UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                         ------------------------------
                                    FORM 10-Q


[X]      Quarterly  Report  Pursuant  to Section  13 or 15(d) of the  Securities
         Exchange Act of 1934 For the fiscal quarter ended September 30, 1996.

[  ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities 
         Exchange Act of 1934
         For the transition period from                  to

                         Commission file number 0-14598


                 PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985
                                   INCOME FUND
             (Exact name of registrant as specified in its charter)


    California                                            94-2946245
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                        Identification No.)

One Market, Steuart Street Tower,
 Suite 800, San Francisco, CA                             94105-1301
  (Address of principal                                   (Zip Code)
   executive offices)

        Registrant's telephone number, including area code (415) 974-1399
                        ---------------------------------

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


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                                 BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                           September 30,          December 31,
                                                                               1996                   1995
                                                                          ---------------------------------------

   <S>                                                                    <C>                   <C>           
   Equipment held for operating leases, at cost                           $  3,732,989          $   3,972,722 
   Less accumulated depreciation                                            (3,556,768 )           (3,616,132 )
                                                                          ---------------------------------------
      Net equipment                                                            176,221                356,590

   Cash and cash equivalents                                                   416,818                293,808
   Investment in unconsolidated special purpose entity                              --                 79,116
   Accounts receivable, net of allowance for doubtful accounts of
     $26,718 in 1996 and $19,664 in 1995                                        78,711                135,320
   Prepaid insurance                                                               264                  3,128
                                                                          =======================================
      Total assets                                                        $    672,014          $     867,962
                                                                          =======================================

                                         LIABILITIES AND PARTNERS' CAPITAL

   Liabilities:

   Due to affiliates                                                      $      4,641          $       4,641 
   Accounts payable and accrued expenses                                        16,519                 21,292
   Prepaid deposits and engine reserves                                              8                    260
                                                                          ---------------------------------------
       Total liabilities                                                        21,168                 26,193

   Partners capital (deficit):

   Limited Partners (22,276 units)                                             742,387                931,401
   General Partner                                                             (91,541 )              (89,632 )
                                                                          ---------------------------------------
       Total partners' capital                                                 650,846                841,769
                                                                          ---------------------------------------

       Total liabilities and partners' capital                            $    672,014          $     867,962   
                                                                          =======================================

</TABLE>



                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                For the three months                  For the nine months
                                                                 ended September 30,                   ended September 30,
                                                               1996              1995                  1996            1995
                                                           ---------------------------------------------------------------------
   <S>                                                     <C>              <C>                    <C>             <C>         
   Revenues:
     Lease revenue                                         $    94,091      $    170,789           $  289,005      $  517,021  
     Interest and other income                                   2,408             4,863                8,496          28,042
     Gain on disposition of
        equipment                                                3,040             6,199               32,674          29,029
                                                           ---------------------------------------------------------------------
            Total revenues                                      99,539           181,851              330,175         574,092

   Expenses:
     Depreciation                                               52,357            68,579              160,238         209,873
     Management fees to affiliate                               16,331            13,923               41,767          41,768
     Bad debt expense                                           19,502            25,944               12,646          38,701
     Repairs and maintenance                                    25,782            53,357               70,983         129,305
     General and administrative
        expenses to affiliates                                  14,067            28,346               62,503          95,703
     Other general and administrative
       expenses                                                 13,948            14,998               40,931          39,615
                                                           ---------------------------------------------------------------------
            Total expenses                                     141,987           205,147              389,068         554,965

   Equity in net income of unconsolidated
     special purpose entity                                    245,732                --              265,108              --
                                                           ---------------------------------------------------------------------

   Net income (loss)                                       $   203,284      $    (23,296 )         $  206,215      $   19,127   
                                                           =====================================================================

   Partners' share of net income (loss):

      Limited  Partners - 99%                              $   201,251      $    (23,063 )         $  204,153      $   18,936  
      General Partner - 1%                                       2,033              (233 )              2,062             191
                                                           --------------------------------        -----------------------------
                                                                                           ========
            Total                                          $   203,284      $    (23,296 )         $  206,215      $   19,127  
                                                           =====================================================================

   Net income (loss) per Limited
     Partnership Unit (22,276 units)                       $      9.03      $      (1.04 )         $     9.16      $     0.85  
                                                           =====================================================================

   Cash distributions                                      $    99,047      $     99,047           $  297,138      $  297,140  
                                                           =====================================================================

   Cash distribution per
      Limited Partnership Unit                             $      4.40      $       4.40           $    13.21      $    13.21 
                                                           =====================================================================

   Special cash distributions                              $        --      $         --           $  100,000      $       --  
                                                           =====================================================================
   Special cash distributions per
     Limited Partnership Unit                              $        --      $         --           $     4.44      $       --   
                                                           =====================================================================
   Total cash distributions per
     Limited Partnership Unit                              $      4.40      $       4.40           $    17.65      $    13.21  
                                                           =====================================================================
</TABLE>

                       See accompanying notes to financial
                                  statements.



<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
               For the period from December 31, 1994 to September
                                    30, 1996



<TABLE>
<CAPTION>



                                                           Limited               General
                                                           Partner               Partner                 Total
                                                        ------------------------------------------------------------

   <S>                                                  <C>                    <C>                   <C>             
   Partners' capital (deficit)
      at December 31, 1994                              $  1,294,613           $  (85,963 )          $   1,208,650   

   Net income                                                 29,013                  293                   29,306

   Cash distributions                                       (392,225 )             (3,962 )               (396,187 )
                                                        -------------------------------------------------------------

   Partners' capital (deficit)
      at December 31, 1995                                   931,401              (89,632 )                841,769

   Net income                                                204,153                2,062                  206,215

   Quarterly cash distributions                             (294,167 )             (2,971 )               (297,138 )

   Special distributions                                     (99,000 )             (1,000 )               (100,000 )
                                                        -------------------------------------------------------------

   Partners' capital (deficit)
      at September 30, 1996                             $    742,387           $  (91,541 )          $     650,846  
                                                        =============================================================


