                                     -------
Item 5.    Market for Registrant's Securities and
             Related Security Holder Matters.......................  6
Item 6.    Selected Financial Data.................................  8
Item 7.    Management's Discussion and Analysis of
             Financial Condition and Results of
             Operations............................................  9
Item 7A.   Qualitative and Quantitative Disclosures
             About Market Risk..................................... 19
Item 8.    Financial Statements and Supplementary Data............. 19
Item 9.    Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure................ 19

                                    PART III
                                    --------
Item 10.   Directors and Executive Officers of the
             Registrant............................................ 20
Item 11.   Executive Compensation.................................. 23
Item 12.   Security Ownership of Certain Beneficial
             Owners and Management................................. 24
Item 13.   Certain Relationships and Related
             Transactions.......................................... 24

                                     PART IV
                                     -------
Item 14.   Exhibits, Financial Statement Schedules and
             Reports on Form 8-K................................... 25

Signatures ........................................................ 30


<PAGE>4


                                     PART I


ITEM 1.  BUSINESS

Development and Description of Business
---------------------------------------
         Information  concerning  the  business  of  American  Insured  Mortgage
Investors - Series 85, L.P. (the  Partnership)  is contained in Part II, Item 7,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  and in Notes 1, 5, 6 and 7 of the notes to the financial  statements
of the Partnership  (filed in response to Item 8 hereof),  which is incorporated
herein by reference. Also see Schedule IV-Mortgage Loans on Real Estate, for the
table of the Insured Mortgages (as defined below) invested in by the Partnership
as of December 31, 1998, which is hereby incorporated by reference herein.

Employees
---------
         The Partnership has no employees.  The business of the Partnership is
managed by CRIIMI, Inc. (the General Partner), while its portfolio of mortgages
is managed by AIM Acquisition Partners, L.P. (the Advisor) pursuant to an 
advisory agreement (the Advisory Agreement).  CRIIMI, Inc. is a wholly owned 
subsidiary of CRIIMI MAE Inc. (CRIIMI MAE).  CRIIMI MAE was formerly managed by
an affiliate of CRI, Inc. (CRI).

         The general partner of the Advisor is AIM Acquisition  Corporation (AIM
Acquisition)  and the  limited  partners  include,  but are not  limited to, AIM
Acquisition,  The  Goldman  Sachs  Group,  L.P.,  Broad,  Inc.  and CRIIMI  MAE.
Effective September 6, 1991 and through June 30, 1995, a sub-advisory  agreement
(the  Sub-advisory  Agreement)  existed  whereby  CRI/AIM  Management,  Inc., an
affiliate of CRI, managed the  Partnership's  portfolio.  In connection with the
transaction  in  which  CRIIMI  MAE  became  a  self-administered   real  estate
investment  trust (REIT),  an affiliate of CRIIMI MAE acquired the  Sub-advisory
Agreement. As a result of this transaction,  effective June 30, 1995, CRIIMI MAE
Services  Limited   Partnership,   an  affiliate  of  CRIIMI  MAE,  manages  the
Partnership's  portfolio.  These transactions had no effect on the Partnership's
financial statements.

Competition
-----------
         In disposing of mortgage  investments,  the  Partnership  competes with
private investors, mortgage banking companies, mortgage brokers, state and local
government agencies, lending institutions, trust funds, pension funds, and other
entities,  some with similar  objectives to those of the Partnership and some of
which are or may be  affiliates of the  Partnership,  its General  Partner,  the
Advisor  or  their  respective  affiliates.  Some of  these  entities  may  have
substantially  greater capital  resources and experience in disposing of Federal
Housing Administration (FHA) insured mortgages than the Partnership.

<PAGE>5

                                     PART I


ITEM 1.  BUSINESS - Continued

         CRIIMI  MAE and its  affiliates  also may  serve as  general  partners,
sponsors  or  managers  of real  estate  limited  partnerships,  REITs  or other
entities in the future.  The  Partnership may attempt to dispose of mortgages at
or about the same time that  CRIIMI  MAE,  one or more of the other "AIM  Funds"
(defined as the Partnership,  American  Insured  Mortgage  Investors ("AIM 84"),
American  Insured  Mortgage  Investors  L.P. - Series 86 ("AIM 86") and American
Insured Mortgage  Investors L.P. - Series 88 ("AIM 88")),  and/or other entities
sponsored or managed by CRIIMI MAE, are attempting to dispose of mortgages. As a
result of market conditions that could limit  dispositions,  CRIIMI MAE Services
Limited  Partnership (CMSLP) and its affiliates could be faced with conflicts of
interest in determining  which  mortgages  would be disposed of. Both CRIIMI MAE
Services Limited Partnership (CMSLP) and CRIIMI,  Inc., however,  are subject to
their  fiduciary  duties in evaluating the  appropriate  action to be taken when
faced with such conflicts.

Forward-Looking Statements
--------------------------
         In  accordance  with the Private  Securities  Litigation  Reform Act of
1995, the Partnership can obtain a "Safe Harbor" for forward-looking  statements
by  identifying  those  statements and by  accompanying  those  statements  with
cautionary  statements which identify factors that could cause actual results to
differ from those in the forward-looking statements.  Accordingly, the following
information contains or may contain forward-looking  statements: (1) information
included  or  incorporated  by  reference  in this  Annual  Report on Form 10-K,
including,  without  limitation,  statements  made  under  Item 7,  Management's
Discussion and Analysis of Financial  Condition and Results of  Operations,  (2)
information  included or  incorporated  by  reference  in future  filings by the
Partnership  with the  Securities  and Exchange  Commission  including,  without
limitation,  statements with respect to growth,  projected  revenues,  earnings,
returns and yields on its portfolio of mortgage  assets,  the impact of interest
rates, costs and business strategies and plans and (3) information  contained in
written  material,  releases and oral statements  issued by or on behalf of, the
Partnership,  including, without limitation,  statements with respect to growth,
projected  revenues,  earnings,  returns and yields on its portfolio of mortgage
assets, the impact of interest rates,  costs and business  strategies and plans.
The  Partnership's  actual results may differ materially from those contained in
the forward-looking  statements identified above. Factors which may cause such a
difference  to  occur  include,  but  are  not  limited  to (i)  regulatory  and
litigation  matters,  (ii)  interest  rates,  (iii) trends in the economy,  (iv)
prepayment of mortgages and (v) defaulted mortgages.


<PAGE>6

ITEM 2.  PROPERTIES

         Although the Partnership  does not own the underlying real estate,  the
mortgages  underlying the  Partnership's  mortgage  investments are non-recourse
first liens on the respective multifamily residential developments or retirement
homes.

ITEM 3.  LEGAL PROCEEDINGS

         There are no material legal  proceedings to which the  Partnership is a
party.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to the security holders to be voted on during
the fourth quarter of 1998.

                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY
           HOLDER MATTERS

Principal Market and Market Price for Units and Distributions
-------------------------------------------------------------
         Since April 8, 1992, the Limited  Partnership Units (Units) have traded
on the American Stock Exchange (AMEX) with a trading symbol of "AII."

         The high and low trade prices for the Units as reported on AMEX and the
distributions, as applicable, for each quarterly period in 1998 and 1997 were as
follows:

<TABLE>
<CAPTION>
                                                                                               Amount of
                                                               1998                          Distribution
    Quarter Ended                                      High              Low                    Per Unit
   ---------------------                             ---------         ---------             ---------------
   <S>                                               <C>               <C>                   <C>
   March 31                                          $14 1/2           $13 9/16                 $      1.07 (1)
   June 30                                            13 3/4            12 7/8                         0.58 (2)
   September 30                                       13 3/4            12 13/16                       0.53 (3)
   December 31                                        13 5/8            11 5/8                         1.27 (4)
                                                                                             --------------
                                                                                             $         3.45
                                                                                             ==============

                                                                                               Amount of
                                                               1998                          Distribution
    Quarter Ended                                      High              Low                    Per Unit
   ---------------------                             ---------         ---------             ---------------
   <S>                                               <C>               <C>                   <C>
   March 31                                          $ 15 1/4            14 3/8                $        0.39 (5)
   June 30                                             15 1/8            14 1/4                         0.30
   September 30                                        15                13 13/16                       0.84 (6)
   December 31                                         14 7/8            13 7/8                         1.23 (7)
                                                                                               -------------
                                                                                              $        2.76
                                                                                               =============
   </TABLE>

<PAGE>7

                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY
           HOLDER MATTERS - Continued

   (1)    This amount includes  approximately  $0.77 per Unit  representing  net
          proceeds  from  the  prepayment  of  the  mortgage  on  Spanish  Trace
          Apartments.
   (2)    This amount includes  approximately  $0.31 per Unit  representing  net
          proceeds from the prepayment of the mortgages on Isle of Pines Village
          Apartments, Emerald Green Apartments, and Stoney Brook Apartments.
   (3)    This amount includes  approximately  $0.27 per Unit  representing  net
          proceeds from the  prepayment of the mortgages on Amador  Residential,
          Continental Village, and Bentgrass Hills Apartments.
   (4)    This amount includes  approximately  $1.00 per Unit  representing  net
          proceeds from the  prepayment  of the mortgages on Northdale  Commons,
          Cedar Bluff Apartments, and Wayland Health Center.
   (5)    This amount includes approximately $0.07 per Unit from the disposition
          of the following  mortgages:  net proceeds from the  assignment of the
          mortgage  on  Meadow  Park  Apartments  I of  $0.05  per  Unit and net
          proceeds from the prepayment of the mortgage on Security Apartments of
          $0.02 per Unit.
   (6)    This amount includes  approximately  $0.54 per Unit from the following
          mortgages:  final  settlement  of the  mortgage  on Pine Tree Lodge of
          $0.02 per Unit and net proceeds from the prepayment of the mortgage on
          Peachtree Place North of $0.52 per Unit.
   (7)    This amount includes  approximately  $0.92 per Unit  representing  net
          proceeds  from  the  prepayment  of the  mortgages  on  Ashford  Place
          Apartments,   Fleetwood   Village   Apartments,   Silverwood   Village
          Apartments and Maryland Meadows.

         There are no material legal restrictions upon the Partnership's present
or future ability to make distributions in accordance with the provisions of the
Partnership Agreement.


                                            Approximate Number of Unitholders
   Title of Class                                 as of December 31, 1998
--------------------                        ---------------------------------
Depositary Units of Limited
  Partnership Interest                                  11,800


<PAGE>8

                                     PART II


ITEM 6.  SELECTED FINANCIAL DATA
         (Dollars in thousands, except per Unit amounts)

<TABLE><CAPTION>
                                                                For the Years Ended December 31,
                                               1998         1997         1996         1995         1994
                                           ----------   ----------    ----------   ----------   ----------
<S>                                       <C>          <C>           <C>          <C>          <C>
Income                                       $ 14,744     $ 16,761      $ 17,943     $ 18,589     $ 19,167

Net gains (losses) on mortgage
  dispositions/modifications                    1,403          908           522           36         (151)

Net earnings                                   13,893       15,137        15,789       15,903       16,155

Net earnings per Limited
  Partnership Unit - Basic (1)                   1.11         1.20          1.26         1.27         1.29

Distributions per Limited
  Partnership Unit (1)(2)                        3.45         2.76          2.25         1.54         1.96


                                                                            As of December 31,
                                              1998        1997           1996         1995         1994
                                          -----------  -----------   -----------  -----------  -----------
<S>                                      <C>          <C>           <C>          <C>          <C>
Total assets                                 $170,970     $203,450      $215,951     $225,691     $214,823

Partners' equity                              153,543      187,682       204,687      220,681      209,557

(1) Calculated based upon the weighted average number of Units outstanding.
(2) Includes distributions due the Unitholders for the Partnership's fiscal
    quarters ended December 31, 1998, 1997, 1996, 1995 and 1994, which were
    paid  subsequent  to year  end.  See  Notes 3 and 7 of the notes to the
    financial statements of the Partnership contained in Item 8, "Financial
    Statements and Supplementary Data."
</TABLE>

         The  selected  statements  of  income  and  comprehensive  income  data
presented  above for the years ended  December 31, 1998,  1997 and 1996, and the
balance  sheet data as of December  31, 1998 and 1997,  are derived from and are
qualified by reference to the Partnership's financial statements which have been
included elsewhere in this Form 10-K. The statements of income and comprehensive
income data for the years ended December 31, 1995 and 1994 and the balance sheet
data as of December 31, 1996,  1995 and 1994 are derived from audited  financial
statements  not  included  in  this  Form  10-K.  This  data  should  be read in
conjunction with the financial statements and the notes thereto.


<PAGE>9

                                     PART II


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS

General
-------
         American Insured Mortgage Investors - Series 85, L.P. (the Partnership)
was formed under the Uniform Limited  Partnership Act of the state of California
on June 26, 1984. During the period from March 8, 1985 (the initial closing date
of the Partnership's  public offering) through January 27, 1986 (the termination
date of the  offering),  the  Partnership,  pursuant  to its public  offering of
12,079,389  Depository Units of limited partnership  interest (Units),  raised a
total of  $241,587,780  in gross  proceeds.  In  addition,  the initial  limited
partner  contributed  $2,500 to the capital of the  Partnership and received 125
units of limited partnership interest in exchange therefor.

         CRIIMI, Inc. (the General Partner) holds a partnership interest of 
3.9%.  CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. 
(CRIIMI MAE).  Prior to June 30, 1995, CRIIMI MAE was managed by an advisor 
whose general partner is CRI, Inc. (CRI).  However, effective June 30, 1995, 
CRIIMI MAE became a self-administered real estate investment trust (REIT) and, 
as a result, the advisor no longer advises CRIIMI MAE.

         AIM  Acquisition  Partners L.P. (the Advisor)  serves as the advisor of
the  Partnership.  The  general  partner  of  the  Advisor  is  AIM  Acquisition
Corporation  (AIM  Acquisition) and the limited  partners  include,  but are not
limited to, AIM  Acquisition,  The Goldman Sachs Group,  L.P.,  Broad,  Inc. and
CRIIMI  MAE.  Pursuant  to the terms of certain  amendments  to the  Partnership
Agreement, the General Partner is required to receive the consent of the Advisor
prior to taking  certain  significant  actions which affect the  management  and
policies of the Partnership.

         Effective  September 6, 1991 and through June 30, 1995, a  sub-advisory
agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc.,
an affiliate of CRI, managed the Partnership's portfolio. In connection with the
transaction in which CRIIMI MAE became a self-administered REIT, an affiliate of
CRIIMI  MAE  acquired  the  Sub-advisory  Agreement.  As a  consequence  of this
transaction,   effective  June  30,  1995,  CMSLP,   manages  the  Partnership's
portfolio.  These  transactions  had no  effect on the  Partnership's  financial
statements.

