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


QUARTERLY REPORT UNDER SECTION 13 or 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended           September 30, 1998
                                ------------------

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

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


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



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



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


         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 and (2) has been  subject to such  filing
requirements for the past 90 days. Yes X No
                                   ----     ----
         As of  September  30,  1998,  12,079,389  depositary  units of  limited
partnership interest were outstanding.


<PAGE>2

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

                                   INDEX TO FORM 10-Q

                        FOR THE QUARTER ENDED SEPTEMBER 30, 1998

                                                                       Page
                                                                       ----

PART I.           Financial Information

Item 1.           Financial Statements

                  Balance Sheets - September 30, 1998 (unaudited)
                    and December 31, 1997..........................      3

                  Statements of Operations - for the three and
                    nine months ended September 30, 1998 and 1997
                    (unaudited) .....................................    4

                  Statement of Changes in Partners' Equity -
                    for the nine months ended September 30,
                    1998 (unaudited).................................    5

                  Statements of Cash Flows - for the nine
                    months ended September 30, 1998 and
                    1997 (unaudited).................................    6

                  Notes to Financial Statements (unaudited)...........   7

Item 2.           Management's Discussion and Analysis of
                    Financial Condition and Results
                    of Operations.....................................  14

PART II.          Other Information

Item 6.           Exhibits and Reports on Form 8-K....................  17

Signature         ....................................................  18


<PAGE>3

PART I.           FINANCIAL INFORMATION
ITEM 1.           FINANCIAL STATEMENTS

                                          BALANCE SHEETS
<TABLE><CAPTION>
                                                                            September 30,         December 31,
                                                                                1998                  1997
                                                                           --------------        -------------
                                                                            (unaudited)

                                                         ASSETS
<S>                                                                        <C>                   <C>
Investment in FHA-Insured Certificates and GNMA Mortgage- 
  Backed Securities,  at fair value:
    Acquired insured mortgages                                             $ 124,932,760         $ 142,822,793
    Originated insured mortgages                                              16,735,693            16,887,282
                                                                           -------------         -------------
                                                                             141,668,453           159,710,075
                                                                           -------------         -------------
Investment in FHA-Insured Loans, at
  amortized cost, net of unamortized
  discount and premium:
    Acquired insured mortgages                                                11,648,902            14,416,917
    Originated insured mortgages                                              12,846,867            12,928,572
                                                                           -------------         -------------
                                                                              24,495,769            27,345,489

Cash and cash equivalents                                                      6,026,464            14,718,103

Receivables and other assets                                                   3,858,090             1,676,021
                                                                           -------------         -------------
     Total assets                                                          $ 176,048,776         $ 203,449,688
                                                                           =============         =============

                                            LIABILITIES AND PARTNERS' EQUITY

Distributions payable                                                      $   6,661,959         $  15,460,772

Accounts payable and accrued expenses                                            182,396               306,715

Due to affiliate                                                               1,148,049                    --
                                                                           -------------         -------------
     Total liabilities                                                         7,992,404            15,767,487
                                                                           -------------         -------------
Partners' equity:
  Limited partners' equity                                                   163,985,838           180,044,243
  General partner's deficit                                                   (3,176,358)           (2,524,665)
  Unrealized gain on investment
    in FHA-Insured Certificates
    and GNMA Mortgage-Backed
    Securities                                                                 7,613,371            10,482,727
  Unrealized loss on investment
    in FHA-Insured Certificates
    and GNMA Mortgage-Backed
    Securities                                                                  (366,479)             (320,104)
                                                                           -------------         -------------
     Total partners' equity                                                  168,056,372           187,682,201
                                                                           -------------         -------------
     Total liabilities and partners'
       equity                                                              $ 176,048,776         $ 203,449,688
                                                                           =============         =============
</TABLE>
                                       The   accompanying  notes are an integral
                                             part of these financial statements.