</TABLE>






                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>



                                                                              For the nine months ended
                                                                                    September 30,
                                                                             1996                  1995
                                                                         ------------------------------------
   <S>                                                                   <C>                  <C>          
   Operating Activities:
   Net income                                                            $   206,215          $     19,127 
      Adjustments to reconcile net income
         to net cash provided by operating activities:
      Gain on disposition of equipment                                       (32,674 )             (29,029 )
      Depreciation                                                           160,238               209,873
      Income from unconsolidated special purpose
        entity in excess of cash distributions                              (224,028 )                  --
      Changes in operating assets and liabilities:
          Restricted cash                                                         --                  (446 )
          Accounts receivable, net                                            56,609                24,333
          Prepaid insurance                                                    2,864                 2,984
          Due to affiliates                                                       --               (12,652 )
          Accounts payable and accrued expenses                               (4,773 )             (14,825 )
          Prepaid deposits and engine reserves                                  (252 )                (596 )
                                                                         ------------------------------------

   Cash provided by operating activities                                     164,199               198,769
                                                                         ------------------------------------

   Investing activities:
      Capitalized equipment repairs                                               --                   (45 )
      Proceeds from disposition of equipment                                  52,805                76,658
      Liquidation proceeds from unconsolidated
       special purpose entity                                                303,144                    --
                                                                         ------------------------------------
   Cash provided by investing activities                                     355,949                76,613
                                                                         ------------------------------------

   Cash flows used in financing activities:
      Cash distributions paid to General Partner                              (3,971 )              (2,971 )
      Cash distributions paid to Limited Partners                           (393,167 )            (294,169 )
                                                                         ------------------------------------
   Cash used in financing activities                                        (397,138 )            (297,140 )
                                                                         ------------------------------------

   Net increase (decrease) in cash and cash equivalents                      123,010               (21,758 )

   Cash and cash equivalents at beginning of period                          293,808               358,864
                                                                         ------------------------------------

   Cash and cash equivalents at end of period                            $   416,818          $    337,106  
                                                                         ====================================

</TABLE>


                       See accompanying notes to financial
                                  statements.



<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 1996

1.   Opinion of Management

     In the  opinion of the  management  of PLM  Financial  Services  Inc.,  the
     General Partner,  the accompanying  unaudited financial  statements contain
     all  adjustments  necessary,   consisting  primarily  of  normal  recurring
     accruals,  to present  fairly the  Partnership's  financial  position as of
     September 30, 1996,  the  statements  of operations  for the three and nine
     months ended  September  30, 1996 and 1995,  the  statements  of changes in
     partners'  capital for the period from  December 31, 1994 to September  30,
     1996 and the  statements of cash flows for the nine months ended  September
     30, 1996 and 1995. Certain  information and footnote  disclosures  normally
     included in financial  statements  prepared in  accordance  with  generally
     accepted  accounting  principles  have been  condensed  or omitted from the
     accompanying  financial  statements.  For  further  information,  reference
     should be made to the financial  statements  and notes thereto  included in
     the  Partnership's  Annual Report on Form 10-K for the year ended  December
     31, 1995, on file at the Securities and Exchange Commission.

2.   Equipment

     The components of owned equipment are as follows:
<TABLE>
<CAPTION>

                                                         September 30,         December 31,
                                                             1996                  1995
                                                        --------------------------------------
   Equipment held for operating leases:

   <S>                                                  <C>                   <C>          
   Trailers                                             $   3,324,757         $   3,543,334
   Marine containers                                           89,583               110,739
   Rail equipment                                             318,649               318,649
                                                        --------------------------------------
                                                            3,732,989             3,972,722
   Less accumulated depreciation                           (3,556,768 )          (3,616,132 )
                                                        --------------------------------------
            Net equipment                               $     176,221         $     356,590
                                                        ======================================
</TABLE>

     All of the  equipment  owned  by the  Partnership  was  either  on lease or
     operating in  PLM-affiliated  short-term  rental facilities as of September
     30,  1996.  With the  exception  of one  trailer  with a carrying  value of
     $6,500, all of the equipment was on lease as of December 31, 1995.

     During the nine months ended  September 30, 1996, the  Partnership  sold or
     disposed of nine trailers and eight marine containers with an aggregate net
     book value of $20,131 for proceeds of $52,805. During the nine months ended
     September 30, 1995, the Partnership  sold or disposed of eight trailers and
     11 marine  containers  with an  aggregate  net book  value of  $47,629  for
     proceeds of $76,658.

3.   Liquidation and special distributions

     During the first quarter of 1995, the  Partnership  completed its 10th year
     of  operations.  As  originally  anticipated  by the General  Partner,  the
     Partnership  will be liquidated  in an orderly  manner in its 11th and 12th
     years of operation. The General Partner is actively marketing the remaining
     equipment  portfolio with the intent of maximizing  sale proceeds.  As sale
     proceeds are received, the General Partner intends to periodicially declare
     special  distributions  to  distribute  the sale  proceeds to the partners.
     During the liquidation phase of the Partnership the equipment will continue
     to be leased under  operating  leases until sold.  Operating cash flows, to
     the  extent  they  exceed  Partnership   expenses,   will  continue  to  be
     distributed on a quarterly basis to partners. The amounts reflected for

<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 1996

3.   Liquidation and special distributions (continued)

     assets and liabilites of the Partnership  have not been adjusted to reflect
     liquidation  values. The equipment portfolio continues to be carried at the
     lower of depreciated cost or fair value less cost to dispose.  Although the
     General  Partner   estimates  that  there  will  be   distributions   after
     liquidation  of assets and  liabilities,  the amounts  cannot be accurately
     determined  prior  to  actual  liquidation  of the  equipment.  Any  excess
     proceeds over expected  Partnership  obligations will be distributed to the
     Partners  throughout the liquidation  period.  Upon final liquidation,  the
     Partnership will be dissolved.

