UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                      ------------------------------------

                                    FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                      ------------------------------------

For the fiscal year ended December 31, 2002       Commission file number 1-11059

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

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

                              11200 Rockville Pike
                            Rockville, Maryland 20852
                                 (301) 816-2300
                        (Address, including zip code, and
                                telephone number,
        including area code, of registrant's principal executive offices)

                      ------------------------------------

           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
                      ------------------------------------

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

     As of December 31, 2002, 12,079,514 depositary units of limited partnership
interest  were  outstanding.  The  aggregate  market value of such units held by
non-affiliates of the Registrant,  based on the last reported sale price on June
28, 2002, was $78,128,576.

                       Documents incorporated by Reference

                                      None

<PAGE>2



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

                         2002 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
                                                                PART I
<S>               <C>                                                                                    <C>
Item 1.           Business.........................................................................       3
Item 2.           Properties.......................................................................       5
Item 3.           Legal Proceedings................................................................       5
Item 4.           Submission of Matters to a Vote of Security Holders..............................       5



                                                                PART II

Item 5.           Market for Registrant's Securities and Related Security Holder Matters...........       6
Item 6.           Selected Financial Data..........................................................       7
Item 7.           Management's Discussion and Analysis of Financial Condition and
                     Results of Operations.........................................................       7
Item 7a.          Qualitative and Quantitative Disclosures about Market Risk.......................      16
Item 8.           Financial Statements and Supplementary Data......................................      16
Item 9.           Changes in and Disagreements with Accountants on Accounting and
                     Financial Disclosure..........................................................      16



                                                               PART III

Item 10.          Directors and Executive Officers of the Registrant...............................      18
Item 11.          Executive Compensation...........................................................      20
Item 12.          Security Ownership of Certain Beneficial Owners, Management and Related
                     Unitholder Matters............................................................      20
Item 13.          Certain Relationships and Related Transactions...................................      21
Item 14.          Controls and Procedure...........................................................      21

                                                                PART IV

Item 15.          Exhibits, Financial Statement Schedules and Reports on Form 8-K..................      22

Signatures        .................................................................................      25

Certifications    .................................................................................      26
</TABLE>

<PAGE>3
                                     PART I

ITEM 1.   BUSINESS

FORWARD-LOOKING  STATEMENTS.  When used in this Annual Report on Form 10-K,  the
words  "believe,"  "anticipate,"  "expect,"  "contemplate,"  "may,"  "will," and
similar  expressions  are  intended  to  identify  forward-looking   statements.
Statements  looking  forward in time are included in this Annual  Report on Form
10-K  pursuant  to  the  "safe  harbor"  provision  of  the  Private  Securities
Litigation  Reform Act of 1995. Such statements are subject to certain risks and
uncertainties,   which  could  cause  actual   results  to  differ   materially.
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 prior and
future  filings by the  Partnership  (defined  below)  with the  Securities  and
Exchange  Commission  ("SEC")  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. Factors which may cause
actual results to differ materially from those contained in the  forward-looking
statements  identified above include,  but are not limited to (i) regulatory and
litigation  matters,  (ii)  interest  rates,  (iii) trends in the economy,  (iv)
prepayment  of  mortgages,  (v)  defaulted  mortgages,  (vi) errors in servicing
defaulted  mortgages and (vii) sales of mortgage  investments  below fair market
value.   Readers  are   cautioned   not  to  place   undue   reliance  on  these
forward-looking statements, which speak only of the date hereof. The Partnership
undertakes no obligation to publicly revise these forward-looking  statements to
reflect events or  circumstances  occurring  after the date hereof or to reflect
the occurrence of unanticipated events.

Development and Description of Business
---------------------------------------

     American Insured Mortgage  Investors - Series 85, L.P. (the  "Partnership")
was formed pursuant to a limited partnership agreement ("Partnership Agreement")
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., a wholly-owned  subsidiary of CRIIMI MAE Inc. ("CRIIMI MAE"),
acts as the General  Partner (the  "General  Partner") for the  Partnership  and
holds a partnership  interest of 3.9%. The General Partner  provides  management
and  administrative  services  on behalf  of the  Partnership.  AIM  Acquisition
Partners  L.P.  serves as the advisor (the  "Advisor") to the  Partnership.  The
general   partner  of  the  Advisor  is  AIM   Acquisition   Corporation   ("AIM
Acquisition")  and the  limited  partners  include,  but are not limited to, The
Goldman Sachs Group, L.P., Sun America  Investments,  Inc.  (successor to Broad,
Inc.) and CRI/AIM  Investment,  L.P.,  a  subsidiary  of CRIIMI MAE,  over which
CRIIMI  MAE  exercises  100%  voting  control.  AIM  Acquisition  is a  Delaware
corporation  that is primarily  owned by Sun America  Investments,  Inc. and The
Goldman Sachs Group, L.P.

     Pursuant  to the terms of certain  origination  and  acquisition  services,
management services and disposition  services agreements between the Advisor and
the Partnership  (collectively the "Advisory  Agreements"),  the Advisor renders
services to the Partnership, including but not limited to, the management of the
Partnership's  portfolio of mortgages and the  disposition of the  Partnership's
mortgages. Such services are subject to the review and ultimate authority of the
General Partner. However, the General Partner is required to receive the consent
of the Advisor prior to taking certain  significant  actions,  including but not
limited to the  disposition of mortgages,  any transaction or agreement with the
General  Partner  or its  affiliates,  or any  material  change  as to  policies
regarding  distributions  or  reserves  of  the  Partnership  (collectively  the

<PAGE>4

"Consent Rights"). The Advisor is permitted and has delegated the performance of
services to CRIIMI MAE Services Limited Partnership  ("CMSLP"),  a subsidiary of
CRIIMI  MAE,   pursuant  to  a  sub-management   agreement  (the   "Sub-Advisory
Agreement").  The general partner and limited partner of CMSLP are  wholly-owned
subsidiaries  of CRIIMI MAE. The  delegation  of such services by the Advisor to
CMSLP does not relieve the Advisor of its  obligation to perform such  services.
Furthermore, the Advisor has retained its Consent Rights.

     The General Partner also serves as the General Partner for American Insured
Mortgage Investors ("AIM 84"), American Insured Mortgage Investors L.P. - Series
86 ("AIM 86") and American  Insured  Mortgage  Investors  L.P. - Series 88 ("AIM
88") and  owns  general  partner  interests  therein  of  2.9%,  4.9% and  4.9%,
respectively.  The  Partnership,  AIM  84,  AIM 86 and  AIM 88 are  collectively
referred to as the "AIM Limited Partnerships".

     Prior to December  1993,  the  Partnership  was engaged in the  business of
originating  government insured mortgage loans ("Originated  Insured Mortgages")
and acquiring  government  insured 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 of 1937, as amended (the "National  Housing Act"). The
Partnership Agreement states that the Partnership will terminate on December 31,
2009, unless terminated earlier under the provisions thereof. The Partnership is
required,  pursuant to the Partnership Agreement, to dispose of its assets prior
to this date.

     Additional  information  concerning  the  business  of 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, 7 and 8 of the Notes
to Financial  Statements (filed in response to Item 8 hereof),  all of which are
incorporated by reference  herein.  See also Schedule  IV-Mortgage Loans on Real
Estate for the table of the  Partnership's  Insured Mortgages as of December 31,
2002, which is incorporated by reference herein.

Employees and Management of the Partnership
-------------------------------------------

     The  Partnership  has no  employees.  The  business of the  Partnership  is
managed by its General  Partner  while its  portfolio of mortgages is managed by
the  Advisor and CMSLP  pursuant to the  Advisory  Agreements  and  Sub-Advisory
Agreement, respectively, as discussed above. A wholly-owned subsidiary of CRIIMI
MAE, CRIIMI MAE Management, Inc., provides personnel and administrative services
to the Partnership on behalf of the General Partner. The Partnership  reimburses
CRIIMI MAE Management,  Inc. for these services on an actual cost basis pursuant
to the terms of the Partnership Agreement.

     The fee paid by the Partnership to the Advisor for services performed under
the  Advisory  Agreements  (the  "Advisory  Fee"),  is  equal  to  0.95%  of the
Partnership's  Total Invested Assets (as defined in the Partnership  Agreement).
The Advisor pays CMSLP, as sub-advisor,  a fee of 0.28% (the "Sub-Advisory Fee")
of Total Invested Assets for services performed under the Sub-Advisory Agreement
from its Advisory Fee. The Partnership is not liable for paying the Sub-Advisory
Fee to CMSLP.  Additional information concerning these fees is contained in Part
II, Item 7,  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations and in Note 8 of the Notes to Financial  Statements (filed
in  response  to Item 8  hereof),  all of which are  incorporated  by  reference
herein.

Competition
-----------

     The Partnership's  business consists of holding government insured mortgage
investments  primarily on multifamily housing  properties,  and distributing the
payments of  principal  and  interest on such  mortgage  investments,  including
debentures  issued  by  the  United  States  Department  of  Housing  and  Urban
Development  ("HUD")  in  exchange  for such  mortgages,  to the  holders of its
depository  units  of  limited  partnership   interests   ("Unitholders").   The
Partnership may elect to dispose of its mortgage  investments  through a sale to
third parties. In disposing of mortgage  investments,  the Partnership  competes

<PAGE>5

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,  CMSLP or their respective  affiliates.  Some of these entities may
have  substantially  greater  capital  resources and  experience in disposing of
mortgages investments than the Partnership.

     CRIIMI  MAE and its  affiliates  also may  serve  as  general  partners  or
managers of real estate limited  partnerships,  real estate investment trusts or
other similar entities in the future.  The Partnership may attempt to dispose of
mortgages  at or about the same time that CRIIMI  MAE,  one or more of the other
AIM Limited  Partnerships  and/or  other  entities  managed by CRIIMI MAE or its
affiliates,  or the  Advisor or its  affiliates,  are  attempting  to dispose of
mortgages.  As a result of  market  conditions  that  could  have the  effect of
limiting the number of mortgage dispositions or adversely affecting the proceeds
received from such dispositions,  CMSLP, the General Partner and the Advisor and
their affiliates could be faced with conflicts of interest in determining  which
mortgages  would be disposed of and at which price.  CMSLP,  the General Partner
and the Advisor,  however,  are required to exercise their  fiduciary  duties of
good faith, care and loyalty when evaluating the appropriate  action to be taken
when faced with such conflicts.


ITEM 2.   PROPERTIES

      The Partnership does not own any properties. Generally, the mortgages
underlying the Partnership's mortgage investments are non-recourse first liens
on multifamily residential developments or retirement homes.


ITEM 3.   LEGAL PROCEEDINGS

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


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

     No matters were submitted to a vote of the Partnership's Unitholders during
the fourth quarter of 2002.



<PAGE>6
                                     PART II

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

Principal Market and Market Price for Units and Distributions
-------------------------------------------------------------

      The depository units of Limited Partnership interests ("Limited
Partnership Units") are listed for trading on the American Stock Exchange
("AMEX") under the trading symbol of "AII." The high and low trade prices for
the Units as reported on AMEX and the distributions, as applicable, for each
quarterly period in 2002 and 2001 were as follows:

                                                                Amount of
                                        2002                  Distribution
   Quarter Ended               High              Low            Per Unit
   -------------               ----              ---            --------

   March 31                  $ 8.0000         $  6.3800         $  1.325
   June 30                     6.6300            6.3000            0.210
   September 30                6.6700            6.0600            0.410
   December 31                 6.4300            5.7700            0.810
                                                                --------
                                                                $  2.755
                                                                ========

                                                                Amount of
                                        2001                  Distribution
   Quarter Ended               High              Low            Per Unit
   -------------               ----              ---            --------
   March 31                  $ 8.3125         $  7.6500         $  0.680
   June 30                     7.9000            7.5000            0.370
   September 30                7.9800            7.3500            0.710
   December 31                 8.1000            7.5100            0.150
                                                                --------
                                                                $  1.910
                                                                ========

     Detailed information regarding quarterly distributions is contained in Note
9 of the Notes to  Financial  Statements  (filed in  response  to Item 8 hereof)
incorporated by reference herein.

     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.

     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
Partnership's  Insured Mortgages pay a fixed monthly mortgage payment,  the cash
distributions  paid to the Unitholders  will vary during each quarter due to (1)
the  fluctuating  yields in the  short-term  money  market in which the  monthly
mortgage  payment  receipts are temporarily  invested,  by the General  Partner,
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,  the timing of receipt of  debentures,  the interest rate on
debentures  and  debenture  redemptions,  and (4)  changes in the  Partnership's
operating  expenses.  As the  Partnership  continues to  liquidate  its mortgage
investments  and  Unitholders  receive  distributions  of return of capital  and
taxable   gains,   Unitholders   should  expect  a  reduction  in  earnings  and
distributions due to the decreasing mortgage base.

     As of December 31, 2002, there were approximately 9,700 Unitholders.

     The  Partnership  has no  compensation  plans  or  individual  compensation
arrangements under which equity securities of the Partnership are authorized for
issuance.

<PAGE>7
                                     PART II

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

                                                              For the Years Ended December 31,
                                                2002          2001           2000          1999          1998
                                                ----          ----           ----          ----          ----
<S>                                          <C>           <C>            <C>           <C>           <C>
Income                                       $   6,443     $   8,526      $   9,979     $  12,230     $  14,744

Net gains on mortgage
  dispositions                                   1,851         1,785            428           857         1,403
Net earnings                                     7,138         8,969          8,866        11,225        13,893
Net earnings per Limited
  Partnership Unit - Basic (1)               $    0.57     $    0.71      $    0.71     $    0.89     $    1.11

Distributions per Limited
  Partnership Unit (1)(2)                    $   2.755     $    1.91      $    1.61     $    3.09     $    3.45


                                                                    As of December 31,
                                                2002          2001           2000          1999          1998
                                                ----          ----           ----          ----          ----

Total assets                                 $  78,238     $  98,070      $ 118,621     $ 143,470     $ 170,970
Partners' equity                                67,940        94,828        110,982       120,445       153,543
</TABLE>

(1)  Calculated  based upon the weighted  average number of Limited  Partnership
     Units outstanding.
(2)  Includes  distributions  due the Unitholders for the  Partnership's  fiscal
     years ended  December  31,  2002,  2001,  2000,  1999 and 1998,  which were
     partially  paid  subsequent  to year end. See Notes 8 and 9 of the Notes to
     Financial Statements.

     The selected  income  statement  data  presented  above for the years ended
December 31, 2002,  2001 and 2000,  and the  selected  balance  sheet data as of
December 31, 2002 and 2001, are derived from, and are qualified by, reference to
the Partnership's  financial  statements,  which are included  elsewhere in this
Annual Report on Form 10-K.  The selected  income  statement  data for the years
ended  December  31, 1999 and 1998,  and the selected  balance  sheet data as of
December 31, 2000, 1999 and 1998 are derived from audited  financial  statements
not  included  as part of this Annual  Report on Form 10-K.  This data should be
read in conjunction with the financial statements and the notes thereto.


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

General
-------

     The  following  discussion  and analysis  contains  statements  that may be
considered  forward  looking.  These  statements  contain  a number of risks and
uncertainties  as discussed  herein and in Item 1 of this Annual  Report on Form
10-K that could cause actual results to differ materially.

Mortgage Investments
--------------------

      As of December 31, 2002, the Partnership had invested in 29 Insured
Mortgages, with an aggregate amortized cost of approximately $64.9 million, a
face value of approximately $66.6 million and a fair value of approximately
$67.8 million, as discussed below.