<PAGE>4

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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

                                       STATEMENTS OF OPERATIONS

                                                     (Unaudited)
<TABLE>
<CAPTION>
                                                 For the three months ended      For the nine months ended
                                                         September 30,                  September 30,
                                                ---------------------------     ---------------------------
                                                    1998           1997             1998            1997
                                                -----------    ------------     ------------   ------------
<S>                                            <C>             <C>              <C>            <C>
Income:
  Mortgage investment income                   $  3,449,078    $  4,022,828     $ 10,688,101   $ 12,506,840
  Interest and other income                          72,055         100,065          443,346        208,815
                                               ------------    ------------     ------------   ------------
                                                  3,521,133       4,122,893       11,131,447     12,715,655
                                               ------------    ------------     ------------   ------------
Expenses:
  Asset management fee to related parties           400,771         466,278        1,224,832      1,421,123
  General and administrative                         86,396         176,708          378,773        497,452
                                               ------------    ------------     ------------   ------------
                                                    487,167         642,986        1,603,605      1,918,575
                                               ------------    ------------     ------------   ------------
Net earnings before net gains
  on mortgage dispositions                        3,033,966       3,479,907        9,527,842     10,797,080
Net gains on mortgage
  dispositions                                      202,288             319        1,164,078        205,536
                                               ------------    ------------     ------------   ------------
Net earnings                                   $  3,236,254    $  3,480,226     $ 10,691,920   $ 11,002,616
                                               ============    ============     ============   ============
Net earnings allocated to:
  Limited partners - 96.1%                     $  3,110,040    $  3,344,497     $ 10,274,935   $ 10,573,514
  General partner - 3.9%                            126,214         135,729          416,985        429,102
                                               ------------    ------------     ------------   ------------
                                               $  3,236,254    $  3,480,226     $ 10,691,920   $ 11,002,616
                                               ============    ============     ============   ============
Net earnings per Limited
  Partnership Unit-basic                       $       0.26    $       0.28     $       0.85   $       0.88
                                               ============    ============     ============   ============
</TABLE>


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

<PAGE>5

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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

                               STATEMENT OF CHANGES IN PARTNERS' EQUITY

                             For the nine months ended September 30, 1998

                                                (Unaudited)
<TABLE>
<CAPTION>



                                                                                    Adjustment       Adjustment
                                                                                        to               to
                                                                                    Unrealized       Unrealized
                                                                                      Gains on        Losses on
                                                                                    Investment       Investment
                                             General         Limited                in Insured       in Insured
                                             Partner         Partner                Mortgages        Mortgages          Total
                                           ------------    ------------           -------------    ------------     -------------
<S>                                        <C>             <C>                    <C>              <C>              <C>

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

  Net earnings                                  416,985       10,274,935                     --              --        10,691,920

  Distributions paid or
    accrued of $2.18 per
    Unit, including return
    of capital of $1.33                      (1,068,678)     (26,333,340)                    --              --       (27,402,018)

  Adjustments to unrealized
    gains (losses) on investments
    in FHA-Insured Certificates
    and GNMA Mortgage-Backed
    Securities                                       --               --             (2,869,356)         (46,375)      (2,915,731)
                                        ---------------    -------------          -------------    -------------    -------------
Balance, September 30, 1998             $    (3,176,358)   $ 163,985,838          $   7,613,371    $    (366,479)   $ 168,056,372
                                        ===============    =============          =============    =============    =============

Limited Partnership Units
    outstanding - basic, as of
    September 30, 1998                                           12,079,514
                                                                ===========

</TABLE>


                                           The   accompanying   notes   are   an
                                                 integral    part    of    these
                                                 financial statements.
<PAGE>6

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                              For the nine months ended September 30,
                                                                                   1998                  1997
                                                                              -------------         ------------
<S>                                                                           <C>                   <C>
Cash flows from operating activities:
  Net earnings                                                                $ 10,691,920          $ 11,002,616
  Adjustments to reconcile net earnings
    to net cash provided by operating
    activities:
    Net gain on mortgage dispositions                                           (1,164,078)             (205,536)
    Changes in assets and liabilities:
      (Decrease) increase in accounts payable and
        accrued expenses                                                          (124,318)               61,035
      Decrease in receivables and other assets                                     114,029                98,476
      Decrease in investment in affiliate                                               --               314,072
                                                                             -------------          ------------
        Net cash provided by operating activities                                9,517,553            11,270,663
                                                                             -------------          ------------
Cash flows from investing activities:
  Receipt of mortgage principal from
    scheduled payments                                                           1,026,943             1,243,345
  Proceeds from mortgage dispositions                                           16,964,698             7,428,110
                                                                             -------------          ------------
        Net cash provided by investing activities                               17,991,641             8,671,455
                                                                             -------------          ------------
Cash flows from financing activities:
  Distributions paid to partners                                               (36,200,833)          (19,357,385)
  Decrease in note payable
    and due to affiliate                                                                --              (380,877)
                                                                             -------------          ------------
        Net cash used in financing activities                                  (36,200,833)          (19,738,262)
                                                                             -------------          ------------
Net (decrease)  increase in cash and cash
  equivalents                                                                   (8,691,639)              203,856