     During the nine months ended  September 30, 1996, the General  Partner paid
     special  distributions of $4.44 per Limited  Partnership Unit with proceeds
     from equipment liquidations.  No special distributions was paid in the nine
     months  ended  September  30, 1995.  The  Partnership  is not  permitted to
     reinvest proceeds from sales or liquidations of equipment.  These proceeds,
     in excess of operational cash  requirements,  are periodically  paid out to
     limited  partners  in the form of  special  distributions.  The  sales  and
     liquidations occur because of equipment destructions,  the determination by
     the General Partner that it is the appropriate  time to maximize the return
     on an asset through sale of that asset, and, in some leases, the ability of
     the lessee to exercise purchase options.

4.   Investment in Unconsolidated Special Purpose Entity

     Prior  to  1996,  the  Partnership   accounted  for  operating   activities
     associated with joint ownership of rental equipment as undivided interests,
     including its proportionate  share of each asset with similar  wholly-owned
     assets in its financial  statements.  Under generally  accepted  accounting
     principles, the effects of such activities, if material, should be reported
     using the equity  method of  accounting.  Therefore,  effective  January 1,
     1996,  the  Partnership  adopted  the  equity  method  to  account  for its
     investment in such jointly-held assets.

     The principle  differences  between the previous  accounting method and the
     equity method relate to the  presentation  of activities  relating to these
     assets in the statement of operations. Whereas, under equity accounting the
     Partnership's  proportionate  share is  presented  as a single net  amount,
     "equity in net income (loss) of unconsolidated  special purpose  entities",
     under the  previous  method,  the  Partnership's  statement  of  operations
     reflected its  proportionate  share of each  individual item of revenue and
     expense.   Accordingly,  the  effect  of  adopting  the  equity  method  of
     accounting  has no  cumulative  effect  on  previously  reported  partner's
     capital  or on the  Partnership's  net  income  (loss)  for the  period  of
     adoption.  Because the effects on previously issued financial statements of
     applying the equity method of accounting to  investments  in  jointly-owned
     assets are not considered to be material to such financial statements taken
     as a whole,  previously issued financial statements have not been restated.
     However,  certain items have been  reclassified  in the  previously  issued
     balance sheet to conform to the current period presentation.

     During the nine months ended September 30, 1996, the  Partnership  sold its
     31% investment in a commuter aircraft for $303,144.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                                 BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>

                                                                          September 30,           December 31,
                                                                              1996                   1995
                                                                         ---------------------------------------

      <S>                                                                <C>                    <C>          
      Equipment held for operating leases, at cost                       $   4,460,572          $   5,059,215
      Less accumulated depreciation                                         (4,179,692 )           (4,536,562 )
                                                                         ---------------------------------------
          Net equipment                                                        280,880                522,653

      Cash and cash equivalents                                                811,144                551,094
      Investments in unconsolidated special purpose entities                   126,577                425,957
      Accounts receivable, net of allowance for doubtful accounts
          of $11,510 in 1996 and $6,649 in 1995                                 72,844                143,225
      Prepaid insurance                                                            237                  5,435
                                                                         =======================================
          Total assets                                                   $   1,291,682          $   1,648,364
                                                                         =======================================

                                        LIABILITIES AND PARTNERS' CAPITAL

   Liabilities:

      Due to affiliates                                                  $       7,026          $       7,026
      Accounts payable and accrued expenses                                     11,416                 15,202
                                                                         ---------------------------------------
           Total liabilities                                                    18,442                 22,228

      Partners capital (deficit):

      Limited Partners (33,727 units)                                        1,409,009              1,758,377
      General Partner                                                         (135,769 )             (132,241 )
                                                                         ---------------------------------------
          Total partners' capital                                            1,273,240              1,626,136
                                                                         ---------------------------------------

          Total liabilities and partners' capital                        $   1,291,682          $   1,648,364
                                                                         =======================================

</TABLE>








                       See accompanying notes to financial
                                  statements.


<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                              STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                   For the three months              For the nine months
                                                                   ended September 30,               ended September 30,
                                                                   1996            1995              1996            1995
                                                               ---------------------------------------------------------------

       <S>                                                     <C>             <C>               <C>             <C>       
       Revenues:

           Lease revenue                                       $   96,968      $  272,726        $  316,717      $  855,499
           Interest and other income                                3,768           7,863            14,590          28,095
           Gain on disposition of
               equipment                                           14,895          19,988            69,529          66,647
                                                               ---------------------------------------------------------------
                Total revenues                                    115,631         300,577           400,836         950,241

       Expenses:
           Depreciation                                            60,477         127,707           189,848         386,745
           Management fees to affiliate                            32,944          21,080            70,767          66,889
           Bad debt expense                                           (79 )        19,161             3,872          15,887
           Repairs and maintenance                                 21,703          59,874            68,639         165,264
           General and administrative
               expenses to affiliates                              22,579          42,904            89,661         144,212
           Other general and administrative
               expenses                                            11,981          15,137            44,846          38,534
                                                               ---------------------------------------------------------------
               Total expenses                                     149,605         285,863           467,633         817,531

       Equity in net income of unconsolidated
         special purpose entities                                 569,504              --           640,348              --
                                                               ---------------------------------------------------------------

       Net income                                              $  535,530      $   14,714        $  573,551      $  132,710
                                                               ===============================================================

       Partners' share of net income:
          Limited  Partners - 99%                              $  530,175      $   14,567        $  567,815      $  131,383
          General Partner - 1%                                      5,355             147             5,736           1,327
                                                               ===============================================================
                Total                                          $  535,530      $   14,714        $  573,551      $  132,710
                                                               ===============================================================

       Net income per Limited Partnership
          Unit (33,727 units)                                  $    15.72      $     0.43        $    16.84      $     3.90
                                                               ===============================================================

       Cash distributions                                      $  156,815      $  161,316        $  576,447      $  687,222
                                                               ===============================================================

       Cash distribution per
          Limited Partnership Unit                             $     4.60      $     4.74        $    16.92      $    20.17
                                                               ===============================================================

       Special cash distributions                              $  100,000      $  100,000        $  350,000      $  200,000
                                                               ===============================================================

       Special cash distributions per
          Limited Partnership Unit                             $     2.94      $     2.94        $    10.27      $     5.87
                                                               ===============================================================

       Total Cash Distributions per
          Limited Partnership Units                            $     7.54      $     7.68        $    27.19      $    26.04
                                                               ===============================================================
</TABLE>

                       See accompanying notes to financial
                                  statements.

