<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, 1997 
                              ------------------

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 6, 1998, 12,079,389 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 $170,566,635.             

<PAGE>3

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

                         1997 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                     PART I
                                     ------
                                                         Page 
                                                         ----
Item 1.   Business  . . . . . . . . . . . . . . . . . .     4
Item 2.   Properties  . . . . . . . . . . . . . . . . .     5
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 . . . . . .     7
Item 6.   Selected Financial Data . . . . . . . . . . .     9
Item 7.   Management's Discussion and Analysis of
            Financial Condition and Results of 
            Operations  . . . . . . . . . . . . . . . .    10
Item 8.   Financial Statements and Supplementary Data .    17
Item 9.   Changes in and Disagreements with Accountants 
            on Accounting and Financial Disclosure  . .    17

                                    PART III
                                    --------
Item 10.  Directors and Executive Officers of the
            Registrant  . . . . . . . . . . . . . . . .    17
Item 11.  Executive Compensation  . . . . . . . . . . .    18
Item 12.  Security Ownership of Certain Beneficial
            Owners and Management . . . . . . . . . . .    18
Item 13.  Certain Relationships and Related Transactions   18

                                     PART IV
                                     -------
Item 14.  Exhibits, Financial Statement Schedules and
            Reports on Form 8-K . . . . . . . . . . . .    20

Signatures  . . . . . . . . . . . . . . . . . . . . . .    23 

<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, 1997.

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.

     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, 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 and its
affiliates could be faced with conflicts of interest in determining which
mortgages would be disposed of.  Both CRIIMI MAE Services Limited Partnership
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 

<PAGE>5 


                                     PART I



ITEM 1.   BUSINESS - Continued

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 identifed 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.

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. 

<PAGE>6


                                     PART I

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 1997. 

<PAGE>7

                                     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 bid prices for the Units as reported on AMEX and the
distributions, as applicable, for each quarterly period in 1997 and 1996 were as
follows:

<TABLE>
<CAPTION>                                              Amount of
                                     1997            Distribution
      Quarter Ended            High       Low          Per Unit  
 ---------------------        -------   -------      ------------
 <S>                          <C>       <C>          <C>
 March 31                     $15 1/4   $14 3/8        $ 0.39(1)
 June 30                       15 1/8    14 1/4          0.30
 September 30                  15        13 13/16        0.84(2)
 December 31                   14 7/8    13 7/8          1.23(3)
                                                     --------
                                                     $   2.76
                                                     ========

                                                       Amount of
                                     1996            Distribution
      Quarter Ended            High       Low          Per Unit  
 ---------------------        -------   -------      ------------
 <S>                          <C>       <C>          <C>
 March 31                     $15       $14 3/8        $ 0.33
 June 30                       14 5/8    13 3/4          0.64(4)
 September 30                  14 1/2    13 7/8          0.43(5)
 December 31                   14 7/8    14 1/8          0.85(6)
                                                       ------
                                                       $ 2.25
                                                       ======
 </TABLE>

 (1) 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.
 (2) 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.
 (3) 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.
 (4) 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.
 (5) This amount includes approximately $0.10 per Unit representing net
     proceeds from the assignment of the mortgage on Woodland Village
     Apartments.
 (6) 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 

<PAGE>8 


                                     PART II

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

     the partial prepayment of the mortgage on Cambridge Arms Apartments.

     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, 1997     
--------------------           ---------------------------------
Depositary Units of Limited
  Partnership Interest                          12,000 

PAGE>9


                                     PART II

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

<TABLE><CAPTION>
                                                    For the Years Ended December 31, 
                                         1997          1996           1995           1994        1993  
                                       --------      --------       --------       --------    --------
<S>                                    <C>           <C>            <C>            <C>         <C>     
Income                                 $ 16,761      $ 17,943       $ 18,589       $ 19,167    $ 19,202

Net gains (losses) on mortgage
  dispositions/modifications                908           522             36           (151)      2,636

Net earnings                             15,137        15,789         15,903         16,155      19,058

Net earnings per Limited
  Partnership Unit - Basic (1)             1.20          1.26           1.27           1.29        1.52

Distributions per Limited
  Partnership Unit (1)(2)                  2.76          2.25           1.54           1.96       1.775


                                                           As of December 31,        
                                         1997          1996           1995           1994        1993  
                                       --------      --------       --------       --------    --------
<S>                                    <C>           <C>            <C>            <C>         <C>     
Total assets                           $203,450      $215,951       $225,691       $214,823    $227,937

Partners' equity                        187,682       204,687        220,681        209,557     221,504

(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, 1997, 1996, 1995, 1994
     and 1993, 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 operations data presented above for the years
ended December 31, 1997, 1996 and 1995, and the balance sheet data as of
December 31, 1997 and 1996, 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 operations data for the years ended December
31, 1994 and 1993 and the balance sheet data as of December 31, 1995, 1994 and
1993 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>10


                                     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, CRIIMI MAE Services Limited
Partnership, manages the Partnership's portfolio.  These transactions had no
effect on the Partnership's financial statements.

     The Partnership is currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance.  The Partnership does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations.  The Partnership does not anticipate any material disruption in its
operations as a result of any failure by the Partnership to be in compliance. 
The Partnership is currently evaluating the Year 2000 compliance status of its
service providers.  The Partnership does not expect any non Year 2000 compliance
by its service providers to cause disruption in its operations.

     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. 

<PAGE>11 


                                     PART II

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


     As of December 31, 1997, the Partnership had invested in 81  Insured
Mortgages, with an aggregate amortized cost of approximately $176.9 million, a
face value of approximately $184.1 million and a fair value of approximately
$190.6 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>12 


                                     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,         
                                                     1997             1996    
                                                 ------------     ------------
<S>                                              <C>              <C>         
Fully Insured Acquired Insured:
  Number of
    GNMA Mortgage-Backed Securities(4)(7)(8)                9                9
    FHA-Insured Certificates(1)(2)(3)(4)
    (5)(6)                                                 55               62
  Amortized Cost                                 $132,530,176     $151,866,819
  Face Value                                      137,674,964      157,889,594
  Fair Value                                      142,822,793      159,959,297


Fully Insured Originated Insured:
  Number of
    GNMA Mortgage-Backed Securities                         1                1
    FHA-Insured Certificates                                1                1
  Amortized Cost                                  $17,017,276     $ 17,126,685
  Face Value                                       16,660,658       16,770,069
  Fair Value                                       16,887,282       16,646,943

</TABLE>

(1)  On October 11, 1996, the servicer of the mortgage on Meadow Park Apartments
     I filed a Notice of Default and Election to Assign the mortgage with HUD. 
     On January 24, 1997, the Partnership received approximately $628,000
     representing approximately 90% of the assignment proceeds.  The Partnership
     recognized a gain of approximately $139,000 for the year ended December 31,
     1997.  A distribution of $0.05 per Unit related to this assignment, was
     declared in February 1997 and was paid to Unitholders in May 1997.  The
     remaining 9% of proceeds due from HUD were received in May 1997, and since
     the distribution was less than $0.01 per Unit, these proceeds were
     distributed with regular cash flow in August 1997.