Cash and cash equivalents, beginning of period                                  14,718,103             9,716,786
                                                                             -------------          ------------
Cash and cash equivalents, end of period                                     $   6,026,464          $  9,920,642
                                                                             =============          ============
Non cash investing activity:
    9.5% debenture received from HUD in exchange
     for the mortgage on Porter Village I Apartments                         $  2,296,098                     --

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

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

</TABLE>


<PAGE>7

                          AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

                                       NOTES TO FINANCIAL STATEMENTS

                                               (Unaudited)

1.       ORGANIZATION

         American Insured Mortgage Investors - Series 85, L.P. (the Partnership)
was formed under the Uniform Limited  Partnership Act of the state of California
on June 26, 1984. The  Partnership  will terminate on December 31, 2009,  unless
previously terminated under the provisions of the Partnership Agreement.

         Effective September 6, 1991, CRIIMI, Inc. (the General Partner) 
succeeded the former general partners to become the sole general partner of the 
Partnership.  CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. 
(CRIIMI MAE).

         The  Partnership's  investment in mortgages  consists 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  and  together  with  FHA-Insured  Certificates  and GNMA  Mortgage-Backed
Securities  referred to herein as Insured Mortgages).  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.

         On October 5, 1998, CRIIMI MAE Inc., the parent of the General 
Partner, and CRIIMI MAE Management, Inc., an affiliate of CRIIMI MAE Inc. 
and provider of personnel  and  administrative  services  to the  Partnership,  
filed voluntary petitions for  reorganization  under  Chapter 11 of the  
Bankruptcy Code.  Such bankruptcy  filings could result in certain  adverse  
effects to the  Partnership including  without  limitation,  the  potential  
loss of  CRIIMI MAE Inc.  as a potential  source of  capital, and the potential
need to replace  CRIIMI MAE Management, Inc. as a provider of personnel and  
administrative  services to the Partnership.

2.       BASIS OF PRESENTATION

         In the  opinion of the  General  Partner,  the  accompanying  unaudited
financial  statements  contain  all  adjustments  of a normal  recurring  nature
necessary to present  fairly the  financial  position of the  Partnership  as of
September 30, 1998 and December 31, 1997 and the results of its  operations  for
the three and nine months ended  September  30, 1998 and 1997 and its cash flows
for the nine months ended September 30, 1998 and 1997.

         These unaudited financial statements have been prepared pursuant to the
rules  and  regulations  of the  Securities  and  Exchange  Commission.  Certain
information  and note  disclosures  normally  included in  financial  statements
prepared in accordance with generally accepted  accounting  principles have been
condensed or omitted.  While the General  Partner  believes that the disclosures
presented are adequate to make the information  not misleading,  these financial
statements  should be read in conjunction with the financial  statements and the
notes to the financial statements included in the


<PAGE>8

                          AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

                                       NOTES TO FINANCIAL STATEMENTS

                                               (Unaudited)

2.       BASIS OF PRESENTATION - Continued

Partnership's  Annual Report filed on Form 10-K for the year ended  December 31,
1997.

New Accounting Standards
------------------------
         During 1997, FASB issued SFAS No. 130 "Reporting  Comprehensive Income"
(FAS 130).  FAS 130 states  that all items that are  required  to be  recognized
under  accounting  standards as  components  of  comprehensive  income are to be
reported in a separate  statement  of income.  This would  include net income as
currently  reported by the Partnership  adjusted for unrealized gains and losses
related to the  Partnership's  mortgages  accounted for as "available for sale".
FAS 130 was adopted by the  Partnership  January 1, 1998. For the three and nine
months  ended  September  30,  1998,  comprehensive  income was  $1,552,031  and
$7,776,189,  respectively.  For the three and nine months  ended  September  30,
1997, comprehensive income was $5,074,695 and $11,974,485, respectively.