<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
               For the period from December 31, 1994 to September
                                    30, 1996

<TABLE>
<CAPTION>


                                                           Limited                 General
                                                           Partner                 Partner                 Total
                                                        ---------------------------------------------------------------

   <S>                                                  <C>                     <C>                   <C>            
   Partners' capital (deficit)
      at December 31, 1994                              $  2,622,019            $  (123,518 )         $   2,498,501  

   Net income                                                173,422                  1,752                 175,174

   Cash distributions                                     (1,037,064 )              (10,475 )            (1,047,539 )
                                                        ---------------------------------------------------------------

   Partners' capital (deficit)
      at December 31, 1995                                 1,758,377               (132,241 )             1,626,136

   Net income                                                567,815                  5,736                 573,551

   Quarterly cash distributions                             (570,683 )               (5,764 )              (576,447 )

   Special distributions                                    (346,500 )               (3,500 )              (350,000 )
                                                        ---------------------------------------------------------------

   Partners' capital (deficit)
      at September 30, 1996                             $  1,409,009               (135,769 )             1,273,240   
                                                        ===============================================================

</TABLE>







                       See accompanying notes to financial
                                  statements.



<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                  For the nine months
                                                                                  ended September 30,
                                                                              1996                   1995
                                                                         --------------------------------------
   <S>                                                                   <C>                     <C>        
   Operating Activities:
   Net income                                                            $    573,551            $   132,710
     Adjustment to reconcile net income
        to net cash provided by operating activities:
      Gain on disposition of equipment                                        (69,529 )              (66,647 )
      Depreciation                                                            189,848                386,745
      Income from unconsolidated special purpose
        entities in excess of cash distributions                             (386,849 )                   --
      Changes in operating assets and liabilities
          Restricted cash                                                          --                   (550 )
         Accounts receivable, net                                              70,381                 71,180
         Prepaid insurance                                                      5,198                  4,346
         Due to affiliates                                                         --                (17,211 )
         Accounts payable and accrued expenses                                 (3,786 )                1,581
         Prepaid deposits and engine reserves                                      --                    464
                                                                         --------------------------------------

   Cash provided by operating activities                                      378,814                512,618
                                                                         --------------------------------------

   Investing activities:
      Capitalized equipment repairs                                                --                   (191 )
      Proceeds from disposition of equipment                                  121,454                136,648
      Liquidation proceeds from unconsolidated
        special purpose entity                                                686,229                     --
                                                                         --------------------------------------
   Cash provided by investing activities                                      807,683                136,457
                                                                         --------------------------------------

   Cash flows used in financing activities:
      Cash distributions paid to General Partner                               (9,264 )               (8,872 )
      Cash distributions paid to Limited Partners                            (917,183 )             (878,350 )
                                                                         --------------------------------------
   Cash used in financing activities                                         (926,447 )             (887,222 )
                                                                         --------------------------------------

   Net increase (decrease) in cash and cash equivalents                       260,050               (238,147 )

   Cash and cash equivalents at beginning of period                           551,094                799,068
                                                                         --------------------------------------

   Cash and cash equivalents at end of period                            $    811,144            $   560,921
                                                                         ======================================

</TABLE>





                       See accompanying notes to financial
                                  statements.



<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 1996

1.   Opinion of Management

     In the  opinion of the  management  of PLM  Financial  Services  Inc.,  the
     General Partner,  the accompanying  unaudited financial  statements contain
     all  adjustments  necessary,   consisting  primarily  of  normal  recurring
     accruals,  to present  fairly the  Partnership's  financial  position as of
     September 30, 1996,  the statements of income for the three and nine months
     ended  September 30, 1996 and 1995,  the statements of changes in partners'
     capital for the period from  December 31, 1994 to September  30, 1996,  and
     the  statements of cash flows for the nine months ended  September 30, 1996
     and 1995. Certain information and footnote disclosures normally included in
     financial   statements  prepared  in  accordance  with  generally  accepted
     accounting  principles have been condensed or omitted from the accompanying
     financial statements. For further information,  reference should be made to
     the financial  statements and notes thereto  included in the  Partnership's
     Annual Report on Form 10-K for the year ended December 31, 1995, on file at
     the Securities and Exchange Commission.

2.   Equipment

     The components of owned equipment are as follows:
<TABLE>
<CAPTION>

                                                         September 30,           December 31,
                                                              1996                   1995
                                                        ----------------------------------------
   Equipment held for operating leases:

   <S>                                                   <C>                    <C>            
   Trailers                                              $   4,258,792          $   4,833,449  
   Marine containers                                           201,780                225,766
                                                        ----------------------------------------
                                                             4,460,572              5,059,215
   Less accumulated depreciation                            (4,179,692 )           (4,536,562 )
                                                        ========================================
               Net equipment                             $     280,880          $     522,653  
                                                        ========================================
</TABLE>

     All of the  equipment  owned  by the  Partnership  is  either  on  lease or
     operating in  PLM-affiliated  short-term  rental facilities as of September
     30, 1996, and at December 31, 1995.

     During the nine months ended  September 30, 1996, the  Partnership  sold or
     disposed of nine marine  containers  and 18 trailers  with an aggregate net
     book value of $51,925  for  proceeds  of  $121,454.  During the nine months
     ended  September 30, 1995,  the  Partnership  sold or disposed of 15 marine
     containers  and 14 trailers with an aggregate net book value of $70,001 for
     proceeds of $136,648.