(2)  In late February 1997, the mortgage on Security Apartments was prepaid. 
     The Partnership received net proceeds of approximately $304,000, and
     recognized a gain of approximately $66,000 for the year ended December 31,
     1997.  A distribution of approximately $0.02 per Unit related to this
     prepayment was declared in March 1997 and was paid to Unitholders in May
     1997.

(3)  On July 1, 1997, the mortgage on Peachtree Apartments was prepaid.  The
     Partnership received net proceeds of approximately $6.5 million, and
     recognized a gain of less than $1,000 for the year ended December 31, 1997.
     A distribution of approximately $0.52 per Unit related to this prepayment
     was declared in July 1997, and was paid to Unitholders in November 1997.

(4)  In September 1997, the mortgage on Pine Tree Lodge was converted to a GNMA
     Mortgage-Backed Security from an FHA-Insured certificate.  A distribution 

<PAGE>13 


                                     PART II

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


     of approximately $0.02 per Unit related to the final settlement of this
     mortgage was declared in September 1997 and paid in November 1997.

(5)  On October 1, 1997, the mortgage on Ashford Place Apartments was prepaid. 
     The Partnership received net proceeds of approximately $3.4 million and
     recognized a gain of approximately $34,000 for the year ended December 31,
     1997.  A distribution of approximately $0.27 was declared in October 1997
     and paid in February 1998.

(6)  On October 22, 1997, the mortgages on Silverwood Village Apartments and
     Fleetwood Village Apartments were prepaid.  The Partnership received net
     proceeds of approximately $1.4 million and $1.5 million, respectively, and
     recognized gains of approximately $214,000 and $237,000 for the mortgages
     on Silverwood Village Apartments and Fleetwood Village Apartments,
     respectively, for the year ended December 31, 1997.  A distribution of
     approximately $0.23 per Unit was declared in November 1997 and paid in
     February 1998.

(7)  In November 1997, the mortgage on Maryland Meadows was prepaid.  The
     Partnership received net proceeds of approximately $5.2 million, and
     recognized a gain of approximately $217,000 for the year ended December 31,
     1997.  A distribution of approximately $0.42 per Unit was declared in
     December 1997 and paid in February 1998.

(8)  In February 1998, the mortgage on Spanish Trace Apartments was prepaid. 
     The Partnership received net proceeds of approximately $9.7 million, and
     anticipates it will recognize a loss of approximately $96,000 in 1998.  A
     distribution of approximately $0.77 per Unit related to this prepayment was
     declared in March 1998 and is expected to be paid in May 1998.

     As of March 3, 1998, 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 Country Club Terrace
Apartments and Isle of Pines Village with respect to the January 1998 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, 1997, 1996 and 1995, the Partnership
received $51,457, $0 and $0, respectively, from the Participations.  These
amounts, if any, are included in mortgage investment income on the accompanying
statements of operations.

     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>14 


                                     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,         
                                                     1997             1996    
                                                 ------------     ------------
<S>                                              <C>              <C>         
Fully Insured Acquired Insured:
  Number of Loans                                          12               12
  Amortized Cost                                 $ 14,416,917     $ 14,556,595
  Face Value                                       17,165,551       17,405,640
  Fair Value                                       17,432,816       17,706,486

Fully Insured Originated Insured:
  Number of Loans                                           3                3
  Amortized Cost                                 $ 12,928,572     $ 13,030,131
  Face Value                                       12,589,214       12,681,532
  Fair Value                                       13,431,769       12,969,589

</TABLE>

          As of March 3, 1998, all of the fully insured FHA-Insured Loans were
     current with respect to the payment of principal and interest, except for
     the mortgage on Portervillage I Apartments, which has been delinquent since
     January 1997.  In May 1997, the servicer of the mortgage on Portervillage I
     Apartments filed a Notice of Default and an Election to Assign the mortgage
     with HUD.  The face value of this mortgage was approximately $1.2 million
     at December 31, 1996.  The Partnership expects to receive 99% of this
     amount plus accrued 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, 1997, 1996 and
     1995, the Partnership received $37,766, $42,417 and $64,676, respectively,
     from the Participations.  These amounts are included in mortgage investment
     income on the accompanying statements of operations.

Results of Operations
---------------------
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 below.

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

     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. 

<PAGE>15 


                                     PART II

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


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

     Interest expense to affiliate decreased for 1997 as compared to 1996 due to
the cancellation of the note payable to American Insured Mortgage Investors L.P.
- Series 88 (AIM 88), as discussed in Note 8 of the Notes to the Financial
Statements.

     Gains from dispositions and modifications increased as a result of seven
mortgage dispositions in 1997, as discussed above, 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.

1996 versus 1995
----------------
     Net earnings decreased slightly for 1996 as compared to 1995 primarily due
to a decrease in mortgage investment income.  Partially offsetting this decrease
was a decrease in asset management fees and an increase in net gains on mortgage
dispositions and modifications, as discussed below.

     Mortgage investment income decreased for 1996 as compared to 1995 primarily
due to the reduction in mortgage base due to the disposition of mortgages, as
discussed above.

     Interest and other income increased for 1996 as compared to 1995 primarily
due to the temporary investment of mortgage disposition proceeds prior to
distribution to Unitholders.

     Asset management fees to related parties decreased for 1996 as compared to
1995 as a result of the reduction in the mortgage base.

     Gains from dispositions and modifications increased as a result of 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, as discussed previously.  Losses from
dispositions and modifications increased primarily due to a modification
agreement on the mortgage of Waterford Green Apartments and the assignment of
the mortgage on Woodland Village Apartments, as previously discussed.

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, were sufficient during the years ended December 31,
1997, 1996 and 1995 to meet operating requirements.  

     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 

<PAGE>16 


                                     PART II

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


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.

     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 - 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.

     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.

Cash flow - 1996 versus 1995
----------------------------
     Net cash provided by operating activities decreased slightly for 1996 as
compared to 1995.  This decrease was primarily due to a decrease in mortgage
investment income, as discussed above.  This decrease was offset by a reduction
in note payable and due to an affiliate during 1995 resulting from the
prepayment of the mortgage on Richardson Road Apartments underlying the GNMA
Mortgage-Backed Security which had been transferred to IFI to meet IFI's minimum
net worth requirement which resulted in lower net cash provided by operations
for 1995.  In addition, offsetting the decrease in net cash provided by
operating activities was an increase in Due from HUD as a result of the
assignment of the Woodland Village mortgage.  The balance represents the
remaining proceeds, plus interest due from HUD.  

     Net cash provided by investing activities increased in 1996 as compared to
1995 due to the increase in proceeds from mortgage dispositions, as discussed
previously.  In addition, receipt of mortgage principal from scheduled payments
increased for 1996 as compared to 1995 due to partial prepayment of the mortgage
on Cambridge Arms Apartments prior to disposition.

     Net cash used in financing activities increased for 1996 as compared to
1995, as a result of an increase in distributions paid to partners. 
Distributions paid to partners in 1996 included special distributions resulting 

<PAGE>17 


                                     PART II

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


from the disposition of the mortgages on Harbor View Estates, Cambridge Arms
Apartments, Bear Creek Apartments II and Woodland Village Apartments.