         On October 5, 1998,  CRIIMI MAE, the parent of the General  Partner and
the parent of AIM Investment L.P., and CRIIMI MAE Management, Inc., an affiliate
of CRIIMI MAE and  provider  of  personnel  and  administrative  services to the

<PAGE>10

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

Partnership,  filed a voluntary petition for reorganization  under Chapter 11 of
the U.S.  Bankruptcy  Code.  As a  debtor-in-possession,  CRIIMI MAE will not be
permitted  to provide  any  available  capital to the  General  Partner  without
approval from the bankruptcy  court.  This  restriction or potential loss of the
availability of a potential  capital resource could adversely affect the General
Partner  and  the  Partnership;   however,   CRIIMI  MAE  has  not  historically
represented  a  significant  source of capital  for the  General  Partner or the
Partnership.  Such bankruptcy filings could also result in the potential need to
replace   CRIIMI  MAE   Management,   Inc.  as  a  provider  of  personnel   and
administrative services to the Partnership.

Year 2000
---------
         The Year 2000  issue is a  computer  programming  issue that may affect
many electronic  processing  systems.  Until  relatively  recently,  in order to
minimize the length of data fields, most date-sensitive  programs eliminated the
first two digits of the year.  This issue could  affect  information  technology
("IT")  systems and date sensitive  embedded  technology  that controls  certain
systems (such as  telecommunications  systems,  security systems,  etc.) leaving
them unable to properly  recognize or  distinguish  dates in the  twentieth  and
twenty-first   centuries.   This   treatment   could   result   in   significant
miscalculations when processing critical date-sensitive  information relating to
dates after December 31, 1999.

         The General  Partner is currently in the process of assessing and 
testing Year 2000 compliance of its IT systems,  which include  software systems
to administer and manage  mortgage  assets  and  software  systems  used for  
internal  accounting purposes.  A majority of the IT systems used by the 
Partnership is licensed from third  parties.  These third parties have either  
provided  upgrades to existing systems  or have  indicated  that their  systems
are Year 2000  compliant.  The General Partner has applied  upgrades and has 
completed a substantial  amount of compliance  testing as of March 30, 1999.  
There can be no  assurance,  however, that the  Partnership's  IT systems will 
be Year 2000  compliant by December 31, 1999.

         The  Year  2000   issue  may  also   affect   the   General   Partner's
date-sensitive   embedded  technology,   which  controls  systems  such  as  the
telecommunications  systems, security systems, etc. The General Partner does not

<PAGE>11

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS

believe that the cost to modify or replace such  technology to make it Year 2000
compliant  will be  material.  The  failure of any such  systems to be Year 2000
compliant could be material to the Partnership.

         The  potential  impact of the Year 2000 issue  depends  not only on the
corrective  measures the General Partner has undertaken and will undertake,  but
also on the ways in which the Year 2000 issue is addressed by third parties with
whom the  Partnership  directly  interfaces  or  whose  financial  condition  or
operations  are  important to the  Partnership.  The  Partnership  has initiated
communications  with third parties with which it directly interfaces to evaluate
the risk of their failure to be Year 2000  compliant and the extent to which the
Partnership  may be vulnerable to such failure.  There can be no assurance  that
the systems of these third  parties will be Year 2000  compliant by December 31,
1999. The failure of these third parties to be Year 2000 compliant  could have a
material adverse effect on the operations of the Partnership.

         The  Partnership  believes  that its greatest  risk with respect to the
Year 2000 issue relates to failures by third parties to be Year 2000  compliant.
In  addition  to  risks  posed by  third  parties  with  which  the  Partnership
interfaces  directly,  risks are created by third parties providing  services to
large  segments  of  society.  The  failure  of third  parties  to be Year  2000
compliant could,  among other things,  cause disruptions in the capital and real
estate  markets and borrower  defaults on real estate loans and  mortgage-backed
securities as well as the pools of mortgage loans  underlying  such  securities.
The  Partnership  believes  that its  greatest  exposure  to the Year 2000 issue
involves the loan servicing  operations of an affiliate of the  Partnership.  An
affiliate of the Partnership, CMSLP, currently services approximately 21% of the
total mortgage  investments in the AIM Funds. CMSLP has applied a vendor upgrade
and has substantially completed compliance testing on the upgrade.

         Currently the Partnership estimates the cost of system upgrades related
to Year 2000 issues to be immaterial.

         Although the General Partner has substantially completed its compliance
testing and  remediation,  it is also in the process of  developing  contingency
plans for the risks of the  failure of the  Partnership  or third  parties to be
Year 2000 compliant.  The General Partner intends to complete  contingency plans
for the Year 2000 issue by May 31, 1999.  Due to the inability to predict all of
the potential  problems that may arise from the Year 2000 issue, there can be no
assurance that all contingencies will be adequately addressed by such plans.

<PAGE>12

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

Mortgage Investments
--------------------
         Prior to the  expiration of the  Partnership's  reinvestment  period in
December  1993,  the  Partnership  was engaged in the  business  of  originating
mortgage  loans  (Originated  Insured  Mortgages)  and acquiring  mortgage loans
(Acquired  Insured Mortgages and,  together with Originated  Insured  Mortgages,
referred to herein as Insured  Mortgages).  In accordance  with the terms of the
Partnership  Agreement,  the Partnership is no longer authorized to originate or
acquire Insured Mortgages and, consequently,  its primary objective is to manage
its  portfolio of mortgage  investments,  all of which are insured under Section
221(d)(4) or Section 231 of the National Housing Act. The Partnership  Agreement
states  that the  Partnership  will  terminate  on  December  31,  2009,  unless
previously terminated under the provisions of the Partnership Agreement.

         As of December 31,  1998,  the  Partnership  had invested in 69 Insured
Mortgages,  with an aggregate amortized cost of approximately  $145.9 million, a
face value of  approximately  $151.8  million and a fair value of  approximately
$153.8 million, as discussed below.

Investment in Insured Mortgages
-------------------------------
         The  Partnership's  investment  in Insured  Mortgages  is  comprised of
participation  certificates  evidencing a 100% undivided  beneficial interest in
government insured multifamily mortgages issued or sold pursuant to FHA programs
(FHA-Insured Certificates),  mortgage-backed securities guaranteed by GNMA (GNMA
Mortgage-Backed  Securities) and FHA-insured mortgage loans (FHA-Insured Loans).
The mortgages  underlying the  FHA-Insured  Certificates,  GNMA  Mortgage-Backed
Securities and  FHA-Insured  Loans are  non-recourse  first liens on multifamily
residential developments or retirement homes.

         The  following  is a  discussion  of the  types  of  the  Partnership's
mortgage investments, along with the risks related to each type of investment:


<PAGE>13

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

Fully Insured GNMA Mortgage-Backed Securities and FHA-Insured
  Certificates
-------------------------------------------------------------
         Listed below is the Partnership's aggregate investment in Fully Insured
Mortgages:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                   1998                      1997
                                                               ------------             ------------
<S>                                                            <C>                      <C>
Fully Insured Acquired Insured:
  Number of
    GNMA Mortgage-Backed Securities(1)                                    8                        9
    FHA-Insured Certificates
    (2)(3)(4)(5)(6)(7)(8)(9)                                             46                       55
  Amortized Cost                                               $104,595,386             $132,530,176
  Face Value                                                    108,690,257              137,674,964
  Fair Value                                                    110,253,225              142,822,793


Fully Insured Originated Insured:
  Number of
    GNMA Mortgage-Backed Securities                                       1                        1
    FHA-Insured Certificates                                              1                        1
  Amortized Cost                                                $16,899,484             $ 17,017,276
  Face Value                                                     16,542,867               16,660,658
  Fair Value                                                     16,738,030               16,887,282

</TABLE>

(1)      In February 1998, the mortgage on Spanish Trace Apartments was prepaid.
         The Partnership  received net proceeds of  approximately  $9.7 million,
         and  recognized  a loss of  approximately  $96,000  for the year  ended
         December  31, 1998.  A  distribution  of $0.77 per Unit related to this
         prepayment  was declared in March 1998 and paid to  Unitholders  in May
         1998.

(2)      In April 1998,  the mortgages on Isle of Pines Village  Apartments  and
         Emerald Green  Apartments were prepaid.  The  Partnership  received net
         proceeds of approximately $1.3 million and $1.1 million,  respectively,
         and   recognized   gains  of   approximately   $290,000  and  $230,000,
         respectively,  for the year ended December 31, 1998. A distribution  of
         $0.19 per Unit  related to these  prepayments  was declared in May 1998
         and paid to Unitholders in August 1998.

(3)      In May 1998, the mortgage on Stoney Brook  Apartments was prepaid.  The
         Partnership  received net proceeds of approximately  $1.5 million,  and
         recognized a gain of approximately $338,000 for the year ended December
         31, 1998. A distribution  of $0.12 per Unit related to this  prepayment
         was declared in June 1998 and paid to Unitholders in August 1998.

(4)      In July 1998,  the  mortgage on Amador  Residential  was  prepaid.  The
         Partnership  received net proceeds of approximately  $1.4 million,  and
         recognized a gain of approximately  $64,000 for the year ended December
         31, 1998. A distribution  of $0.11 per Unit related to this  prepayment
         was declared in July 1998 and paid to Unitholders in November 1998.

(5)      In August 1998, the mortgage on Bentgrass Hills Apartments was prepaid.
         The Partnership  received net proceeds of approximately  $238,000,  and
         recognized a gain of approximately  $54,000 for the year ended December
         31, 1998. A distribution  of $0.02 per Unit related to this  prepayment
         was  declared in  September  1998 and paid to  Unitholders  in November
         1998.

(6)      In October  1998,  the mortgage on Northdale  Commons was prepaid.  The
         Partnership  received  net  proceeds  of  approximately  $718,000,  and
         recognized a gain of approximately  $24,000 for the year ended December
         31, 1998. A distribution  of $0.06 per Unit related to this  prepayment
         was declared in November 1998 and paid to Unitholders in February 1999.

<PAGE>14

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

(7)      In  November  1998,  the  mortgage  on Cedar  Bluff  was  prepaid.  The
         Partnership  received net proceeds of approximately  $4.6 million,  and
         recognized a gain of approximately $170,000 for the year ended December
         31, 1998. A distribution  of $0.36 per Unit related to this  prepayment
         was declared in December 1998 and paid to Unitholders in February 1999.

(8)      In November  1998,  the mortgage on Wayland  Health Center was prepaid.
         The Partnership  received net proceeds of  approximately  $7.3 million,
         and  recognized  a gain of  approximately  $9,000  for the  year  ended
         December  31, 1998.  A  distribution  of $0.58 per Unit related to this
         prepayment  was declared in December  1998 and paid to  Unitholders  in
         February 1999.

(9)      In December 1998, the mortgage on Gamel & Gamel Apartments (Brown Gable
         Apartments)  was  prepaid.  The  Partnership  received  net proceeds of
         approximately  $703,000, and recognized a gain of approximately $36,000
         for the year ended December 31, 1998. A distribution  of $0.06 per Unit
         related  to this  prepayment  was  declared  in  February  1999  and is
         expected to be paid to Unitholders in May 1999.

         As of March 26, 1999,  all of the fully  insured  GNMA  Mortgage-Backed
Securities and FHA-Insured  Certificates are current with respect to the payment
of principal and interest, except for the mortgages on Woodland Villas and Quail
Creek  Apartments.  These  mortgages are delinquent  with respect to the January
1999 payment.  The  Partnership  does not anticipate problems  regarding the
collection of these payments.

         In  addition  to  base  interest  payments  under  Originated   Insured
Mortgages,  the  Partnership  is  entitled  to  additional  interest  based on a
percentage of the net cash flow from the underlying  development (referred to as
Participations).  During the years ended  December 31, 1998,  1997 and 1996, the
Partnership   received  $76,991,   $51,457  and  $0,   respectively,   from  the
Participations.  These  amounts,  if any,  are  included in mortgage  investment
income on the accompanying statements of income and comprehensive income.

         In the case of fully insured  Originated Insured Mortgages and Acquired
Insured   Mortgages,   the  Partnership's   maximum  exposure  for  purposes  of
determining  loan  losses  would  generally  be  approximately  1% of the unpaid
principal  balance  of the  Originated  Insured  mortgage  or  Acquired  Insured
Mortgage  (an  assignment  fee charged by FHA) at the date of default,  plus the
unamortized  balance  of  acquisition  fees and  closing  costs  of the  Insured
Mortgage and the loss of approximately 30 days accrued interest.


<PAGE>15

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

Fully Insured FHA-Insured Loans
-------------------------------
         Listed below is the Partnership's  aggregate  investment in FHA-Insured
Loans:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                  1998                    1997
                                                            ---------------         ----------------
<S>                                                       <C>                     <C>
Fully Insured Acquired Insured:
  Number of Loans (1)(2)                                                 10                       12
  Amortized Cost                                               $ 11,617,321             $ 14,416,917
  Face Value                                                     14,068,282               17,165,551
  Fair Value                                                     14,087,092               17,432,816

Fully Insured Originated Insured:
  Number of Loans                                                         3                        3
  Amortized Cost                                               $ 12,818,519             $ 12,928,572
  Face Value                                                     12,488,890               12,589,214
  Fair Value                                                     12,747,524               13,431,769

(1)      In March 1998, HUD issued assignment proceeds in the form of a 9.5% 
         debenture for the mortgage on Portervillage I Apartments.  This 
         mortgage was owned 50% by AIM 85 and 50% by an affiliate of the
         Partnership, American Insured Mortgage Investors (AIM 84).  The 
         debenture, with a face value of $2,296,098, was issued to the 
         Partnership, with interest payable semi-annually on January 1 and
         July 1.  The Partnership recognized a gain of approximately $200,000 on
         the assignment of this loan for the year ended December 31, 1998.  In 
         January 1999, proceeds of approximately $2.4 million, including accrued
         interest of approximately $109,000, were received upon redemption of 
         these debentures, of which approximately $1.2 million were due to the 
         Partnership.  Accordingly, a distribution of $0.10 per Unit related to
         this assignment was declared in January 1999 and is expected to be paid
         to Unitholders in May 1999.

(2)      In August 1998,  the mortgage on Continental  Village was prepaid.  The
         Partnership  received net proceeds of approximately  $1.8 million,  and
         recognized a gain of approximately  $84,000 for the year ended December
         31, 1998. A distribution  of $0.14 per Unit related to this  prepayment
         was  declared in  September  1998 and paid to  Unitholders  in November
         1998.

</TABLE>

                  As of March 26,  1999,  all of the fully  insured  FHA-Insured
         Loans were  current  with  respect  to the  payment  of  principal  and
         interest.