3.   Liquidation and special distributions

     During the first quarter of 1995, the  Partnership  completed its 10th year
     of  operations.  As  originally  anticipated  by the General  Partner,  the
     Partnership  will be liquidated  in an orderly  manner in its 11th and 12th
     years of operation. The General Partner is actively marketing the remaining
     equipment  portfolio with the intent of maximizing  sale proceeds.  As sale
     proceeds are received the General Partner intends to periodicially  declare
     special  distributions  to  distribute  the sale  proceeds to the partners.
     During the liquidation phase of the Partnership the equipment will continue
     to be leased under  operating  leases until sold.  Operating cash flows, to
     the  extent  they  exceed  Partnership   expenses,   will  continue  to  be
     distributed  on a quarterly  basis to partners.  The amounts  reflected for
     assets and liabilities of the Partnership have not been adjusted to reflect
     liquidation values. The

<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                               September 30, 1996

3.   Liquidation and special distributions (continued)

     equipment  portfolio  continues  to be carried at the lower of  depreciated
     cost or fair value  less cost to  dispose.  Although  the  General  Partner
     estimates that there will be distributions  after liquidation of assets and
     liabilities,  the amounts cannot be accurately  determined  prior to actual
     liquidation of the equipment. Any excess proceeds over expected Partnership
     obligations will be distributed to the Partners  throughout the liquidation
     period. Upon final liquidation, the Partnership will be dissolved.

     During the nine months  ended  September  30, 1996,  and 1995,  the General
     Partner  paid  special  distributions  of  $10.27  and  $5.87  per  Limited
     Partnership Unit,  respectively,  for proceeds from equipment liquidations.
     The  Partnership  is not  permitted  to  reinvest  proceeds  from  sales or
     liquidations of equipment.  These proceeds,  in excess of operational  cash
     requirements,  are periodically paid out to limited partners in the form of
     special  distributions.   The  sales  and  liquidations  occur  because  of
     equipment destructions, the determination by the General Partner that it is
     the  appropriate  time to maximize  the return on an asset  through sale of
     that  asset,  and,  in some  leases,  the ability of the lessee to exercise
     purchase options.

4.   Investments in Unconsolidated Special Purpose Entities

     Prior  to  1996,  the  Partnership   accounted  for  operating   activities
     associated with joint ownership of rental equipment as undivided interests,
     including its proportionate  share of each asset with similar  wholly-owned
     assets in its financial  statements.  Under generally  accepted  accounting
     principles, the effects of such activities, if material, should be reported
     using the equity  method of  accounting.  Therefore,  effective  January 1,
     1996,  the  Partnership  adopted  the  equity  method  to  account  for its
     investment in such jointly-held assets.

     The principle  differences  between the previous  accounting method and the
     equity method relate to the  presentation  of activities  relating to these
     assets in the  income  statement.  Whereas,  under  equity  accounting  the
     Partnership's  proportionate  share is  presented  as a single net  amount,
     "equity in net income (loss) of unconsolidated  special purpose  entities",
     under the previous method, the Partnership's income statement reflected its
     proportionate  share  of each  individual  item  of  revenue  and  expense.
     Accordingly,  the effect of adopting the equity method of accounting has no
     cumulative  effect  on  previously  reported  partner's  capital  or on the
     Partnership's  net income  (loss) for the period of  adoption.  Because the
     effects on previously  issued  financial  statements of applying the equity
     method  of  accounting  to  investments  in  jointly-owned  assets  are not
     considered to be material to such  financial  statements  taken as a whole,
     previously  issued  financial  statements have not been restated.  However,
     certain items have been reclassified in the previously issued balance sheet
     to conform to the current period presentation.

     The "Investments in unconsolidated  special purpose entities"  includes 69%
     and 80% interests in two separate  commuter  aircraft.  The General Partner
     sold one of the  jointly-owned  aircraft in which the Partnership  holds an
     investment of 69% for $686,229 in the third quarter of 1996.


<PAGE>



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

(I)  Results of Operations

Comparison of the Partnerships' Operating Results for the Three Months Ended 
September 30, 1996 and 1995

TEP VIIB:

(A)  Owned equipment operations

Lease  revenues less direct  expenses  (defined as repairs and  maintenance  and
asset specific insurance expenses) on owned equipment decreased during the third
quarter of 1996 when compared to the same quarter of 1995.  The following  table
presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                             For the three months
                                                                              ended September 30,
                                                                            1996               1995
                                                                         ------------------------------
   <S>                                                                   <C>                <C>       
   Trailers                                                              $  60,225          $   88,442
   Railcar equipment                                                         7,455                 261
   Marine containers                                                            36               6,168
</TABLE>

Trailers:  Trailer lease revenues and direct  expenses were $86,526 and $26,301,
respectively,  for the three  months  ended  September  30,  1996,  compared  to
$135,929 and $47,487, respectively during the same quarter of 1995. The decrease
in net contribution was due to lower  utlilization of trailers in the short-term
rental facilities in the third quarter of 1996 when compared to the same quarter
of 1995, and the  disposition of five trailers in the third and fourth  quarters
of 1995 and nine trailers during the first nine months of 1996;

Railcar  equipment:  Railcar lease revenues and direct  expenses were $7,500 and
$45,  respectively,  for the three months ended September 30, 1996,  compared to
$4,537 and $4,276,  respectively,  during the same quarter of 1995. Although the
railcar fleet remained relatively the same size for both quarters,  the increase
in railcar  contribution  resulted  from  running  repairs  required  on certain
railcars  in the fleet  during  1995  which  were not  needed  during  1996.  In
addition,  early lease termination on four railcars in the third quarter of 1995
resulted in a $3,600 credit given back to the lessee;

Marine containers:  Marine container lease revenues and direct expenses were $66
and $30,  respectively,  for the three months ended September 30, 1996, compared
to $6,230 and $62, respectively,  during the same quarter of 1995. The number of
marine  containers  owned by the  Partnership  has been  declining over the past
twelve months due to sales and dispositions.  The result of this declining fleet
has been a decrease in marine container net contribution.