New Accounting Standards
------------------------
     In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS
128").  FAS 128 changes the requirements for the calculation and disclosure of
earnings per share.  The Partnership is required to present basic net earnings
per limited partnership unit as opposed to net earnings per limited partnership
unit.  However, the computational differences between FAS 128 and the prior
accounting standard do not impact the Partnership.  FAS 128 has been applied to
the year ended December 31, 1997, and all prior periods.

     During 1997 FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure" ("FAS 129").  FAS 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements.  The Partnership's disclosures comply with the requirements of
this statement.

     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 would include 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 is
effective for years beginning on or after December 15, 1997.

     During 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131").  FAS 131 establishes standards
for the way that public business enterprises report information about operating
segments and related disclosures about products and services, geographical areas
and major customers.  FAS 131 is effective for years beginning on or after
December 15, 1997.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is on pages 24 through 51.

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

     None.

                                    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 partnership interest of 3.9%.  The affairs of the Partnership
are managed by the General Partner, which is wholly owned by CRIIMI MAE, a
company 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.  

<PAGE>18

                                     PART III

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

     AIM Acquisition Partners, L.P. (the Advisor) serves as the advisor of the
Partnership.  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, 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.

          (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)  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, 1997.


ITEM 11.  EXECUTIVE COMPENSATION

     The information required by Item 11 is incorporated herein by reference to
Note 3 of the notes to the financial statements of the Partnership. 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT

     As of December 31, 1997, 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.

     As of December 31, 1997, 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.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     (a)  Transactions with management and others. 

<PAGE>19

                                     PART III

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued

          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 incorporated
          herein by reference.

     (b)  Certain business relationships.

          Other than as set forth in Item 11 of this report which is
          incorporated herein by reference, 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.
<PAGE>20

                               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, 1997
       and 1996                                                         26

     Statements of Operations for the years ended
       December 31, 1997, 1996, and 1995                                27

     Statements of Changes in Partners' Equity for
       the years ended December 31, 1997, 1996 and
       1995                                                             28

     Statements of Cash Flows for the years ended
       December 31, 1997, 1996 and 1995                                 29

     Notes to Financial Statements                                      30


     (a)(2)  Financial Statement Schedules:

          IV - Mortgage Loans on Real Estate                            42

               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. 

<PAGE>21

                                      PART IV

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

     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.

     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.

    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. 

<PAGE>22

                                      PART IV

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

    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, (filed herewith).

     27.       Financial Data Schedule (filed herewith).

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

               All other items are not applicable. 

<PAGE>23

                                   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

March 20, 1998                /s/ William B. Dockser
---------------------------   -------------------------
DATE                          William B. Dockser
                              Chairman of the Board and
                                Principal Executive Officer
                                

March 20, 1998                /s/ H. William Willoughby
---------------------------   -------------------------
DATE                          H. William Willoughby
                              President and Director


March 20, 1998                /S/ Cynthia O. Azzara
---------------------------   -------------------------
DATE                          Cynthia O. Azzara
                              Principal Financial and
                                Accounting Officer


March 20, 1998                /s/ Garrett G. Carlson, Sr.
---------------------------   --------------------------
DATE                          Garrett G. Carlson, Sr.
                              Director


March 20, 1998                /s/ Larry H. Dale
---------------------------   -------------------------
DATE                          Larry H. Dale
                              Director

March 20, 1998                G. Richard Dunnells
---------------------------   -------------------------
DATE                          G. Richard Dunnells
                              Director


March 20, 1998                /s/ Robert Merrick
---------------------------   -------------------------
DATE                          Robert Merrick
                              Director 

<PAGE>24






























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

              Financial Statements as of December 31, 1997 and 1996

            and for the Years Ended December 31, 1997, 1996 and 1995 

<PAGE>25


                    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, 1997
and 1996, and the related statements of operations, changes in partners' equity
and cash flows for the years ended December 31, 1997, 1996 and 1995.  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, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995 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, 1997 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 20, 1998 

<PAGE>26

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

                                             BALANCE SHEETS

                                                ASSETS
<TABLE><CAPTION>
                                                       December 31,       December 31,
                                                           1997               1996    
                                                       ------------       ------------
<S>                                                    <C>                <C>         
Investment in FHA-Insured Certificates
  and GNMA Mortgage-Backed Securities,
  at fair value:
  Acquired insured mortgages                           $142,822,793       $159,959,297
  Originated insured mortgages                           16,887,282         16,646,943
                                                       ------------       ------------
                                                        159,710,075        176,606,240
                                                       ------------       ------------
Investment in FHA-Insured Loans,
  at amortized cost, net of unamortized
  discount and premium:
  Acquired insured mortgages                             14,416,917         14,556,595
  Originated insured mortgages                           12,928,572         13,030,131
                                                       ------------       ------------
                                                         27,345,489         27,586,726

Cash and cash equivalents                                14,718,103          9,716,786

Receivables and other assets                              1,676,021          1,727,662

Investment in affiliate                                          --            314,072
                                                       ------------       ------------
     Total assets                                      $203,449,688       $215,951,486
                                                       ============       ============

                                                  LIABILITIES AND PARTNERS' EQUITY

Distributions payable                                  $ 15,460,772       $ 10,684,274

Accounts payable and accrued expenses                       306,715            198,964

Note payable and due to affiliate                                --            380,877
                                                       ------------       ------------
     Total liabilities                                   15,767,487         11,264,115
                                                       ------------       ------------
Partners' equity:
  Limited partners' equity                              180,044,243        198,836,652
  General partner's deficit                              (2,524,665)        (1,762,017)
  Unrealized gain on investment
   in FHA-Insured Certificates
   and GNMA Mortgage-Backed
   Securities                                            10,482,727          8,715,942
  Unrealized loss on investment
   in FHA-Insured Certificates
   and GNMA Mortgage-Backed
   Securities                                              (320,104)        (1,103,206)
                                                       ------------       ------------
     Total partners' equity                             187,682,201        204,687,371
                                                       ------------       ------------
     Total liabilities and partners' equity            $203,449,688       $215,951,486
                                                       ============       ============

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

<PAGE>27

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

                                       STATEMENTS OF OPERATIONS

<TABLE><CAPTION>
                                                                        For the years ended December 31,  
                                                                    1997             1996             1995    
                                                                ------------     ------------     ------------
     <S>                                                        <C>              <C>              <C>         
     Income:
       Mortgage investment income                               $ 16,350,497     $ 17,731,547     $ 18,404,737
       Interest and other income                                     410,839          211,779          183,846
                                                                ------------     ------------     ------------
                                                                  16,761,336       17,943,326       18,588,583
                                                                ------------     ------------     ------------
     Expenses:
       Asset management fee to related
         parties                                                   1,873,563        1,997,649        2,042,886
       General and administrative                                    652,511          655,426          655,831
       Interest expense to affiliate                                   5,783           23,132           23,133
                                                                ------------     ------------      -----------
                                                                   2,531,857        2,676,207        2,721,850
                                                                ------------     ------------      -----------
     Earnings before gains (losses) 
       on mortgage dispositions/
        modifications                                             14,229,479       15,267,119       15,866,733

     Mortgage dispositions/modifications:
       Gains                                                         907,923          666,179           52,730
       Losses                                                             --         (144,595)         (16,665)
                                                                ------------     ------------     ------------
     Net earnings                                               $ 15,137,402     $ 15,788,703     $ 15,902,798
                                                                ============     ============     ============