                  In addition to base interest payments under Originated Insured
         Mortgages,  the Partnership is entitled to additional interest based on
         a  percentage  of the net cash  flow  from the  underlying  development
         (referred to as  Participations).  During the years ended  December 31,
         1998,  1997 and 1996, the  Partnership  received  $34,553,  $37,766 and
         $42,417,  respectively,  from the  Participations.  These  amounts  are
         included in mortgage  investment income on the accompanying  statements
         of income and comprehensive income.


<PAGE>16

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

Results of Operations
---------------------
1998 versus 1997
----------------
         Net earnings  decreased for 1998 as compared to 1997 primarily due to a
decrease in mortgage investment income.  Partially  offsetting this decrease was
an  increase  in net  gains  on  mortgage  dispositions  and  modifications,  as
discussed below.

         Mortgage  investment  income  decreased  for 1998 as  compared  to 1997
primarily due to the reduction in mortgage base from 12 dispositions during 1998
with an aggregate cost balance of approximately $29.6 million.

         Interest  and  other  income  increased  for 1998 as  compared  to 1997
primarily due to the temporary investment of mortgage disposition proceeds prior
to distribution to Unitholders.  During 1998, twelve mortgages were disposed of,
as compared to seven dispositions in 1997.

         Asset management fees to related parties decreased for 1998 as compared
to 1997 as a result of the reduction in the mortgage base.

         Interest  expense to affiliate  decreased  for 1998 as compared to 1997
due to the  cancellation  of the  note  payable  to  American  Insured  Mortgage
Investors L.P. - Series 88 (AIM 88) in April 1997, as discussed in Note 8 of the
Notes to the Financial Statements.

         Net gains from dispositions and modifications  increased as a result of
twelve mortgage  dispositions or assignments in 1998, as discussed above, versus
eight dispositions, modifications or assignments in 1997.

1997 versus 1996
----------------
         Net earnings  decreased for 1997 as compared to 1996 primarily due to a
decrease in mortgage investment income.  Partially  offsetting this decrease was
an  increase  in net  gains  on  mortgage  dispositions  and  modifications,  as
discussed above.

         Mortgage  investment  income  decreased  for 1997 as  compared  to 1996
primarily  due to the  reduction  in  mortgage  base due to the  disposition  of
mortgages, as discussed.

<PAGE>17

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

         Interest  and  other  income  increased  for 1997 as  compared  to 1996
primarily due to the temporary investment of mortgage disposition proceeds prior
to distribution to Unitholders.

         Asset management fees to related parties decreased for 1997 as compared
to 1996 as a result of the reduction in the mortgage base.

         Gains from  dispositions  and  modifications  increased  as a result of
seven  mortgage  dispositions  in 1997,  as  discussed,  versus 1996 activity as
follows: a modification agreement on the mortgage on Oakforest Apartments II and
the prepayment of mortgages on Cambridge Arms Apartments,  Bear Creek Apartments
II and Westlake Village  Apartments.  Losses from dispositions and modifications
decreased  due  to no  losses  in  1997  versus  1996  activity  as  follows:  a
modification  agreement on the mortgage of Waterford  Green  Apartments  and the
1996 assignment of the mortgage on Woodland Village Apartments.

Liquidity and Capital Resources
-------------------------------
         The  Partnership's  operating  cash  receipts  derived from payments of
principal and interest on Insured Mortgages, plus cash receipts from interest on
short-term  investments are the  Partnership's  principal sources of cash flows,
and were  sufficient  during the years ended December 31, 1998, 1997 and 1996 to
meet operating  requirements.  The Partnership  anticipates its cash flows to be
sufficient to meet operating expense requirements for 1999.

         The basis for paying  distributions to Unitholders is net proceeds from
mortgage  dispositions,  if any, and cash flow from  operations,  which includes
regular  interest  income and principal from Insured  Mortgages after paying all
expenses  of the  Partnership.  Although  the  Insured  Mortgages  yield a fixed
monthly  mortgage  payment once purchased,  the cash  distributions  paid to the
Unitholders  will vary during each quarter due to (1) the fluctuating  yields in
the  short-term  money market where the monthly  mortgage  payment  receipts are
temporarily  invested prior to the payment of quarterly  distributions,  (2) the
reduction in the asset base resulting from monthly  mortgage payment receipts or
mortgage  dispositions,  (3)  variations  in the cash flow  attributable  to the
delinquency  or  default  of  Insured   Mortgages  and  professional   fees  and
foreclosure  costs incurred in connection  with those Insured  Mortgages and (4)
variations in the Partnership's operating expenses.

<PAGE>18

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

         Since the  Partnership  is  obligated  to  distribute  the  Proceeds of
Mortgage  Prepayments,  Sales and Insurance on Insured  Mortgages (as defined in
the Partnership  Agreement) to its  Unitholders,  the size of the  Partnership's
portfolio  will continue to decrease.  The magnitude of the decrease will depend
upon the size of the Insured  Mortgages which are prepaid,  sold or assigned for
insurance proceeds as reflected in the preceding table.

Cash flow - 1998 versus 1997
----------------------------
         Net  cash  provided  by  operating  activities  decreased  for  1998 as
compared to 1997,  primarily due to the reduction in mortgage investment income,
as discussed above.

         Net cash provided by investing activities increased in 1998 as compared
to 1997 due to the increase in proceeds from mortgage dispositions, as discussed
previously.

         Net cash used in financing activities increased for 1998 as compared to
1997,  as  a  result  of  an  increase  in   distributions   paid  to  partners.
Distributions  paid to partners in 1998  included  proceeds  resulting  from the
disposition of eleven  mortgages during the fourth quarter of 1997 and the first
three quarters of 1998. This compares to distributions  paid to partners in 1997
which included proceeds  resulting from the disposition of five mortgages during
the fourth quarter of 1996 and the first three quarters of 1997.

Cash flow - 1997 versus 1996
----------------------------
         Net  cash  provided  by  operating  activities  decreased  for  1997 as
compared to 1996.  This  decrease  was  primarily  due to a decrease in mortgage
investment income, as discussed above. In addition, receivables and other assets
decreased  due to the receipt of the  remaining  proceeds  from the  mortgage on
Woodland Village.

         Net cash provided by investing activities increased in 1997 as compared
to 1996 due to the increase in proceeds from mortgage dispositions, as discussed
previously.  In addition,  receipt of mortgage principal from scheduled payments
increased  slightly for 1997 as compared to 1996 due to the normal  amortization
of mortgages.

<PAGE>19

                                    PART II

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS - Continued

         Net cash used in financing activities increased for 1997 as compared to
1996,  as  a  result  of  an  increase  in   distributions   paid  to  partners.
Distributions paid to partners in 1997 included special distributions  resulting
from the  disposition  of the  mortgages on Meadow Park  Apartments  I, Security
Apartments,  Peachtree Apartments, Ashford Place Apartments,  Silverwood Village
Apartments, Fleetwood Village Apartments and Maryland Meadows.

ITEM 7A.          QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The Partnership's principal market risk is exposure to changes in interest rates
in the US Treasury  market,  which  coupled with the related  spread to treasury
investors  required for the  Partnership's  Insured  Mortgages,  will cause  
fluctuations  in the market value of Partnership's assets.

The table below provides information about the Partnership's  Insured Mortgages,
all of which were entered into for purposes  other than trading.  The table 
presents anticipated  principal and interest cash flows based upon the
assumptions  used in  determining  the fair  value of these  securities  and the
related weighted average interest rates by expected maturity.

<TABLE>
<CAPTION>
                  1999       2000         2001        2002         2003        Thereafter     Total     Fair Value
<S>               <C>        <C>          <C>         <C>          <C>         <C>          <C>         <C>
Insured                                                                                                             
Mortgages                                                                                                                     
(in millions)    $26.8      $25.0        $22.2       $20.4        $18.8       $126.6       $239.8      $153.8

Average Interest       
Rate              7.90%      7.91%        7.91%       7.92%        7.92%        8.16%          --          --

</TABLE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is on pages 31 through 62.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                           ACCOUNTING AND FINANCIAL DISCLOSURES

         None.


<PAGE>20

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         (a),(b),(c),(e)

         The Partnership has no officers or directors. CRIIMI, Inc. (the General
Partner)  holds a general  partnership  interest  of 3.9%.  The  affairs  of the
Partnership are managed by the General Partner,  which is wholly owned by CRIIMI
MAE, a corporation whose shares are listed on the New York Stock Exchange. Prior
to June 30, 1995, CRIIMI MAE was managed by an advisor whose general partner was
CRI.  However,  effective June 30, 1995,  CRIIMI MAE became a  self-administered
REIT and, as a result, the advisor no longer advises CRIIMI MAE.

         AIM Acquisition  Partners,  L.P. (the Advisor) serves as the advisor of
the  Partnership.  AIM  Acquisition  Corporation  is the general  partner of the
Advisor  and  the  limited  partners  include,  but  are  not  limited  to,  AIM
Acquisition,  The Goldman Sachs Group, L.P, Broad, Inc. and CRIIMI MAE. Pursuant
to the terms of certain  amendments to the  Partnership  Agreement,  the General
Partner is  required  to receive  the  consent  of the  Advisor  prior to taking
certain  significant  actions  which affect the  management  and policies of the
Partnership.

         Effective  September 6, 1991, and through June 30, 1995, a sub-advisory
agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc.,
an affiliate of CRI, managed the Partnership's portfolio. In connection with the
transaction in which CRIIMI MAE became a self-administered REIT, an affiliate of
CRIIMI  MAE  acquired  the  Sub-advisory  Agreement.  As a  consequence  of this
transaction,  effective June 30, 1995, CRIIMI MAE Services Limited  Partnership,
an affiliate of CRIIMI MAE, manages the Partnership's portfolio.

         The  General  Partner is also the general  partner of American  Insured
Mortgage Investors (AIM 84), American Insured Mortgage Investors  L.P.-Series 86
(AIM 86) and  American  Insured  Mortgage  Investors  L.P.-Series  88 (AIM  88),
limited  partnerships  with  investment  objectives  similar  to  those  of  the
Partnership.


The following table sets forth information concerning the executive officers and
directors of the General Partner as of March 15, 1999:


<PAGE>21

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -
           Continued


<TABLE>
<CAPTION>

Name                                        Age                         Position
-------                                     -----                      ------------
<S>                                         <C>                        <C>
William B. Dockser                          62                         Chairman of the Board

H. William Willoughby                       52                         President and Secretary

Frederick J. Burchill (a)                   50                         Executive Vice President

Cynthia O. Azzara                           39                         Senior Vice President, Chief  Financial
                                                                          Officer and Treasurer

Brian L. Hanson                             37                         Senior Vice President

David B. Iannarone                          38                         Senior Vice President and General
                                                                          Counsel

Garrett G. Carlson, Sr.                     61                         Director

G. Richard Dunnells                         61                         Director

Robert Merrick                              54                         Director

Robert E. Woods                             51                         Director

</TABLE>

         William B.  Dockser has served as Chairman of the Board of the General
Partner  since 1991.  Mr.  Dockser has been  Chairman  of the Board of CRIIMI  
MAE  since  1989 and  Chairman  of the  Board of CRIIMI  MAE  Financial
Corporation since 1995.  Mr. Dockser is also the founder of CRI, serving as its
Chairman of the Board since 1974.

         H.  William  Willoughby  has served as President  and  Secretary of the
General  Partner since 1991.  Mr.  Willoughby  has been  President of CRIIMI MAE
since 1990 and a Director and  Secretary  of CRIIMI MAE since 1989.  He has also
served as a  director  of CRIIMI  MAE  Financial  Corporation  since  1995.  Mr.
Willoughby has been a director of CRI since 1974,  Secretary of CRI from 1974 to
1990 and President of CRI since 1990.

         (a) Mr.  Burchill was Executive Vice  President of the General  Partner
until his  resignation  from CRIIMI MAE and the  General  Partner on February 8,
1999.

         Cynthia O. Azzara has served as Chief Financial  Officer of the General
Partner since 1994. Ms. Azzara has served as Chief  Financial  Officer of CRIIMI
MAE since 1994. She has also served as Senior Vice President of CRIIMI MAE since
1995 and Treasurer of CRIIMI MAE since 1997,  Accounting and Finance Departments
of CRI from 1985 to June 1995.

<PAGE>22

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -
           Continued

         Brian L.  Hanson has served as Senior  Vice  President  of the  General
Partner  since March 1998.  Mr.  Hanson has served as Senior Vice  President  of
CRIIMI MAE since March 1998;  Group Vice President of CRIIMI MAE from March 1996
to March  1998;  Chief  Operating  Officer,  Director  of Asset  Operations  and
Portfolio Director of JCF Partners, Lanham, Maryland from 1991 to March 1996.

         David B.  Iannarone has served as Senior Vice  President of the General
Partner since March 1998.  Mr.  Iannarone has served as Senior Vice President of
CRIIMI  MAE since  March  1998;  General  Counsel of CRIIMI MAE since July 1996;
Counsel-Securities     and    Finance    for    Federal    Deposit     Insurance
Corporation/Resolution Trust Corporation from 1991 to July 1996.

         Garrett G. Carlson, Sr. has served as Director of the General Partner 
since 1989.  Mr. Carlson has served as Director of CRIIMI MAE since 1989; 
President of Can-American Realty Corp. and Canadian Financial Corp. since 1979 
and 1974, respectively; President of Garrett Real Estate Development since 1982;
President of the Satellite Broadcasting Corporation since 1996; Chairman of
the Board of SCA Realty Holdings Inc. from 1985 to 1995; Vice Chairman of 
Shelter Development Corporation Ltd. from 1983 to 1995 and member of the board 
of Bank Windsor from 1992 to 1994.

         G. Richard Dunnells has served as Director of the General Partner since
1991.  Mr.  Dunnells has served as Director of CRIIMI MAE since 1991;  Firm-wide
Hiring Partner,  Partner in the  Washington,  D.C. office and former Director of
the law firm of Holland & Knight since January 1994; Chairman of the Washington,
D.C. law firm of Dunnells & Duvall from 1989 to 1993; Senior Partner of such law
firm from 1973 to 1993;  Special  Assistant  to the  Under-Secretary  and Deputy
Assistant Secretary for Housing and Urban Renewal and Deputy Assistant Secretary
for Housing Management with the U.S. Department of Housing and Urban Development
from 1969 to 1973; President's Commission on Housing from 1981 to 1982.