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

        Fully Insured Mortgage Investments
        ----------------------------------
                  Listed  below is the  Partnership's  aggregate  investment  in
Fully Insured Mortgages:

<TABLE>
<CAPTION>                                                     September 30,             December 31,
                                                                  1998                      1997
                                                              -------------             ------------
<S>                                                            <C>                      <C>
Fully Insured Acquired:
  Number of
    GNMA Mortgage-Backed Securities(1)                                    8                        9
    FHA-Insured Certificates (2)(3)(4)(5)(6)                             50                       55
  Amortized Cost                                               $117,491,816             $132,530,176
  Face Value                                                    121,643,983              137,674,964
  Fair Value                                                    124,932,760              142,822,793

Fully Insured Originated:
  Number of
    GNMA Mortgage-Backed Securities                                       1                        1
    FHA-Insured Certificates                                              1                        1
  Amortized Cost                                               $ 16,929,751             $ 17,017,276
  Face Value                                                     16,573,135               16,660,658
  Fair Value                                                     16,735,693               16,887,282

</TABLE>


<PAGE>9

                         AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

                                       NOTES TO FINANCIAL STATEMENTS

                                               (Unaudited)

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


         (1)    In February 1998,  the mortgage on Spanish Trace  Apartments was
                prepaid.  The Partnership received net proceeds of approximately
                $9.7 million and recognized a loss of approximately  $96,000 for
                the nine months ended  September  30, 1998.  A  distribution  of
                approximately  $0.77 per unit  related  to this  prepayment  was
                declared in March 1998 and was paid to Unitholders in May 1998.

         (2)    In April 1998,  the  mortgages on Emerald Green  Apartments  and
                Isle of Pines Village  Apartments were prepaid.  The Partnership
                received net proceeds,  for the two mortgages,  of approximately
                $2.3 million  resulting in an  aggregate  gain of  approximately
                $520,000  for the  nine  months  ended  September  30,  1998.  A
                distribution  of  approximately  $0.19 per Unit  related  to the
                prepayment  of these  mortgages was declared in May 1998 and was
                paid to Unitholders in August 1998.

         (3)    In May  1998,  the  mortgage  on  Stoney  Brook  Apartments  was
                prepaid.  The Partnership received net proceeds of approximately
                $1.5 million  resulting in a gain of approximately  $338,000 for
                the nine months ended  September  30, 1998.  A  distribution  of
                approximately  $0.12 per Unit related to the  prepayment of this
                mortgage was  declared in June 1998 and was paid to  Unitholders
                in August 1998.

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

         (5)    In August 1998, the mortgage on Bentgrass  Hills  Apartments was
                prepaid.  The Partnership received net proceeds of approximately
                $238,000 and recognized a gain of approximately  $54,000 for the
                nine  months  ended   September  30,  1998.  A  distribution  of
                approximately  of $0.02 per Unit  related to the  prepayment  of
                this  mortgage was  declared in  September  1998 and was paid to
                Unitholders in November 1998.

         (6)    In October 1998, the mortgage on Northdale  Commons was prepaid.
                The Partnership received net proceeds of approximately  $718,000
                and expects to recognize a gain of  approximately  $24,000.  The
                Partnership  expects to distribute  approximately $0.06 per Unit
                in February 1999, related to the prepayment of this mortgage.

                As of November  4, 1998,  all of the fully  insured  FHA-Insured
         Certificates  and GNMA  Mortgage-Backed  Securities  are  current  with
         respect  to the  payment  of  principal  and  interest  except  for the
         mortgage on Wayland Health Center,  which has been delinquent since May
         1998. In October 1998,  HUD has approved a refinance on the mortgage of
         Wayland  Health  Center.  Terms are expected by the end of the year. In
         addition,  Quail  Creek  Apartments  and Bowling  Brook,  Section I are
         delinquent  with respect to the September 1998 payment of principal and
         interest.



<PAGE>10

                        AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

                                   NOTES TO FINANCIAL STATEMENTS

                                            (Unaudited)

4.       INVESTMENT IN FHA-INSURED LOANS

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

<TABLE>
<CAPTION>                                                      September 30,            December 31,
                                                                   1998                     1997
                                                               ------------             ------------
<S>                                                            <C>                      <C>
Fully Insured Acquired:
  Number of Loans(1)(2)                                                  10                       12
  Amortized Cost                                               $ 11,648,902             $ 14,416,917
  Face Value                                                     14,124,361               17,165,551
  Fair Value                                                     14,425,680               17,432,816

Fully Insured Originated:
  Number of Loans                                                         3                        3
  Amortized Cost                                               $ 12,846,867             $ 12,928,572
  Face Value                                                     12,514,759               12,589,214
  Fair Value                                                     13,024,193               13,431,769