<PAGE>8

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 the Federal
Housing   Administration   ("FHA")   programs   ("FHA-Insured    Certificates"),
mortgage-backed  securities  guaranteed  by  the  Government  National  Mortgage
Association  ("GNMA")  ("GNMA   Mortgage-Backed   Securities")  and  FHA-insured
mortgage loans ("FHA-Insured  Loans").  The mortgages underlying the FHA-Insured
Certificates,   GNMA  Mortgage-Backed   Securities  and  FHA-Insured  Loans  are
non-recourse first liens on multifamily  residential  developments or retirement
homes.

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

GNMA Mortgage-Backed Securities and FHA-Insured Certificates
------------------------------------------------------------

     Listed   below  is  the   Partnership's   aggregate   investment   in  GNMA
Mortgage-Backed Securities and FHA-Insured Certificates:
<TABLE>
<CAPTION>
                                                                                December 31,
                                                                           2002             2001
                                                                           ----             ----
<S>                                                                    <C>              <C>
Acquired Mortgages:
   Number of
      GNMA Mortgage-Backed Securities                                             2                2
      FHA-Insured Certificates (1) through (6)                                   17               26
Amortized Cost                                                         $ 32,449,759     $ 44,640,062
Face Value                                                               33,076,449       46,215,896
Fair Value                                                               33,849,089       45,845,197

Originated Mortgages:
   Number of
      GNMA Mortgage-Backed Securities                                             1                1
      FHA-Insured Certificates                                                    1                1
Amortized Cost                                                         $ 15,974,329     $ 16,132,560
Face Value                                                               15,974,328       16,132,560
Fair Value                                                               15,986,295       15,734,485
</TABLE>

     Listed  below  is a  summary  of  prepayments  during  2002 on the  Insured
Mortgages:
<TABLE>
<CAPTION>

(Dollars in thousands, except per unit amounts)
                                                   Date                                      Distribution
                                      Net        Proceeds      Gain/   Dist./  Declaration      Payment
      Complex Name                  Proceeds     Received      Loss     Unit       Date           Date
      ------------                  --------     --------      ----     ----       ----           ----
  <S>                                 <C>        <C>            <C>    <C>       <C>            <C>
  (1) Garden Court Apartments         $1,152     Apr 2002       $  9   $0.09     Apr 2002       Aug 2002
  (2) Franklin Plaza                   5,029     Sep 2002         (8)   0.40     Oct 2002       Feb 2003
  (3) Rock Glen Apartments             1,009     Oct 2002        117    0.08     Nov 2002       Feb 2003
  (4) Highland Oaks Apartments           888     Nov 2002         96    0.07     Dec 2002       Feb 2003
  (5) Walnut Hills Apartments            454     Dec 2002         83    0.04     Jan 2003       May 2003
  (6) Four mortgages were approved for assignment to HUD under the section 221
      Program, as discussed below in "Redemption of debentures".
</TABLE>

     As of  March  1,  2003,  all  of the  fully  insured  GNMA  Mortgage-Backed
Securities and FHA-Insured  Certificates are current with respect to the payment
of principal and interest.

<PAGE>9

     In addition to regular interest payments under Originated Insured Mortgages
FHA-Insured  Certificates,  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, 2002,
2001 and 2000, the Partnership received $0 from the Participations.

     The Section 221 Program
     -----------------------

     Certain  Insured  Mortgages  held  by  the  Partnership  are  eligible  for
assignment to HUD under the Section  221(g)(4)  program of the National  Housing
Act (the "Section 221 Program").  A mortgagee has the right to assign a mortgage
("put") to the United States Department of Housing and Urban Development ("HUD")
at the expiration of 20 years from the date of final  endorsement  ("Anniversary
Date") if the  mortgage  is not in  default  at such  time.  The  mortgagee  may
exercise  its  option to put the  mortgage  to HUD  during  the one year  period
subsequent to the Anniversary  Date. This assignment  procedure is applicable to
an  Insured  Mortgage,  which  had a firm  or  conditional  commitment  for  HUD
insurance  benefits on or before  November 30, 1983.  Any mortgagee  electing to
assign an Insured  Mortgage to HUD receives,  in exchange  therefor,  debentures
having a total face value equal to (i) the then outstanding principal balance of
the Insured  Mortgage (ii) plus accrued  interest on the mortgage to the date of
assignment  ("Debenture  Issuance Date").  These debentures  generally mature 10
years  from  the  date of  assignment  and  bear  interest  at a rate  announced
semi-annually  by HUD in the Federal  Register  ("going  Federal  rate") at such
date. Generally,  the Partnership is not the named mortgagee for the FHA-Insured
Certificates.  In this  case,  the HUD  debentures  are  generally  issued to an
unrelated  third  party  that  is  the  named  mortgagee.  The  servicer  of the
applicable  mortgage is responsible  for delivering to the  Partnership  all HUD
insurance claim proceeds.  The debenture  interest is paid to the Partnership in
the month it is received by the servicer. The debenture proceeds are paid to the
Partnership  in the  month  the  debenture  is  redeemed  by HUD or  sold by the
servicer. Based on the recommendation of CMSLP, the sub-advisor, and the consent
of the Advisor the General  Partner may elect to put Insured  Mortgages  to HUD,
based upon, in general, but not limited to, (i) the interest rates on mortgages,
(ii) the  interest  rates on  debentures  issued  by HUD and (iii) the costs and
risks associated with continuing to hold the Insured Mortgages.

     Once the  servicer  of an Insured  Mortgage  has filed an  application  for
insurance  benefits  ("HUD put date") under the Section 221 program on behalf of
the Partnership,  the Partnership  will no longer receive the monthly  principal
and interest on the applicable  mortgage,  and instead, HUD will begin receiving
the  monthly  principal  and  interest.  HUD issues  debentures  at the time the
mortgage  is  assigned  to HUD  (approximately  30 days after the HUD put date);
however, the debentures are not transferred to the mortgagee until HUD completes
its assignment  process of the Insured Mortgage.  Based on the General Partner's
experience,  HUD's assignment process is generally six to eighteen months. After
HUD completes its assignment process for the Insured Mortgage,  HUD transfers to
the mortgagee (i) HUD debentures, as discussed above, (ii) plus cash for accrued
interest  on the  debentures  at the  going  Federal  rate,  from the  Debenture
Issuance  Date to the  most  current  interest  payment  date.  Thereafter,  the
mortgagee  receives interest on the debentures on the semi-annual  payment dates
of January 1 and July 1. The going Federal rate for HUD debentures  issued under
the  Section  221  Program  for the period  January 1 through  June 30, 2002 was
6.375%;  for the period July 1 through December 31, 2002 it was 6.625%;  and for
the period  January 1 through June 30, 2003 it is 5.75%.  The  Partnership  will
recognize a gain on a mortgage  assignment at the time it receives  notification
that the assignment has been approved.  HUD assignment approval generally occurs
when HUD transfers the debentures to the mortgagee  and/or when the  Partnership
receives  cash for the  accrued  interest  on the  debentures.  The  Partnership
recognizes a loss on a mortgage  assignment when it becomes probable that a loss
will be incurred.  The gain or loss  recognized  is generally  equal to proceeds
received from HUD, as discussed  above,  less the amortized  cost of the Insured
Mortgage.

     a.   Redemption of debentures
          ------------------------

     The following  list  represents  debentures  issued in 2001 and redeemed in
January 2002. In addition, the Partnership received interest on these debentures
in 2002: (1) a distribution of approximately  $0.02 per unit of interest related
to the debentures  issued in exchange for the mortgages on Park Hill Apartments,

<PAGE>10

Fairfax  House and  Woodland  Villas was  declared  in January  2002,  and (2) a
distribution  of  approximately  $0.02  per  unit  of  interest  related  to the
debentures  issued in exchange for the mortgages on Summit  Square  Manor,  Park
Place,  Park Hill Apartments,  Fairfax House and Woodland Villas was declared in
February 2002. These distributions were paid in May 2002.
<TABLE>
<CAPTION>

(Dollars in thousands, except per unit amounts)
                            Debenture                                                    Dist.
                            Interest    Net       HUD put     Dist./    Declaration    Payment
Complex Name                  Rate    Proceeds     Date        Unit         Date         Date
------------                  ----    --------     ----        ----         ----         ----
<S>                          <C>      <C>        <C>         <C>          <C>          <C>
Summit Square Manor          7.125%   $ 1,883    Jun 2000    $ 0.150      Feb 2002     May 2002
Park Place                   7.125%       746    Jun 2000      0.060      Feb 2002     May 2002
Park Hill Apartments         7.500%     1,721    Sep 2000      0.140      Feb 2002     May 2002
Fairfax House                7.500%     2,109    Sep 2000      0.170      Feb 2002     May 2002
Woodland Villas              7.125%       300    Apr 2001      0.025      Feb 2002     May 2002
                                      -------                -------
                                      $ 6,759                $ 0.545
                                      =======                =======
</TABLE>

     The  following  list  represents  debentures  issued  in  January  2002 and
redeemed in July 2002.  The  aggregate  gain of $497,000 was  recognized  in the
first quarter of 2002, when the Partnership received  approximately  $286,000 of
accrued  interest in cash on these  debentures.  A distribution  related to this
accrued debenture interest of approximately $0.02 per Unit was declared in March
2002  and  paid in May  2002.  Net  proceeds  represent  (i)  the  Partnership's
beneficial  interest  in the face  value of the  debenture,  plus (ii)  interest
earned on the  debenture  during  the HUD  assignment  process,  less  (iii) net
mortgage  investment  income  due on the  applicable  mortgage  during  the  HUD
assignment process.
<TABLE>
<CAPTION>

(Dollars in thousands, except per unit amounts)
                              Debenture                           Gain                             Dist
                              Interest       Net       HUD put   1st Qtr.  Dist./  Declaration   Payment
Complex Name                    Rate       Proceeds     Date      2002      Unit       Date        Date
------------                    ----       --------     ----      -----    -----       ----        ----
<S>                            <C>          <C>       <C>         <C>      <C>       <C>         <C>
Country Club Terrace Apts.     7.500%       $1,425    Sep 2000    $ 178    $0.12     Aug 2002    Nov 2002
Nevada Hills Apartments        7.500%        1,134    Dec 2000      154     0.09     Aug 2002    Nov 2002
Dunhaven Apartments            7.125%          872    Jan 2001      165     0.07     Aug 2002    Nov 2002
                                            ------                -----    -----
                                            $3,431                $ 497    $0.28
                                            ======                =====    =====
</TABLE>

     Subsequent  to  December  31,  2002,  a  7.5%  debenture  of  approximately
$758,000,  issued in July 2002 for the  mortgage on Fairlawn II was  redeemed by
HUD in January 2003. The Partnership  recognized a gain of approximately $95,000
in the  third  quarter  of 2002,  when the  Partnership  received  approximately
$100,000 of accrued interest in cash on this debenture.  A distribution  related
to this accrued debenture interest of approximately  $0.01 per Unit was declared
in August 2002 and paid in November 2002. A distribution of approximately  $0.06
per Unit related to the debenture  proceeds was declared in February 2003 and is
expected  to be paid  to  Unitholders  in May  2003.  The  accrued  interest  of
approximately  $28,000  related to this  debenture  was also received in January
2003 and is being distributed through regular cash flow distributions.  The 7.5%
debenture  proceeds and accrued  interest are included in receivables  and other
assets in the Partnership's balance sheet as of December 31, 2002.

b.   Mortgages in the HUD assignment process
     ---------------------------------------

     The  mortgage  on  Executive  House was put to HUD under  the  Section  221
Program by its  servicer  in April  2002.  The face value of this  mortgage  was
approximately  $805,000  as of the HUD  put  date.  The  Partnership  no  longer
receives monthly principal and interest from mortgages that are put to HUD under
the Section 221 Program. HUD receives the monthly principal and interest and the
Partnership earns semi-annual interest on debentures issued by HUD, as discussed
above. The Partnership has not received approval for this assignment as of March
1, 2003,  and will  continue to accrue  interest on the  mortgage  until the HUD
debenture is  transferred  to the  Partnership  and it begins  receiving the HUD
debenture interest. The fair value of this mortgage is included in Investment in
FHA-Insured Certificates and GNMA Mortgage-Backed  Securities,  Acquired Insured
Mortgages in the Partnership's balance sheet as of December 31, 2002.

<PAGE>11

c.   Remaining mortgages eligible for assignment
     -------------------------------------------

     The Partnership's  mortgage  portfolio  includes minority interests in five
FHA-Insured Certificates eligible under the Section 221 Program with anniversary
dates  in  April  2002.  Since  it  owns  less  than  34% of  these  FHA-Insured
Certificates and the other certificate holders have not yet elected to put these
mortgages to HUD the  Partnership  does not expect these  mortgages to be put to
HUD. The  Partnership  does not own any other  FHA-Insured  Certificates or GNMA
Mortgage-Backed Securities eligible to be put to HUD.

FHA-Insured Loans
-----------------

     Listed  below is the  Partnership's  aggregate  investment  in  FHA-Insured
Loans:
<TABLE>
<CAPTION>
                                                                            December 31,
                                                                    2002                    2001
                                                                    ----                    ----
<S>                                                             <C>                     <C>
Acquired Loans:
  Number of Loans (2)(3)                                                  6                        7
Amortized Cost                                                  $ 7,176,274             $  8,914,573
Face Value                                                        8,519,762               10,632,937
Fair Value                                                        8,513,052               10,451,178

Originated Loans:
  Number of Loans (1)                                                     2                        3
Amortized Cost                                                  $ 9,311,907             $ 12,430,002
Face Value                                                        9,059,734               12,132,653
Fair Value                                                        9,470,182               12,122,221
</TABLE>

(1)  In  January  2002,  the  mortgage  on  Longleaf  Lodge  was  prepaid.   The
     Partnership  received  net  proceeds  of  approximately  $3.7  million  and
     recognized a gain of approximately  $672,000 during the year ended December
     31, 2002. A  distribution  of  approximately  $0.29 per Unit related to the
     prepayment  of this  mortgage  was  declared  in  January  2002 and paid to
     Unitholders in May 2002.
(2)  In December  2002, the mortgage on Bay Pointe  Apartments was prepaid.  The
     Partnership  received  net  proceeds  of  approximately  $1.9  million  and
     recognized a gain of approximately  $290,000 during the year ended December
     31, 2002. A  distribution  of  approximately  $0.15 per Unit related to the
     prepayment  of this  mortgage  was  declared in  December  2002 and paid to
     Unitholders in February 2003.
(3)  In January 2003, the Partnership  received assignment proceeds from HUD for
     the mortgage on Westbrook Apartments. The servicer of this mortgage filed a
     Notice of Election to Assign in November  2002 as a result of principal and
     interest payments being over 60 days delinquent.  The Partnership  received
     net  proceeds of  approximately  $1.5  million,  which  included 90% of the
     unpaid principal  balance of this mortgage,  plus interest at the debenture
     rate of 9.875% from  September  2002 through  January  2003.  The remaining
     amount  due  from HUD is  approximately  $150,000  (representing  9% of the
     unpaid principal balance) and is expected to be received during the next 12
     months.  The  Partnership  expects  to  recognize  a gain of  approximately
     $228,000 during the first quarter of 2003. A distribution of  approximately
     $0.12 per Unit related to the  assignment  of this mortgage was declared in
     February 2003 and is expected to be paid to Unitholders in May 2003.

     As of March 1,  2003,  all of the  fully  insured  FHA-Insured  Loans  were
current with respect to the payment of principal  and  interest,  except for the
mortgage  on Town Park  Apartments,  which is  delinquent  with  respect  to the
February 2003 payment of principal and interest, as discussed further below.