     Net earnings allocated to:   
       Limited partners -96.1%                                  $ 14,547,043     $ 15,172,944     $ 15,282,589
       General partner - 3.9%                                        590,359          615,759          620,209
                                                                ------------     ------------     ------------
                                                                $ 15,137,402     $ 15,788,703     $ 15,902,798
                                                                ============     ============     ============

     Net earnings per Limited        
       Partnership Unit - Basic                                 $       1.20     $       1.26     $       1.27
                                                                ============     ============     ============

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

<PAGE>28

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

                                STATEMENTS OF CHANGES IN PARTNERS' EQUITY

                          For the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                                   Unrealized        Unrealized 
                                                                                     Gains             Losses   
                                                                                 on Investment     on Investment      Total   
                                                   General         Limited        in Insured        in Insured      Partners' 
                                                   Partner         Partners        Mortgages         Mortgages       Equity   
                                                -------------    ------------ ----------------   ---------------  ------------
<S>                                             <C>              <C>          <C>                <C>              <C>         
Balance, January 1, 1995                        $  (1,140,053)   $214,162,478 $      5,177,224   $    (8,642,268) $209,557,381

  Net earnings                                        620,209      15,282,589               --                --    15,902,798

  Distributions paid or accrued of
    of $1.54 per Unit, including return
    of capital of $0.27 per Unit                     (754,938)    (18,602,452)              --                --   (19,357,390)

  Adjustment to unrealized gains 
    (losses) on investment in 
    insured mortgages                                      --              --        6,982,335         7,596,238    14,578,573
                                                -------------    ------------ ----------------   ---------------  ------------
Balance, December 31, 1995                         (1,274,782)    210,842,615       12,159,559        (1,046,030)  220,681,362

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

  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)

  Adjustment to unrealized gains
    (losses) on investment in
    insured mortgages                                      --              --       (3,443,617)          (57,176)   (3,500,793)
                                                -------------    ------------ ----------------   ---------------  ------------
Balance, December 31, 1996                         (1,762,017)    198,836,652        8,715,942        (1,103,206)  204,687,371

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

  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)

  Adjustment to unrealized gains
    (losses) on investment in
    insured mortgages                                      --              --        1,766,785           783,102     2,549,887
                                                -------------    ------------ ---------------=   ---------------  ------------

Balance, December 31, 1997                      $  (2,524,665)   $180,044,243 $     10,482,727   $      (320,104) $187,682,201
                                                =============    ============ ================   ===============  ============

Limited Partnership Units outstanding -
  basic, as of December 31, 1997,
  1996 and 1995                                                    12,079,514
                                                                 ============

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

<PAGE>29

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

                                       STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              For the years ended December 31,       
                                                                         1997             1996               1995    
                                                                     ------------     ------------       ------------
<S>                                                                  <C>              <C>                 <C>        
Cash flows from operating activities:
  Net earnings                                                       $ 15,137,402     $ 15,788,703       $ 15,902,798
  Adjustments to reconcile net earnings
    to net cash provided by operating
    activities:
    Losses on mortgage dispositions/modification                               --          144,595             16,665
    Gains on mortgage dispositions/modification                          (907,923)        (666,179)           (52,730)
    Changes in assets and liabilities:
     Decrease in receivables and other assets                              51,641          186,942                 51
     Increase (decrease) in accounts
         payable and accrued expenses                                     107,751           35,227           (137,195)
     (Decrease) increase in due to affiliate                              (66,805)          59,957           (118,513)
     Return on investment in affiliate                                         --            3,079              1,924
                                                                     ------------     ------------       ------------
        Net cash provided by operating
          activities                                                   14,322,066       15,552,324         15,613,000
                                                                     ------------     ------------       ------------
Cash flows from investing activities:
  Proceeds from disposition of mortgages                               18,996,279       11,346,665          2,334,318
  Receipt of mortgage principal from
    scheduled payments                                                  1,598,933        1,571,828          1,315,947
                                                                     ------------     ------------       ------------
        Net cash provided by investing activities                      20,595,212       12,918,493          3,650,265
                                                                     ------------     ------------       ------------
Cash flows from financing activities:
  Distributions paid to partners                                      (29,915,961)     (22,122,731)       (19,357,390)
                                                                     ------------     ------------       ------------
Net increase (decrease) in cash and cash equivalents                    5,001,317        6,348,086            (94,125)

Cash and cash equivalents, beginning of year                            9,716,786        3,368,700          3,462,825
                                                                     ------------     ------------       ------------
Cash and cash equivalents, end of year                               $ 14,718,103     $  9,716,786       $  3,368,700
                                                                     ============     ============       ============

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

<PAGE>30

              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, CRIIMI MAE Services Limited
Partnership, 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.

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.

     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 

<PAGE>31 

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

                          NOTES TO FINANCIAL STATEMENTS

2.   SIGNIFICANT ACCOUNTING POLICIES - Continued

     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.

          As of December 31, 1997, the weighted average remaining term of the
     Partnership's investments in GNMA Mortgage-Backed Securities and FHA-
     Insured Certificates is approximately 30 years.  However, the Partnership
     Agreement states that the Partnership will terminate in approximately 12
     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, 1997, 1996
     and 1995, 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 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, 1997, 1996 and 1995, 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 balance of the 

<PAGE>32 

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

                          NOTES TO FINANCIAL STATEMENTS

2.   SIGNIFICANT ACCOUNTING POLICIES - Continued

     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.

     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 operations 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, 1997, 1996 and 1995.  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.

     New Accounting Standards
     ------------------------
          In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS
     128").  FAS 128 changes the requirements for the calculation and disclosure
     of earnings per share.  The Partnership is required to present basic net
     earnings per limited partnership unit as opposed to net earnings per
     limited partnership unit.  However, the computational differences between
     FAS 128 and the prior accounting standard do not impact the Partnership. 
     FAS 128 has been applied to the year ended December 31, 1997, and all prior
     periods.

          During 1997 FASB issued SFAS No. 129 "Disclosure of Information about
     Capital Structure" ("FAS 129").  FAS 129 continues the existing
     requirements to disclose the pertinent rights and privileges of all
     securities other than ordinary common stock but expands the number of
     companies subject to portions of its requirements.  The Partnership's
     disclosures comply with the requirements of this statement.

          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 would include
     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 is effective for years beginning on or after
     December 15, 1997.

          During 1997, FASB issued SFAS No. 131 "Disclosures about Segments of
     an Enterprise and Related Information" ("FAS 131").  FAS 131 establishes
     standards for the way that public business enterprises report information
     about operating segments and related disclosures about products and 

<PAGE>33 

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

                          NOTES TO FINANCIAL STATEMENTS

2.   SIGNIFICANT ACCOUNTING POLICIES - Continued

     services, geographical areas and major customers.  FAS 131 is effective for
     years beginning on or after December 15, 1997.