(B)  Indirect expenses related to owned equipment operations

Total  indirect  expenses of $115,611 for the quarter ended  September 30, 1996,
decreased  from  $140,515  for the same  quarter  in  1995.  The  variances  are
explained as follows:

(a) a $17,002  decrease  in general  and  administrative  expenses  due to lower
indirect  costs  associated  with the  short-term  rental  facilites  due to the
decreased volume of trailers  operating in the facilites in the third quarter of
1996 as compared to the third quarter of 1995, and lower accounting costs;

(b) a  $6,442  decrease  in  bad  debt  expense  due to  the  General  Partner's
evaluation of the  collectibility  of trade receivables from trailer rental yard
lessees;

(c) a $3,869 decrease in depreciation and amortization expenses from 1995 levels
reflecting the sale of certain assets during 1996 and 1995.

(C) Net gain on  disposition  of  equipment  was $3,040 in the third  quarter of
1996, from the disposition of one marine container and one trailer compared to a
gain of $6,199 in the third quarter of 1995,  from the disposition of six marine
containers and five trailers.

(D)  Interest and other income

Interest and other income  decreased $2,455 during the third quarter of 1996 due
primarily to lower interest income resulting from lower cash balances  available
for investments when compared to the same period of 1995.

(E)  Equity in net income of unconsolidated special purpose entity

Equity in net income of  unconsolidated  special purpose entity was $245,732 and
$11,286 for the three months ended  September  30, 1996 and 1995,  respectively,
and represents the operating  income  generated from a 31% interest in a jointly
owned  commuter  aircraft  accounted  for under the  equity  method and the gain
($236,700)  resulting from the sale of this investment for proceeds of $303,144.
(see Note 4 to the financial statements).

(F) Net income

The Partnership's net income of $203,284 in the third quarter of 1996, decreased
from a net loss of  $23,296  in the third  quarter  of 1995.  The  Partnership's
ability to operate or liquidate assets, secure leases, and re-lease those assets
whose leases  expire during the duration of the  Partnership  is subject to many
factors,  and the Partnership's  performance in the third quarter of 1996 is not
necessarily  indicative of future  periods.  In the third  quarter of 1996,  the
Partnership  distributed  $98,057 to the Limited Partners,  or $4.40 per Limited
Partnership Unit.



<PAGE>


TEP VIIC:

(A)  Owned equipment operations

Lease  revenues less direct  expenses  (defined as repairs and  maintenance  and
asset specific insurance expenses) on owned equipment decreased during the third
quarter of 1996 when compared to the same quarter of 1995.  The following  table
presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                              For the three months
                                                                               ended September 30,
                                                                            1996                1995
                                                                         --------------------------------
   <S>                                                                   <C>                <C>       
   Trailers                                                              $  74,056          $  107,416
   Marine containers                                                           420               7,395

</TABLE>

Trailers:  Trailer lease revenues and direct  expenses were $96,503 and $22,447,
respectively,  for the three  months  ended  September  30,  1996,  compared  to
$165,600 and $58,184, respectively during the same quarter of 1995. The decrease
in net contribution was due to lower  utlilization of trailers in the short-term
rental facilities in the third quarter of 1996 when compared to the same quarter
of 1995, and the disposition of six trailers in the third and fourth quarters of
1995 and 18 trailers during the first nine months of 1996;

Marine containers: Marine container lease revenues and direct expenses were $465
and $45,  respectively,  for the three months ended September 30, 1996, compared
to $7,521 and $126,  respectively during the same quarter of 1995. The number of
marine  containers  owned by the  Partnership  has been  declining over the past
twelve months due to sales and dispositions.  The result of this declining fleet
has been a decrease in marine container net contribution.

(B)  Indirect expenses related to owned equipment operations

Total  indirect  expenses of $127,113 for the quarter ended  September 30, 1996,
decreased from $173,369 for the same period in 1995. The variances are explained
as follows:

(a) a $27,210  decrease  in the general and  administrative  expenses  from 1995
levels was due to decreased  administrative costs associated with the short-term
rental facilities;

(b) a  $19,240  decrease  in bad  debt  expense  due to  the  General  Partner's
evaluation of the  collectibility  of trade receivables from trailer rental yard
lessees;

(c) a $11,670  decrease in  depreciation  and  amortization  expenses  from 1995
levels reflecting the sale of certain assets during 1996 and 1995;

(d) a $11,864 increase in management fees due to higher levels of operating cash
flow during the comparable  periods.  Monthly  management fees are calculated as
the greater of 10% of the Partnership's  Operating Cash Flow, or 1/12 of 1/2% of
the Partnership's  Capital  Contributions as defined in the Limited  Partnership
Agreement.

(C) Net gain on  disposition  of equipment  was $14,895 in the third  quarter of
1996, from the disposition of five marine containers and two trailers,  compared
to a gain of $19,988 in the third quarter of 1995,  from the disposition of four
marine containers and six trailers.

(D) Interest and other income  decreased to $3,768 in the third  quarter of 1996
from $7,863 in the third  quarter of 1995.  This decrease was primarily due to a
lower interest rate earned on cash investments and lower cash balances available
for investments in the third quarter of 1996 when compared to the same period of
1995.



<PAGE>


(E) Equity in net income of unconsolidated special purpose entities

Equity in net income of unconsolidated  special purpose entities of $569,504 and
$45,421 for the three months ended  September  30, 1996 and 1995,  respectively,
represents the operating income  generated from jointly owned commuter  aircraft
accounted for under the equity method and the gain ($535,821) resulting from the
sale of one  jointly-owned  aircraft for proceeds of $686,229 (see Note 4 to the
financial statements).

     The  increase  in  aircraft  net  contribution  was due to the  sale of one
jointly  owned  commuter  aircraft  in the third  quarter of 1996 with a gain of
$535,821.

(F)  Net Income

The Partnership's net income increased to $535,530 in the third quarter of 1996,
from $14,714 in the third quarter of 1995. The Partnership's  ability to operate
or liquidate  assets,  secure  leases,  and  re-lease  those assets whose leases
expire during the duration of the  Partnership  is subject to many factors,  and
the  Partnership's  performance in the third quarter of 1996 is not  necessarily
indicative  of future  periods.  In the third quarter of 1996,  the  Partnership
distributed  $254,247 to the Limited Partners,  or $7.54 per Limited Partnership
Unit which included a special distribution of $2.94 per unit.