     In addition to base interest  payments under Originated  Insured  Mortgages
FHA-Insured   Loans,   the  Partnership  is  entitled  to  additional   interest
Participations.  During the years ended  December 31, 2002,  2001 and 2000,  the
Partnership  received  $8,396,  $53,424,  and  $21,566,  respectively,  from the
Participations.  These amounts are included in mortgage investment income on the
accompanying statements of income and comprehensive income.

     The Section 221 Program
     -----------------------

     a. Issuance of HUD Debenture
        -------------------------

     In February 2003, HUD transferred assignment proceeds to the Partnership in
the  form of a  6.375%  debenture  in  exchange  for the  mortgage  on  Baypoint

<PAGE>12

Shoreline  Apartments.  The servicer of this mortgage filed an  application  for
insurance  benefits  under the Section 221 Program in June 2002. The mortgage on
Baypoint Shoreline  Apartments was beneficially owned 50% by the Partnership and
50% by AIM 84. The debenture,  with a face value of approximately  $1.8 million,
pays interest semi-annually on January 1 and July 1 with a maturity date of June
27, 2012. The debenture may be called prior to its maturity date. A distribution
will be  declared  at that  time.  Since  the  mortgage  on  Baypoint  Shoreline
Apartments  was owned 50% by the  Partnership  and 50% by AIM 84,  approximately
$906,000  of the  debenture  face  is  due to AIM  84.  In  February  2003,  the
Partnership received  approximately  $59,000 in cash of accrued interest on this
Debenture. Approximately $29,000 of this accrued interest was transferred to AIM
84 and the  remaining  amount  will be  distributed  through  regular  cash flow
distributions.  The  Partnership  expects to  recognize a gain of  approximately
$131,000 during the first quarter of 2003.

     b. Mortgages in the HUD assignment process
        ---------------------------------------

     The mortgages on Brougham  Estates and College Green Apartments were put to
HUD under the Section 221 Program by the respective  servicers in February 2003.
The aggregate face value of these mortgages was approximately $3.7 million as of
the HUD put date.  The  Partnership  no longer  receives  monthly  principal and
interest from mortgages  that are put to HUD under the Section 221 Program.  HUD
receives  the  monthly   principal  and  interest  and  the  Partnership   earns
semi-annual  interest on  debentures  issued by HUD,  as  discussed  above.  The
Partnership has not received approval for these assignments as of March 1, 2003,
and will continue to accrue  interest on the mortgages  until the HUD debentures
are  transferred to the  Partnership  and it begins  receiving the HUD debenture
interest.

     c. Remaining mortgages eligible for assignment
        -------------------------------------------

     The  Partnership's   mortgage  portfolio  includes  two  FHA-Insured  Loans
eligible under the Section 221 Program with  anniversary  dates in September and
October  2002,  including  Kaynorth  Apartments  and Town Park  Apartments.  The
Partnership expects these mortgages to be put to HUD, if not otherwise disposed,
by the servicer during the second quarter of 2003.

Investment in debenture
-----------------------

     The  mortgage  on Fox Run  Apartments  was  beneficially  owned  50% by the
Partnership  and  50% by AIM  84.  A  7.125%  debenture,  with a face  value  of
approximately  $2.4 million,  was issued by HUD to the  Partnership  in December
2000 with  interest  payable  semi-annually  on January 1 and July 1. In January
2002, the debenture was  liquidated at par value.  Since the mortgage on Fox Run
Apartments  was owned 50% by the  Partnership  and 50% by AIM 84,  approximately
$1.2 million of the debenture  proceeds were paid to AIM 84, including  interest
of approximately $42,000. A distribution of approximately $0.09 per Unit related
to the  redemption  of this  debenture  was declared in January 2002 and paid to
Unitholders in May 2002.

Results of Operations
---------------------
2002 compared to 2001
---------------------

     Net earnings  decreased by approximately  $1.8 million for 2002 as compared
to  2001,  primarily  due an  approximate  $1.8  million  decrease  in  mortgage
investment  income  resulting  from the  reduction  in the  mortgage  base.  The
mortgage  base  decreased  as a  result  of 11  mortgage  dispositions  with  an
aggregate  principal  balance of  approximately  $18  million,  representing  an
approximate  20%  decrease  in the  aggregate  principal  balance  of the  total
mortgage portfolio since December 2001.

     Interest and other income decreased by  approximately  $268,000 for 2002 as
compared to 2001,  primarily  due to the timing and amount of the  investment of
mortgage proceeds prior to the distribution to Unitholders.

<PAGE>13

     Asset  management  fees  decreased  by  approximately  $215,000 for 2002 as
compared to 2001,  primarily due to the reduction in the mortgage base discussed
above.

     General and administrative  expenses increased by approximately $29,000 for
2002 as compared to 2001, primarily due to an increase in professional fees.

     Gains on mortgage dispositions  increased by approximately $74,000 for 2002
as compared to 2001 as a result of gains recognized on six mortgage  prepayments
and four mortgage  assignments  in 2002, as discussed  above,  compared to gains
recognized on seven mortgage  prepayments and five mortgage assignments in 2001.
A loss was recognized on one mortgage  prepayment in 2002 as discussed above. No
losses were recognized in 2001.

2001 compared to 2000
---------------------

     Net earnings increased slightly for 2001 as compared to 2000, primarily due
to an increase in net gains from  mortgage  dispositions,  as  discussed  below,
partially  offset by a decrease in mortgage  investment  income of approximately
$1.6 million,  primarily due to the reduction in the mortgage base. The mortgage
base  decreased  as a  result  of 17  mortgage  dispositions  with an  aggregate
principal balance of approximately $34 million,  representing an approximate 28%
decrease in the  aggregate  principal  balance of the total  mortgage  portfolio
since March 2000.

     Interest and other income increased by  approximately  $161,000 for 2001 as
compared  to 2000,  primarily  due to the timing of the  investment  of mortgage
proceeds prior to the distribution to Unitholders.

     Asset  management  fees  decreased  by  approximately  $182,000 for 2001 as
compared to 2000, primarily due to the reduction in the mortgage base.

     Gains on mortgage dispositions  increased by approximately $1.3 million for
2001 as  compared  to 2000 as a result  of gains  recognized  on seven  mortgage
prepayments and five mortgage assignments in 2001, as discussed above,  compared
to gains recognized on four mortgage  prepayments and one assignment in 2000. No
losses were  recognized  in 2001  compared to loss  recognized  on one  mortgage
prepayment in 2000.

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

     The  Partnership's  operating  cash  receipts,  derived  from  payments  of
principal and interest on Insured  Mortgages plus cash receipts from interest on
short-term  investments,  are the Partnership's principal sources of cash flows,
and were sufficient for the years ended December 31, 2002, 2001 and 2000 to meet
operating expense requirements.  The Partnership anticipates its cash flows will
be sufficient to meet operating expense requirements for 2003.

     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
Partnership's  Insured Mortgages pay a fixed monthly mortgage payment,  the cash
distributions  paid to the Unitholders  will vary during each quarter due to (1)
the  fluctuating  yields in the  short-term  money  market in which 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,
the  timing of  receipt of  debentures,  the  interest  rate on  debentures  and
debenture redemptions,  and (4) changes in the Partnership's operating expenses.
As  the  Partnership   continues  to  liquidate  its  mortgage  investments  and
Unitholders  receive  distributions  of return of  capital  and  taxable  gains,
Unitholders  should expect a reduction in earnings and  distributions due to the
decreasing mortgage base.

     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

<PAGE>14

upon the size of the Insured  Mortgages which are prepaid,  sold or assigned for
insurance proceeds.

Cash flow - 2002 compared to 2001
---------------------------------

     Net cash  provided  by  operating  activities  decreased  by  approximately
$718,000 in 2002 compared to 2001,  primarily due to lower  mortgage  investment
income  resulting from a reduction in the mortgage base,  partially  offset by a
decrease in receivables and other assets.  The decrease in receivables and other
assets is  primarily  due to the receipt of principal  and  interest  previously
accrued on the  mortgages  awaiting  assignment  from HUD under the  Section 221
Program during 2002, as previously discussed.

     Net cash provided by investing  activities  increased by approximately $6.0
million in 2002 compared to 2001.  This increase is primarily due to an increase
in proceeds  received from mortgage  assignments as discussed  above and the net
proceeds from the debentures, as discussed above, partially offset by a decrease
in proceeds received from the prepayment of mortgages as discussed above.

     Net cash used in  financing  activities  decreased  by  approximately  $2.1
million  in  2002  compared  to  2001  due  to a  reduction  in  the  amount  of
distributions paid to partners in 2002 compared to 2001.

Cash flow - 2001 compared to 2000
---------------------------------

     Net cash provided by operating  activities  decreased by approximately $1.3
million in 2001  compared to 2000,  primarily  due to the  reduction in mortgage
investment income, as discussed above.

     Net cash provided by investing  activities  increased by approximately $9.7
million in 2001 compared to 2000.  This increase is primarily due to an increase
in proceeds received from mortgage prepayments.

     Net cash used in  financing  activities  decreased  by  approximately  $8.4
million  in  2001  compared  to  2000  due  to a  reduction  in  the  amount  of
distributions paid to partners in 2001 compared to 2000.

Critical Accounting Policies
----------------------------

     The Partnership's significant accounting polices are described in Note 2 to
the Financial Statements.  The Partnership believes its most critical accounting
policy (a critical  accounting  policy being one that is both very  important to
the portrayal of the Partnership's financial condition and results of operations
and requires  management's  most difficult,  subjective,  or complex  judgments)
is the determination of fair value of Insured Mortgages.

-    Fair Value of Insured Mortgages - The Partnership  estimates the fair value
     of its Insured Mortgages internally. The Partnership uses a discounted cash
     flow methodology to estimate the fair value.  This requires the Partnership
     to  make  certain   estimates   regarding   discount   rates  and  expected
     prepayments.  The cash flows were discounted using a discount rate that, in
     the Partnership's  view, was commensurate  with the market's  perception of
     risk and value.  The Partnership used a variety of sources to determine its
     discount rate including:  (i)  institutionally-available  research reports,
     and (ii)  communications  with dealers and active insured mortgage security
     investors  regarding the valuation of comparable  securities.  Increases in
     the  discount  rate used by the  Partnership  would  generally  result in a
     corresponding  decrease  in the  fair  value of the  Partnership's  insured
     mortgages.  Decreases in the discount  rate used by the  Partnership  would
     generally  result  in a  corresponding  increase  in the fair  value of the
     Partnership's  insured  mortgages.   The  Partnership  also  makes  certain
     assumptions regarding the prepayment speeds of its Insured Mortgages.  In a
     low interest rate environment,  mortgages are more likely to prepay even if
     the mortgage contains prepayment penalties.  In general, if the Partnership
     increases  its  assumed  prepayment  speed,  the fair value of the  Insured
     Mortgages  will  decrease.   If  the  Partnership   decreases  its  assumed
     prepayment speed, the fair value of the Insured Mortgages will increase.

<PAGE>15


Recent Accounting Pronouncements
--------------------------------

     In January  2003,  the FASB  issued  FASB  Interpretation  ("FIN")  No. 46,
"Consolidation of Variable Interest  Entities",  an interpretation of Accounting
Research  Bulletin  No.  51,  "Consolidated  Financial  Statements."  FIN No. 46
explains  how to  identify  variable  interest  entities  and how an  enterprise
assesses  its  interests  in a  variable  interest  entity to decide  whether to
consolidate that entity.  This Interpretation  requires existing  unconsolidated
variable interest entities to be consolidated by their primary  beneficiaries if
the entities do not effectively  disperse risks among parties involved.  FIN No.
46 is effective immediately for variable interest entities created after January
31, 2003, and to variable  interest  entities in which an enterprise  obtains an
interest after that date. The Interpretation applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable  interest  entities in
which an enterprise  holds a variable  interest that it acquired before February
1, 2003.  The  Partnership  does not expect the adoption of FIN No. 46 to have a
material effect on its financial position or results of operations.

<PAGE>16


ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     The Partnership's  principal market risk is exposure to changes in interest
rates in the U.S. Treasury market. The Partnership will experience  fluctuations
in the market value of its assets  related to (i) changes in the interest  rates
of U.S.  Treasury  securities,  (ii) changes in the spread  between the interest
rates on U.S.  Treasury  securities and the interest rates on the  Partnership's
Insured Mortgages, and (iii) changes in the weighted average life of the Insured
Mortgages,  determined by reviewing the  attributes of the Insured  Mortgages in
relation to the current market interest rates.  The weighted average life of the
Insured  Mortgages  decreased as of December  31, 2002  compared to December 31,
2001, due to the lower market interest rates,  which may imply faster prepayment
rates, and other attributes of the Partnership's Insured Mortgages.

     The  Partnership   has  changed  its  method  of  presenting   market  risk
disclosures  from those  disclosures  presented  in the December 31, 2001 Annual
Report on Form 10-K. The Partnership  believes that the market risk  disclosures
presented  below  provide more  meaningful  information  to its  Unitholders  in
assessing the affect of changes in interest rates on the values of its assets.

     As of December 31, 2002,  the  weighted  average life of the U.S.  Treasury
securities that were used to value the insured mortgage  securities were shorter
than those used at December  31,  2001 due to lower  market  interest  rates and
other loan attributes of the underlying insured mortgage securities,  which made
the likelihood of the mortgage assets prepaying  greater than the previous year.
If the  Partnership  assumed that the discount  rate used to determine  the fair
values of its insured mortgage securities  increased by 100 basis points and 200
basis  points,  the  increase  in the  discount  rate would have  resulted  in a
corresponding  decrease in the fair values of its insured mortgage securities by
approximately  $1.6 million (or 2.4%) and approximately  $3.1 million (or 4.5%),
respectively,  as of December  31,  2002.  A 100 basis point and 200 basis point
increase in the discount rate would have resulted in a corresponding decrease in
the  fair  values  of  the   Partnership's   insured   mortgage   securities  by
approximately  $3.3 million (or 4.0%) and approximately  $6.4 million (or 7.6%),
respectively, as of December 31, 2001.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this Item is set forth in this Annual Report on
Form 10-K commencing on page 28.


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

     On May 8,  2002,  the Board of  Directors  of the  General  Partner  of the
Partnership   dismissed   Arthur   Andersen  LLP  ("Arthur   Andersen")  as  the
Partnership's   independent   auditors.   Arthur  Andersen  had  served  as  the
Partnership's independent accountants since 1991.

     Arthur  Andersen's  reports on the Partnership's  financial  statements for
each of the  past two  fiscal  years  did not  contain  an  adverse  opinion  or
disclaimer  of  opinion,  nor were such  reports  qualified  or  modified  as to
uncertainty, audit scope or accounting principles.

     During each of the  Partnership's  two most recent fiscal years and through
the date of Arthur Andersen's  dismissal,  there were: (i) no disagreements with
Arthur Andersen on any matter of accounting  principles or practices,  financial
statements disclosure,  or auditing scope or procedure which, if not resolved to
Arthur Andersen's satisfaction,  would have caused them to make reference to the
subject matter in connection  with their report on the  Partnership's  financial
statements for such years;  and (ii) there were no reportable  events as defined
in Item 304(a)(1)(v) of Regulation S-K.

<PAGE>17

     The  Partnership  has provided Arthur Andersen with a copy of the foregoing
disclosure.  The  Partnership  requested  Arthur  Andersen  to furnish it with a
letter addressed to the SEC stating whether it agrees with the above statements.
A copy of that letter  dated May 9, 2002 was filed as Exhibit 16 to the Form 8-K
filed with the SEC by the Partnership on May 10, 2002.