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, 1997, 1996 and 1995, earned or received compensation or payments for
services from the Partnership as follows: 

<PAGE>34 

              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 December 31,     
Name of Recipient                    Served/Item                 1997           1996          1995   
                            ----------------------------      ----------     ----------    ----------
<S>                         <C>                               <C>            <C>           <C>       
CRIIMI, Inc.(1)             General Partner/Distribution      $1,353,007     $1,102,994    $  754,938

AIM Acquisition             Advisor/Asset Management Fee       1,873,563      1,997,649     2,042,886
  Partners, L.P.(2)

CRIIMI MAE                  Affiliate of General Partner/         62,274         68,328        28,087
Management, Inc.(3)           Expense Reimbursement


CRI(3)                      Affiliate of General Partner/             --             --        71,129
                              Expense Reimbursement

(1)  The General Partner, pursuant to amendments to the Partnership Agreement, effective September 6, 1991, is entitled to receive
     3.9% of the Partnership's income, loss, capital and distributions including, without limitation, the Partnership's Adjusted
     Cash from Operations and Proceeds of Mortgage Prepayments, Sales or Insurance (both as defined in the Partnership Agreement).

(2)  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.  As discussed in Note 1,
     effective June 30, 1995, CRIIMI MAE Services Limited Partnership now serves as the Sub-advisor.  Of the amounts paid to the
     Advisor, CRIIMI MAE Services Limited Partnership earned a fee equal to $552,222, $590,353 and $299,460 for the years ended
     December 31, 1997 and 1996, and the six months ended December 31, 1995, respectively.  CRI/AIM Management, Inc., which through
     June 30, 1995 acted as the Sub-advisor, earned a fee equal to $302,682 for the six months ended June 30, 1995.

(3)  Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to CRI as reimbursement for expenses incurred prior to
     June 30, 1995 on behalf of the General Partner and the Partnership.  As discussed in Note 1, the transaction in which CRIIMI
     MAE became a self-administered REIT has no impact on the payments required to be made by the Partnership, other than that the
     expense reimbursement, previously paid by the Partnership to CRI in connection with the provision of services by the Sub-
     advisor are, effective June 30, 1995, paid to a wholly-owned subsidiary of CRIIMI MAE, CRIIMI MAE Management, Inc.  The amounts
     paid to CRI during the year ended December 31, 1995 represent reimbursement of expenses incurred prior to June 30, 1995.  This
     is included with general and administrative expenses.

</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>35 

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

                          NOTES TO FINANCIAL STATEMENTS


4.   FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

<TABLE>
<CAPTION>
                                                    As of December 31, 1997         As of December 31, 1996
                                                     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                      $132,530,176     $142,822,793   $151,866,819   $159,959,297
  Originated insured mortgages                      17,017,276       16,887,282     17,126,685     16,646,943
                                                  ------------     ------------   ------------   ------------
                                                  $149,547,452     $159,710,075   $168,993,504   $176,606,240
                                                  ============     ============   ============   ============
Investment in FHA-Insured Loans:
  Acquired insured mortgages                      $ 14,416,917     $ 17,432,816   $ 14,556,595   $ 17,706,486
  Originated insured mortgages                      12,928,572       13,431,769     13,030,131     12,969,589
                                                  ------------     ------------   ------------   ------------
                                                  $ 27,345,489     $ 30,864,585   $ 27,586,726   $ 30,676,075
                                                  ============     ============   ============   ============

Cash and cash equivalents                         $ 14,718,103     $ 14,718,103   $  9,716,786   $  9,716,786
                                                  ============     ============   ============   ============
Accrued interest receivable                       $  1,421,935     $  1,421,935   $  1,426,113   $  1,426,113
                                                  ============     ============   ============   ============
</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 and FHA-Insured Loans
     ------------------------------------------------------------
          The fair value of the FHA-Insured Certificates, GNMA Mortgage-Backed
     Securities and FHA-Insured Loans is based on quoted market prices.

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

<PAGE>36

              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,         
                                                     1997             1996    
                                                 ------------     ------------
<S>                                              <C>              <C>         
Fully Insured Acquired Insured:
  Number of
    GNMA Mortgage-Backed Securities(4)(7)(8)                9                9
    FHA-Insured Certificates(1)(2)(3)(4)
    (5)(6)                                                 55               62
  Amortized Cost                                 $132,530,176     $151,866,819
  Face Value                                      137,674,964      157,889,594
  Fair Value                                      142,822,793      159,959,297


Fully Insured Originated Insured:
  Number of
    GNMA Mortgage-Backed Securities                         1                1
    FHA-Insured Certificates                                1                1
  Amortized Cost                                  $17,017,276     $ 17,126,685
  Face Value                                       16,660,658       16,770,069
  Fair Value                                       16,887,282       16,646,943

</TABLE>

(1)  On October 11, 1996, the servicer of the mortgage on Meadow Park Apartments
     I filed a Notice of Default and Election to Assign the mortgage with HUD. 
     On January 24, 1997, the Partnership received approximately $628,000
     representing approximately 90% of the assignment proceeds.  The Partnership
     recognized a gain of approximately $139,000 for the year ended December 31,
     1997.  A distribution of $0.05 per Unit related to this assignment, was
     declared in February 1997 and was paid to Unitholders in May 1997.  The
     remaining 9% of proceeds due from HUD were received in May 1997, and since
     the distribution was less than $0.01 per Unit, these proceeds were
     distributed with regular cash flow in August 1997.

(2)  In late February 1997, the mortgage on Security Apartments was prepaid. 
     The Partnership received net proceeds of approximately $304,000, and
     recognized a gain of approximately $66,000 for the year ended December 31,
     1997.  A distribution of approximately $0.02 per Unit related to this
     prepayment was declared in March 1997 and was paid to Unitholders in May
     1997.

(3)  On July 1, 1997, the mortgage on Peachtree Apartments was prepaid.  The
     Partnership received net proceeds of approximately $6.5 million, and
     recognized a gain of less than $1,000 for the year ended December 31, 1997.
     A distribution of approximately $0.52 per Unit related to this prepayment
     was declared in July 1997, and was paid to Unitholders in November 1997.

(4)  In September 1997, the mortgage on Pine Tree Lodge was converted to a GNMA
     Mortgage-Backed Security from an FHA-Insured certificate.  A distribution 

<PAGE>37 

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

                          NOTES TO FINANCIAL STATEMENTS

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

     of approximately $0.02 per Unit related to the final settlement of this
     mortgage was declared in September 1997 and paid in November 1997.

(5)  On October 1, 1997, the mortgage on Ashford Place Apartments was prepaid. 
     The Partnership received net proceeds of approximately $3.4 million and
     recognized a gain of approximately $34,000 for the year ended December 31,
     1997.  A distribution of approximately $0.27 was declared in October 1997
     and paid in February 1998.

(6)  On October 22, 1997, the mortgages on Silverwood Village Apartments and
     Fleetwood Village Apartments were prepaid.  The Partnership received net
     proceeds of approximately $1.4 million and $1.5 million, respectively, and
     recognized gains of approximately $214,000 and $237,000 for the mortgages
     on Silverwood Village Apartments and Fleetwood Village Apartments,
     respectively, for the year ended December 31, 1997.  A distribution of
     approximately $0.23 per Unit was declared in November 1997 and paid in
     February 1998.

(7)  In November 1997, the mortgage on Maryland Meadows was prepaid.  The
     Partnership received net proceeds of approximately $5.2 million, and
     recognized a gain of approximately $217,000 for the year ended December 31,
     1997.  A distribution of approximately $0.42 per Unit was declared in
     December 1997 and paid in February 1998.