         Robert J. Merrick has served as Director of the General  Partner  since
1997. Mr.  Merrick has served as Director of CRIIMI MAE since 1997;  Director of
MCG Credit  Corporation since February 1998;  Executive Vice President from 1985
and Chief Credit Officer of Signet Banking Corporation through 1997, also served
as Chairman of the Credit Policy Committee and member of the Asset and Liability
Committee and Management Committee; Credit Officer-Virginia Banking Corporation,
an affiliate of Signet  Bank/Virginia,  from 1980 to 1984; Senior Vice President
of Bank of Virginia from 1976 to 1980.

<PAGE>23

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -
           Continued

         Robert E. Woods has served as  Director of the  General  Partner  since
1998.  Mr.  Woods has  served as  Director  of CRIIMI MAE since  1998;  Managing
Director and head of loan syndications for the Americas at Societe Generale, New
York since 1997;  Managing  Director,  head of Real Estate  Capital  Markets and
Mortgage-backed  Securities  division,  Citicorp  from  1991  to  1997,  Head of
Citicorp's  syndications,  private  placements,  money markets and  asset-backed
businesses from 1985 to 1990.


                  (d)      There is no family relationship between any of the 
                           officers and directors of the General Partner.

                  (f)      Involvement in certain legal proceedings.

                           None.

                  (g)      Promoters and control persons. Not applicable.

                  (h)      Section   16(a)   Beneficial    Ownership   Reporting
                           Compliance - Based solely on its review of Forms 3, 4
                           and  5  and  amendments   thereto  furnished  to  the
                           Partnership, and written representations from certain
                           reporting  persons that no Form 5s were  required for
                           those  persons,  the  Partnership  believes  that all
                           reporting  persons have filed on a timely basis Forms
                           3, 4 and 5 as  required  in  the  fiscal  year  ended
                           December 31, 1998.

ITEM 11. EXECUTIVE COMPENSATION

         The  Partnership  does not have any directors or officers.  None of the
directors  or officers of the General  Partner  received  compensation  from the
Partnership,  and the General  Partner does not receive  reimbursement  from the
Partnership for any portion of their  salaries.  Other  information  required by
Item 11 is hereby incorporated herein by reference herein to Note 3 of the notes
to the financial statements of the Partnership.


<PAGE>24

                                    PART III


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT

(a)      As of December 31, 1998, no person was known by the  Partnership  to be
         the beneficial  owner of more than five percent (5%) of the outstanding
         Units of the Partnership.

(b)      As of December 31,  1998,  neither the  officers  and  directors,  as a
         group,  of the  General  Partner  nor any  individual  director  of the
         General Partner, are known to own more than 1% of the outstanding Units
         of the Partnership.

(c)      There are no arrangements  known to the  Partnership,  the operation of
         which may at any  subsequent  date result in a change in control of the
         Partnership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         (a)      Transactions with management and others.

                  Note  3 of  the  notes  to  the  financial  statements  of the
                  Partnership  contains a discussion  of the  amounts,  fees and
                  other  compensation  paid or accrued by the Partnership to the
                  directors  and executive  officers of the General  Partner and
                  their  affiliates,  and is hereby  incorporated  by  reference
                  herein.



<PAGE>25

                                    PART III

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
           Continued


         (b)      Certain business relationships.

                  Other  than as set  forth in Item 11 of this  report  which is
                  hereby  incorporated by reference herein,  the Partnership has
                  no business  relationship  with  entities of which the current
                  General Partner of the Partnership are officers,  directors or
                  equity owners.

         (c)      Indebtedness of management.

                  None.

         (d)      Transactions with promoters.

                  Not applicable.



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K


         (a)(1)   Financial Statements:
                                                                 Page
        Description                                             Number
        -----------                                         --------------

         Balance Sheets as of December 31, 1998
           and 1997                                               33

         Statements of Income and Comprehensive Income
           for the years ended December 31, 1998,
           1997, and 1996                                         34
         Statements of Changes in Partners' Equity for
           the years ended December 31, 1998, 1997 and
           1996                                                   35

         Statements of Cash Flows for the years ended
           December 31, 1998, 1997 and 1996                       36

         Notes to Financial Statements                            37


         (a)(2)  Financial Statement Schedules:

                  IV - Mortgage Loans on Real Estate              50


<PAGE>26

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K - Continued

                  All other schedules have been omitted because they are
                  inapplicable, not required, or the information is included in
                  the Financial Statements or Notes thereto.

         (a)(3)  Exhibits:

               4.0         Amended   and   Restated   Certificates   of  Limited
                           Partnership are  incorporated by reference to Exhibit
                           4(a) to the Registration  Statement on Form S-11 (No.
                           2-93294)  dated  January 28, 1985 (such  Registration
                           Statement,  as amended,  is referred to herein as the
                           "Registration Statement").

               4.1         Second Amended and Restated Partnership  Agreement is
                           incorporated   by  reference  to  Exhibit  3  to  the
                           Registration Statement.

               4.2         Amendment  No. 1 to the Second  Amended and  Restated
                           Partnership Agreement is incorporated by reference to
                           Exhibit 4(a) to the  Partnership's  Annual  Report on
                           Form 10-K for the year ended December 31, 1986.

               4.3         Amendment  No. 2 to the Second  Amended and  Restated
                           Partnership Agreement is incorporated by reference to
                           exhibit 4(b) to the  Partnership's  Annual  Report on
                           Form 10-K for the year ended December 31, 1986.

               4.4         Amendment  No.  3 dated  February  12,  1990,  to the
                           Second  Amended  and  Restated  Agreement  of Limited
                           Partnership  of  the   Partnership   incorporated  by
                           reference to Exhibit 4(c) to the Partnership's Annual
                           Report on Form 10-K for the year ended  December  31,
                           1989.

              10.0         Escrow  Agreement,  dated January 14, 1985, among the
                           Partnership,   the  Managing   General   Partner  and
                           Integrated Resources Marketing, Inc., incorporated by
                           reference  to  Exhibit  10(a)  to  the   Registration
                           Statement.

              10.1         Amended  and  Restated  Origination  and  Acquisition
                           Services  Agreement,  dated as of  January  8,  1985,
                           between  the  Partnership  and IFI,  incorporated  by
                           reference  to  Exhibit  10(b)  to  the   Registration
                           Statement.

              10.2         Amended and Restated  Management  Services Agreement,
                           dated as of January 8, 1985,  between the Partnership
                           and IFI,  incorporated  by reference to Exhibit 10(c)
                           to the Registration Statement.

<PAGE>27

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K - Continued

              10.3         Amended and Restated  Disposition Services Agreement,
                           dated as of January 8, 1985,  between the Partnership
                           and IFI,  incorporated  by reference to Exhibit 10(d)
                           to the Registration Statement.

              10.4         Agreement,  dated as of January  8,  1985,  among the
                           former managing general partner, the former associate
                           general  partner  and  Integrated  Resources,   Inc.,
                           incorporated  by  reference  to Exhibit  10(e) to the
                           Registration Statement.

              10.5         Reinvestment  Plan,  incorporated by reference to the
                           Prospectus contained in the Registration Statement.

              10.6         Declaration of Trust and Pooling Servicing  Agreement
                           dated  as  of  July  1,   1982  as  to   Pass-Through
                           Certificates, is incorporated by reference to Exhibit
                           10(h) to Registrant's  Annual Report on Form 10-K for
                           the fiscal year ended December 31, 1986.

              10.7         Pages  A-1 - A-5  of  the  Partnership  Agreement  of
                           Registrant,  incorporated  by reference to Exhibit 28
                           to the  Partnership's  Annual Report on Form 10-K for
                           the year ended December 31, 1990.

              10.8         Purchase Agreement among AIM Acquisition,  the former
                           managing  general   partner,   the  former  corporate
                           general  partner,  IFI  and  Integrated  dated  as of
                           December  13,  1990,  as  amended  January  9,  1991,
                           incorporated  by  reference   Exhibit  28(a)  to  the
                           Partnership's Annual Report on Form 10-K for the year
                           ended December 31, 1990.

              10.9         Purchase   Agreement   among   CRIIMI,    Inc.,   AIM
                           Acquisition, the former managing general partner, the
                           former corporate general partner,  IFI and Integrated
                           dated as of  December  13,  1990 and  executed  as of
                           March 1, 1991,  incorporated  by reference to Exhibit
                           28(b) to the Partnership's Annual Report on Form 10-K
                           for the year ended December 31, 1990.

             10.10         Amendment to Partnership Agreement dated September 4,
                           1991,  incorporated by reference to Exhibit 28(c), to
                           the Partnership's  Annual Report on Form 10-K for the
                           year ended December 31, 1991.

<PAGE>28

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K - Continued

             10.11         Sub-Management   Agreement   by   and   between   AIM
                           Acquisition and CRI/AIM Management, Inc., dated as of
                           March 1, 1991,  incorporated  by reference to Exhibit
                           28(f) to the Partnership's Annual Report on Form 10-K
                           for the year ended December 31, 1992.

             10.12         Expense Reimbursement Agreement by and among 
                           Integrated Funding Inc. and the Partnership, American
                           Insured Mortgage Investors  L.P. - Series 86, and 
                           American Insured Mortgage Investors L.P. - Series 88,
                           effective December 31, 1992, incorporated by 
                           reference to Exhibit 28(g) to the Partnership's 
                           Quarterly Report on Form 10-Q for the quarter ended 
                           June 30, 1991.

             10.13         Non-negotiable  promissory  note to American  Insured
                           Mortgage  Investors L.P. - Series 88 in the amount of
                           $319,074.67  dated  April 1,  1994,  incorporated  by
                           reference  to  Exhibit  10(q)  to  the  Partnership's
                           Annual  Report  on  Form  10-K  for  the  year  ended
                           December 31, 1994.

             10.14         Amendment No. 1 to Reimbursement Agreement by and 
                           among Integrated Funding Inc. and the Partnership, 
                           American Insured Mortgage Investors L.P. - Series 86,
                           and American Insured Mortgage Investors L.P. - 
                           Series 88, effective April 1, 1994, incorporated by
                           reference to Exhibit 10(r) to the Partnership's 
                           Annual Report on Form 10-K for the year ended 
                           December 31, 1994.

             10.15         Amendment  No.  2  to   Reimbursement   Agreement  by
                           Integrated   Funding,   Inc.,  and  American  Insured
                           Mortgage  Investors   L.P.-Series  86,  and  American
                           Insured Mortgage Investors  L.P.-Series 88, effective
                           April 1, 1997,  incorporated  by reference to Exhibit
                           10.15 to the Partnership's Annual Report on Form 10-K
                           for the year ended December 31, 1997.

              27.          Financial Data Schedule (filed herewith).


<PAGE>29

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
           FORM 8-K - Continued

         (b)               Reports on Form 8-K filed during the last quarter
                           of the fiscal year:  None.

                           All other items are not applicable.


<PAGE>30



                                   SIGNATURES

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

                            AMERICAN INSURED MORTGAGE
                             INVESTORS - SERIES 85, L.P.
(Registrant)

                            By:      CRIIMI, Inc.
                            General Partner

/s/ March 30, 1999                  /s/ William B. Dockser
---------------------------         -------------------------
DATE                                William B. Dockser
                                    Chairman of the Board and
                                      Principal Executive Officer


/s/ March 30, 1999                  /s/ H. William Willoughby
---------------------------         -------------------------
DATE                                H. William Willoughby
                                    President and Director


/s/ March 30, 1999                  /s/ Cynthia O. Azzara
---------------------------         -------------------------
DATE                                Cynthia O. Azzara
                                    Principal Financial and
                                      Accounting Officer


/s/ March 30, 1999                  /s/ Garrett G. Carlson, Sr.
---------------------------         ---------------------------
DATE                                Garrett G. Carlson, Sr.
                                    Director


/s/ March 30, 1999                  /s/ G. Richard Dunnells
---------------------------         -------------------------
DATE                                G. Richard Dunnells
                                    Director

/s/ March 30, 1999                  /s/ Robert J. Merrick
---------------------------         -------------------------
DATE                                Robert J. Merrick
                                    Director


/s/ March 30, 1999                 /s/ Robert E. Woods
---------------------------        -------------------------
DATE                               Robert E. Woods
                                   Director


<PAGE>31





















              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

              Financial Statements as of December 31, 1998 and 1997

            and for the Years Ended December 31, 1998, 1997 and 1996


<PAGE>32


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
  American Insured Mortgage Investors - Series 85, L.P.:

         We have audited the  accompanying  balance  sheets of American  Insured
Mortgage  Investors - Series 85, L.P. (the  Partnership) as of December 31, 1998
and 1997, and the related statements of income and comprehensive income, changes
in partners'  equity and cash flows for the years ended December 31, 1998,  1997
and 1996. These financial  statements and the schedule referred to below are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and the 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 the Partnership as
of December 31, 1998 and 1997,  and the results of its  operations  and its cash
flows for the years ended  December 31, 1998,  1997 and 1996 in conformity  with
generally accepted accounting principles.

         Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule IV-Mortgage Loans on Real Estate
as of  December  31,  1998 is  presented  for  purposes  of  complying  with the
Securities and Exchange Commission's rules and regulations and is not a required
part of the basic  financial  statements.  The  information in this schedule has
been  subjected  to the auditing  procedures  applied in our audits of the basic
financial  statements  and, in our  opinion,  is fairly  stated in all  material
respects in relation to the basic financial statements taken as a whole.



Arthur Andersen LLP
Washington, D.C.
March 30, 1999


<PAGE>33




              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.