     On June 5, 2002, the General Partner of the  Partnership  appointed Ernst &
Young LLP to audit the  Partnership's  financial  statements for the year ending
December  31,  2002.  During the years ended  December 31, 2001 and 2000 and the
subsequent  interim period  through June 5, 2002,  neither the  Partnership  nor
anyone on its behalf consulted Ernst & Young LLP with respect to the application
of  accounting  principles  to  a  specified  transaction  either  completed  or
proposed,  or  the  type  of  audit  opinion  that  might  be  rendered  on  the
Partnership's  financial  statements or any other  matters or reportable  events
listed in Items 304(a)(2)(1) and (11) of Regulation S-K.

<PAGE>18
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  Partnership  has no executive  officers or directors.  The Partnership
does not directly  employ any persons  responsible for managing or operating the
Partnership or for providing  services  relating to day to day business affairs.
The affairs of the Partnership are managed by its General Partner,  CRIIMI, Inc.
a wholly-owned  subsidiary of CRIIMI MAE, a corporation  whose shares are listed
on the New  York  Stock  Exchange.  CRIIMI,  Inc.  holds a  general  partnership
interest of 3.9%.

     The business of the Partnership is managed by its General Partner while its
portfolio  of  mortgages  is managed by the  Advisor  and CMSLP  pursuant to the
Advisory  Agreements  and  Sub-Advisory  Agreement,  respectively,  as discussed
above. A wholly-owned  subsidiary of CRIIMI MAE,  CRIIMI MAE  Management,  Inc.,
provides personnel and  administrative  services to the Partnership on behalf of
the General Partner.

     The General  Partner is also the general  partner of AIM 84, AIM 86 and AIM
88, limited  partnerships  with  investment  objectives  similar to those of the
Partnership.

     The Board of Directors of the General  Partner has  established a committee
(the "Audit  Committee")  consisting  of  independent  directors  (as defined in
Section 121 of the AMEX listing  standards).  The Audit Committee of the General
Partner has appointed Ernst & Young LLP as the Partnership's  independent public
accountants for the fiscal year ending  December 31, 2003,  such  appointment to
continue at the discretion of the Audit Committee.

     All  directors of the General  Partner are elected  annually by CRIIMI MAE.
All executive officers serve at the discretion of the General Partner. There are
no family relationships among any directors or executive officers of the General
Partner.

     The  following  table  sets  forth  information  concerning  the  executive
officers and the directors of the General Partner as of March 5, 2003:

<TABLE>
<CAPTION>

Name                                        Age                          Position
----                                        ---                          --------
<S>                                         <C>                  <C>
Barry S. Blattman                           40                   Chairman of the Board of Directors,
                                                                   President and Chief Executive Officer

David B. Iannarone                          42                   Executive Vice President,
                                                                   Chief Operating Officer and a Director

Cynthia O. Azzara                           43                   Senior Vice President, Chief Financial Officer
                                                                      and Treasurer

Craig M. Lieberman                          41                   Senior Vice President and
                                                                   Chief Portfolio Risk Officer

Brian L. Hanson                             41                   Senior Vice President

John R. Cooper                              55                   Director

Robert J. Merrick                           57                   Director

Robert E. Woods                             55                   Director
</TABLE>

<PAGE>19


     Barry S.  Blattman  has been  Chairman  of the  Board of  Directors,  Chief
Executive  Officer and President of the General  Partner since January 23, 2003.
Mr. Blattman is the Managing Partner of Brascan Real Estate Financial  Partners.
From 1996 until the end of 2001,  Mr.  Blattman was a Managing  Director of Real
Estate Investment Banking at Merrill Lynch.

     David B.  Iannarone has served as Chief  Operating  Officer and Director of
the General  Partner  since  January 2003 and  Executive  Vice  President of the
General  Partner  since  December  2000,  as Senior Vice  President  and General
Counsel of the General  Partner  from March 1998 to December  2000;  and as Vice
President  and General  Counsel of the General  Partner  from July 1996 to March
1998.

     Cynthia  O.  Azzara has served as Chief  Financial  Officer of the  General
Partner since 1994, as Senior Vice  President of the General  Partner since 1995
and Treasurer of the General Partner since 1997.

     Craig M. Lieberman has served as Senior Vice President and Chief  Portfolio
Risk Officer of the General  Partner since February  2003.  From 2001 to January
2003, Mr. Lieberman was a managing partner for Quantico  Partners.  From 1998 to
2001,  Mr.  Lieberman  served  as the  Director  of  Commercial  Mortgage-Backed
Securitization  for First  Union  Securities.  From  1996 to 1998 Mr.  Lieberman
practiced  as both a  partner  and  counsel  in the law  firm  of  Kilpatrick  &
Stockton, LLP.

     Brian L. Hanson has served as Senior Vice President of the General  Partner
since March 1998; and as Group Vice President of the General  Partner from March
1996 to March 1998.

     John R. Cooper has served as Director  of the General  Partner  since April
2001. Mr. Cooper was Senior Vice  President,  Finance,  of PG&E National  Energy
Group,  Inc. until  February 2003. He had been with PG&E National  Energy Group,
Inc. and its predecessor, U.S. Generating Company, since its inception in 1989.

     Robert J. Merrick has served as Director of the General Partner since 1997.
Mr.  Merrick  has served as Chief  Credit  Officer  and  Director of MCG Capital
Corporation  since February  1998;  Executive Vice President from 1985 and Chief
Credit Officer of Signet Banking  Corporation through 1997. While at Signet, Mr.
Merrick also served as Chairman of the Credit Policy Committee and member of the
Asset and Liability Committee and the Management Committee.

     Robert E. Woods has served as Director of the General  Partner  since 1998.
Mr. Woods has served as Managing  Director and Head of Loan Syndications for the
Americas at Societe  Generale,  New York since 1997,  and as Managing  Director,
Head of Real Estate Capital Markets and  Mortgage-Backed  Securities division at
Citicorp from 1991 to 1997.

Section  16(a)  Beneficial  Ownership  Reporting  Compliance - Section 16 of the
Securities Exchange Act of 1934, as amended,  (the "Exchange Act") requires each
director and executive  officer of the General  Partner and each person who owns
more than 10% of the  Partnership's  Units to  report to the SEC by a  specified
date, his, her or its beneficial  ownership of, and certain  transactions in the
Partnership's  Units.  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 5's were required for those persons,
the Partnership  believes that all directors,  executive officers and beneficial
owners of more than 10% of the Partnership's  Units have filed on a timely basis
Forms 3, 4 and 5 as required in the fiscal year ended December 31, 2002.

<PAGE>20

ITEM 11.  EXECUTIVE COMPENSATION

     The  Partnership  does not have any  directors or executive  officers.  The
Partnership  does not directly  employ any persons  responsible  for managing or
operating  the  Partnership  or for  providing  services  relating to day to day
business   affairs.   The  General  Partner   provides  such  services  for  the
Partnership. None of the directors or executive officers of the General Partner,
however,  received  compensation  from the Partnership,  and the General Partner
does not receive  reimbursement  from the  Partnership  for any portion of their
salaries or other  compensation.  The  Partnership's  portfolio  of mortgages is
managed  by the  Advisor  and CMSLP  pursuant  to the  Advisory  Agreements  and
Sub-Advisory  Agreement,   respectively,  as  discussed  above.  A  wholly-owned
subsidiary of CRIIMI MAE, CRIIMI MAE  Management,  Inc.  provides  personnel and
administrative services to the Partnership on behalf of the General Partner. The
Partnership  reimburses  CRIIMI MAE  Management,  Inc. for these  services on an
actual cost basis.

     The fee paid by the Partnership to the Advisor for services performed under
the  Advisory  Agreements  (the  "Advisory  Fee"),  is  equal  to  0.95%  of the
Partnership's  Total Invested Assets (as defined in the Partnership  Agreement).
The Advisor pays CMSLP as sub-advisor,  a fee of 0.28% (the "Sub-Advisory  Fee")
of Total Invested Assets for services performed under the Sub-Advisory Agreement
from its Advisory Fee. The Partnership is not liable for paying the Sub-Advisory
Fee to CMSLP.  Additional information concerning these fees is contained in Part
II, Item 7,  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations and in Note 8 of the Notes to Financial  Statements (filed
in  response  to Item 8  hereof),  all of which are  incorporated  by  reference
herein.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT
         AND RELATED UNITHOLDER MATTERS

The Partnership does not provide for equity compensation plans.

(a)  As of March 5,  2003,  no  person  was known by the  Partnership  to be the
     beneficial owner of more than five percent (5%) of the outstanding Units of
     the Partnership.

(b)  The following table sets forth certain information regarding the beneficial
     ownership  of the  Partnership's  Units as of March 5, 2003 by each  person
     known by the Partnership to be the beneficial  owner of more than 5% of its
     Units,  each director of the General Partner,  each named executive officer
     of the  General  Partner,  and by  affiliates  of the  Partnership.  Unless
     otherwise  indicated,  each Unitholder has sole voting and investment power
     with respect to the Units beneficially owned.
<TABLE>
<CAPTION>

                                        Amount and Nature
                                            of Units                          Percentage of Units
Name                                   Beneficially Owned                         Outstanding
----                                   ------------------                         -----------
<S>                                         <C>                                       <C>
CRIIMI MAE                                  4,000                                      *

*    Less than 1%
</TABLE>

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

<PAGE>21


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(a)  Transactions with management and others.

     Note 8 of the Notes to Financial  Statements of the Partnership  contains a
     discussion of the amounts,  fees and other  compensation paid or accrued by
     the  Partnership  to the directors  and  executive  officers of the General
     Partner  and their  affiliates,  and is hereby  incorporated  by  reference
     herein.

(b)  Certain business relationships.

     Other than as set forth in Item 11 of this Annual Report on Form 10-K which
     is hereby incorporated by reference herein, the Partnership has no business
     relationship  with entities of which the executive  officers,  directors or
     equity  owners of the  General  Partner of the  Partnership  are  executive
     officers, directors or equity owners.


ITEM 14.  CONTROLS AND PROCEDURES

     Within 90 days prior to the date of filing this Annual Report on Form 10-K,
the General  Partner  carried out an evaluation,  under the supervision and with
the  participation of the General  Partner's  management,  including the General
Partner's  Chairman of the Board and Chief Executive Officer (CEO) and the Chief
Financial Officer (CFO), of the effectiveness of the design and operation of its
disclosure controls and procedures  pursuant to Exchange Act Rule 13a-14.  Based
on that  evaluation,  the  General  Partner's  CEO and CFO  concluded  that  its
disclosure  controls and procedures are effective and timely in alerting them to
material  information relating to the Partnership required to be included in the
Partnership's  periodic SEC filings.  There were no  significant  changes in the
General Partner's internal controls or in other factors that could significantly
affect  these  internal  controls  subsequent  to the  date of its  most  recent
evaluation,   including  any  corrective  actions  with  regard  to  significant
deficiencies and material weaknesses.

<PAGE>22
                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
          FORM 8-K
<TABLE>
<CAPTION>
         (a)(1)   Financial Statements:
                                                                                                        Page
         Description                                                                                   Number
         -----------                                                                                   ------

         <S>                                                                                             <C>
         Balance Sheets as of December 31, 2002 and 2001.................................................31

         Statements of Income and Comprehensive Income for the years ended December 31, 2002,
            2001, and 2000 ..............................................................................32

         Statements of Changes in Partners' Equity for the years ended December 31, 2002, 2001
            and 2000.....................................................................................33

         Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000...................34

         Notes to Financial Statements...................................................................35


         (a)(2) Financial Statement Schedules:

               IV - Mortgage Loans on Real Estate........................................................48

               All  other  schedules  have  been  omitted  because  they are not
               applicable,  not required,  or the information is included in the
               Financial Statements or Notes thereto.
</TABLE>

         (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.
<PAGE>23


    10.1  Amended and Restated  Origination and Acquisition  Services Agreement,
          dated as of January 8, 1985,  between the  Partnership  and Integrated
          Funding,  Inc.,  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 Integrated Funding, Inc.,
          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 Integrated Funding, Inc.,
          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,  Integrated  Funding,
          Inc. and Integrated Resources,  Inc. 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,
          Integrated Funding,  Inc. 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.


    16.0  Letter  from  Arthur  Andersen  LLP to  the  Securities  and  Exchange
          Commission dated May 9, 2002, regarding the General Partner's decision
          to change its  certifying  accountant,  incorporated  by  reference to
          Exhibit 16 to the Partnership's Form 8-K filed on May 10, 2002.
<PAGE>24

    99.0  Letter to  Securities  and Exchange  Commission  from the  Partnership
          dated March 20,  2002,  regarding  the  representation  received  from
          Arthur  Andersen LLP in performing  the audit of the December 31, 2001
          financial statements, incorporated by reference to Exhibit 99.0 to the
          Partnership's  Annual Report on Form 10-K for the year ended  December
          31, 2001.

    99.1  Certification  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of
          2002 from Barry S. Blattman,  Chief  Executive  Officer of the General
          Partner (Filed herewith).

    99.2  Certification  pursuant  to Section 906 of the  Sarbanes-Oxley  Act of
          2002 from Cynthia O. Azzara,  Chief  Financial  Officer of the General
          Partner (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>25

                                   SIGNATURES

     KNOW ALL  PERSONS  BY THESE  PRESENTS,  that each  person  whose  signature
appears below constitutes and appoints Barry S. Blattman,  his attorney-in-fact,
each with the power of substitution  for him in any and all capacities,  to sign
any  amendments  to this  Annual  Report  on Form 10-K and to file the same with
exhibits  thereto  and  other  documents  in  connection  therewith,   with  the
Securities  and Exchange  Commission,  hereby  ratifying and confirming all that
each said attorney-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, 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 19, 2003                            /s/Barry S. Blattman
--------------                            --------------------------------------
DATE                                      Barry S. Blattman
                                          Chairman of the Board,
                                          Chief Executive Officer and President
                                          (Principal Executive Officer)


March 25, 2003                            /s/Cynthia O. Azzara
--------------                            --------------------------------------
DATE                                      Cynthia O. Azzara
                                          Senior Vice President,
                                          Chief Financial Officer and Treasurer
                                          (Principal Accounting Officer)


March 19, 2003                            /s/David B. Iannarone
--------------                            --------------------------------------
DATE                                      David B. Iannarone
                                          Executive Vice President,
                                          Chief Operating Officer and a Director


March 19, 2003                            /s/John R. Cooper
--------------                            --------------------------------------
DATE                                      John R. Cooper
                                          Director


March 19, 2003                            /s/Robert J. Merrick
--------------                            -------------------------------------
DATE                                      Robert J. Merrick
                                          Director


March 19, 2003                            /s/Robert E. Woods
--------------                            -------------------------------------
DATE                                      Robert E. Woods
                                          Director
<PAGE>26
                                  CERTIFICATION

I, Barry Blattman, Chairman of the Board, Chief Executive Officer and President,
certify that:

1.   I have  reviewed  this  Annual  Report  on Form  10-K of  American  Insured
     Mortgage Investors-Series 85, L.P.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

                                           AMERICAN INSURED MORTGAGE
                                           INVESTORS - SERIES 85, L.P.
                                           (Registrant)
                                           By: CRIIMI, Inc.
                                               General Partner


Date:  March 19, 2003                      /s/Barry S. Blattman
       --------------                      -------------------------------------
                                           Barry S. Blattman
                                           Chairman of the Board,
                                           Chief Executive Officer and President
<PAGE>27
                                  CERTIFICATION

I,  Cynthia O.  Azzara,  Senior  Vice  President,  Chief  Financial  Officer and
Treasurer, certify that:

1.   I have  reviewed  this  Annual  Report  on Form  10-K of  American  Insured
     Mortgage Investors-Series 85, L.P.;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   Presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent functions):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

                                  AMERICAN INSURED MORTGAGE
                                  INVESTORS - SERIES 85, L.P.
                                  (Registrant)
                                  By: CRIIMI, Inc.
                                      General Partner

Date: March 25, 2003              /s/Cynthia O. Azzara
      --------------              ----------------------------------------------
                                  Cynthia O. Azzara
                                  Senior Vice President, Chief Financial Officer
                                  and Treasurer

<PAGE>28












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



                              Financial Statements

                        as of December 31, 2002 and 2001

                             and for the Years Ended

                        December 31, 2002, 2001 and 2000


<PAGE>29



                         REPORT OF INDEPENDENT AUDITORS

Partners
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, 2002,
and the  related  statements  of income  and  comprehensive  income,  changes in
partners'  equity,  and cash  flows for the year  then  ended.  Our  audit  also
included the financial  statement schedule listed in the Index at Item 15(a)(2).
These  financial   statements  and  schedule  are  the   responsibility  of  the
Partnership's  management.  Our responsibility is to express an opinion on these
financial  statements and schedule based on our audit. The financial  statements
of the Partnership as of December 31, 2001, and for the years ended December 31,
2001 and 2000,  were audited by other  auditors who have ceased  operations  and
whose report  dated March 4, 2002,  expressed  an  unqualified  opinion on those
statements.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States.  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 audit provides a reasonable  basis
for our opinion.