(1)      In March  1998,  HUD issued  assignment  proceeds in the form of a 9.5%
         debenture for the mortgage on Portervillage I Apartments. This mortgage
         was  owned  50% by AIM 85 and  50% by an  affiliate,  American  Insured
         Mortgage  Investors  (AIM 84). The  debenture  face value is $2,296,098
         with  interest  payable  semi-annually  on  January  1 and July 1. Upon
         disposition  of the  debenture,  50% of the proceeds will be payable to
         AIM  84.  The   Partnership   expects  to  receive   net   proceeds  of
         approximately  $1.1 million and has recognized a gain of  approximately
         $200,000 for the nine months ended  September  30, 1998.  The debenture
         and accrued  interest are included on the balance sheet in  Receivables
         and other  assets and the  portion  due to AIM 84 is included in Due to
         affiliate. A distribution will be declared in the quarter in which cash
         is received for the debenture.

(2)      In August 1998,  the mortgage on  Continental  Village  Apartments  was
         prepaid.  The Partnership  received net proceeds of approximately  $1.8
         million and  recognized  a gain of  approximately  $84,000 for the nine
         months ended September 30, 1998. A distribution of approximately  $0.14
         per Unit  related to the  prepayment  of this  mortgage was declared in
         September 1998 and was paid to Unitholders in November 1998.
</TABLE>

                  As of November 4, 1998, all of the  Partnership's  FHA-Insured
         Loans,  recorded at  amortized  cost,  were current with respect to the
         payment of principal and interest.

                  In addition to base interest payments under Originated Insured
         Mortgages,  the Partnership is entitled to additional interest based on
         a  percentage  of the net cash  flow  from the  underlying  development
         (referred to as Participations). During the three and nine months ended
         September 30, 1998, the Partnership  received additional interest of $0
         and $34,553 as compared to $0 and $89,222 for the corresponding periods
         in 1997 from the Participations. These amounts, if any, are included in
         mortgage   investment   income  on  the   accompanying   statements  of
         operations.


<PAGE>11

                      AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

                                  NOTES TO FINANCIAL STATEMENTS

                                            (Unaudited)

5.       DISTRIBUTIONS TO UNITHOLDERS

         The  distributions  paid or accrued to  Unitholders on a per Unit basis
for the nine months ended September 30, 1998 and 1997 are as follows:
    
                                                1998                 1997
                                               ------               ------
         Quarter ended March 31,               $ 1.07(1)            $ 0.39(4)
         Quarter ended June 30,                  0.58(2)              0.30
         Quarter ended September 30,             0.53(3)              0.84(5)
                                                ------              ------
                                                $ 2.18              $ 1.53
                                                ======              ======

(1)      This amount includes approximately $0.77 per Unit return of capital 
         from the disposition of the mortgage on Spanish Trace Apartments.
(2)      This amount includes approximately $0.31 per Unit return of capital and
         gain from the  disposition  of the following  mortgages:  Emerald Green
         Apartments and Isle of Pines Village of $0.19 per Unit and Stoney Brook
         Apartments of $0.12 per Unit.
(3)      This amount includes approximately $0.27 per Unit return of capital and
         gain  from  the   disposition  of  the  following   mortgages:   Amador
         Residential of $0.11 per Unit,  Bentgrass Hills Apartments of $0.02 per
         Unit and Continental Village Apartments of $0.14 per Unit.
(4)      This amount includes approximately $0.07 per Unit return of capital and
         gain from the  disposition  of the  following  mortgages:  Meadow  Park
         Apartments  I of $0.05 per Unit and  Security  Apartments  of $0.02 per
         Unit.
(5)      This  amount  includes  approximately  $0.54 per Unit return of capital
         related to the following  mortgages:  The prepayment of the mortgage on
         Peachtree  Apartments  ($0.52  per  Unit)  and  the  conversion  of the
         mortgage on Pine Tree Lodge to a GNMA-Mortgage  Backed Security from an
         FHA-Insured Loan ($0.02 per Unit).