(8)  In February 1998, the mortgage on Spanish Trace Apartments was prepaid. 
     The Partnership received net proceeds of approximately $9.7 million, and
     anticipates it will recognize a loss of approximately $96,000 in 1998.  A
     distribution of approximately $0.77 per Unit related to this prepayment was
     declared in March 1998 and is expected to be paid in May 1998.

     As of March 3, 1998, 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 Country Club Terrace
Apartments and Isle of Pines Village with respect to the January 1998 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, 1997, 1996 and 1995, the Partnership
received $51,457, $0 and $0, respectively, from the Participations.  These
amounts, if any, are included in mortgage investment income on the accompanying
statements of operations.

     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>38

              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,         
                                                     1997             1996    
                                                 ------------     ------------
<S>                                              <C>              <C>         
Fully Insured Acquired Insured:
  Number of Loans                                          12               12
  Amortized Cost                                 $ 14,416,917     $ 14,556,595
  Face Value                                       17,165,551       17,405,640
  Fair Value                                       17,432,816       17,706,486

Fully Insured Originated Insured:
  Number of Loans                                           3                3
  Amortized Cost                                 $ 12,928,572     $ 13,030,131
  Face Value                                       12,589,214       12,681,532
  Fair Value                                       13,431,769       12,969,589

</TABLE>

          As of March 3, 1998, all of the fully insured FHA-Insured Loans were
     current with respect to the payment of principal and interest, except for
     the mortgage on Portervillage I, which has been delinquent since January
     1997.  In May 1997, the servicer of the mortgage on Portervillage I
     Apartments filed a Notice of Default and an Election to Assign the mortgage
     with HUD.  The face value of this mortgage was approximately $1.2 million
     at December 31, 1996.  The Partnership expects to receive 99% of this
     amount plus accrued 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, 1997, 1996 and
     1995, the Partnership received $37,766, $42,417 and $64,676, respectively,
     from the Participations.  These amounts are included in mortgage investment
     income on the accompanying statements of operations.

7.   DISTRIBUTIONS TO UNITHOLDERS

     The distributions paid or accrued to Unitholders on a per Unit basis for
the years ended December 31, 1997, 1996 and 1995 are as follows:

                                         1997        1996         1995 
                                        ------      ------       ------
     Quarter ended March 31,            $0.39(1)    $0.33        $0.36
     Quarter ended June 30,              0.30        0.64 (4)     0.33
     Quarter ended September 30,         0.84(2)     0.43 (5)     0.49(7)
     Quarter ended December 31,          1.23(3)     0.85 (6)     0.36 (8) 
                                        -----       -----        -----
                                        $2.76       $2.25        $1.54
                                        =====       =====        ===== 

<PAGE>39 

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

                          NOTES TO FINANCIAL STATEMENTS

7.   DISTRIBUTIONS TO UNITHOLDERS - Continued

(1)  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.
(2)  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.
(3)  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.
(4)  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.
(5)  This amount includes approximately $0.10 per Unit representing net proceeds
     from the assignment of the mortgage on Woodland Village Apartments.
(6)  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.
(7)  This amount includes approximately $0.16 per Unit representing net proceeds
     from the assignment of the mortgage on El Lago Apartments.
(8)  This amount includes approximately $0.02 per Unit representing additional
     net proceeds from the assignment of the mortgage on El Lago 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.

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 

<PAGE>40 

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

                          NOTES TO FINANCIAL STATEMENTS

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

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 therefore.<PAGE>
<PAGE>41

              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, 1997, 1996 and 1995.

<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>

<TABLE><CAPTION>
                                                                1995              
                                                           Quarter ended           
                                        March 31      June 30        September 30     December 31 
                                       ----------    ---------      --------------   -------------
<S>                                    <C>           <C>            <C>              <C>          
Income                                 $    4,640    $   4,717      $        4,626   $       4,606
Net gains (losses) from
  mortgage dispositions                        53          (36)                 --              19
Net earnings                                3,980        4,017               3,944           3,962
Net earnings per Limited
  Partnership Unit - Basic                   0.32         0.32                0.31            0.32

</TABLE> 

<PAGE>42  

                         AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                              SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                             DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                               Interest                                                    
                                                               Rate on        Face             Net         Annual Payment  
                                          Maturity    Put      Mortgage     Value of     Carrying Value    (Principal and  
Development Name/Location                   Date    Date (1)    (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% $     871,101   $     880,943      $    78,855(4)
Walnut Apartments          
  La Puente, California                       3/20     11/01         7.5%     2,669,575       2,700,340          248,862(4)
Woodland Hills Apartments          
  Auburn, Alabama                            10/19      6/99         7.5%       723,142         731,529           68,044(4)
Fairlawn II          
  Waterbury, Connecticut                      6/20      5/00         7.5%       795,141         804,241           73,364(4)
Willow Dayton          
  Chicago, Illinois                           8/19     12/00         7.5%     1,062,339       1,074,620           99,489(4)
Cedar Ridge Apartments          
  Richton Park, Illinois                      4/20      2/01         7.5%     2,839,009       2,871,562          262,699(4)
Park Hill Apartments          
  Lexington, Kentucky                         3/19      3/00         7.5%     1,841,699       1,863,104          173,845(4)
Fairfax House        
  Buffalo, New York                          11/19      5/00         7.5%     2,248,500       2,274,412          209,608(4)
Country Club Terrace Apt.
  Holidaysburg, Pennsylvania                  8/19      6/00         7.5%     1,522,007       1,539,602          142,537(4)
Summit Square Manor
  Rochester, Minnesota                        8/19      5/99         7.5%     2,001,763       2,024,903          187,467(4)
Park Place          
 Rochester, Minnesota                         3/20     10/99         7.5%       792,389         801,530           73,980(4) 


<PAGE>43

                      AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                            SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                          DECEMBER 31, 1997

                                                               Interest                                                    
                                                               Rate on        Face             Net         Annual Payment  
                                          Maturity    Put      Mortgage     Value of     Carrying Value    (Principal and  
Development Name/Location                   Date    Date (1)    (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)
Nevada Hills Apartments
  Reno, Nevada                                2/21      8/00         7.5%     1,209,355       1,223,091          110,345(4)
Bentgrass Hills Apartments          
  Milwaukee, Wisconsin                        7/21      5/01         7.5%       240,388         243,109           21,817(6)
Colony West Apartments          
  Chico, California                           7/20     12/00         7.5%       676,910         684,650           62,365(6)
Dunhaven Apartments Section I          
  Baltimore County, Maryland                  1/20     12/99         7.5%       940,697         951,516           87,429(6)
Emerald Green Apartments          
  Indianapolis, Indiana                       1/20     12/99         7.5%     1,079,973       1,092,393          100,374(6)
Isle of Pines Village          
  Apartments
  Baltimore County, Maryland                 12/20      4/00         7.5%     1,279,142       1,293,698          117,030(6)
Kings Villa/Discovery Commons          
  Sacramento, California                      7/19     11/99         7.5%     1,134,530       1,147,658          106,414(6)
Stoney Brook Apartments
  North Providence
  Rhode Island                                9/20     10/00         7.5%     1,505,110       1,522,285          138,278(6)
Steeplechase Apartments
  Aiken, South Carolina                       9/18      8/98         7.5%       532,336         538,579           50,921(6)
Walnut Hills Apartments
  Plainfield, Indiana                         9/19      3/00         7.5%       510,048         515,938           47,692(6)
Woodland Villas           
  Jasper, Alabama                             8/19      3/00         7.5%       325,340         329,101           30,468(6)
Ashley Oaks Apartments           
  Carrollton, Georgia                         3/22      4/02         7.5%       582,762         589,308           52,292(7)
Highland Oaks Apartments,           
  Phase III           
  Wichita Falls, Texas                        2/21      4/02         7.5%       983,537         994,709           89,741(7) 