     In our opinion,  the 2002  financial  statements  referred to above present
fairly, in all material  respects,  the financial position of the Partnership at
December 31, 2002,  and the results of its operations and its cash flows for the
year then ended in conformity with accounting  principles  generally accepted in
the United  States.  Also,  in our  opinion,  the  related  financial  statement
schedule, when considered in relation to the basic financial statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.


/s/Ernst & Young LLP
McLean, Virginia
March 14, 2003




<PAGE>30


                    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, 2001
and 2000, and the related statements of income and comprehensive income, changes
in partners'  equity and cash flows for the years ended December 31, 2001,  2000
and 1999. 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  auditing  standards  generally
accepted in the United States.  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, 2001 and 2000, and the results of its operations and its cash flows
for the  years  ended  December  31,  2001,  2000  and 1999 in  conformity  with
accounting principles generally accepted in the United States.

     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,  2001 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.



/s/ Arthur Andersen LLP
Vienna, Virginia
March 4, 2002



--------------------------------------------------------------------------------
This is a copy of the audit report  previously  issued by Arthur Andersen LLP in
connection with the  Partnership's  filing of its Annual Report on Form 10-K for
the year ended  December  31, 2001.  This audit report has not been  reissued by
Arthur  Andersen LLP in  connection  with this Annual  Report on Form 10-K.  See
exhibit 16.0 for further discussion.


<PAGE>31
             AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                            December 31,     December 31,
                                                                2002            2001
                                                            ------------    -------------
                        ASSETS
<S>                                                         <C>             <C>
Investment in FHA-Insured Certificates and GNMA
  Mortgage-Backed Securities, at fair value:
    Acquired insured mortgages                              $ 33,849,089    $ 45,845,197
    Originated insured mortgages                              15,986,295      15,734,485
                                                            ------------    ------------

                                                              49,835,384      61,579,682

Investment in FHA-Insured Loans, at amortized cost,
  net of unamortized discount and premium:
    Acquired insured mortgages                                 7,176,274       8,914,573
    Originated insured mortgages                               9,311,907      12,430,002
                                                            ------------    ------------
                                                              16,488,181      21,344,575

Cash and cash equivalents                                     10,448,516       4,366,085

Receivables and other assets                                   1,465,453       8,394,392

Investment in FHA debenture                                            -       2,385,233
                                                            ------------    ------------

      Total assets                                          $ 78,237,534    $ 98,069,967
                                                            ============    ============


           LIABILITIES AND PARTNERS' EQUITY

Distributions payable                                       $ 10,181,484    $  1,885,460

Accounts payable and accrued expenses                            115,799         121,659

Due to affiliate                                                       -       1,235,104
                                                            ------------    ------------

      Total liabilities                                       10,297,283       3,242,223
                                                            ------------    ------------

Partners' equity:
  Limited partners' equity, 15,000,000 Units
      authorized, 12,079,514 Units issued and outstanding     73,382,252      99,801,805
  General partner's deficit                                   (6,853,298)     (5,781,121)
  Accumulated other comprehensive income                       1,411,297         807,060
                                                            ------------    ------------

      Total partners' equity                                  67,940,251      94,827,744
                                                            ------------    ------------

      Total liabilities and partners' equity                $ 78,237,534    $ 98,069,967
                                                            ============    ============
</TABLE>


                   The accompanying notes are an integral part
                         of these financial statements.
<PAGE>32


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

                  STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
                                                                     For the years ended December 31,
                                                                   2002            2001             2000
                                                               ------------     ------------    ------------
<S>                                                            <C>              <C>             <C>
Income:
  Mortgage investment income                                   $  6,168,254     $  7,983,600    $  9,597,605
  Interest and other income                                         274,342          541,979         380,932
                                                               ------------     ------------    ------------

                                                                  6,442,596        8,525,579       9,978,537
                                                               ------------     ------------    ------------


Expenses:
  Asset management fee to related parties                           744,733          959,934       1,142,121
  General and administrative                                        411,226          382,296         397,713
                                                               ------------     ------------    ------------

                                                                  1,155,959        1,342,230       1,539,834
                                                               ------------     ------------    ------------

Earnings before gains (losses)
  on mortgage dispositions                                        5,286,637        7,183,349       8,438,703

Mortgage dispositions
  Gains                                                           1,859,749        1,785,376         467,414
  Losses                                                             (8,498)               -         (39,819)
                                                               ------------     ------------    ------------

Net earnings                                                   $  7,137,888     $  8,968,725    $  8,866,298
                                                               ============     ============    ============
Other comprehensive income (loss) - adjustment to unrealized
  gains on investments in insured mortgages                         604,237       (1,114,340)      1,907,406
                                                               ------------     ------------    ------------

Comprehensive income                                           $  7,742,125     $  7,854,385    $ 10,773,704
                                                               ============     ============    ============


Net earnings allocated to:
  Limited partners - 96.1%                                     $  6,859,510     $  8,618,945    $  8,520,512
  General partner -   3.9%                                          278,378          349,780         345,786
                                                               ------------     ------------    ------------

                                                               $  7,137,888     $  8,968,725    $  8,866,298
                                                               ============     ============    ============

Net earnings per Limited
  Partnership Unit - Basic                                     $       0.57     $       0.71    $       0.71
                                                               ============     ============    ============
</TABLE>

                   The accompanying notes are an integral part
                         of these financial statements.
<PAGE>33

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

                    STATEMENTS OF CHANGES IN PARTNERS' EQUITY

                For the years ended December 31, 2002, 2001, 2000
<TABLE>
<CAPTION>
                                                                                         Accumulated
                                                                                            Other
                                                         General          Limited       Comprehensive
                                                         Partner          Partners          Income           Total
                                                      -------------    -------------    -------------    -------------
<S>                                                   <C>              <C>              <C>              <C>
Balance, January 1, 2000                              $  (4,751,114)   $ 125,182,237    $      13,994    $ 120,445,117

  Net earnings                                              345,786        8,520,512                -        8,866,298
    Adjustment to unrealized gains on
      investments in insured mortgages                            -                -        1,907,406        1,907,406
    Distributions paid or accrued of $1.61 per Unit,
      including return of capital of $0.90 per Unit        (789,254)     (19,448,018)               -      (20,237,272)
                                                      -------------    -------------    -------------    -------------

Balance, December 31, 2000                               (5,194,582)     114,254,731        1,921,400      110,981,549

  Net earnings                                              349,780        8,618,945                -        8,968,725
    Adjustment to unrealized gains on
      investments in insured mortgages                            -                -       (1,114,340)      (1,114,340)
    Distributions paid or accrued of $1.91 per Unit,
      including return of capital of $1.20 per Unit        (936,319)     (23,071,871)               -      (24,008,190)
                                                      -------------    -------------    -------------    -------------

Balance, December 31, 2001                               (5,781,121)      99,801,805          807,060       94,827,744

  Net earnings                                              278,378        6,859,510                -        7,137,888
    Adjustment to unrealized gains on
      investments in insured mortgages                            -                -          604,237          604,237
    Distributions paid or accrued of $2.755 per Unit,
      including return of capital of $2.185 per Unit     (1,350,555)     (33,279,063)               -      (34,629,618)
                                                      -------------    -------------    -------------    -------------

Balance, December 31, 2002                            $  (6,853,298)   $  73,382,252    $   1,411,297    $  67,940,251
                                                      =============    =============    =============    =============



Limited Partnership Units outstanding - Basic, as of
  December 31, 2002, 2001 and 2000                                        12,079,514
                                                                          ==========
</TABLE>

                   The accompanying notes are an integral part
                         of these financial statements.

<PAGE>34

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

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                     For the years ended December 31,
                                                                                   2002            2001            2000
                                                                               --------------------------------------------
<S>                                                                            <C>             <C>             <C>
Cash flows from operating activities:
   Net earnings                                                                $  7,137,888    $  8,968,725    $  8,866,298
   Adjustments to reconcile net earnings to net cash
      provided by operating activities:
      Losses on mortgage dispositions                                                 8,498               -          39,819
      Gains on mortgage dispositions                                             (1,859,749)     (1,785,376)       (467,414)
      Changes in assets and liabilities:
         Decrease (increase) in receivables and other assets                        913,856        (315,436)       (196,242)
         (Decrease) increase  in accounts payable and accrued expenses               (5,860)          8,795         (34,609)
         Decrease in due to affiliate                                               (42,487)         (7,003)              -
                                                                               ------------    ------------    ------------

           Net cash provided by operating activities                              6,152,146       6,869,705       8,207,852
                                                                               ------------    ------------    ------------

Cash flows from investing activities:
   Proceeds from mortgage prepayments                                            14,111,131      19,316,901       9,346,682
   Proceeds from mortgage assignments                                            10,190,539               -               -
   Receipt of mortgage principal from scheduled payments                            769,593         955,959       1,182,259
   Proceeds from redemption of debenture                                          2,385,233               -               -
   Debenture proceeds paid to affiliate                                          (1,192,617)              -               -
                                                                               ------------    ------------    ------------

           Net cash provided by investing activities                             26,263,879      20,272,860      10,528,941
                                                                               ------------    ------------    ------------

Cash flows from financing activities:
   Distributions paid to partners                                               (26,333,594)    (28,407,597)    (36,829,320)
                                                                               ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents                              6,082,431      (1,265,032)    (18,092,527)

Cash and cash equivalents, beginning of year                                      4,366,085       5,631,117      23,723,644
                                                                               ------------    ------------    ------------

Cash and cash equivalents, end of year                                         $ 10,448,516    $  4,366,085    $  5,631,117
                                                                               ============    ============    ============

Non-cash investing activity:

   7.125% debenture received from HUD in exchange for
      the mortgage on Fox Run Apartments                                       $          -    $          -    $  2,385,233
   Portion of 7.125% debenture due to affiliate, AIM 84                                   -               -      (1,242,107)
   Portion of 7.125% - 7.5% debentures due from a third party
      in exchange for the mortgages on Summit Square Manor, Park Place,
      Park Hill Apartments, Fairfax House and Woodland Villas                             -       6,759,242               -
   Portion of 7.5% debenture due from a third party in exchange
      for the mortgage on Fairlawn II                                               744,159               -               -
</TABLE>

                   The accompanying notes are an integral part
                         of these financial statements.
<PAGE>35

                  AMERICAN MORTGAGE INVESTORS - SERIES 85, L.P.

                          NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION

     American Insured Mortgage  Investors - Series 85, L.P. (the  "Partnership")
was formed pursuant to a limited partnership agreement ("Partnership Agreement")
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., a wholly-owned  subsidiary of CRIIMI MAE Inc. ("CRIIMI MAE"),
acts as the General  Partner (the  "General  Partner") for the  Partnership  and
holds a partnership  interest of 3.9%. The General Partner  provides  management
and  administrative  services  on behalf  of the  Partnership.  AIM  Acquisition
Partners  L.P.  serves as the advisor (the  "Advisor") to the  Partnership.  The
general   partner  of  the  Advisor  is  AIM   Acquisition   Corporation   ("AIM
Acquisition")  and the  limited  partners  include,  but are not limited to, The
Goldman Sachs Group, L.P., Sun America  Investments,  Inc.  (successor to Broad,
Inc.) and CRI/AIM  Investment,  L.P.,  a  subsidiary  of CRIIMI MAE,  over which
CRIIMI  MAE  exercises  100%  voting  control.  AIM  Acquisition  is a  Delaware
corporation  that is primarily  owned by Sun America  Investments,  Inc. and The
Goldman Sachs Group, L.P.

     Pursuant  to the terms of certain  origination  and  acquisition  services,
management services and disposition  services agreements between the Advisor and
the Partnership  (collectively the "Advisory  Agreements"),  the Advisor renders
services to the Partnership, including but not limited to, the management of the
Partnership's  portfolio of mortgages and the  disposition of the  Partnership's
mortgages. Such services are subject to the review and ultimate authority of the
General Partner. However, the General Partner is required to receive the consent
of the Advisor prior to taking certain  significant  actions,  including but not
limited to the  disposition of mortgages,  any transaction or agreement with the
General  Partner  or its  affiliates,  or any  material  change  as to  policies
regarding  distributions  or  reserves  of  the  Partnership  (collectively  the
"Consent Rights"). The Advisor is permitted and has delegated the performance of
services to CRIIMI MAE Services Limited Partnership  ("CMSLP"),  a subsidiary of
CRIIMI  MAE,   pursuant  to  a  sub-management   agreement  (the   "Sub-Advisory
Agreement").  The general partner and limited partner of CMSLP are  wholly-owned
subsidiaries  of CRIIMI MAE. The  delegation  of such services by the Advisor to
CMSLP does not relieve the Advisor of its  obligation to perform such  services.
Furthermore the Advisor has retained its Consent Rights.

     The General Partner also serves as the General Partner for American Insured
Mortgage Investors ("AIM 84"), American Insured Mortgage Investors L.P. - Series
86 ("AIM 86") and American  Insured  Mortgage  Investors  L.P. - Series 88 ("AIM
88") and  owns  general  partner  interests  therein  of  2.9%,  4.9% and  4.9%,
respectively.  The  Partnership,  AIM  84,  AIM 86 and  AIM 88 are  collectively
referred to as the "AIM Limited Partnerships".

     Prior to December  1993,  the  Partnership  was engaged in the  business of
originating  government insured mortgage loans ("Originated  Insured Mortgages")
and acquiring  government  insured 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 of 1937, as amended (the "National  Housing Act"). The
Partnership Agreement states that the Partnership will terminate on December 31,
2009, unless terminated earlier under the provisions thereof. The Partnership is
required,  pursuant to the Partnership Agreement, to dispose of its assets prior
to this date.

<PAGE>36

2.   SIGNIFICANT ACCOUNTING POLICIES

     Method of Accounting
     --------------------

     The Partnership's financial statements are prepared on the accrual basis of
accounting in accordance with accounting  principles  generally  accepted in the
United States  ("GAAP").  The preparation of financial  statements in conformity
with GAAP 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 Federal
Housing   Administration   ("FHA")   programs   ("FHA-Insured    Certificates"),
mortgage-backed  securities  guaranteed  by  the  Government  National  Mortgage
Association  ("GNMA")  ("GNMA   Mortgage-Backed   Securities")  and  FHA-insured
mortgage loans ("FHA-Insured  Loans").  The mortgages underlying the FHA-Insured
Certificates,   GNMA  Mortgage-Backed   Securities  and  FHA-Insured  Loans  are
primarily  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,  2002,  the  weighted  average  remaining  term of the
Partnership's  investments in GNMA  Mortgage-Backed  Securities and  FHA-Insured
Certificates is  approximately  27 years.  However,  the  Partnership  Agreement
states that the Partnership  will terminate in approximately 7 years on December
31, 2009,  unless  terminated  earlier 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 or intent,
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 classified as available for
sale. 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 dispose
of these  assets  other than those which may be assigned to HUD 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  under  Section  221 (g)(4) of the
National Housing Act (the "Section 221 program"), as discussed in Note 5.