                                 BALANCE SHEETS


                                     ASSETS
<TABLE>
<CAPTION>
                                                                               December 31,            December 31,
                                                                                  1998                      1997
                                                                              ------------             ------------
<S>                                                                           <C>                      <C>
Investment in FHA-Insured Certificates and GNMA Mortgage-Backed  
Securities,  at fair value:
  Acquired insured mortgages                                                  $110,253,225             $142,822,793
  Originated insured mortgages                                                  16,738,030               16,887,282
                                                                              ------------             ------------
                                                                               126,991,255              159,710,075
                                                                              ------------             ------------
Investment in FHA-Insured Loans,
  at amortized cost, net of unamortized discount and premium:
  Acquired insured mortgages                                                    11,617,321               14,416,917
  Originated insured mortgages                                                  12,818,519               12,928,572
                                                                              ------------             ------------
                                                                                24,435,840               27,345,489

Cash and cash equivalents                                                       15,793,919               14,718,103

Investment in FHA debentures                                                     2,296,098                       --

Receivables and other assets                                                     1,453,292                1,676,021
                                                                              ------------             ------------
     Total assets                                                             $170,970,404             $203,449,688
                                                                              ============             ============

                                              LIABILITIES AND PARTNERS' EQUITY

Distributions payable                                                         $ 15,963,562             $ 15,460,772

Accounts payable and accrued expenses                                              184,236                  306,715

Due to affiliate                                                                 1,279,178                       --
                                                                              ------------             ------------
     Total liabilities                                                          17,426,976               15,767,487
                                                                              ------------             ------------
Partners' equity:
  Limited partners' equity, 15,000,000 Units
    authorized, 12,079,514 Units issued and outstanding                        151,721,136              180,044,243
  General partner's deficit                                                     (3,674,093)              (2,524,665)
  Accumulated other
    comprehensive income                                                         5,496,385               10,162,623
                                                                              ------------             ------------
     Total partners' equity                                                    153,543,428              187,682,201
                                                                              ------------             ------------
     Total liabilities and partners' equity                                   $170,970,404             $203,449,688
                                                                              ============             ==========

                                         The accompanying notes are an
                                        integral part of these  financial
                                                 statements.
</TABLE>


<PAGE>34

             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                  STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

<TABLE><CAPTION>
                                                                    For the years ended December 31,
                                                              1998              1997               1996
                                                          ------------      ------------        ------------
         <S>                                              <C>               <C>                 <C>
         Income:
           Mortgage investment income                     $ 14,067,956      $ 16,350,497        $ 17,731,547
           Interest and other income                           675,768           410,839             211,779
                                                          ------------      ------------        ------------
                                                            14,743,724        16,761,336          17,943,326
                                                          ------------      ------------        ------------
         Expenses:
           Asset management fee to related parties           1,617,625         1,873,563           1,997,649
           General and administrative                          550,640           652,511             655,426
           Interest expense to affiliate                        85,565             5,783              23,132
                                                          ------------      ------------        ------------
                                                             2,253,830         2,531,857           2,676,207
                                                          ------------      ------------        ------------
         Earnings before gains (losses)
           on mortgage dispositions/ modifications          12,489,894        14,229,479          15,267,119

         Mortgage dispositions/modifications:
           Gains                                             1,499,412           907,923             666,179
           Losses                                              (96,262)               --            (144,595)
                                                          ------------      ------------        ------------
         Net earnings                                     $ 13,893,044      $ 15,137,402        $ 15,788,703
                                                          ============      ============        ============

         Other comprehensive income                         (4,666,238)        2,549,887          (3,500,793)
                                                          ------------      ------------        ------------
         Comprehensive income                                9,226,806        17,687,289          12,287,910
                                                          ============      ============        ============
         Net earnings allocated to:
           Limited partners - 96.1%                       $ 13,351,215      $ 14,547,043        $ 15,172,944
           General partner - 3.9%                              541,829           590,359             615,759
                                                          ------------      ------------        ------------
                                                          $ 13,893,044      $ 15,137,402        $ 15,788,703
                                                          ============      ============        ============

         Net earnings per Limited
           Partnership Unit - Basic                       $       1.11      $       1.20        $       1.26
                                                          ============      ============        ============

                                     The   accompanying  notes  are an  integral
                                           part of these financial statements.
</TABLE>


<PAGE>35

             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                    STATEMENTS OF CHANGES IN PARTNERS' EQUITY

              For the years ended December 31, 1998, 1997 and 1996

<TABLE><CAPTION>
                                                                             Accumulated
                                                                                 Other                  Total
                                      General           Limited              Comprehensive            Partners'
                                      Partner           Partners                 Income                Equity
                                    ----------         -----------           -------------           -----------
<S>                                 <C>                <C>                   <C>                     <C>
Balance, January 1, 1996           (1,274,782)         210,842,615              11,113,529           220,681,362

Net earnings                          615,759           15,172,944                      --            15,788,703

Adjustment to unrealized gains (losses) 
  on investment in insured mortgages       --                   --              (3,500,793)           (3,500,793)

Distributions paid or accrued of 
  $2.25 per Unit, including return of 
  capital of $0.99 per Unit        (1,102,994)         (27,178,907)                     --           (28,281,901)
                                  -----------         ------------           -------------          ------------
Balance, December 31, 1996         (1,762,017)         198,836,652               7,612,736           204,687,371

    Net earnings                      590,359           14,547,043                      --            15,137,402

Adjustment to unrealized gains 
  (losses) on investments in 
  insured mortgages                        --                   --               2,549,887             2,549,887

Distributions paid or accrued of 
  $2.76 per Unit, including return 
  of capital of $1.56 per Unit     (1,353,007)         (33,339,452)                     --           (34,692,459)
                                  -----------         ------------           -------------          ------------
Balance, December 31, 1997         (2,524,665)         180,044,243              10,162,623           187,682,201

    Net earnings                      541,829           13,351,215                      --            13,893,044

      Adjustment to unrealized gains 
       (losses) on investments in 
       insured mortgages                   --                   --              (4,666,238)           (4,666,238)

Distributions paid or accrued of 
  $3.45 per Unit, including return 
  of capital of $2.34 per Unit     (1,691,257)         (41,674,322)                     --           (43,365,579)
                                  -----------         ------------           -------------          ------------
Balance, December 31, 1998         (3,674,093)         151,721,136               5,496,385           153,543,428
                                  ===========         ============           =============          ============
Limited Partnership Units outstanding -
  basic, as of December 31, 1998, 1997,
  and 1996                                              12,079,514
                                                        ==========


                                     The accompanying notes are an integral
                                       part of these financial statements.
</TABLE>



<PAGE>36

             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      For the years ended December 31,
                                                              1998               1997                1996
                                                          ------------       -------------     -------------
<S>                                                       <C>                <C>               <C>
Cash flows from operating activities:
    Net earnings                                          $ 13,893,044       $  15,137,402     $  15,788,703
    Adjustments to reconcile net earnings
      to net cash provided by operating
      activities:
      Losses on mortgage dispositions/modification              96,262                  --           144,595
      Gains on mortgage dispositions/modification           (1,499,412)           (907,923)         (666,179)
      Changes in assets and liabilities:
          Decrease in receivables and other assets             222,729              51,641           186,942
          (Decrease) increase in accounts payable and 
            accrued expenses                                  (122,476)            107,751            35,227
          Increase (decrease) in due to affiliate              131,129             (66,805)           59,957
          Return on investment in affiliate                         --                  --             3,079
                                                          ------------       -------------     -------------
          Net cash provided by operating activities         12,721,276          14,322,066        15,552,324
                                                          ------------       -------------     -------------
Cash flows from investing activities:
    Proceeds from disposition of mortgages                  29,895,275          18,996,279        11,346,665
    Receipt of mortgage principal from scheduled payments    1,322,056           1,598,933         1,571,828
                                                          ------------       -------------     -------------
        Net cash provided by investing activities           31,217,331          20,595,212        12,918,493
                                                          ------------       -------------     -------------
Cash flows from financing activities:
    Distributions paid to partners                         (42,862,791)        (29,915,961)      (22,122,731)
                                                          ------------       -------------     -------------
Net increase in cash and cash equivalents                    1,075,816           5,001,317         6,348,086

Cash and cash equivalents, beginning of year                14,718,103           9,716,786         3,368,700
                                                          ------------       -------------     -------------
Cash and cash equivalents, end of year                    $ 15,793,919       $  14,718,103     $   9,716,786
                                                          ============       =============     =============
Non-cash investing activity:
  9.5% debenture received from HUD in exchange for
  the mortgage on Portervillage I Apartments              $  2,296,098                  --                --

Portion of debenture due to affiliate, AIM 84               (1,148,049)                 --                --
                                                          ============       =============     =============

                                    The accompanying notes are an integral
                                       part of these financial statements.
</TABLE>


<PAGE>37




              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


1.       ORGANIZATION

         American Insured Mortgage Investors - Series 85, L.P. (the Partnership)
was formed under the Uniform Limited  Partnership Act of the state of California
on June 26, 1984.

         CRIIMI, Inc. (the General Partner) holds a partnership interest of 
3.9%.  CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. 
(CRIIMI MAE).  From inception through June 30, 1995, CRIIMI MAE was managed by 
an advisor whose general partner was CRI, Inc. (CRI).  However, effective June 
30, 1995, CRIIMI MAE became a self-administered real estate investment trust 
(REIT) and, as a result, the advisor no longer advises CRIIMI MAE.

         AIM Acquisition Partners,  L.P., (the Advisor) serves as the advisor to
the Partnership.  AIM Acquisition  Corporation (AIM  Acquisition) is the general
partner of the Advisor,  and the limited partners  include,  but are not limited
to, AIM Acquisition, The Goldman Sachs Group, L.P., Broad, Inc., and CRIIMI MAE.
Pursuant to the terms of certain  amendments  to the  Partnership  Agreement  as
discussed  below,  the General Partner is required to receive the consent of the
Advisor prior to taking certain  significant actions which affect the management
and policies of the Partnership.

         Effective  September 6, 1991 and through June 30, 1995, a  sub-advisory
agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc.,
an affiliate of CRI, managed the Partnership's portfolio. In connection with the
transaction in which CRIIMI MAE became a self-administered REIT, an affiliate of
CRIIMI  MAE  acquired  the  Sub-advisory  Agreement.  As a  consequence  of this
transaction, effective June 30, 1995, CMSLP, an affiliate of CRIIMI MAE, manages
the Partnership's portfolio.

         Prior to the  expiration of the  Partnership's  reinvestment  period in
December  1993,  the  Partnership  was engaged in the  business  of  originating
mortgage  loans  (Originated  Insured  Mortgages)  and acquiring  mortgage loans
(Acquired  Insured Mortgages and,  together with Originated  Insured  Mortgages,
referred to herein as Insured  Mortgages).  In accordance  with the terms of the
Partnership  Agreement,  the Partnership is no longer authorized to originate or
acquire Insured Mortgages and, consequently,  its primary objective is to manage
its  portfolio of mortgage  investments,  all of which are insured under Section
221(d)(4) or Section 231 of the National Housing Act. The Partnership  Agreement
states  that the  Partnership  will  terminate  on  December  31,  2009,  unless
previously terminated under the provisions of the Partnership Agreement.

         On October 5, 1998,  CRIIMI MAE, the parent of the General  Partner and
the parent of AIM Investment L.P., and CRIIMI MAE Management, Inc., an affiliate
of CRIIMI MAE and  provider  of  personnel  and  administrative  services to the
Partnership,  filed a voluntary petition for reorganization  under Chapter 11 of
the U.S.  Bankruptcy  Code.  As a  debtor-in-possession,  CRIIMI MAE will not be
permitted  to provide  any  available  capital to the  General  Partner  without
approval from the bankruptcy  court.  This  restriction or potential loss of the
availability of a potential  capital resource could adversely affect the General
Partner  and  the  Partnership;   however,   CRIIMI  MAE  has  not  historically
represented  a  significant  source of capital  for the  General  Partner or the
Partnership.  Such bankruptcy filings could also result in the potential need to
replace   CRIIMI  MAE   Management,   Inc.  as  a  provider  of  personnel   and
administrative services to the Partnership.

<PAGE>38

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


2.       SIGNIFICANT ACCOUNTING POLICIES

         Method of Accounting
         --------------------
                  The  Partnership's  financial  statements  are prepared on the
         accrual  basis of  accounting in  accordance  with  generally  accepted
         accounting  principles.  The  preparation  of financial  statements  in
         conformity  with  generally  accepted  accounting  principles  requires
         management to make estimates and  assumptions  that affect the reported
         amounts  of  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 differ from those estimates.

         Reclassification
         ----------------
                  Certain  amounts  in the  financial  statements  for the years
         ended December 31, 1997 and 1996 have been  reclassified  to conform to
         the 1998 presentation.

         Investment in Insured Mortgages
         -------------------------------
                  The Partnership's investment in Insured Mortgages is comprised
         of participation  certificates  evidencing a 100% undivided  beneficial
         interest in government  insured  multifamily  mortgages  issued or sold
         pursuant to FHA programs  (FHA-Insured  Certificates),  mortgage-backed
         securities  guaranteed by the Government National Mortgage  Association
         (GNMA) (GNMA Mortgage-Backed Securities) and FHA-insured mortgage loans
         (FHA-Insured   Loans).   The  mortgages   underlying  the   FHA-Insured
         Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are
         non-recourse  first liens on multifamily  residential  developments  or
         retirement homes.

                  Payments of principal and interest on FHA-Insured Certificates
         and  FHA-Insured  Loans are insured by the United States  Department of
         Housing and Urban Development (HUD) pursuant to Title 2 of the National
         Housing Act. Payments of principal and interest on GNMA Mortgage-Backed
         Securities  are  guaranteed by GNMA pursuant to Title 3 of the National
         Housing Act.

<PAGE>39

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


2.       SIGNIFICANT ACCOUNTING POLICIES - Continued

                  As of December 31, 1998, the weighted  average  remaining term
         of the Partnership's investments in GNMA Mortgage-Backed Securities and
         FHA-Insured  Certificates  is  approximately  29  years.  However,  the
         Partnership  Agreement  states that the  Partnership  will terminate in
         approximately  11  years,  on  December  31,  2009,  unless  previously
         terminated  under the provisions of the Partnership  Agreement.  As the
         Partnership is anticipated to terminate  prior to the weighted  average
         remaining term of its  investments in GNMA  Mortgage-Backed  Securities
         and  FHA-Insured  Certificates,  the  Partnership  does  not  have  the
         ability,   at  this  time,  to  hold  these  investments  to  maturity.
         Consequently,  the  General  Partner  believes  that the  Partnership's
         investments  in  GNMA   Mortgage-Backed   Securities  and   FHA-Insured
         Certificates  should be included in the  Available  for Sale  category.
         Although  the   Partnership's   investments  in  GNMA   Mortgage-Backed
         Securities and FHA-Insured Certificates are classified as Available for
         Sale for financial  statement  purposes,  the General  Partner does not
         intend to  voluntarily  sell these assets other than those which may be
         sold as a result of a default or those which are  eligible to be put to
         FHA  at  the  expiration  of 20  years  from  the  date  of  the  final
         endorsement.

                  In  connection  with this  classification,  as of December 31,
         1998 and 1997,  all of the  Partnership's  investments  in GNMA
         Mortgage-Backed Securities and FHA-Insured Certificates are recorded at
         fair value,  with the net  unrealized  gains or losses on these  assets
         reported as other  comprehensive  income and as a separate component of
         partners' equity.  Subsequent  increases or decreases in the fair value
         of  GNMA  Mortgage-Backed   Securities  and  FHA-Insured  Certificates,
         classified  as  Available  for Sale,  will be  included  as a  separate
         component  of  partners'  equity.  Realized  gains  and  losses on GNMA
         Mortgage-Backed Securities and FHA-Insured Certificates,  classified as
         Available  for Sale,  will  continue to be reported  in  earnings.  The
         amortized cost of the  investments in GNMA  Mortgage-Backed  Securities
         and   FHA-Insured   Certificates  in  this  category  is  adjusted  for
         amortization of discounts and premiums to maturity.  Such  amortization
         is included in mortgage investment income.