<PAGE>44

                         AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                                SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                               DECEMBER 31, 1997

                                                               Interest                                                    
                                                               Rate on        Face             Net         Annual Payment  
                                          Maturity    Put      Mortgage     Value of     Carrying Value    (Principal and  
Development Name/Location                   Date    Date (1)    (5)(9)      Mortgage       (3)(11)(12)    Interest)(9)(10) 
-------------------------               ----------  -------- ------------ -------------  --------------  ------------------
<S>                                     <C>         <C>      <C>          <C>            <C>             <C>               
Holden Court Apartments           
  Seattle, Washington                        12/21      4/02         7.5%       227,179         229,735           20,435(7)
Magnolia Place Apartments           
  Franklin, Tennessee                         5/20      4/02         7.5%       333,384         337,204           30,804(7)
Quail Creek Apartments           
  Howell, Michigan                            5/20      4/02         7.5%       558,147         564,541           51,572(7)
Rainbow Terrace Apartments           
  Milwaukee, Wisconsin                        7/22      4/02         7.5%       331,251         334,959           29,581(7)
Rock Glen Apartments           
  Baltimore, Maryland                         1/22      4/02         7.5%     1,104,748       1,117,177           99,375(7)
Stonebridge Apartments, Phase I           
  Montgomery, Alabama                         4/20      4/02         7.5%     1,071,253       1,083,537           99,125(7)
Village Knoll Apartments                                                                               
  Harrisburg, Pennsylvania                    4/20      4/02         7.5%     1,112,213       1,124,966          102,914(7)
Bowling Brook, Section 1
  Towson, Maryland                            5/30       N/A        8.50%    11,991,085      12,791,749        1,090,128   
Cedar Bluff
  Eagan, Minnesota                            3/27       N/A        8.50%     4,430,470       4,727,057          411,371   
Executive Tower
  Toledo, Ohio                                3/27       N/A        8.75%     2,896,863       3,090,705          275,283   
New Castle Apartments
  Austin, Texas                               3/18       N/A        8.75%     2,072,819       2,213,474          219,143   
Lincoln Green
  Burrillville, Rhode Island                  6/33       N/A       10.25%     3,133,410       3,353,534          330,066   
Turtle Creek Apartments
  San Antonio, Texas                          4/16       N/A        8.95%     1,690,153       1,805,417          188,596   
Sangnok Villa
  Los Angeles, California                     1/30       N/A       10.25%       908,587         972,514           96,825   
The Meadows of Livonia
  Livonia, Michigan                           9/34       N/A       10.00%     6,463,493       6,958,138          627,836    


<PAGE>45

                         AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                                SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                              DECEMBER 31, 1997

                                                               Interest                                                    
                                                               Rate on        Face             Net         Annual Payment  
                                          Maturity    Put      Mortgage     Value of     Carrying Value    (Principal and  
Development Name/Location                   Date    Date (1)    (5)(9)      Mortgage       (3)(11)(12)    Interest)(9)(10) 
-------------------------               ----------  -------- ------------ -------------  --------------  ------------------
<S>                                     <C>         <C>      <C>          <C>            <C>             <C>               
Gamel & Gamel Apartments
  Benton, Kentucky                            4/27       N/A        8.75% $     680,770  $      726,317     $     64,612   
Wayland Health Center
  Providence, Rhode Island                   10/33       N/A        9.75%     6,905,970       7,434,621          696,610   
Eaglewood Villa Apartments
  Springfield, Ohio                           2/27       N/A       8.875%     2,754,713       2,938,997          264,707   
Gold Key Village Apartments
  Englewood, Ohio                             6/27       N/A        9.00%     2,909,518       2,882,074          282,030   
Stafford Towers
  Baltimore, Maryland                         8/16       N/A        9.50%       368,788         397,583           42,613   
Garden Court Apartments
  Lexington, Kentucky                         8/27       N/A        8.60%     1,184,553       1,263,798          110,583   
Northdale Commons 
  Coon Rapids, Minnesota                      9/27       N/A        9.00%       693,765         740,145           67,173   
Northwood Place 
  Meridian, Mississippi                       6/34       N/A        8.75%     4,518,711       4,819,597          412,635   
Amador Residential
  Jackson, California                         1/34       N/A        9.00%     1,346,351       1,435,988          126,173   
Cheswick Apartments
  Indianapolis, Indiana                       9/27       N/A        8.75%     3,125,377       3,334,397          295,736   
Nassau Apartments
  New Orleans, Louisiana                     11/27       N/A        8.63%       879,007         937,799           82,139   
The Gate House Apartments
  Lexington, Kentucky                         2/28       N/A        8.55%     2,850,730       3,041,386          264,092   
Bradley Road Nursing
  Bay Village, Ohio                           5/34       N/A       8.875%     2,527,349       2,695,615          233,708    

<PAGE>46

                       AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                             SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                           DECEMBER 31, 1997

                                                                    Interest                                                       
                                                                    Rate on           Face             Net         Annual Payment  
                                           Maturity      Put        Mortgage        Value of     Carrying Value    (Principal and  
Development Name/Location                    Date      Date (1)      (5)(9)         Mortgage       (3)(11)(12)    Interest)(9)(10) 
-------------------------                ----------    --------   ------------    -------------  --------------  ------------------
<S>                                      <C>           <C>        <C>             <C>            <C>             <C>               
Franklin Plaza
  Cleveland, Ohio                              5/23         N/A         8.175%        5,379,054       5,518,914          503,183   
Heritage Heights Apartments
  Harrison, Arizona                            4/32         N/A          9.50%          417,860         449,865           41,313   
Pleasant View Nursing Home
  Union, New Jersey                            6/29         N/A          7.75%        7,567,785       7,761,802          643,312  
                                                                                  -------------  --------------
  Total FHA-Insured Certificates -
    Acquired Insured Mortgages,
    carried at fair value                                                           110,802,149     115,776,426
                                                                                  -------------  --------------
GNMA Mortgage-Backed Securities
  (carried at fair value)                                                                                      
Pine Tree Lodge
  Pasadena, Texas                             12/33         N/A          9.50%        2,028,264       2,028,819          196,864   
Spanish Trace Apartments
  Md. Heights, Missouri                        9/28         N/A          7.35%        9,676,350       9,743,834          770,973   
Stone Hedge Village Apts.
  Farmington, New York                        11/27         N/A          7.00%        1,826,132       1,839,027          143,285 
Afton Square Apartments                            
  Portsmouth, Virginia                        12/28         N/A          7.25%        1,069,345       1,076,802           81,448   
Carlisle Apartments
  Houston, Texas                              12/28         N/A         7.125%        2,136,970       2,151,914          165,943   
Independence Park
  Largo, Florida                               9/29         N/A          7.75%        4,018,453       4,046,029          330,878
Ridgecrest Timbers
  Portland, Oregon                            12/28         N/A          7.25%        1,556,716       1,567,572          120,915    