     In  connection  with  this   classification,   all  of  the   Partnership's
investments in GNMA Mortgage-Backed  Securities and FHA-Insured Certificates are
recorded at fair value as of December 31, 2002 and 2001, with the net unrealized
gains and losses on these assets reported as other comprehensive income and as a
separate component of partners' equity. Subsequent increases or decreases in the
fair value of GNMA  Mortgage-Backed  Securities  and  FHA-Insured  Certificates,
classified  as available for sale,  will be included as a separate  component of
partners' equity.  Realized gains and losses on GNMA Mortgage-Backed  Securities
and FHA-Insured Certificates, classified as available for sale, will continue to
be reported in earnings.

     As  of  December  31,  2002  and  2001,  the  Partnership's  Investment  in
FHA-Insured Loans is recorded at amortized cost.

<PAGE>37


     The amortized cost of the investments in GNMA  Mortgage-Backed  Securities,
FHA-Insured  Certificates and FHA-Insured  Loans is adjusted for amortization of
discounts and premiums to maturity.  Such  amortization  is included in mortgage
investment income.

     Mortgage  investment  income  consists of  amortization  of the discount or
premiums plus the stated mortgage  interest  payments  received or accrued.  The
difference  between  the cost and the  unpaid  principal  balance at the time of
purchase is carried as a discount or premium and  amortized  over the  remaining
contractual  life of the  mortgage  using the  effective  interest  method.  The
effective  interest  method provides a constant yield of income over the term of
the mortgage.

     Gains from  dispositions  of mortgage  investments  are recognized upon the
receipt of cash or 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  Insured  Mortgage  at the date of
default, plus the unamortized balance of acquisition fees and closing costs paid
in  connection  with the  acquisition  of the Insured  Mortgage  and the loss of
approximately 30 days accrued interest.

Investment in FHA Debenture
---------------------------

     The Partnership may receive  debentures by assigning  current  mortgages to
HUD under the Section 221 program,  as  discussed  in Note 5. In  addition,  the
Partnership may receive  debentures by assigning a defaulted  mortgage to HUD in
order to collect the amount of delinquent principal and interest. In the case of
a default assignment,  the mortgagee may elect to have the claim settled in cash
or by the issuance of a debenture.  Debentures  are  obligations of the mortgage
insurance  funds and are  unconditionally  guaranteed by the United States.  The
term of these  debentures are usually more than 7 years and the interest rate is
set based upon the  interest  rate in effect at the  commitment  date to provide
insurance  or  at  the  final  endorsement  date,   whichever  is  greater.  The
Partnership  classifies its Investment in FHA Debenture as an available for sale
debt security with changes in fair value recorded as an adjustment to equity and
other comprehensive income.

Cash and Cash Equivalents
-------------------------

     Cash and cash equivalents consist of money market funds and time and demand
deposits with original maturities of three months or less.

Income Taxes
------------

     No provision has been made for Federal,  state or local income taxes in the
accompanying   statements  of  income  and  comprehensive  income  since,  as  a
pass-through  entity, all income taxes assessed on the Partnership's  income are
the responsibility of its Unitholders.

Recent Accounting Pronouncements
--------------------------------

     In January  2003,  the FASB  issued  FASB  Interpretation  (or FIN) No. 46,
"Consolidation of Variable Interest  Entities",  an interpretation of Accounting
Research  Bulletin  No.  51,  "Consolidated  Financial  Statements."  FIN No. 46
explains  how to  identify  variable  interest  entities  and how an  enterprise
assesses  its  interests  in a  variable  interest  entity to decide  whether to
consolidate that entity.  This Interpretation  requires existing  unconsolidated
variable interest entities to be consolidated by their primary  beneficiaries if
the entities do not effectively  disperse risks among parties involved.  FIN No.

<PAGE>38

46 is effective immediately for variable interest entities created after January
31, 2003, and to variable  interest  entities in which an enterprise  obtains an
interest after that date. The Interpretation applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable  interest  entities in
which an enterprise  holds a variable  interest that it acquired before February
1, 2003.  The  Partnership  does not expect the adoption of FIN No. 46 to have a
material effect on its financial position or results of operations.


3.   FAIR VALUE OF FINANCIAL INSTRUMENTS

     The  following  estimated  fair  values  of  the  Partnership's   financial
instruments are presented in accordance with GAAP 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.

<TABLE>
<CAPTION>
                                             As of December 31, 2002            As of December 31, 2001
                                             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              $  32,449,759    $   33,849,089    $  44,640,062    $   45,845,197
   Originated Insured Mortgages               15,974,329        15,986,295       16,132,560        15,734,485
                                           -------------    --------------    -------------    --------------

                                           $  48,424,088    $   49,835,384    $  60,772,622    $   61,579,682
                                           =============    ==============    =============    ==============

Investment in FHA-Insured Loans:
  Acquired Insured Mortgages               $   7,176,274    $    8,513,052    $   8,914,573    $   10,451,178
  Originated Insured Mortgages                 9,311,907         9,470,182       12,430,002        12,122,221
                                           -------------    --------------    -------------    --------------

                                           $  16,488,181    $   17,983,234    $  21,344,575    $   22,573,399
                                           =============    ==============    =============    ==============

Cash and cash equivalents                  $  10,448,516    $   10,448,516    $   4,366,085    $    4,366,085
                                           =============    ==============    =============    ==============

Investment in Debenture                    $           -    $            -    $   2,385,233    $    2,385,233
                                           =============    ==============    =============    ==============
</TABLE>


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

Investment in FHA-Insured Certificates,
GNMA Mortgage-Backed Securities, FHA-Insured Loans and Debenture
------------------------------------------------------------------------

     The fair  values  of the  FHA-Insured  Certificates,  GNMA  Mortgage-Backed
Securities and FHA-Insured Loans are priced  internally.  The Partnership used a
discounted  cash flow  methodology  to estimate the fair values;  the cash flows
were  discounted  using a discount rate that,  in the  Partnership's  view,  was
commensurate  with the market's  perception of risk and value.  The  Partnership
used a variety  of  sources  to  determine  its  discount  rate  including:  (i)
institutionally-available research reports, and (ii) communications with dealers
and active  insured  mortgage  security  investors  regarding  the  valuation of
comparable securities. The fair value of a debenture is based upon the prices of
other  comparable  securities  that  trade in the  market.  The fair  value of a
debenture with a short term call date from HUD is equal to its face value.

Cash and cash equivalents
-------------------------

     The carrying amount  approximates  fair value because of the short maturity
of these instruments.
<PAGE>39


4.   COMPREHENSIVE INCOME

     Comprehensive  income  includes net  earnings as currently  reported by the
Partnership adjusted for other comprehensive  income. Other comprehensive income
for the Partnership  consists of changes in unrealized  gains and losses related
to the Partnership's  Insured Mortgages and debenture accounted for as available
for sale.  The table below  details other  comprehensive  income for the periods
presented into the following two categories:  (1) the change to unrealized gains
and losses that relate to Insured  Mortgages  which were  disposed of during the
period  with the  resulting  realized  gain or loss  reflected  in net  earnings
(reclassification  adjustments)  and (2) the change in the  unrealized  gains or
losses related to those investments that were not disposed of during the period.
<TABLE>
<CAPTION>
                                                               2002             2001             2000
                                                               ----             ----             ----
<S>                                                        <C>              <C>              <C>
Reclassification adjustment for (gains) losses
   included in net income                                  $   (768,721)    $ (1,149,729)    $    114,365
Unrealized holding gains arising during
   the period                                                 1,372,958           35,389        1,793,041
                                                           ------------     ------------     ------------

Net adjustment to unrealized gains                         $    604,237     $ (1,114,340)    $  1,907,406
                                                           ============     ============     ============
</TABLE>

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

GNMA Mortgage-Backed Securities and FHA-Insured Certificates
------------------------------------------------------------

     Listed   below  is  the   Partnership's   aggregate   investment   in  GNMA
Mortgage-Backed Securities and FHA-Insured Certificates:
<TABLE>
<CAPTION>
                                                                         December 31,
                                                                    2002             2001
                                                                    ----             ----
<S>                                                             <C>              <C>
Acquired Mortgages:
   Number of
      GNMA Mortgage-Backed Securities                                      2                2
      FHA-Insured Certificates (1) through (6)                            17               26
Amortized Cost                                                  $ 32,449,759     $ 44,640,062
Face Value                                                        33,076,449       46,215,896
Fair Value                                                        33,849,089       45,845,197

Originated Mortgages:
   Number of
      GNMA Mortgage-Backed Securities                                      1                1
      FHA-Insured Certificates                                             1                1
Amortized Cost                                                  $ 15,974,329     $ 16,132,560
Face Value                                                        15,974,328       16,132,560
Fair Value                                                        15,986,295       15,734,485
</TABLE>


<PAGE>40

     Listed below is a summary of prepayments during 2002 on Insured Mortgages:
<TABLE>
<CAPTION>
(Dollars in thousands, except per unit amounts)
                                                   Date                                      Distribution
                                      Net        Proceeds      Gain/   Dist./  Declaration      Payment
      Complex Name                  Proceeds     Received      Loss     Unit       Date           Date
      ------------                  --------     --------      ----     ----       ----           ----
  <S>                                 <C>        <C>            <C>    <C>       <C>            <C>
  (1) Garden Court Apartments         $1,152     Apr 2002       $  9   $0.09     Apr 2002       Aug 2002
  (2) Franklin Plaza                   5,029     Sep 2002         (8)   0.40     Oct 2002       Feb 2003
  (3) Rock Glen Apartments             1,009     Oct 2002        117    0.08     Nov 2002       Feb 2003
  (4) Highland Oaks Apartments           888     Nov 2002         96    0.07     Dec 2002       Feb 2003
  (5) Walnut Hills Apartments            454     Dec 2002         83    0.04     Jan 2003       May 2003
  (6) Four mortgages were approved for assignment to HUD under the section 221
      Program, as discussed below in "Redemption of debentures".
</TABLE>

     As of  March  1,  2003,  all  of the  fully  insured  GNMA  Mortgage-Backed
Securities and FHA-Insured  Certificates are current with respect to the payment
of principal and interest.

     In addition to base interest payments under Originated  Insured  Mortgages,
FHA-Insured Loans, 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, 2002, 2001 and 2000, the
Partnership received $0 from the Participations.

     The Section 221 Program
     -----------------------

     Certain  Insured  Mortgages  held  by  the  Partnership  are  eligible  for
assignment to HUD under the Section  221(g)(4)  program of the National  Housing
Act (the "Section 221  Program.") A mortgagee has the right to assign a mortgage
("put") to the United States Department of Housing and Urban Development ("HUD")
at the expiration of 20 years from the date of final  endorsement  ("Anniversary
Date") if the  mortgage  is not in  default  at such  time.  The  mortgagee  may
exercise  its  option to put the  mortgage  to HUD  during  the one year  period
subsequent to the Anniversary  Date. This assignment  procedure is applicable to
an  Insured  Mortgage,  which  had a firm  or  conditional  commitment  for  HUD
insurance  benefits on or before  November 30, 1983.  Any mortgagee  electing to
assign an Insured  Mortgage to HUD receives,  in exchange  therefor,  debentures
having a total face value equal to (i) the then outstanding principal balance of
the Insured  Mortgage (ii) plus accrued  interest on the mortgage to the date of
assignment  ("Debenture  Issuance Date").  These debentures  generally mature 10
years  from  the  date of  assignment  and  bear  interest  at a rate  announced
semi-annually  by HUD in the Federal  Register  ("going  Federal  rate") at such
date. Generally,  the Partnership is not the named mortgagee for the FHA-Insured
Certificates.  In this  case,  the HUD  debentures  are  generally  issued to an
unrelated  third  party  that  is  the  named  mortgagee.  The  servicer  of the
applicable  mortgage is responsible  for delivering to the  Partnership  all HUD
insurance claim proceeds.  The debenture  interest is paid to the Partnership in
the month it is received by the servicer. The debenture proceeds are paid to the
Partnership  in the  month  the  debenture  is  redeemed  by HUD or  sold by the
servicer. Based on the recommendation of CMSLP, the sub-advisor, and the consent
of the Advisor the General  Partner may elect to put Insured  Mortgages  to HUD,
based upon, in general, but not limited to, (i) the interest rates on mortgages,
(ii) the  interest  rates on  debentures  issued  by HUD and (iii) the costs and
risks associated with continuing to hold the Insured Mortgages.

     Once the  servicer  of an Insured  Mortgage  has filed an  application  for
insurance  benefits  ("HUD put date") under the Section 221 program on behalf of
the Partnership,  the Partnership  will no longer receive the monthly  principal
and interest on the applicable  mortgage,  and instead, HUD will begin receiving
the  monthly  principal  and  interest.  HUD issues  debentures  at the time the
mortgage  is  assigned  to HUD  (approximately  30 days after the HUD put date);
however, the debentures are not transferred to the mortgagee until HUD completes
its assignment  process of the Insured Mortgage.  Based on the General Partner's
experience,  HUD's assignment process is generally six to eighteen months. After

<PAGE>41

HUD completes its assignment process for the Insured Mortgage,  HUD transfers to
the mortgagee (i) HUD debentures, as discussed above, (ii) plus cash for accrued
interest  on the  debentures  at the  going  Federal  rate,  from the  Debenture
Issuance  Date to the  most  current  interest  payment  date.  Thereafter,  the
mortgagee  receives interest on the debentures on the semi-annual  payment dates
of January 1 and July 1. The going Federal rate for HUD debentures  issued under
the  Section  221  Program  for the period  January 1 through  June 30, 2002 was
6.375%;  for the period July 1 through December 31, 2002 it was 6.625%;  and for
the period  January 1 through June 30, 2003 it is 5.75%.  The  Partnership  will
recognize a gain on a mortgage  assignment at the time it receives  notification
that the assignment has been approved.  HUD assignment approval generally occurs
when HUD transfers the debentures to the mortgagee  and/or when the  Partnership
receives  cash for the  accrued  interest  on the  debentures.  The  Partnership
recognizes a loss on a mortgage  assignment when it becomes probable that a loss
will be incurred.  The gain or loss  recognized  is generally  equal to proceeds
received from HUD, as discussed  above,  less the amortized  cost of the Insured
Mortgage.

     a. Redemption of debentures
        ------------------------

     The following  list  represents  debentures  issued in 2001 and redeemed in
January 2002. In addition, the Partnership received interest on these debentures
in 2002: (1) a distribution of approximately  $0.02 per unit of interest related
to the debentures  issued in exchange for the mortgages on Park Hill Apartments,
Fairfax  House and  Woodland  Villas was  declared  in January  2002,  and (2) a
distribution  of  approximately  $0.02  per  unit  of  interest  related  to the
debentures  issued in exchange for the mortgages on Summit  Square  Manor,  Park
Place,  Park Hill Apartments,  Fairfax House and Woodland Villas was declared in
February 2002. These distributions were paid in May 2002.