                  As of December 31, 1998 and 1997, Investment in FHA-Insured 
         Loans are recorded at amortized cost.

                  Gains from dispositions of mortgage investments are recognized
         upon the receipt of cash or HUD debentures.

                  Losses on dispositions of mortgage  investments are recognized
         when it becomes  probable  that a mortgage will be disposed of and that
         the disposition will result in a loss. In the case of Insured Mortgages
         fully insured by HUD, the  Partnership's  maximum exposure for purposes
         of  determining  the loan losses would  generally be an assignment  fee
         charged by HUD  representing  approximately  1% of the unpaid principal

<PAGE>40

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


2.       SIGNIFICANT ACCOUNTING POLICIES - Continued

         balance  of the  Insured  Mortgage  at the  date of  default,  plus the
         unamortized  balance  of  acquisition  fees and  closing  costs paid in
         connection with the acquisition of the Insured Mortgage and the loss of
         approximately 30 days accrued interest.

         Investment in FHA Debenture
         ---------------------------
                  From time to time, the Partnership  assigns defaulted loans to
         HUD in  order  to  collect  the  amount  of  delinquent  principal  and
         interest. HUD determines if the claim will be settled in cash or by the
         issuance of  debentures.  Debentures  are  obligations  of the mortgage
         insurance  funds  and  are  unconditionally  guaranteed  by the  United
         States.  The term of the  debentures  is 20  years  and the rate is set
         based  upon  the  rate in  effect  at the  commitment  date to  provide
         insurance or at the final endorsement date,  whichever ever is greater.
         AIM 85 classifies  its  Investment  in FHA  Debentures as Available for
         Sale  debt  securities  with  changes  in  fair  value  recorded  as an
         adjustment to equity and other comprehensive income.

         Cash and Cash Equivalents
         -------------------------
                  Cash and cash equivalents  consist of money market funds, time
         and demand deposits,  commercial  paper and repurchase  agreements with
         original maturities of three months or less.

         Income Taxes
         ------------
                  No provision has been made for Federal,  state or local income
         taxes in the accompanying statements of income and comprehensive income
         since they are the personal responsibility of the Unitholders.

         Statements of Cash Flows
         ------------------------
                  No cash  payments  were made for interest  expense  during the
         years ended December 31, 1998,  1997 and 1996.  Since the statements of
         cash flows are  intended to reflect  only cash receipt and cash payment
         activity,  the  statements  of  cash  flows  do not  reflect  operating
         activities  that affect  recognized  assets and  liabilities  while not
         resulting in cash receipts or cash payments.



<PAGE>41

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


2.       SIGNIFICANT ACCOUNTING POLICIES - Continued

         New Accounting Standards
         ------------------------
                  During 1997, FASB issued SFAS No. 130 "Reporting Comprehensive
         Income"  (FAS 130).  FAS 130 states that all items that are required to
         be recognized under accounting standards as components of comprehensive
         income are to be  reported  in a  separate  statement  of income.  This
         includes net income as currently  reported by the Partnership  adjusted
         for unrealized gains and losses related to the Partnership's  mortgages
         accounted  for as  "available  for  sale."  FAS 130 was  adopted by the
         Partnership  on  January  1,  1998.  Unrealized  gains and  losses  are
         reported in the equity section of the "Balance  Sheet" as  "accumulated
         other comprehensive  income." The table below breaks out the adjustment
         to  unrealized  gains and losses  that relate to  mortgages  which were
         disposed of during the period with the resulting gain or loss reflected
         in   the    "Statements   of   Income   and    Comprehensive    Income"
         (reclassification  adjustments)  and the portion of the adjustment that
         relates  to those  investments  that were not  disposed  of during  the
         period.

<TABLE>
<CAPTION>
                                                                   1998              1997                1996
                                                                ----------        ----------          ----------
<S>                                                             <C>               <C>                 <C>   
Reclassification adjustment for (gains) losses
  included in net income                                        (1,944,214)         (780,085)           (350,328)
Unrealized holding gains (losses) arising during
  the period                                                    (2,722,024)         3,329,972         (3,150,465)
                                                                ----------        -----------        -----------
Net adjustment to unrealized gains (losses) on mortgages        (4,666,238)         2,549,887         (3,500,793)
                                                                ----------       ------------        -----------
</TABLE>

3.       TRANSACTIONS WITH RELATED PARTIES

         In addition to the related party transactions  described in Note 8, the
General Partner and certain affiliated entities, during the years ended December
31,  1998,  1997 and 1996,  earned or  received  compensation  or  payments  for
services from the Partnership as follows:



<PAGE>42

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS

3.       TRANSACTIONS WITH RELATED PARTIES - Continued

<TABLE>
<CAPTION>
                                   COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
                                   -----------------------------------------------

                                 Capacity in Which                   For the years ended December31,
Name of Recipient                   Served/Item                 1998               1997              1996
                           ----------------------------    ----------------    --------------    -------------
<S>                        <C>                             <C>                <C>               <C>
CRIIMI, Inc.               General Partner/Distribution          $1,691,257        $1,353,007       $1,102,994

AIM Acquisition            Advisor/Asset Management Fee           1,617,625         1,873,563        1,997,649
  Partners, L.P.(1)

CRIIMI MAE                 Affiliate of General Partner/             54,497            62,274           68,328
Management, Inc.             Expense Reimbursement

American Insured           Affiliate of Partnership/
  Mortgage Investors         Share of FHA Debenture               1,202,581                --               --
                             (see Footnote 6)

(1)      The Advisor,  pursuant to the Partnership Agreement,  effective October
         1, 1991, is entitled to an Asset Management Fee equal to 0.95% of Total
         Invested  Assets  (as  defined  in  the  Partnership  Agreement).   The
         sub-advisor to the Partnership  (the  Sub-advisor) is entitled to a fee
         equal to  0.28%  of Total  Invested  Assets  from  the  Advisors  Asset
         Management Fee. Of the amounts paid to the Advisor, CRIIMI MAE Services
         Limited  Partnership (CMSLP) earned a fee  equal  to  $476,800,  
         $552,222  and $590,353  for the  years  ended  December  31,  1998,  
         1997,  and 1996, respectively.  The limited  partner of CMSLP is a 
         wholly-owned subsidiary of CRIIMI MAE Inc.,  which filed for protection
         under Chapter 11 of the U.S. Bankruptcy Code.

</TABLE>

4.       FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  following  estimated  fair values of the  Partnership's  financial
instruments  are  presented in accordance  with  generally  accepted  accounting
principles which define fair value as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties,  other than
in a forced or liquidation  sale. These estimated fair values,  however,  do not
represent the liquidation value or the market value of the Partnership.


<PAGE>43

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS

4.       FAIR VALUE OF FINANCIAL INSTRUMENTS

<TABLE><CAPTION>
                                                As of December 31, 1998              As of December 31, 1997
                                               Amortized          Fair             Amortized          Fair
                                                  Cost            Value              Cost             Value
                                             -------------     ------------      ------------     ------------
<S>                                          <C>               <C>                <C>               <C>
Investment in FHA-Insured Certificates 
  and GNMA Mortgage-Backed Securities:
  Acquired insured mortgages                  $104,595,386     $110,253,225      $132,530,176     $142,822,793
  Originated insured mortgages                  16,899,484       16,738,030        17,017,276       16,887,282
                                              ------------     ------------      ------------     ------------
                                              $121,494,870     $126,991,255      $149,547,452     $159,710,075
                                              ============     ============      ============     ============
Investment in FHA-Insured Loans:
  Acquired insured mortgages                  $ 11,617,321     $ 14,087,092      $ 14,416,917     $ 17,432,816
  Originated insured mortgages                  12,818,519       12,747,524        12,928,572       13,431,769
                                              ------------     ------------      ------------     ------------
                                              $ 24,435,840     $ 26,834,616      $ 27,345,489     $ 30,864,585
                                              ============     ============      ============     ============

Cash and cash equivalents                     $ 15,793,919     $ 15,793,919      $ 14,718,103     $ 14,718,103
                                              ============     ============      ============     ============
Accrued interest receivable                   $  1,180,042     $  1,180,042      $  1,421,935     $  1,421,935
                                              ============     ============      ============     ============
Investment in FHA Debenture                   $  2,296,098     $  2,296,098                --               --
                                              ============     ============      ============     ============

</TABLE>

         The following  methods and  assumptions  were used to estimate the fair
         value of each class of financial instrument:

         Investment in FHA-Insured Certificates, GNMA Mortgage-Backed
           Securities, FHA-Insured Loans and FHA Debentures
         ------------------------------------------------------------
                  The  fair  value  of  the   FHA-Insured   Certificates,   GNMA
         Mortgage-Backed  Securities  and  FHA-Insured  Loans is based on quoted
         market prices from an investment banking institution which trades these
         instruments as part of its day-to-day activities. The fair value of the
         FHA Debenture is based upon the prices of other  comparable  securities
         that trade in the market.

         Cash and cash equivalents and accrued interest receivable
         ---------------------------------------------------------
                  The carrying  amount  approximates  fair value  because of the
         short maturity of these instruments.



<PAGE>44

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


5.       INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-
           BACKED SECURITIES

         GNMA Mortgage-Backed Securities and Fully Insured FHA-
           Insured Certificates
         ------------------------------------------------------
         Listed below is the Partnership's aggregate investment in Fully Insured
Mortgages:

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                 1998                    1997
                                                           ----------------         ----------------
<S>                                                        <C>                      <C>
Fully Insured Acquired Insured:
  Number of
    GNMA Mortgage-Backed Securities(1)                                    8                        9
    FHA-Insured Certificates(2)(3)(4)(5)                                 46                       55
    (6)(7)(8)(9)
  Amortized Cost                                               $104,595,386             $132,530,176
  Face Value                                                    108,690,257              137,674,964
  Fair Value                                                    110,253,225              142,822,793


Fully Insured Originated Insured:
  Number of
    GNMA Mortgage-Backed Securities                                       1                        1
    FHA-Insured Certificates                                              1                        1
  Amortized Cost                                                $16,899,484             $ 17,017,276
  Face Value                                                     16,542,867               16,660,658
  Fair Value                                                     16,738,030               16,887,282

</TABLE>

(1)      In February 1998, the mortgage on Spanish Trace Apartments was prepaid.
         The Partnership  received net proceeds of  approximately  $9.7 million,
         and  recognized  a loss of  approximately  $96,000  for the year  ended
         December  31, 1998.  A  distribution  of $0.77 per Unit related to this
         prepayment  was declared in March 1998 and paid to  Unitholders  in May
         1998.

(2)      In April 1998,  the mortgages on Isle of Pines Village  Apartments  and
         Emerald Green  Apartments were prepaid.  The  Partnership  received net
         proceeds of approximately $1.3 million and $1.1 million,  respectively,
         and   recognized   gains  of   approximately   $290,000  and  $230,000,
         respectively,  for the year ended December 31, 1998. A distribution  of
         $0.19 per Unit related to this  prepayment was declared in May 1998 and
         paid to Unitholders in August 1998.

(3)      In May 1998, the mortgage on Stoney Brook  Apartments was prepaid.  The
         Partnership  received net proceeds of approximately  $1.5 million,  and
         recognized a gain of approximately $338,000 for the year ended December
         31, 1998. A distribution  of $0.12 per Unit related to this  prepayment
         was declared in June 1998 and paid to Unitholders in August 1998.

(4)      In July 1998,  the  mortgage on Amador  Residential  was  prepaid.  The
         Partnership  received net proceeds of approximately  $1.4 million,  and
         recognized a gain of approximately  $64,000 for the year ended December
         31, 1998. A distribution  of $0.11 per Unit related to this  prepayment
         was declared in July 1998 and paid to Unitholders in November 1998.

(5)      In August 1998, the mortgage on Bentgrass Hills Apartments was prepaid.
         The Partnership  received net proceeds of approximately  $238,000,  and
         recognized a gain of approximately  $54,000 for the year ended December
         31, 1998. A distribution  of $0.02 per Unit related to this  prepayment
         was  declared in  September  1998 and paid to  Unitholders  in November
         1998.

(6)      In October  1998,  the mortgage on Northdale  Commons was prepaid.  The
         Partnership  received  net  proceeds  of  approximately  $718,000,  and
         recognized a gain of approximately  $24,000 for the year ended December
         31, 1998. A distribution  of $0.06 per Unit related to this  prepayment
         was declared in November 1998 and paid to Unitholders in February 1999.


<PAGE>45

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS

5.       INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-
           BACKED SECURITIES - Continued


(7)      In  November  1998,  the  mortgage  on Cedar  Bluff  was  prepaid.  The
         Partnership  received net proceeds of approximately  $4.6 million,  and
         recognized a gain of approximately $170,000 for the year ended December
         31, 1998. A distribution  of $0.36 per Unit related to this  prepayment
         was declared in December 1998 and paid to Unitholders in February 1999.

(8)      In November  1998,  the mortgage on Wayland  Health Center was prepaid.
         The Partnership  received net proceeds of  approximately  $7.3 million,
         and  recognized  a gain of  approximately  $9,000  for the  year  ended
         December  31, 1998.  A  distribution  of $0.58 per Unit related to this
         prepayment  was declared in December  1998 and paid to  Unitholders  in
         February 1999.

(9)      In December 1998, the mortgage on Gamel & Gamel Apartments (Brown Gable
         Apartments)  was  prepaid.  The  Partnership  received  net proceeds of
         approximately  $703,000, and recognized a gain of approximately $36,000
         for the year ended December 31, 1998. A distribution  of $0.06 per Unit
         related  to this  prepayment  was  declared  in  February  1999  and is
         expected to be paid to Unitholders in May 1999.

         As of March 26, 1999,  all of the fully  insured  GNMA  Mortgage-Backed
Securities and FHA-Insured  Certificates are current with respect to the payment
of principal and interest, except for the mortgages on Woodland Villas and Quail
Creek  Apartments.  These  mortgages are delinquent  with respect to the January
1999 payment.  The  Partnership  does not anticipate problems  regarding the
collection of these payments.

         In  addition  to  base  interest  payments  under  Originated   Insured
Mortgages,  the  Partnership  is  entitled  to  additional  interest  based on a
percentage of the net cash flow from the underlying  development (referred to as
Participations).  During the years ended  December 31, 1998,  1997 and 1996, the
Partnership   received  $76,991,   $51,457  and  $0,   respectively,   from  the
Participations.  These  amounts,  if any,  are  included in mortgage  investment
income on the accompanying statements of income and comprehensive income.