<PAGE>47
 
                        AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                           SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                         DECEMBER 31, 1997

                                                                    Interest                                                       
                                                                    Rate on           Face             Net         Annual Payment  
                                           Maturity      Put        Mortgage        Value of     Carrying Value    (Principal and  
Development Name/Location                    Date      Date (1)      (5)(9)         Mortgage       (3)(11)(12)    Interest)(9)(10) 
-------------------------                ----------    --------   ------------    -------------  --------------  ------------------
<S>                                      <C>           <C>        <C>             <C>            <C>             <C>               
Huntington Apartments
  Concord, North Carolina                     12/29         N/A          7.25%        2,966,045       2,986,717          233,189   
Northwood Apartments
  Mockville, North Carolina                   12/29         N/A          7.25%        1,594,540       1,605,653          125,362   
                                                                                   ------------  --------------
    Total GNMA Mortgage-Backed
      Securities                                                                     26,872,815      27,046,367
                                                                                   ------------  --------------
    Total investment in Acquired
      Insured Mortgages, carried
      at fair value                                                                 137,674,964     142,822,793
                                                                                   ------------  --------------
ORIGINATED INSURED MORTGAGES
----------------------------
GNMA Mortgage-Backed Security
  (carried at fair value)                          
Oak Forest Apartments II
  Ocoee, Florida                              12/31       11/09          8.25%       10,637,301      10,709,532          840,090   
FHA-Insured Certificate
  (carried at fair value)
Waterford Green Apartments
  South St. Paul, Minnesota (11)              11/30       12/04          8.50%        6,023,357       6,177,750          481,564   
                                                                                   ------------  --------------
    Total investment in Originated Insured
      Mortgages, carried at fair value                                               16,660,658      16,887,282
                                                                                   ------------  --------------
    Total investment in FHA-Insured Certificates
      and GNMA Mortgage-Backed Securities                                           154,335,622     159,710,075
                                                                                   ------------  -------------- 

<PAGE>48

                         AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                               SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                             DECEMBER 31, 1997

                                                                    Interest                                                       
                                                                    Rate on           Face             Net         Annual Payment  
                                           Maturity      Put        Mortgage        Value of     Carrying Value    (Principal and  
Development Name/Location                    Date      Date (1)      (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%        2,069,768       1,705,470          185,268(8)
Baypoint Shoreline Apartments
  Duluth, Minnesota                            1/22        8/00           7.5%          977,925         803,331           87,967(8)
Berryhill Apartments
  Grass Valley, California                     1/21        8/99           7.5%        1,268,509       1,044,711          115,899(8)
Brougham Estates II
  Kansas City, Kansas                         11/22        8/00           7.5%        2,597,377       2,128,223          230,860(8)
College Green Apartments
  Wilmington, North Carolina                   3/23        6/01           7.5%        1,395,308       1,142,583          123,455(8)
Fox Run Apartments
  Dothan, Alabama                             10/19       12/97           7.5%        1,243,489       1,028,200          116,242(8)
Kaynorth Apartments
  Lansing, Michigan                            4/23        3/01           7.5%        1,893,162       1,549,755          167,318(8)
Lakeside Apartments
  Bennettsville, South Carolina                1/22        3/01           7.5%          392,461         322,708           35,303(8)
Portervillage I Apartments
  Portervillage, California                    8/21        5/00           7.5%        1,144,441         941,454          103,733(8)
Town Park Apartments             
  Rockingham, North Carolina                  10/22        6/01           7.5%          637,453         522,941           56,755(8)
Westbrook Apartments
  Kokomo, Indiana                             11/22       12/00           7.5%        1,810,993       1,491,160          163,177(8)
Continental Village
  New Hope, Minnesota                          1/22         N/A          8.95%        1,734,665       1,736,381          175,954   
                                                                                   ------------  --------------
    Total investment in Acquired
      Insured Mortgages, carried 
        at amortized cost                                                            17,165,551      14,416,917
                                                                                   ------------  -------------- 

<PAGE>49

                         AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
                              SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
                                            DECEMBER 31, 1997

                                                                    Interest                                                       
                                                                    Rate on           Face             Net         Annual Payment  
                                           Maturity      Put        Mortgage        Value of     Carrying Value    (Principal and  
Development Name/Location                    Date      Date (1)      (5)(9)         Mortgage       (3)(11)(12)    Interest)(9)(10) 
-------------------------                ----------    --------   ------------    -------------  --------------  ------------------
<S>                                      <C>           <C>        <C>             <C>            <C>             <C>               
ORIGINATED INSURED MORTGAGES
----------------------------
Fully Insured Mortgages
-----------------------
FHA-Insured Loans
  (carried at amortized cost)(2)
Cobblestone Apartments                             
  Fayetteville, North Carolina                 3/28       12/02          8.50%        5,020,691       5,173,123          462,703   
Longleaf Lodge
  Hoover, Alabama                              7/26          --          8.25%        3,100,462       3,139,846          282,958   
The Plantation
  Greenville, North Carolina                   4/28        4/03          8.25%        4,468,061       4,615,603          402,046   
                                                                                   ------------    ------------
  Total investment in Originated
    Insured Mortgages, carried at amortized 
    cost                                                                             12,589,214      12,928,572
                                                                                   ------------    ------------
  Total investment in FHA-Insured Loans                                              29,754,765      27,345,489
                                                                                   ------------    ------------
  TOTAL INVESTMENT IN INSURED MORTGAGES                                           $ 184,090,387   $ 187,055,564
                                                                                   ============    ============

</TABLE> 

<PAGE>50

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

              NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

                                DECEMBER 31, 1997


(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
     therefor, 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 mortgages 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 

<PAGE>51

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

              NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

                                DECEMBER 31, 1997


     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, 1997, 1996 and 1995, the
     Partnership received additional interest of $89,223, $42,417 and $64,676,
     respectively, from the Participations.

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

(11) A reconciliation of the carrying value of Insured Mortgages for the years
     ended December 31, 1997 and 1996, is as follows:

                                                     1997             1996    
                                                 ------------     ------------

     Beginning balance                           $204,192,966     $220,229,526

       Principal receipts on mortgages             (1,598,933)      (1,571,828)

       Due from HUD                                        --         (138,858)

       Proceeds from disposition of 
         Mortgages                                (18,996,279)     (11,346,665)

       Net gains on mortgage
          dispositions/modifications                  907,923          521,584

       Decrease (increase) in unrealized 
         losses on investment in 
         Insured Mortgages                            783,102          (57,176)

       Increase (decrease) in unrealized 
         gains on investment in
         Insured Mortgages                          1,766,785       (3,443,617)
                                                 ------------     ------------
     Ending balance                              $187,055,564     $204,192,966
                                                 ============     ============

(12) As of December 31, 1997 and 1996, the tax basis of the Insured Mortgages
     was approximately $174.4 million and $194.1 million, respectively.<PAGE>