<TABLE>
<CAPTION>
(Dollars in thousands, except per unit amounts)
                            Debenture                                                    Dist.
                            Interest    Net       HUD put     Dist./    Declaration    Payment
Complex Name                  Rate    Proceeds     Date        Unit         Date         Date
------------                  ----    --------     ----        ----         ----         ----
<S>                          <C>      <C>        <C>         <C>          <C>          <C>
Summit Square Manor          7.125%   $ 1,883    Jun 2000    $ 0.150      Feb 2002     May 2002
Park Place                   7.125%       746    Jun 2000      0.060      Feb 2002     May 2002
Park Hill Apartments         7.500%     1,721    Sep 2000      0.140      Feb 2002     May 2002
Fairfax House                7.500%     2,109    Sep 2000      0.170      Feb 2002     May 2002
Woodland Villas              7.125%       300    Apr 2001      0.025      Feb 2002     May 2002
                                      -------                -------
                                      $ 6,759                $ 0.545
                                      =======                =======
</TABLE>

     The  following  list  represents  debentures  issued  in  January  2002 and
redeemed in July 2002.  The  aggregate  gain of $497,000 was  recognized  in the
first quarter of 2002, when the Partnership received  approximately  $286,000 of
accrued  interest in cash on these  debentures.  A distribution  related to this
accrued debenture interest of approximately $0.02 per Unit was declared in March
2002  and  paid in May  2002.  Net  proceeds  represent  (i)  the  Partnership's
beneficial  interest  in the face  value of the  debenture,  plus (ii)  interest
earned on the  debenture  during  the HUD  assignment  process,  less  (iii) net
mortgage  investment  income  due on the  applicable  mortgage  during  the  HUD
assignment process.

<TABLE>
<CAPTION>
(Dollars in thousands, except per unit amounts)
                              Debenture                           Gain                             Dist
                              Interest       Net       HUD put   1st Qtr.  Dist./  Declaration   Payment
Complex Name                    Rate       Proceeds     Date      2002      Unit       Date        Date
------------                    ----       --------     ----      -----    -----       ----        ----
<S>                            <C>          <C>       <C>         <C>      <C>       <C>         <C>
Country Club Terrace Apts.     7.500%       $1,425    Sep 2000    $ 178    $0.12     Aug 2002    Nov 2002
Nevada Hills Apartments        7.500%        1,134    Dec 2000      154     0.09     Aug 2002    Nov 2002
Dunhaven Apartments            7.125%          872    Jan 2001      165     0.07     Aug 2002    Nov 2002
                                            ------                -----    -----
                                            $3,431                $ 497    $0.28
                                            ======                =====    =====
</TABLE>

<PAGE>42

     Subsequent  to  December  31,  2002,  a  7.5%  debenture  of  approximately
$758,000,  issued in July 2002 for the  mortgage on Fairlawn II was  redeemed by
HUD in January 2003. The Partnership  recognized a gain of approximately $95,000
in the  third  quarter  of 2002,  when the  Partnership  received  approximately
$100,000 of accrued interest in cash on this debenture.  A distribution  related
to this accrued debenture interest of approximately  $0.01 per Unit was declared
in August 2002 and paid in November 2002. A distribution of approximately  $0.06
per Unit related to the debenture  proceeds was declared in February 2003 and is
expected  to be paid  to  Unitholders  in May  2003.  The  accrued  interest  of
approximately  $28,000  related to this  debenture  was also received in January
2003 and is being distributed through regular cash flow distributions.  The 7.5%
debenture  proceeds and accrued  interest are included in receivables  and other
assets in the Partnership's balance sheet as of December 31, 2002.

     b. Mortgages in the HUD assignment process
        ---------------------------------------

     The  Mortgage  on  Executive  House was put to HUD under  the  Section  221
Program by the  servicer  in April  2002.  The face value of this  mortgage  was
approximately  $805,000  as of the HUD  put  date.  The  Partnership  no  longer
receives monthly principal and interest from mortgages that are put to HUD under
the Section 221 Program. HUD receives the monthly principal and interest and the
Partnership earns semi-annual interest on debentures issued by HUD, as discussed
above. The Partnership has not received approval for this assignment as of March
1,  2003,  and will  continue  to  accrue  interest  on the  mortgage  until the
debenture  is  transferred  to the  Partnership  and  it  begins  receiving  the
debenture interest. The fair value of this mortgage is included in Investment in
FHA-Insured  Certificates and GNMA Mortage-Backed  Securities,  Acquired Insured
Mortgages in the Partnership's balance sheet as of December 31, 2002.

     c. Remaining mortgages eligible for assignment
        -------------------------------------------

     The Partnership's mortgage portfolio includes five FHA-Insured Certificates
eligible under the Section 221 Program with anniversary  dates in April 2002. At
this time,  the  Partnership  does not expect  these  mortgages to be put to HUD
since it owns  less  than 34% of these  FHA-Insured  Certificates  and the other
certificate  holders  have not yet elected to put these  mortgages  to HUD.  The
Partnership   does  not  own  any  other   FHA-Insured   Certificates   or  GNMA
Mortgage-Backed Securities eligible to be put to HUD.


6.   INVESTMENT IN FHA-INSURED LOANS

Insured FHA-Insured Loans
-------------------------

          Listed below is the Partnership's  aggregate investment in FHA-Insured
     Loans:
<TABLE>
<CAPTION>
                                                                   December 31,
                                                          2002                     2001
                                                          ----                     ----
<S>                                                   <C>                      <C>
Fully Insured Acquired Loans:
  Number of Loans (2)(3)                                         6                        7
Amortized Cost                                        $  7,176,274             $  8,914,573
Face Value                                               8,519,762               10,632,937
Fair Value                                               8,513,052               10,451,178

Fully Insured Originated Loans:
  Number of Loans (1)                                            2                        3
Amortized Cost                                        $  9,311,907             $ 12,430,002
Face Value                                               9,059,734               12,132,653
Fair Value                                               9,470,182               12,122,221
</TABLE>


(1)  In  January  2002,  the  mortgage  on  Longleaf  Lodge  was  prepaid.   The
     Partnership  received  net  proceeds  of  approximately  $3.7  million  and
     recognized a gain of approximately  $672,000 during the year ended December
     31, 2002. A  distribution  of  approximately  $0.29 per Unit related to the
     prepayment  of this  mortgage  was  declared  in  January  2002 and paid to
     Unitholders in May 2002.

<PAGE>43

(2)  In December  2002, the mortgage on Bay Pointe  Apartments was prepaid.  The
     Partnership  received  net  proceeds  of  approximately  $1.9  million  and
     recognized a gain of approximately  $290,000 during the year ended December
     31, 2002. A  distribution  of  approximately  $0.15 per Unit related to the
     prepayment  of this  mortgage  was  declared in  December  2002 and paid to
     Unitholders in February 2003.
(3)  In January 2003, the Partnership  received assignment proceeds from HUD for
     the mortgage on Westbrook Apartments. The servicer of this mortgage filed a
     Notice of Election to Assign in November  2002 as a result of principal and
     interest payments being over 60 days delinquent.  The Partnership  received
     net  proceeds of  approximately  $1.5  million,  which  included 90% of the
     unpaid principal  balance of this mortgage,  plus interest at the debenture
     rate of 9.875% from  September  2002 through  January  2003.  The remaining
     amount  due  from HUD is  approximately  $150,000  (representing  9% of the
     unpaid principal balance) and is expected to be received during the next 12
     months.  The  Partnership  expects  to  recognize  a gain of  approximately
     $228,000 during the first quarter of 2003. A distribution of  approximately
     $0.12 per Unit related to the  assignment  of this mortgage was declared in
     February 2003 and is expected to be paid to Unitholders in May 2003.

     As of March 1,  2003,  all of the  fully  insured  FHA-Insured  Loans  were
current with respect to the payment of principal  and  interest,  except for the
mortgage  on Town Park  Apartments,  which is  delinquent  with  respect  to the
February 2003 payment of principal and interest, as discussed further below.

     In addition to base interest  payments under Originated  Insured  Mortgages
FHA-Insured   Loans,   the  Partnership  is  entitled  to  additional   interest
Participations.  During the years ended  December 31, 2002,  2001 and 2000,  the
Partnership  received  $8,396,  $53,424,  and  $21,566,  respectively,  from the
Participations.  These amounts are included in mortgage investment income on the
accompanying statements of income and comprehensive income.

     The Section 221 Program
     -----------------------

     a. Issuance of Debenture
        ---------------------

     In February 2003, HUD transferred assignment proceeds to the Partnership in
the  form of a  6.375%  debenture  in  exchange  for the  mortgage  on  Baypoint
Shoreline  Apartments.   The  mortgage  on  Baypoint  Shoreline  Apartments  was
beneficially owned 50% by the Partnership and 50% by AIM 84. The debenture, with
a face value of  approximately  $1.8  million,  pays interest  semi-annually  on
January 1 and July 1 with a maturity date of June 27, 2012. The debenture may be
called prior to its maturity date. A distribution will be declared at that time.
Since  the  mortgage  on  Baypoint  Shoreline  Apartments  was  owned 50% by the
Partnership and 50% by AIM 84,  approximately  $906,000 of the debenture face is
due to AIM 84. In February 2003, the Partnership received  approximately $59,000
in cash of accrued  interest on this  debenture.  Approximately  $29,000 of this
accrued  interest was  transferred  to AIM 84 and the  remaining  amount will be
distributed through regular cash flow distributions.  The Partnership expects to
recognize a gain of approximately $131,000 during the first quarter of 2003. The
servicer of this mortgage filed an application for insurance  benefits under the
Section 221 Program in June 2002.

     b. Mortgages in the HUD assignment process
        ---------------------------------------

     The mortgages on Brougham  Estates and College Green Apartments were put to
HUD under the Section 221 Program by the respective  servicers in February 2003.
The aggregate face value of these mortgages was approximately $3.7 million as of
the HUD put date.  The  Partnership  no longer  receives  monthly  principal and
interest from mortgages  that are put to HUD under the Section 221 Program.  HUD
receives  the  monthly   principal  and  interest  and  the  Partnership   earns
semi-annual  interest on  debentures  issued by HUD,  as  discussed  above.  The
Partnership has not received approval for these assignments as of March 1, 2003,
and will continue to accrue  interest on the mortgages  until the debentures are
transferred to the Partnership and it begins receiving the debenture interest.

     c. Remaining mortgages eligible for assignment
        -------------------------------------------

     The  Partnership's   mortgage  portfolio  includes  two  FHA-Insured  Loans
eligible under the Section 221 Program with  anniversary  dates in September and
October  2002,  including  Kaynorth  Apartments  and Town Park  Apartments.  The
Partnership expects these mortgages to be put to HUD, if not otherwise disposed,
by the servicer during the second quarter of 2003.
<PAGE>44

7.   INVESTMENT IN FHA DEBENTURE

     The  mortgage  on Fox Run  Apartments  was  beneficially  owned  50% by the
Partnership  and  50% by AIM  84.  A  7.125%  debenture,  with a face  value  of
approximately  $2.4 million,  was issued by HUD to the  Partnership  in December
2000 with  interest  payable  semi-annually  on January 1 and July 1. In January
2002, the debenture was  liquidated at par value.  Since the mortgage on Fox Run
Apartments  was owned 50% by the  Partnership  and 50% by AIM 84,  approximately
$1.2 million of the debenture  proceeds were paid to AIM 84, including  interest
of approximately $42,000. A distribution of approximately $0.09 per Unit related
to the  redemption  of this  debenture  was declared in January 2002 and paid to
Unitholders in May 2002.


8.   TRANSACTIONS WITH RELATED PARTIES

     The  principal  executive  officers of the General  Partner did not receive
fees for serving as executive  officers of the General  Partner during the years
ended December 31, 2002,  2001 and 2000, nor are any fees expected to be paid to
the executive officers in the future.

     The General Partner, CMSLP and certain affiliated entities have, during the
years ended December 31, 2002, 2001 and 2000, earned or received compensation or
payments for services from the Partnership as follows:

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

                                                                                      For the year ended December 31,
Name of Recipient                          Capacity in Which Served/Item              2002         2001          2000
-----------------                          -----------------------------              ----         ----          ----
<S>                                        <C>                                     <C>          <C>           <C>
CRIIMI, Inc.(1)                            General Partner/Distribution            $1,350,555   $  936,319    $  789,254

AIM Acquisition Partners, L.P.(2)          Advisor/Asset Management Fee               744,733      959,934     1,142,121

CRIIMI MAE Management, Inc.(3)             Affiliate of General Partner/Expense        55,487       44,951        42,074
</TABLE>

(1)  The  General  Partner  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  from mortgage
     prepayments,  sales  or  insurance  (both  as  defined  in the  Partnership
     Agreement).

(2)  The Advisor is entitled to an asset  management fee equal to 0.95% of Total
     Invested  Assets  (as  defined  in the  Partnership  Agreement).  CMSLP  is
     entitled  to a fee  equal  to  0.28%  of  total  invested  assets  from the
     Advisor's asset  management fee. Of the amounts paid to the Advisor,  CMSLP
     earned fees equal to  $219,496,  $282,943,  and  $336,565  during the years
     ended December 31, 2002, 2001, and 2000, respectively.  The general partner
     and limited partner of CMSLP are wholly-owned subsidiaries of CRIIMI MAE.

(3)  CRIIMI MAE  Management,  Inc.,  an  affiliate  of the General  Partner,  is
     reimbursed  for  personnel  and  administrative  services on an actual cost
     basis.
<PAGE>45

9.       DISTRIBUTIONS TO UNITHOLDERS

     The distributions paid or accrued to Unitholders on a per Unit basis during
the years ended December 31, 2002, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                            2002             2001            2000
                                            ----             ----            ----
<S>                                       <C>             <C>             <C>
Quarter ended March 31                    $  1.325(1)     $   0.68(5)     $   0.47(8)
Quarter ended June 30                        0.210(2)         0.37(6)         0.46(9)
Quarter ended September 30                   0.410(3)         0.71(7)         0.18
Quarter ended December 31                    0.810(4)         0.15            0.50(10)
                                          --------        --------        --------
                                          $  2.755        $   1.91        $   1.61
                                          ========        ========        ========
</TABLE>

     The following disposition proceeds are included in the distributions listed
above:
<TABLE>
<CAPTION>
                                                                                Date                     Net
                                                                              Proceeds      Type of    Proceeds
                                Complex Name(s)                               Received    Disposition  Per Unit
                                ---------------                               --------    -----------  --------
  <S>                                                                         <C>         <C>          <C>
  (1) Quarter ended March 31, 2002:
      The Gate House Apartments                                               Dec 2001    Prepayment   $ 0.220
      Longleaf Lodge                                                          Jan 2002    Prepayment     0.290
      Fox Run Apartments                                                      Jan 2002    Assignment     0.090
      Interest on debentures related to the mortgages on Summit Square
        Manor, Park Place, Park Hill Apartments, Fairfax House, Woodland
        Villas, Country Club Terrace Apartments, Dunhaven Apartments and      Jan-Feb
        Nevada Hill Apartments                                                  2002      Assignment     0.060
      Summit Square Manor                                                     Jan 2002    Assignment     0.150
      Park Place                                                              Jan 2002    Assignment     0.060
      Park Hill Apartments                                                    Jan 2002    Assignment     0.140
      Fairfax House                                                           Jan 2002    Assignment     0.170
      Woodland Villas                                                         Jan 2002    Assignment     0.025
  (2) Quarter ended June 30, 2002:
      Garden Court Apartments                                                 Apr 2002    Prepayment     0.090
  (3) Quarter ended September 30, 2002:
      Interest on debenture related to the mortgage on Fairlawn II            Jul 2002    Assignment     0.010
      Country Club Terrace Apartments                                         Jul 2002    Assignment     0.120
      Nevada Hill Apartments                                                  Jul 2002    Assignment     0.090
      Dunhaven Apartments                                                     Jul 2002    Assignment     0.070
  (4) Quarter ended December 31, 2002:
      Franklin Plaza                                                          Sep 2002    Prepayment     0.400
      Rock Glen Apartments                                                    Oct 2002    Prepayment     0.080
      Highland Oaks Apartments                                                Nov 2002    Prepayment     0.070
      Bay Pointe Apartments                                                   Dec 2002    Prepayment     0.150
  (5) Quarter ended March 31, 2001:
      The Meadows of Livonia                                                  Jan 2001    Prepayment     0.530
  (6) Quarter ended June 30, 2001:
      Gold Key Village Apartments                                             Mar 2001    Prepayment     0.220
  (7) Quarter ended September 30, 2001:
      Cedar Ridge Apartments                                                  Jun 2001    Prepayment     0.210
      Carlisle Apartments                                                     Jun 2001    Prepayment     0.170
      Afton Square Apartments                                                 Jul 2001    Prepayment     0.080
      Berryhill Apartments                                                    Sep 2001    Prepayment     0.100
  (8) Quarter ended March 31, 2000:
      Northwood Apartments                                                    Dec 1999    Prepayment     0.130
      Turtle Creek Apartments                                                 Jan 2000    Prepayment     0.130
  (9) Quarter ended June 30, 2000
      Woodland Hills Apartments                                               Apr 2000    Prepayment     0.060
      New Castle Apartments                                                   May 2000    Prepayment     0.160
       Colony West Apartments                                                 May 2000    Prepayment     0.050
 (10) Quarter ended December 31, 2000
       Independence Park                                                      Oct 2000    Prepayment     0.320
</TABLE>
<PAGE>46

     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
Partnership's  Insured Mortgages pay a fixed monthly mortgage payment,  the cash
distributions  paid to the Unitholders  will vary during each quarter due to (1)
the  fluctuating  yields in the  short-term  money  market in which 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,
the  timing of  receipt of  debentures,  the  interest  rate on  debentures  and
debenture redemptions,  and (4) changes in the Partnership's operating expenses.
As  the  Partnership   continues  to  liquidate  its  mortgage  investments  and
Unitholders  receive  distributions  of return of  capital  and  taxable  gains,
Unitholders  should expect a reduction in earnings and  distributions due to the
decreasing mortgage base.