Comparison of the Partnerships' Operating Results for the Nine Months Ended 
September 30, 1996 and 1995

TEP VIIB:

(A)  Owned equipment operations

Lease  revenues less direct  expenses  (defined as repairs and  maintenance  and
asset specific insurance expenses) on owned equipment decreased during the first
nine  months of 1996 when  compared to the same  period of 1995.  The  following
table presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                               For the nine months
                                                                               ended September 30,
                                                                             1996                1995
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $  186,338          $  281,037
   Railcar equipment                                                         22,091              13,220
   Marine containers                                                          7,811              18,437

</TABLE>

Trailers:  Trailer lease revenues and direct expenses were $258,604 and $72,266,
respectively, for the nine months ended September 30, 1996, compared to $404,931
and $123,894, respectively,  during the same period of 1995. The decrease in net
contribution was due to lower  utlilization of trailers in the short-term rental
facilities  in the first nine months of 1996 when compared to the same period of
1995, and the  disposition of five trailers in the third and fourth  quarters of
1995 and nine trailers during the first nine months of 1996;

Railcar  equipment:  Railcar lease revenues and direct expenses were $22,500 and
$409,  respectively,  for the nine months ended September 30, 1996,  compared to
$20,549 and $7,329,  respectively,  during the same period of 1995. Although the
railcar fleet remained relatively the same size for both quarters,  the increase
in railcar  contribution  resulted  from  running  repairs  required  on certain
railcars  in the fleet  during  1995  which  were not  needed  during  1996.  In
addition,  early lease termination on four railcars in the third quarter of 1995
resulted in a $3,600 credit given back to the lessee.



<PAGE>


Marine  containers:  Marine  container  lease revenues and direct  expenses were
$7,901 and $90,  respectively,  for the nine months  ended  September  30, 1996,
compared to $18,631 and $194, respectively,  during the same period of 1995. The
number of marine containers owned by the Partnership has been declining over the
past twelve months due to sales and  dispositions.  The result of this declining
fleet has been a decrease in marine container net contribution.

(B)  Indirect expenses related to owned equipment operations

Total  indirect  expenses of $316,303  for the nine months ended  September  30,
1996,  decreased  from  $385,454 for the same period in 1995.  The variances are
explained as follows:

(a) a $30,520 decrease in general and  administrative  expenses from 1995 levels
was due to decreased  administrative costs associated with the short-term rental
facilities;

(b) a $26,055  decrease in bad debt  expense  was due to the  General  Partner's
evaluation of the  collectibility  of trade receivables from trailer rental yard
lessees;

(c) a $12,576  decrease in  depreciation  and  amortization  expenses  from 1995
levels reflecting the sale of certain assets during 1996 and 1995.

(C) For the nine months ended  September 30, 1996,  the  Partnership  realized a
gain of $32,674 on the sale or disposition  of eight marine  containers and nine
trailers,  compared to the same period in 1995 where the Partnership  realized a
gain of  $29,029  on the sale or  disposition  of eight  trailers  and 11 marine
containers.

(D)  Interest  and other  income  decreased  to $8,496 for the nine months ended
September  30, 1996 from $28,042 for the same period of 1995.  This decrease was
primarily due to income earned from an early lease  termination  penalty on four
railcars in the third quarter of 1995, and lower  interest  income earned due to
lower cash balances  available for investments  when compared to the same period
of 1995.

(E) Equity in net income of the unconsolidated special purpose entity

Equity in net income of  unconsolidated  special purpose entity was $265,108 and
$34,816 for the nine months ended September 30, 1996 and 1995, respectively, and
represents the operating income generated from a 31% interest in a jointly owned
aircraft accounted for under the equity method and the gain ($236,700) resulting
from the sale of this  investment  for  proceeds of $303,144  (see Note 4 to the
financial statements).




<PAGE>



(F) Net income

The  Partnership's net income of $206,215 in the nine months ended September 30,
1996, decreased from $19,127 in the first nine months of 1995. The Partnership's
ability to operate or liquidate assets, secure leases, and re-lease those assets
whose leases  expire during the duration of the  Partnership  is subject to many
factors,  and the Partnership's  performance in the first nine months of 1996 is
not  necessarily  indicative  of  future  periods.  For the  nine  months  ended
September  30,  1996,  the  Partnership  distributed  $393,167  to  the  Limited
Partners,  or $17.65  per  Limited  Partnership  Unit  which  included a special
distribution of $4.44 per unit.

TEP VIIC:

(A)  Owned equipment operations

Lease  revenues less direct  expenses  (defined as repairs and  maintenance  and
asset specific insurance expenses) on owned equipment decreased during the first
nine  months of 1996 when  compared to the same  period of 1995.  The  following
table presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                               For the nine months
                                                                               ended September 30,
                                                                             1996                1995
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $  241,758          $  368,975
   Marine containers                                                          3,533              22,994

</TABLE>

Trailers:  Trailer lease revenues and direct expenses were $313,025 and $71,267,
respectively, for the nine months ended 1996, compared to $533,915 and $164,940,
respectively  during the same quarter of 1995. The decrease in net  contribution
was due to lower  utlilzation of trailers in the short-term rental facilities in
the first nine months of 1996 when compared to the same period of 1995,  and the
disposition  of six  trailers  in the third and fourth  quarters  of 1995 and 18
trailers during the first nine months of 1996;

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$3,692 and $159,  respectively,  for the nine  months  ended  1996,  compared to
$23,399 and $405,  respectively  during the same quarter of 1995.  The number of
marine  containers  owned by the  Partnership  has been  declining over the past
twelve months due to sales and dispositions.  The result of this declining fleet
has been a decrease in marine container net contribution.