         In the case of fully insured  Originated Insured Mortgages and Acquired
Insured   Mortgages,   the  Partnership's   maximum  exposure  for  purposes  of
determining  loan  losses  would  generally  be  approximately  1% of the unpaid
principal  balance  of the  Originated  Insured  mortgage  or  Acquired  Insured
Mortgage  (an  assignment  fee charged by FHA) at the date of default,  plus the
unamortized  balance  of  acquisition  fees and  closing  costs  of the  Insured
Mortgage and the loss of approximately 30 days accrued interest.



<PAGE>46

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS

6.       INVESTMENT IN FHA-INSURED LOANS

         Fully Insured FHA-Insured Loans
         -------------------------------
                  Listed  below is the  Partnership's  aggregate  investment  in
FHA-Insured Loans:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                 1998                     1997
                                                           ----------------         ----------------
<S>                                                      <C>                      <C>
Fully Insured Acquired Insured:
  Number of Loans(1)(2)                                                  10                       12
  Amortized Cost                                               $ 11,617,321             $ 14,416,917
  Face Value                                                     14,068,282               17,165,551
  Fair Value                                                     14,087,092               17,432,816

Fully Insured Originated Insured:
  Number of Loans                                                         3                        3
  Amortized Cost                                               $ 12,818,519             $ 12,928,572
  Face Value                                                     12,488,890               12,589,214
  Fair Value                                                     12,747,524               13,431,769

</TABLE>

(1)      In March 1998, HUD issued assignment proceeds in the form of a 9.5% 
         debenture for the mortgage on Portervillage I Apartments.  This 
         mortgage was owned 50% by AIM 85 and 50% by an affiliate of the 
         Partnership, American Insured Mortgage Investors (AIM 84).  The 
         debenture, with a face value of $2,296,098, was issued to the 
         Partnership, with interest payable semi-annually on January 1 and July
         1. The Partnership recognized a gain of approximately $200,000 on the
         assignment of this loan for the year ended December 31, 1998.  In 
         January 1999, proceeds of approximately $2.4 million, including accrued
         interest of approximately $109,000, were received upon redemption of 
         these debentures, of which approximately $1.2 million were due to the 
         Partnership.  Accordingly, a distribution of $0.10 per Unit related to 
         this assignment was declared in January 1999 and is expected to be paid
         to Unitholders in May 1999.

(2)      In August 1998,  the mortgage on Continental  Village was prepaid.  The
         Partnership  received net proceeds of approximately  $1.8 million,  and
         recognized a gain of approximately  $84,000 for the year ended December
         31, 1998. A  distribution  of  approximately  $0.14 per Unit related to
         this  prepayment was declared in September 1998 and paid to Unitholders
         in November 1998.

                  As of March 26,  1999,  all of the fully  insured  FHA-Insured
         Loans were  current  with  respect  to the  payment  of  principal  and
         interest.

                  In addition to base interest payments under Originated Insured
         Mortgages,  the Partnership is entitled to additional interest based on
         a  percentage  of the net cash  flow  from the  underlying  development
         (referred to as  Participations).  During the years ended  December 31,
         1998,  1997 and 1996, the  Partnership  received  $34,553,  $37,766 and
         $42,417,  respectively,  from the  Participations.  These  amounts  are
         included in mortgage  investment income on the accompanying  statements
         of income and comprehensive income.


<PAGE>47

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


7.       DISTRIBUTIONS TO UNITHOLDERS

         The  distributions  paid or accrued to  Unitholders on a per Unit basis
for the years ended December 31, 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                       1998                     1997             1996
                                                     ----------            -----------       ----------
<S>                                                  <C>                   <C>               <C>          
Quarter ended March 31,                              $  1.07(1)             $ 0.39(5)           0.33
Quarter ended June 30,                                  0.58(2)               0.30              0.64(8)
Quarter ended September 30,                             0.53(3)               0.84(6)           0.43(9)
Quarter ended December 31,                              1.27(4)               1.23(7)           0.85(10)
                                                      ------                ------            ------
                                                      $ 3.45                $ 2.76            $ 2.25
                                                      ======                ======            ======
</TABLE>

(1)      This amount  includes  approximately  $0.77 per Unit  representing  net
         proceeds  from  the   prepayment  of  the  mortgage  on  Spanish  Trace
         Apartments.
(2)      This amount  includes  approximately  $0.31 per Unit  representing  net
         proceeds from the  prepayment of the mortgages on Isle of Pines Village
         Apartments, Emerald Green Apartments, and Stoney Brook Apartments.
(3)      This amount  includes  approximately  $0.27 per Unit  representing  net
         proceeds from the  prepayment  of the mortgages on Amador  Residential,
         Continental Village, and Bentgrass Hills Apartments.
(4)      The  amount  includes  approximately  $1.00 per Unit  representing  net
         proceeds from the  prepayment  of the  mortgages on Northdale  Commons,
         Cedar Bluff, and Wayland Health Center.
(5)      This amount includes  approximately $0.07 per Unit from the disposition
         of the following  mortgages:  net proceeds  from the  assignment of the
         mortgage on Meadow Park Apartments I of $0.05 per Unit and net proceeds
         from the prepayment of the mortgage on Security Apartments of $0.02 per
         Unit.
(6)      This amount  includes  approximately  $0.54 per Unit from the following
         mortgages: final settlement of the mortgage on Pine Tree Lodge of $0.02
         per Unit  and net  proceeds  from the  prepayment  of the  mortgage  on
         Peachtree Place North of $0.52 per Unit.
(7)      This amount  includes  approximately  $0.92 per Unit  representing  net
         proceeds  from  the  prepayment  of  the  mortgages  on  Ashford  Place
         Apartments, Fleetwood Village Apartments, Silverwood Village Apartments
         and Maryland Meadows.
(8)      This amount  includes  approximately  $0.31 per Unit  representing  net
         proceeds  from the  prepayment of the mortgages on Harbor View Estates,
         Bear Creek Apartments II, and Cambridge Arms Apartments.
(9)      This amount  includes  approximately  $0.10 per Unit  representing  net
         proceeds  from the  assignment  of the  mortgage  on  Woodland  Village
         Apartments.
(10)     This amount  includes  approximately  $0.51 per Unit  representing  net
         proceeds from the  prepayment of the mortgage on Westlake  Village.  In
         addition,  it includes  approximately  $0.01 per Unit  representing net
         proceeds from the modification of mortgage on Oak Forest  Apartments II
         and  the  partial   prepayment  of  the  mortgage  on  Cambridge   Arms
         Apartments.

         The basis for paying  distributions to Unitholders is net proceeds from
mortgage  dispositions,  if any, and cash flow from  operations,  which includes
regular  interest  income and  principal  from Insured  Mortgages.  Although the
Insured  Mortgages yield a fixed monthly  mortgage  payment once purchased,  the
cash  distributions paid to the Unitholders will vary during each quarter due to
(1) the  fluctuating  yields in the  short-term  money  market where the monthly
mortgage  payment  receipts  are  temporarily  invested  prior to the payment of
quarterly  distributions,  (2) the  reduction in the asset base  resulting  from
monthly mortgage payments received or mortgage  dispositions,  (3) variations in
the cash flow  attributable to the  delinquency or default of Insured  Mortgages
and  professional  fees and foreclosure  costs incurred in connection with those
Insured Mortgages and (4) variations in the Partnership's operating expenses.


<PAGE>48

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


8.       INVESTMENT IN AFFILIATE, NOTE PAYABLE AND DUE TO AFFILIATE

         Integrated  Funding,  Inc. (IFI), an affiliate of the Partnership,  was
the  coinsurance  lender  for  coinsured   mortgages   previously  held  by  the
Partnership.  In order to  capitalize  IFI with  sufficient  net worth under HUD
regulations, in April 1994, American Insured Mortgage Investors L.P. - Series 88
(AIM 88), an affiliate of the  Partnership,  transferred a GNMA  mortgage-backed
security in the amount of $2.0  million to IFI.  The  Partnership  and  American
Insured  Mortgage  Investors  L.P.  - Series 86 (AIM 86),  an  affiliate  of the
Partnership,  each  issued a  demand  note  payable  to AIM 88 and  recorded  an
investment  in IFI through an affiliate  (AIM  Mortgage,  Inc.) in proportion to
each  entity's  coinsured  mortgages for which IFI was mortgagee of record as of
April 15,  1994.  Interest  expense on the note payable was based on an interest
rate of 7.25% per annum.

         IFI had  entered  into an  expense  reimbursement  agreement  with  the
Partnership,  AIM 86  and  AIM 88  (collectively  the  AIM  Funds)  whereby  IFI
reimburses  the AIM Funds for general and  administrative  expenses  incurred on
behalf of IFI. The expense  reimbursement is allocated to the AIM Funds based on
an amount  proportionate to each entity's IFI coinsured  mortgages.  The expense
reimbursement, interest from the two notes and the Partnership's equity interest
in IFI's net income or loss,  substantially  equals the mortgage  principal  and
interest on the GNMA mortgage-backed security transferred to IFI.

         The final coinsured  mortgages held by the Partnership  were prepaid in
late 1996. As a result, the aforementioned demand note payable to AIM 88 and the
expense reimbursement agreement from IFI were cancelled as of April 1, 1997.

9.       PARTNERS' EQUITY

         Depositary Units  representing  economic rights in limited  partnership
interests  (Units) were issued at a stated  value of $20. A total of  12,079,389
Units were issued for an aggregate  capital  contribution  of  $241,587,780.  In
addition,  the initial limited partner  contributed $2,500 to the capital of the
Partnership and received 125 Units in exchange therefor.



<PAGE>49

              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS


10.      SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
                  (In Thousands, Except Per Unit Data)

         The following is a summary of unaudited quarterly results of operations
for the years ended December 31, 1998, 1997 and 1996.

<TABLE><CAPTION>
                                                                           1998
                                                                       Quarter ended
                                           March 31             June 30         September 30      December 31
                                          -----------          ----------    ----------------- ----------------
<S>                                       <C>                  <C>           <C>               <C>
Income                                     $    3,859            $  3,751    $           3,521 $          3,613
Net gains from mortgage
  dispositions                                    104                 858                  202              239
Net earnings                                    3,400               4,055                3,236            3,202
Net earnings per Limited
  Partnership Unit - Basic                       0.27                0.32                 0.26             0.26

</TABLE>

<TABLE><CAPTION>
                                                                          1997
                                                                      Quarter ended
                                           March 31             June 30         September 30      December 31
                                         ------------          ----------    ----------------- ----------------
<S>                                      <C>                   <C>           <C>               <C>
Income                                    $     4,274           $   4,318    $           4,123 $          4,046
Net gains from mortgage
  dispositions                                    205                  --                   --              703
Net earnings                                    3,848               3,675                3,480            4,134
Net earnings per Limited
  Partnership Unit - Basic                       0.31                0.29                 0.28             0.32

</TABLE>

<TABLE><CAPTION>
                                                                          1996
                                                                      Quarter ended
                                           March 31             June 30         September 30      December 31
                                         ------------          ----------    ----------------- ----------------
<S>                                      <C>                   <C>           <C>               <C>
Income                                    $     4,612           $   4,529     $          4,447 $          4,355
Net gains (losses) from
  mortgage dispositions                            (1)                556                  (40)               7
Net earnings                                    3,928               4,417                3,790            3,654
Net earnings per Limited
  Partnership Unit - Basic                       0.31                0.35                 0.30             0.30

</TABLE>


<PAGE>50
             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Certificates
  (carried at fair value)
The Executive House
 Dayton, Ohio                      8/21             12/01             7.5%   $     857,103   $      858,310     $    78,855(4)
Walnut Apartments
  La Puente, California            3/20             11/01             7.5%       2,619,224        2,623,565         248,862(4)
Woodland Hills Apartments
  Auburn, Alabama                 10/19              6/99             7.5%         708,850          710,082          68,044(4)
Fairlawn II
  Waterbury, Connecticut           6/20              5/00             7.5%         780,931          782,156          73,364(4)
Willow Dayton
  Chicago, Illinois                8/19             12/00             7.5%       1,041,829        1,043,598          99,489(4)
Cedar Ridge Apartments
  Richton Park, Illinois           4/20              2/01             7.5%       2,787,488        2,791,930         262,699(4)
Park Hill Apartments
  Lexington, Kentucky              3/19              3/00             7.5%       1,804,728        1,807,916         173,845(4)
Fairfax House
  Buffalo, New York               11/19              5/00             7.5%       2,206,092        2,209,748         209,608(4)
Country Club Terrace Apt.
  Holidaysburg, Pennsylvania       8/19              6/00             7.5%       1,492,624        1,495,157         142,537(4)
Summit Square Manor
  Rochester, Minnesota             8/19              5/99             7.5%       1,963,118        1,966,450         187,467(4)
Park Place
 Rochester, Minnesota              3/20             10/99             7.5%         777,327          778,626          73,980(4)

</TABLE>

<PAGE>51


             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Certificates
  (carried at fair value) - Continued

Nevada Hills Apartments
  Reno, Nevada                     2/21             8/00              7.5%     1,189,021         1,190,774               110,345(4)
Colony West Apartments
  Chico, California                7/20            12/00              7.5%       664,906           665,941                62,365(6)
Dunhaven Apartments Section I
  Baltimore County, Maryland       1/20            12/99              7.5%       923,228           924,734                87,429(6)
Kings Villa/Discovery Commons
  Sacramento, California           7/19            11/99              7.5%     1,112,457         1,114,360               106,414(6)
Steeplechase Apartments
  Aiken, South Carolina            9/18             8/98              7.5%       520,954           521,936                50,921(6)
Walnut Hills Apartments
  Plainfield, Indiana              9/19             3/00              7.5%       500,278           501,120                47,692(6)
Woodland Villas
  Jasper, Alabama                  8/19             3/00              7.5%       319,060           319,601                30,468(6)
Ashley Oaks Apartments
  Carrollton, Georgia              3/22             4/02              7.5%       573,876           574,642                52,292(7)
Highland Oaks Apartments,
  Phase III
  Wichita Falls, Texas             2/21             4/02              7.5%       967,000           968,426                89,741(7)
Holden Court Apartments
  Seattle, Washington             12/21             4/02              7.5%       223,663           223,966                20,435(7)
Magnolia Place Apartments
  Franklin, Tennessee              5/20             4/02              7.5%       327,381           327,898                30,804(7)


</TABLE>

<PAGE>52

             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Certificates
  (carried at fair value) - Continued