10.  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 prior to February 1986 for an aggregate  capital  contribution
of $241,587,780.  In addition, the initial limited partner contributed $2,500 to
the capital of the Partnership and received 125 Units in exchange therefor.



<PAGE>47



11.  SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 2002, 2001 and 2000.
<TABLE>
<CAPTION>

(In Thousands, Except Per Unit Data)
                                                                2002
                                                            Quarter ended
                                        March 31       June 30     September 30    December 31
                                        --------       -------     ------------    -----------
<S>                                     <C>            <C>           <C>             <C>
Income                                  $  1,727       $ 1,668       $ 1,591         $  1,457
Net gains from
   mortgage dispositions                   1,169             9            87              586
Net earnings                               2,607         1,361         1,390            1,780
Net earnings per Limited
   Partnership Unit - Basic                 0.21          0.11          0.11             0.14

                                                                  2001
                                                              Quarter ended
                                        March 31       June 30     September 30    December 31
                                        --------       -------     ------------    -----------
Income                                  $  2,295       $ 2,216       $ 2,044         $  1,971
Net gains from
   mortgage dispositions                     262           723           219              581
Net earnings                               2,196         2,599         1,940            2,234
Net earnings per Limited
   Partnership Unit - Basic                 0.17          0.21          0.15             0.18

                                                                 2000
                                                             Quarter ended
                                        March 31       June 30     September 30    December 31
                                        --------       -------     ------------    -----------
Income                                  $  2,676       $ 2,553       $ 2,330         $  2,420
Net gains from
   mortgage dispositions                      44           235            --              149
Net earnings                               2,320         2,396         1,948            2,202
Net earnings per Limited
   Partnership Unit - Basic                 0.18          0.19          0.15             0.19
</TABLE>
<PAGE>48
              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

                   SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

                                December 31, 2002
<TABLE>
<CAPTION>
                                                                        Interest
                                                                        Rate on       Face             Net          Annual Payment
                                                 Maturity      Put      Mortgage    Value of     Carrying  Value   (Principal and
Development Name/Location                          Date       Date(1)     (7)       Mortgage(5)    (5)(13)(15)     Interest)(11)(12)
-------------------------                          ----       -------     ---       -----------    -----------     -----------------
<S>                                               <C>         <C>         <C>       <C>            <C>              <C>
ACQUIRED INSURED MORTGAGES
FHA-Insured Certificates (carried at fair value)
------------------------------------------------

The Executive House, Dayton, OH (2)                8/21       12/01        7.5%     $    789,370   $    790,997     $     78,855 (6)
Willow Dayton, Chicago, IL                         8/19         N/A        7.5%          942,585        944,884           99,489 (6)
Steeplechase Apts., Aiken, SC                      9/18         N/A        7.5%          465,876        467,158           50,921 (8)
Ashley Oaks Apts., Carrollton, GA                  3/22        4/02        7.5%          530,877        531,862           52,292 (9)
Magnolia Place Apts., Franklin, TN                 5/20        4/02        7.5%          298,329        299,000           30,804 (9)
Rainbow Terrace Apts., Milwaukee, WI               7/22        4/02        7.5%          302,621        303,164           29,581 (9)
Stonebridge Apts., Phase I, Montgomery, AL         4/20        4/02        7.5%          957,744        959,918           99,125 (9)
Village Knoll Apts., Harrisburg, PA                4/20        4/02        7.5%          994,368        996,625          102,914 (9)
Executive Tower, Toledo, OH                        3/27         N/A       8.75%        2,760,693      2,885,906          275,283
Sangnok Villa, Los Angeles, CA                     1/30         N/A      10.25%          884,589        906,853           96,825
Eaglewood Villa Apts., Springfield, OH             2/27         N/A      8.875%        2,628,001      2,747,140          264,707
Stafford Towers, Baltimore, MD                     8/16         N/A       9.50%          320,527        321,485           42,613
Northwood Place, Meridian, MS                      6/34         N/A       8.75%        4,411,013      4,608,726          412,635
Cheswick Apts., Indianapolis, IN                   9/27         N/A       8.75%        2,986,344      3,121,614          295,736
Bradley Road Nursing, Bay Village, OH              5/34         N/A      8.875%        2,468,423      2,579,038          233,708
Heritage Heights Apts., Harrison, AR               4/32         N/A       9.50%          407,566        407,719           41,313
Pleasant View Nursing Home, Union, NJ              6/29         N/A       7.75%        7,222,207      7,228,188          643,311
                                                                                    ------------   ------------

   Total FHA-Insured Certificates -
      Acquired Insured Mortgages, carried at fair value                             $ 29,371,133   $ 30,100,277
                                                                                    ------------   ------------


GNMA Mortgage-Backed Securities (carried at fair value)
-------------------------------------------------------

Pine Tree Lodge, Pasadena, TX                     12/33         N/A       9.50%     $  1,985,491   $  2,027,043     $    194,399
Stone Hedge Village Apts., Farmington, NY         11/27         N/A       7.00%        1,719,825      1,721,769          143,481
                                                                                    ------------   ------------

   Total GNMA Mortgage-Backed Securities -
      Acquired Insured Mortgages, carried at fair value                             $  3,705,316   $  3,748,812
                                                                                    ------------   ------------

Total investment in Acquired Insured Mortgages, carried at fair value               $ 33,076,449   $ 33,849,089
                                                                                    ------------   ------------

ORIGINATED INSURED MORTGAGES
GNMA Mortgage-Backed Security (carried at fair value)
-----------------------------------------------------

Oak Forest Apts. II, Ocoee, FL                    12/31       11/09(3)    8.25%     $ 10,220,413   $ 10,227,794          840,860

FHA-Insured Certificate (carried at fair value)

Waterford Green Apts., South St. Paul, MN         11/30       12/04(3)    7.25%(11)    5,753,915      5,758,501          481,564
                                                                                    ------------   ------------

Total investment in Originated Insured Mortgages, carried at fair value             $ 15,974,328   $ 15,986,295
                                                                                    ------------   ------------

   Total investment in FHA-Insured Certificates and
       GNMA Mortgage-Backed Securities, carried at fair value                       $ 49,050,777   $ 49,835,384
                                                                                    ------------   ------------
</TABLE>

<PAGE>49
<TABLE>
<CAPTION>
                                                                        Interest
                                                                        Rate on       Face             Net          Annual Payment
                                                 Maturity      Put      Mortgage    Value of     Carrying  Value   (Principal and
Development Name/Location                          Date       Date(1)     (7)       Mortgage(5)    (5)(13)(15)     Interest)(11)(12)
-------------------------                          ----       -------     ---       -----------    -----------     -----------------
<S>                                               <C>         <C>         <C>       <C>            <C>              <C>
ACQUIRED INSURED MORTGAGES
FHA-Insured Loans (carried at amortized cost) (4)
---------------------------------------------

Baypoint Shoreline Apts., Duluth, MN (15)          1/22       10/01       7.50%     $    889,548   $    750,546     $     87,967(10)
Brougham Estates II, Kansas City, KS (2)          11/22        3/02       7.50%        2,379,451      2,000,171          230,860(10)
College Green Apts., Wilmington, NC (2)            3/23       12/02       7.50%        1,281,638      1,076,156          123,455(10)
Kaynorth Apts., Lansing, MI                        4/23        9/02       7.50%        1,740,061      1,460,448          167,318(10)
Town Park Apts., Rockingham, NC                   10/22       10/02       7.50%          583,386        491,001           56,755(10)
Westbrook Apts., Kokomo, IN (15)                  11/22        9/02       7.50%        1,645,678      1,397,952          163,177(10)
                                                                                    ------------   ------------

   Total investment in Acquired Insured Mortgages,
      FHA-Insured Loans, carried at amortized cost                                  $  8,519,762   $  7,176,274
                                                                                    ------------   ------------


ORIGINATED INSURED MORTGAGES
FHA-Insured Loans (carried at amortized cost) (4)
---------------------------------------------

Cobblestone Apts., Fayetteville, NC                3/28       12/02(3)    8.50%(11) $  4,797,712   $  4,922,623     $    462,703
The Plantation, Greenville, NC                     4/28        4/03(3)    8.25%(11)    4,262,022      4,389,284          402,046
                                                                                    ------------   ------------     ------------

   Total investment in Originated Insured Mortgages,
      FHA-Insured Loans, carried at amortized cost                                  $  9,059,734   $  9,311,907
                                                                                    ------------   ------------

Total investment in FHA-Insured Loans, carried at amortized cost                    $ 17,579,496   $ 16,488,181
                                                                                    ------------   ------------

TOTAL INVESTMENT IN INSURED MORTGAGES                                               $ 66,630,273   $ 66,323,565
                                                                                    ============   ============


TOTAL ANNUAL PRINCIPAL AND INTEREST                                                                                 $  6,204,697
                                                                                                                    ============
</TABLE>

<PAGE>50
              AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.

              NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

                                DECEMBER 31, 2002

(1)  Certain  Insured  Mortgages  held  by  the  Partnership  are  eligible  for
     assignment  to HUD under the  Section  221(g)(4)  program  of the  National
     Housing Act (the  "Section  221  Program.")  A  mortgagee  has the right to
     assign a mortgage  ("put") to the United  States  Department of Housing and
     Urban  Development  ("HUD") at the  expiration of 20 years from the date of
     final endorsement ("Anniversary Date") if the mortgage is not in default at
     such time. The mortgagee may exercise its option to put the mortgage to HUD
     during  the one  year  period  subsequent  to the  Anniversary  Date.  This
     assignment procedure is applicable to an Insured Mortgage, which had a firm
     or conditional  commitment for HUD insurance benefits on or before November
     30,  1983.  Any  mortgagee  electing  to assign an Insured  Mortgage to HUD
     receives, in exchange therefor,  debentures having a total face value equal
     to (i) the then outstanding  principal balance of the Insured Mortgage (ii)
     plus accrued interest on the mortgage to the date of assignment ("Debenture
     Issuance Date").  These debentures  generally mature 10 years from the date
     of assignment and bear interest at a rate announced semi-annually by HUD in
     the Federal  Register ("going Federal rate") at such date.  Generally,  the
     Partnership is not the named mortgagee for the FHA-Insured Certificates. In
     this case, the HUD debentures  are generally  issued to an unrelated  third
     party that is the named mortgagee.  The servicer of the applicable mortgage
     is responsible  for delivering to the  Partnership  all HUD insurance claim
     proceeds. The debenture interest is paid to the Partnership in the month it
     is  received  by the  servicer.  The  debenture  proceeds  are  paid to the
     Partnership  in the month the  debenture  is redeemed by HUD or sold by the
     servicer.  Based on the  recommendation  of  CMSLP,  the  sub-advisor,  and
     consent  of the  Advisor  the  General  Partner  may  elect to put  Insured
     Mortgages  to HUD,  based  upon,  in  general,  but not limited to, (i) the
     interest rates on mortgages,  (ii) the interest rates on debentures  issued
     by HUD and (iii) the costs and risks associated with continuing to hold the
     Insured Mortgages.

(2)  An  application  for insurance  benefits  under the Section 221 program has
     been  filed  for this  mortgage.  The  Partnership  is  currently  awaiting
     approval from HUD for this application.

(3)  Certain mortgages that do not qualify under the Section 221 program contain
     a special assignment option, in certain Insured Mortgage  documents,  which
     allow the  Partnership,  anytime  after  this  date,  the option to require
     payment  from the borrower of the unpaid  principal  balance of the Insured
     Mortgages. Upon such request from the Partnership,  the borrowers must make
     payment to the Partnership,  or the Partnership,  at its option, may cancel
     the FHA insurance and institute foreclosure proceedings.

(4)  Inclusive of closing costs and acquisition fees.

(5)  The mortgages  underlying  the  Partnership's  investments  in  FHA-Insured
     Certificates,  GNMA  Mortgage-Backed  Securities and FHA-Insured  Loans are
     primarily 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.

(6)  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.

(7)  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.
<PAGE>51

(8)  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.

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

(10) 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.

(11) 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, 2002,  2001 and 2000, the
     Partnership  received additional interest of $8,396,  $53,424, and $21,566,
     respectively, from the Participations.

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

(13) A reconciliation  of the carrying value of Insured  Mortgages for the years
     ended December 31, 2002 and 2001, is as follows:
<TABLE>
<CAPTION>
                                                                    2002              2001
                                                                    ----              ----
<S>                                                             <C>               <C>
Beginning balance                                               $ 82,924,257      $109,309,175

   Principal receipts on mortgages                                  (769,593)         (955,959)

   Proceeds from mortgage prepayments                            (14,111,131)      (19,316,901)

   Proceeds from mortgage assignments                             (3,431,297)                -

   Net gains on mortgage dispositions
                                                                   1,851,251         1,785,376
   Portion of 7.125% - 7.5% debentures due from a third party
      in exchange for the mortgages on Summit Square Manor,
      Park Place, Park Hill Apartments, Fairfax House,
      Woodland Villas and Fairlawn II                               (744,159)       (6,759,242)

   Increase (decrease) to unrealized gains on
      Investments in Insured Mortgages                               604,237        (1,138,192)
                                                                ------------      ------------
Ending balance                                                  $ 66,323,565      $ 82,924,257
                                                                ============      ============
</TABLE>

(14) As of December  31, 2002 and 2001,  the tax basis of the Insured  Mortgages
     was approximately $65.1 million and $80.7 million, respectively.

(15) The  Partnership  received  HUD  assignment  proceeds  for these  mortgages
     subsequent to December 31, 2002.  Detail  information is included in Note 6
     of the Notes to Financial Statements.