(B)  Indirect expenses related to owned equipment operations

Total  indirect  expenses of $396,207  for the nine months ended  September  30,
1996,  decreased  from  $496,732 for the same period in 1995.  The variances are
explained as follows:

(a) a $62,170  decrease  in the general and  administrative  expenses  from 1995
levels due to decreased  administrative  costs  associated  with the  short-term
rental  facilities  due to  decreased  volume  of  trailers  operating  in these
facilities;

(b) a $30,218  decrease in  depreciation  and  amortization  expenses  from 1995
levels reflecting the sale of certain assets during 1996 and 1995;

(c) a  $12,015  decrease  in bad  debt  expense  due to  the  General  Partner's
evaluation of the  collectibility  of trade receivables from trailer rental yard
lessees;



<PAGE>


(d) a $3,878  increase in managment  fees due to higher levels of operating cash
flow during the comparable  periods.  Monthly  management fees are calculated as
the greater of 10% of the Partnership's  Operating Cash Flow, or 1/12 of 1/2% of
the Partnership's  Capital  Contributions as defined in the Limited  Partnership
Agreement.

(C) For the nine months ended  September 30, 1996,  the  Partnership  realized a
gain of  $69,529  on the sale or  disposition  of 18  trailers  and nine  marine
containers,  compared to the same period in 1995, where the Partnership realized
a gain of  $66,647  on the sale or  disposition  of 14  trailers  and 15  marine
containers.

(D)  Equity in net income of unconsolidated special purpose entities

Equity in net income of unconsolidated  special purpose entities of $640,348 and
$142,731 for the nine months ended  September  30, 1996 and 1995,  respectively,
represents the operating income  generated from jointly owned commuter  aircraft
accounted for under the equity method and the gain ($535,821) resulting from the
sale of one  jointly-owned  aircraft for proceeds of $686,229 (see Note 4 to the
financial statements).

(E)  Interest  and other  income  decreased to $14,590 for the nine months ended
September  30,  1996,  from  $28,095  compared to the same period of 1995.  This
decrease was primarily due to lower interest rate earned on cash  investments in
the first nine months of 1996.

 (F) Net Income

The  Partnership's  net income  increased  to $573,551 for the nine months ended
September 30, 1996, from $132,710 in the same period in 1995. The  Partnership's
ability to operate or liquidate assets, secure leases, and re-lease those assets
whose leases  expire during the duration of the  Partnership  is subject to many
factors,  and the Partnership's  performance in the first nine months of 1996 is
not necessarily  indicative of future  periods.  In the nine months of 1996, the
Partnership  distributed $917,183 to the Limited Partners, or $27.19 per Limited
Partnership Unit which included a special distribution of $10.27 per unit.

(II) Asset Sales

The General Partner is actively marketing the remaining equipment portfolio with
the intent of maximizing sale proceeds.

Equipment sales and dispositions prior to the Partnerships'  planned liquidation
phase generally  result from either the exercise by lessees of fair market value
purchase  options  provided for in certain leases,  or the payment of stipulated
loss  values on  equipment  lost or disposed of during the time it is subject to
lease  agreements.  Such disposal of equipment is unpredictable and results from
the wear, tear, and general risk of normal  operations.  As discussed in Note 3,
the Partnerships  have entered the portfolio  liquidation  phase as of the third
quarter of 1995.  During the nine months ended September 30, 1996, TEP VIIB sold
or disposed of nine trailers and eight marine  containers  for $52,805,  and TEP
VIIC sold or disposed of 18 trailers and nine marine containers for $121,454. In
addition, during the nine months ended September 30, 1996, TEP VIIB sold its 31%
investment  in a  commuter  aircraft  for  $303,144  and TEP  VIIC  sold its 69%
investment in a commuter aircraft for $686,229.

As discussed in Note 3, the General Partner is actively  marketing the remaining
equipment portfolio with the intent of maximizing sale proceeds.



<PAGE>


(III)  Market Values

In March 1995, the Financial  Accounting Standards Board (FASB) issued Statement
No. 121,  "Accounting  for the  Impairment of Long-Lived  Assets and  Long-Lived
Assets to be Disposed  Of" (SFAS 121).  This  standard  is  effective  for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not  material as the method  previously  employed by the
Partnership  was  consistent  with SFAS 121. In  accordance  with SFAS 121,  the
General Partner  reviews the carrying value of its equipment  portfolio at least
annually in relation to expected  future  market  conditions  for the purpose of
assessing  recoverability  of the recorded  amounts.  If projected  future lease
revenue plus residual  values are less than the carrying value of the equipment,
a loss on  revaluation  is recorded.  No  adjustments  to reflect  impairment of
individual  equipment carrying values were required during the nine months ended
September 30, 1996.

      As of September 30, 1996,  the General  Partner  estimated the fair market
value  of each  Partnerships'  equipment  portfolio  to be  approximately:  $1.3
million and $2.3 million for TEP VIIB and TEP VIIC, respectively.

 (IV) Government Regulations

The General  Partner  operates the  Partnerships'  equipment in accordance  with
current  regulations  (see  Item 1 (D)  Government  Regulations).  However,  the
continuing  implementation  of  new  or  modified  regulations  by  some  of the
authorities   mentioned   previously,   or  others,  may  adversely  affect  the
Partnerships'  ability to continue to own or operate equipment in its portfolio.
These  on-going  changes in the  regulatory  environment,  both in the U.S.  and
internationally,  cannot be predicted  with any  certainty and thus preclude the
General  Partner  from  accurately  determining  the  impact of such  changes on
Partnership operations, purchases and sales of equipment.

(V)  Future outlook

Pursuant to the original  operating  plan, the  Partnerships  entered into their
liquidation  phase during 1995 and the General Partner is actively  pursuing the
sale of all of the Partnerships'  equipment with the intention of winding up the
Partnerships and distributing all available cash to the Partners.

(VI) Trends

Inflation  and  changing  prices did not  materially  impact  the  Partnerships'
revenues or expenses during the reported periods.



<PAGE>


                           PART II - OTHER INFORMATION

Item 6.           Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  None.

         (b)      Reports on Form 8-K

                  None.



<PAGE>


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

                                          PLM TRANSPORTATION EQUIPMENT
                                          PARTNERS VIIB 1985 INCOME FUND

                                          By:      PLM Financial Services, Inc.
                                                   General Partner




Date:  November 12, 1996                  By:      /s/ David J. Davis
                                                   ------------------
                                                   David J. Davis
                                                   Vice President and
                                                   Corporate Controller