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


<PAGE>13

                    AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

                                 NOTES TO FINANCIAL STATEMENTS

                                           (Unaudited)

6.       TRANSACTIONS WITH RELATED PARTIES

         The General Partner and certain affiliated  entities,  during the three
and  nine  months  ended  September  30,  1998  and  1997,  earned  or  received
compensation or payments for services from the Partnership as follows:

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

                                                                         For the                       For the
                                                                    three months ended            nine months ended
                             Capacity in Which                         September 30,                September 30,
Name of Recipient              Served/Item                         1998          1997            1998          1997
-----------------     ----------------------------              ----------   -----------      ----------    ----------
<S>                   <C>                                       <C>          <C>              <C>           <C>
CRIIMI, Inc.          General Partner/Distribution              $  259,816   $   411,784      $1,068,678    $  750,036

AIM Acquisition       Advisor/Asset Management Fee                 400,771       466,278       1,224,832     1,421,123
  Partners, L.P.(1)

CRIIMI MAE            Affiliate of General Partner/                 12,939        12,176          45,483        47,200
Management, Inc.        Expense Reimbursement


(1)      The Advisor, pursuant to the Partnership Agreement,  effective June 26,
         1984,  is entitled to an Asset  Management  Fee equal to 0.95% of Total
         Invested Assets (as defined in the Partnership  Agreement).  CRIIMI MAE
         Services Limited  Partnership,  the sub-advisor to the Partnership (the
         Sub-advisor)  is entitled to a fee of 0.28% of Total  Invested  Assets,
         pursuant to the amended  partnership  agreement as of October  1991. Of
         the amounts paid to the Advisor,  the Sub-advisor earned a fee equal to
         $118,129 and $360,522 for the three and nine months ended September 30,
         1998,  respectively,  and  $137,665 and $418,870 for the three and nine
         months ended  September 30, 1997,  respectively.  The Sub-advisor is an
         affiliate of CRIIMI MAE.

</TABLE>

<PAGE>14

PART I.  FINANCIAL INFORMATION
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS

Introduction
------------
         The  Partnership's  Management's  Discussion  and Analysis of Financial
Condition and Results of Operations  contains  statements that may be considered
forward looking. These statements contain a number of risks and uncertainties as
discussed  herein  and  in  the  Partnership's  other  reports  filed  with  the
Securities  and Exchange  Commission  that could cause actual  results to differ
materially. See Item 1, "Forward-Looking Statements" in the Partnership's Annual
Report for 1997 on Form 10-K for a more  detailed  discussion  of such risks and
uncertainties.

         On October 5, 1998, CRIIMI MAE Inc., the parent of the General 
Partner, and CRIIMI MAE Management, Inc., an affiliate of CRIIMI MAE Inc. and 
provider of personnel  and  administrative  services  to the  Partnership,  
filed  voluntary petitions for  reorganization  under  Chapter 11 of the  
Bankruptcy  Code.  Such bankruptcy  filings could result in certain  adverse  
effects to the Partnership including  without  limitation,  the  potential  loss
of  CRIIMI  MAE Inc.  as a potential source of capital, as discussed under 
Liquidity and Capital Resources, and the potential need to replace  CRIIMI MAE  
Management, Inc. as a provider of personnel and administrative services to the 
Partnership.

General
-------
         As of September 30, 1998,  the  Partnership  had invested in 73 Insured
Mortgages with an aggregate  amortized cost of approximately  $158.9 million, an
aggregate face value of approximately $164.9 million and an aggregate fair value
of approximately $169.1 million, as discussed below.

         In October  1998,  the mortgage on Northdale  Commons was prepaid.  The
Partnership  received  net  proceeds of  approximately  $718,000  and expects to
recognize a gain of approximately $24,000. The Partnership expects to distribute
approximately $0.06 per Unit in February 1999, related to the prepayment of this
mortgage.

         As  of  November  4,  1998,  all  of  the  fully  insured   FHA-Insured
Certificates and GNMA Mortgage-Backed Securities are current with respect to the
payment of  principal  and interest  except for the  mortgage on Wayland  Health
Center,  which has been  delinquent  since May 1998.  In October  1998,  HUD has
approved a  refinance  on the  mortgage  of  Wayland  Health  Center.  Terms are
expected by the end of the year. In addition, Quail Creek Apartments and Bowling
Brook,  Section I are  delinquent  with respect to the September 1998 payment of
principal and interest.


<PAGE>15

PART I.  FINANCIAL INFORMATION
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS - Continued

Results of Operations
---------------------
         Net  earnings for the three and nine months  ended  September  30, 1998
decreased as compared to the corresponding  periods in 1997,  primarily due to a
decrease in mortgage  investment income as a result of the disposition of twelve
mortgages  since  September  1997.  This  decrease  was  partially  offset by an
increase in net gains from mortgage dispositions, as discussed below.