Quail Creek Apartments
  Howell, Michigan                 5/20             4/02              7.5%       548,095           548,962                51,572(7)
Rainbow Terrace Apartments
  Milwaukee, Wisconsin             7/22             4/02              7.5%       326,347           326,770                29,581(7)
Rock Glen Apartments
  Baltimore, Maryland              1/22             4/02              7.5%     1,087,649         1,089,123                99,375(7)
Stonebridge Apartments, Phase I
  Montgomery, Alabama              4/20             4/02              7.5%     1,051,813         1,053,489                99,125(7)
Village Knoll Apartments
  Harrisburg, Pennsylvania         4/20             4/02              7.5%     1,092,031         1,093,771               102,914(7)
Bowling Brook, Section 1
  Towson, Maryland                 5/30              N/A             8.50%    11,917,371        12,162,230             1,090,128
Executive Tower
  Toledo, Ohio                     3/27              N/A             8.75%     2,874,160         2,933,651               275,283
New Castle Apartments
  Austin, Texas                    3/18              N/A             8.75%     2,033,495         2,077,643               219,143
Lincoln Green
  Burrillville, Rhode Island       6/33              N/A            10.25%     3,124,094         3,281,152               330,066
Turtle Creek Apartments
  San Antonio, Texas               4/16              N/A             8.95%     1,651,255         1,687,723               188,596
Sangnok Villa
  Los Angeles, California          1/30              N/A            10.25%       904,714           950,305                96,825
The Meadows of Livonia
  Livonia, Michigan                9/34              N/A            10.00%     6,442,329         6,637,494               627,836


</TABLE>

<PAGE>53


             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Certificates
  (carried at fair value) - Continued

Eaglewood Villa Apartments
  Springfield, Ohio              2/27              N/A            8.875%      2,733,643           2,790,180              264,707
Gold Key Village Apartments
  Englewood, Ohio                6/27              N/A             9.00%      2,888,491           2,948,122              282,030
Stafford Towers
  Baltimore, Maryland            8/16              N/A             9.50%        360,872             372,407               42,613
Garden Court Apartments
  Lexington, Kentucky            8/27              N/A             8.60%      1,175,490           1,199,801              110,583
Northwood Place
  Meridian, Mississippi          6/34              N/A             8.75%      4,500,755           4,592,358              412,635
Cheswick Apartments
  Indianapolis, Indiana          9/27              N/A             8.75%      3,102,197           3,166,291              295,736
Nassau Apartments
  New Orleans, Louisiana        11/27              N/A             8.63%        872,426             890,456               82,139
The Gate House Apartments
  Lexington, Kentucky            2/28              N/A             8.55%      2,829,559           2,888,021              264,092
Bradley Road Nursing
  Bay Village, Ohio              5/34              N/A            8.875%      2,517,551           2,568,769              233,708
Franklin Plaza
  Cleveland, Ohio                5/23              N/A            8.175%      5,313,176           5,318,873              503,183
Heritage Heights Apartments
  Harrison, Arizona              4/32              N/A             9.50%        416,171             428,808               41,313

</TABLE>

<PAGE>54


             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Certificates
  (carried at fair value) - Continued

Pleasant View Nursing Home
  Union, New Jersey              6/29              N/A             7.75%       7,508,916          7,513,997               643,312
                                                                             -----------     --------------
  Total FHA-Insured Certificates -
    Acquired Insured Mortgages,
    carried at fair value                                                     91,633,738         92,921,332
                                                                             -----------     --------------
GNMA Mortgage-Backed Securities
  (carried at fair value)
Pine Tree Lodge
  Pasadena, Texas               12/33              N/A             9.50%       2,021,248          2,021,858               194,348
Stone Hedge Village Apts.
  Farmington, New York          11/27              N/A             7.00%       1,807,780          1,841,023               143,352
Afton Square Apartments
  Portsmouth, Virginia          12/28              N/A             7.25%       1,059,738          1,079,125                81,520
Carlisle Apartments
  Houston, Texas                12/28              N/A            7.125%       2,117,283          2,156,060               166,018
Independence Park
  Largo, Florida                 9/29              N/A             7.75%       3,987,849          4,060,323               330,993
Ridgecrest Timbers
  Portland, Oregon              12/28              N/A             7.25%       1,542,731          1,570,953               120,989

</TABLE>

<PAGE>56



             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Certificates
  (carried at fair value) - Continued

Huntington Apartments
  Concord, North Carolina       12/29              N/A             7.25%       2,939,579           2,993,339            233,288
Northwood Apartments
  Mockville, North Carolina     12/29              N/A             7.25%       1,580,311           1,609,212            125,415
                                                                             -----------     ---------------
    Total GNMA Mortgage-Backed
      Securities                                                              17,056,519          17,331,893
                                                                             -----------     ---------------
    Total investment in Acquired
      Insured Mortgages, carried
      at fair value                                                          108,690,257         110,253,225
                                                                             -----------     ---------------


</TABLE>

<PAGE>56


              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE><CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ORIGINATED INSURED MORTGAGES
----------------------------
GNMA Mortgage-Backed Security
  (carried at fair value)
Oak Forest Apartments II
  Ocoee, Florida                12/31            11/09             8.25%      10,565,903        10,757,070               840,359
FHA-Insured Certificate
  (carried at fair value)
Waterford Green Apartments
  South St. Paul, Minnesota(11) 11/30            12/04             8.50%       5,976,964         5,980,960               481,564
                                                                             -----------     -------------
    Total investment in Originated Insured
      Mortgages, carried at fair value                                        16,542,867        16,738,030
                                                                             -----------     -------------
    Total investment in FHA-Insured Certificates
      and GNMA Mortgage-Backed Securities                                    125,233,124       126,991,255
                                                                             -----------     -------------
</TABLE>


<PAGE>57



              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Loans
  (carried at amortized cost)(2)
Bay Pointe Apartments
  Lafayette, Indiana            2/23            11/00              7.5%        2,038,674          1,688,629              185,272(8)
Baypoint Shoreline Apartments
  Duluth, Minnesota             1/22             8/00              7.5%          962,790            794,753               87,967(8)
Berryhill Apartments
  Grass Valley, California      1/21             8/99              7.5%        1,247,019          1,032,320              115,899(8)
Brougham Estates II
  Kansas City, Kansas          11/22             8/00              7.5%        2,560,054          2,107,404              230,860(8)
College Green Apartments
  Wilmington, North Carolina    3/23             6/01              7.5%        1,375,840          1,131,782              123,455(8)
Fox Run Apartments
  Dothan, Alabama              10/19            12/97              7.5%        1,219,703          1,014,176              116,242(8)
Kaynorth Apartments
  Lansing, Michigan             4/23             3/01              7.5%        1,866,941          1,535,231              167,318(8)
Lakeside Apartments
  Bennettsville, South Carolina 1/22             3/01              7.5%          386,387            319,254               35,303(8)
Town Park Apartments
  Rockingham, North Carolina   10/22             6/01              7.5%          628,194            517,746               56,755(8)

</TABLE>

<PAGE>58


              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
ACQUIRED INSURED MORTGAGES
--------------------------
FHA-Insured Certificates
  (carried at amortized cost)(2) - Continued

Westbrook Apartments
  Kokomo, Indiana              11/22            12/00              7.5%        1,782,680          1,476,026            163,177(8)
                                                                             -----------     --------------
    Total investment in Acquired
      Insured Mortgages, carried
        at amortized cost                                                     14,068,282         11,617,321
                                                                             -----------     --------------
ORIGINATED INSURED MORTGAGES
----------------------------
Fully Insured Mortgages
-----------------------
FHA-Insured Loans
  (carried at amortized cost)(2) - Continued
Cobblestone Apartments
  Fayetteville, North Carolina  3/28            12/02             8.50%        4,983,313          5,130,821            462,703


</TABLE>

<PAGE>59



              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P
                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                            Interest            Face              Net            Annual Payment
                                Maturity         Put         Rate on          Value of       Carrying Value     (Principal and
Development Name/Location         Date          Date(1)     Mortgage(5)(9)    Mortgage        (3)(11)(12)        Interest) (9)(10)
-------------------------      ---------       --------     --------------   -----------     --------------      ----------------
<S>                            <C>             <C>             <C>           <C>             <C>                <C>
Longleaf Lodge
  Hoover, Alabama                 7/26               --             8.25%      3,072,241          3,110,518               282,958
The Plantation
  Greenville, North Carolina      4/28             4/03             8.25%      4,433,336          4,577,180               402,046
                                                                            ------------     --------------
  Total investment in Originated
    Insured Mortgages, carried at
      amortized cost                                                          12,488,890         12,818,519
                                                                            ------------     --------------
  Total investment in FHA-Insured Loans                                       26,557,172         24,435,840
                                                                            ------------     --------------
  TOTAL INVESTMENT IN INSURED MORTGAGES                                     $151,790,296     $  151,427,095
                                                                            ============     ==============

</TABLE>


<PAGE>60


              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

              NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

                                DECEMBER 31, 1998

(1)      Under the Section 221 program of the National  Housing Act of 1937,  as
         amended,  a mortgagee has the right to assign an Insured Mortgage (put)
         to  FHA  at  the  expiration  of  20  years  from  the  date  of  final
         endorsement,  if the  Insured  Mortgage is not in default at such time.
         Any  mortgagee  electing to assign a  FHA-insured  mortgage to FHA will
         receive,  in exchange  therefore,  HUD  debentures  having a total face
         value  equal  to  the  then  outstanding   principal   balance  of  the
         FHA-insured  mortgage plus accrued  interest to the date of assignment.
         These HUD  debentures  will mature 10 years from the date of assignment
         and will bear interest at the "going  Federal rate" at such date.  This
         assignment  procedure is applicable to an Insured  Mortgage which had a
         firm or conditional  FHA commitment for insurance on or before November
         30, 1983 and,  in the case of a mortgage  sold in a GNMA  auction,  was
         sold in an auction prior to February 1984. Certain of the Partnership's
         Insured  Mortgages may have the right of assignment under this program.
         Certain  mortgages  that do not qualify  under this  program  possess a
         special assignment option, in certain Insured Mortgage documents, which
         allow the  Partnership,  anytime after this date, the option to require
         payment by the borrower of the unpaid principal  balance of the Insured
         Mortgages.  At such  time,  the  borrowers  must  make  payment  to the
         Partnership,  or the  Partnership,  at its  option,  may cancel the FHA
         insurance and institute foreclosure proceedings.

(2)      Inclusive of closing costs and acquisition fees.

(3)      The mortgages  underlying the Partnership's  investments in FHA-Insured
         Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are
         non-recourse  first liens on multifamily  residential  developments and
         retirement homes.  Prepayment of these Insured Mortgages would be based
         upon the unpaid principal balance at the time of prepayment.

(4)      In April and July 1985, and February 1986,  the  Partnership  purchased
         pass-through  certificates  representing undivided fractional interests
         of  157/537,  69/537  and  259/537,  respectively,  in  a  pool  of  19
         FHA-insured  mortgages.  In July 1986 and October 1987, the Partnership
         sold undivided fractional interests of 67/537 and 40/537, respectively,
         in this  pool.  Accordingly,  the  Partnership  now  owns an  undivided
         fractional interest  aggregating  378/537,  or approximately  70.4%, in
         this pool. For purposes of illustration only, the amounts shown in this
         table represent the Partnership's current share of these items as if an
         undivided interest in each mortgage was acquired.

(5)      In addition,  the servicer or the sub-servicer of the Insured Mortgage,
         primarily   unaffiliated   third   parties,   is  entitled  to  receive
         compensation for certain services rendered.

(6)      In June 1985 and February 1986, the Partnership purchased  pass-through
         certificates representing undivided fractional interests of 317/392 and
         11/392, respectively, in a pool of 13 FHA-insured mortgages. In January
         and February 1988, the Partnership sold undivided  fractional interests
         of 100/392 and 104/392,  respectively,  in this pool. Accordingly,  the
         Partnership  now  owns an  undivided  fractional  interest  aggregating
         124/392,  or  approximately  31.6%,  in  this  pool.  For  purposes  of
         illustration  only,  the  amounts  shown in this  table  represent  the
         Partnership's  share of these items as if an undivided interest in each
         mortgage was acquired.

(7)      In June 1985 and February 1986, the Partnership purchased  pass-through
         certificates representing undivided fractional interests of 200/341 and
         101/341,  respectively,  in a  pool  of 12  FHA-insured  mortgages.  In
         October 1987, the Partnership  sold undivided  fractional  interests of
         200/341  in  this  pool.  Accordingly,  the  Partnership  now  owns  an
         undivided  fractional  interest  aggregating  101/341, or approximately
         29.6%,  in this pool.  For purposes of  illustration  only, the amounts
         shown in this table represent the Partnership's share of these items as
         if an undivided interest in each mortgage was acquired.

(8)      These  amounts  represent  the  Partnership's  50%  interest  in  these
         mortgages.  The remaining 50% interest was acquired by American Insured
         Mortgage Investors, an affiliate of the Partnership.

(9)      This  represents  the base interest rate during the permanent  phase of
         these  Insured   Mortgages.   Additional   interest   (referred  to  as
         Participations)  measured as a percentage of the net cash flow from the
         development  and the net proceeds from the sale,  refinancing  or other
         disposition   of  the  underlying   development   (as  defined  in  the
         Participation  Agreements),  will also be due.  During the years  ended
         December 31, 1998, 1997 and 1996, the Partnership  received  additional
         interest of  $111,544,  $89,223  and  $42,417,  respectively,  from the
         Participations.

(10)     Principal  and interest are payable at level  amounts over the life of
         the mortgages.



<PAGE>61


(11)     A reconciliation of the carrying value of Insured Mortgages for the
         years ended December 31, 1998 and 1997, is as follows:

<TABLE>
<CAPTION>

                                                                                1998                  1997
                                                                            ------------          ------------
         <S>                                                                <C>                   <C>
         Beginning balance                                                  $187,055,564          $204,192,966

           Principal receipts on mortgages                                    (1,322,056)           (1,598,933)

           Proceeds from disposition of Mortgages                            (31,043,325)(1)       (18,996,279)

           Net gains on mortgage dispositions/modifications                    1,403,150               907,923

           Decrease (increase) in unrealized losses on investment in
             Insured Mortgages                                                   (77,109)              783,102

           Increase (decrease) in unrealized gains on investment in
             Insured Mortgages                                                (4,589,129)            1,766,785
                                                                            ------------          ------------
         Ending balance                                                     $151,427,095          $187,055,564
                                                                            ============          ============

(1)      This amount represents cash proceeds of $29,895,275 (as reflected in 
         the "Statement of Cash Flows") and non-cash proceeds of $1,148,050.

</TABLE>

(12)     As of December 31, 1998 and 1997, the tax basis of the Insured 
         Mortgages was approximately $143.5 million and $174.4 million, 
         respectively.