         Interest  and  other  income  decreased  for  the  three  months  ended
September 1998, as compared to the  corresponding  period in 1997, and increased
for the nine months ended  September 30, 1998, as compared to the  corresponding
period in 1997. These variances are primarily due to the temporary investment of
proceeds received from the disposition of mortgages,  prior to distribution,  as
discussed in Notes 3,4 and 5 of the financial statements.

         Asset  management  fees  decreased  for the three and nine months ended
September 30, 1998, as compared to the corresponding  periods in 1997, primarily
from the reduction in the mortgage asset base.

         General and  administrative  expenses  decreased for the three and nine
months ended  September  30, 1998, as compared to the  corresponding  periods in
1997,  primarily  due to a reduction in legal  expenses  that  resulted from the
settlement of the mortgage on Pine Tree Lodge.

         Net gains on  mortgage  dispositions  increased  for the three and nine
months ended  September  30, 1998, as compared to the  corresponding  periods in
1997. During the first nine months of 1998, the Partnership  recognized gains of
approximately  $200,000 from the assignment of the mortgage on  Portervillage  I
Apartments in March 1998 and approximately $1,060,000 from the prepayment of the
mortgages on Stoney Brook Apartments,  Emerald Green  Apartments,  Isle of Pines
Village Apartments,  Amador Residential  Apartments,  Bentgrass Hills Apartments
and Continental Village Apartments.  In addition,  the Partnership  recognized a
loss of  approximately  $96,000 from the  prepayment  of the mortgage on Spanish
Trace  Apartments in February  1998.  During the first nine months of 1997,  the
Partnership  recognized gains of  approximately  $139,000 from the assignment of
the  mortgage  on Meadow Park  Apartments  I in January  1997 and  approximately
$66,000 from the  prepayment of the mortgage on Security  Apartments in February
1997.

Liquidity and Capital Resources
-------------------------------
         The  Partnership's  operating cash  receipts,  derived from payments of
principal and interest on Insured Mortgages, plus cash receipts from interest on
short-term investments,  were sufficient during the first nine months of 1998 to
meet operating requirements.

<PAGE>16

PART I.  FINANCIAL INFORMATION
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS - Continued

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

         Net cash provided by operating activities decreased for the nine months
ended  September  30,  1998,  as compared to the  corresponding  period in 1997,
primarily due to the decrease in earnings  before  mortgage  dispositions  as it
relates to the reduction in mortgage base.

         Net cash provided by investing activities increased for the nine months
ended September 30, 1998, as compared to the corresponding  period in 1997. This
increase  is  primarily  due  to  proceeds  received  from  the  disposition  of
mortgages, as discussed in Notes 3,4 and 5 of the financial statements.

         Net cash used in  financing  activities  increased  for the nine months
ended September 30, 1998, as compared to the corresponding  period in 1997. This
increase  was  due to  the  distribution  of  net  proceeds  received  from  the
disposition  of  mortgages,  as  discussed  in Notes 3,4 and 5 of the  financial
statements.

Other
-----
         On October 5, 1998, CRIIMI MAE Inc., the parent of the General 
Partner, filed a voluntary petition for reorganization under Chapter 11 of the 
Bankruptcy Code.  As a  debtor-in-possession,  CRIIMI MAE Inc.  will not be  
permitted  to provide any available  capital to the General Partner without  
approval from the bankruptcy  court.  This  restriction or potential loss of the
availability of a potential  capital  resource could adversely  affect the 
General Partner and the Partnership;  however,  CRIIMI MAE Inc.  has not  
historically  represented  a significant source of capital for the General 
Partner or the Partnership.


<PAGE>17

PART II. OTHER INFORMATION
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         No  reports on Form 8-K were filed  with the  Securities  and  Exchange
Commission during the quarter ended September 30, 1998.

The exhibits filed as part of this report are listed below:

                  Exhibit No.                     Description
                  -----------               -----------------------
                     27                     Financial Data Schedule


<PAGE>18

                                                      SIGNATURE
                                                     ------------

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

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

                                                     By:  CRIIMI, Inc.
                                                          General Partner
          

/s/ November 16, 1998                                  /s/ Cynthia O. Azzara
---------------------                                -------------------------
DATE                                                 Cynthia O. Azzara
                                                     Principal Financial and
                                                       Accounting Officer