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 June 30, 1997.

[  ]     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 INCOME FUND
                             (A Limited Partnership)
                                 BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                             June 30,             December 31,
                                                                               1997                   1996
                                                                         ----------------------------------------
   Assets:

   <S>                                                                     <C>                  <C>              
   Equipment held for operating lease, at cost                             $  2,251,186         $    3,550,990   
     Less accumulated depreciation                                           (2,237,991 )           (3,427,418)
                                                                          ---------------------------------------
       Net equipment                                                             13,195                123,572

   Cash and cash equivalents                                                    293,238                269,628
   Accounts receivable, net of allowance for doubtful accounts of
         $5,102 in 1997 and $5,082 in 1996                                      134,090                127,105
   Prepaid insurance                                                              1,044                  2,714
                                                                          ---------------------------------------

   Total assets                                                            $    441,567         $      523,019    
                                                                          =======================================

   Liabilities and partners' capital:

   Liabilities:
   Accounts payable and accrued expenses                                   $     36,752         $       32,221  
   Due to affiliate                                                               4,641                  4,641
   Lessee deposits and engine reserves                                            9,500                    615
                                                                          ---------------------------------------
       Total liabilities                                                         50,893                 37,477
                                                                          ---------------------------------------

   Partners' capital (deficit):
   Limited partners (22,276 units)                                              484,817                578,736
   General Partner                                                              (94,143 )              (93,194 )
                                                                          ---------------------------------------
       Total partners' capital                                                  390,674                485,542
                                                                          ---------------------------------------

   Total liabilities and partners' capital                                 $    441,567         $      523,019 
                                                                          =======================================

</TABLE>














                       See accompanying notes to financial
                                  statements.


<PAGE>


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

<TABLE>
<CAPTION>

                                                                For the Three Months              For the Six Months
                                                                   Ended June 30,                    Ended June 30,
                                                               1997              1996             1997            1996
                                                           ----------------------------------------------------------------
   Revenues:

   <S>                                                      <C>             <C>               <C>             <C>         
   Lease revenue                                            $   84,522      $     88,840      $  183,005      $  194,914  
   Interest income                                               4,101             2,635           7,629           6,088
   Net gain on disposition of equipment                        111,226            10,304         225,708          29,634
                                                           ----------------------------------------------------------------
       Total revenues                                          199,849           101,779         416,342         230,636
                                                           ----------------------------------------------------------------

   Expenses:

   Depreciation                                                 14,551            53,112          38,061         107,881
   Repairs and maintenance                                      28,739            22,939          44,989          45,201
   Management fees to affiliate                                 13,922            13,922          27,845          25,436
   Provision for (recovery of ) bad debt                         6,336           (24,677 )         6,230          (6,856 )
   General and administrative
         expenses to affiliates                                 18,896            21,889          35,379          48,436
   Other general and administrative expenses                    20,402            14,641          36,525          26,983
                                                           ----------------------------------------------------------------
       Total expenses                                          102,846           101,826         189,029         247,081
                                                           ----------------------------------------------------------------

   Equity in net income of unconsolidated
         special-purpose entity                                     --            10,045              --          19,376
                                                           ----------------------------------------------------------------

   Net income                                               $   97,003      $      9,998      $  227,313      $    2,931  
                                                           ================================================================

   Partners' share of net income:

   Limited  partners - 99%                                  $   96,033      $      9,898      $  225,040      $    2,902 
   General Partner - 1%                                            970               100           2,273              29
                                                           ----------------------------------------------------------------
   Total                                                    $   97,003      $      9,998      $  227,313      $    2,931   
                                                           ================================================================

   Net income per weighted-average limited
         partnership unit (22,276 units)                    $     4.31      $       0.44      $    10.10      $     0.13 
                                                           ================================================================

   Cash distributions                                       $       --      $     99,046      $   97,172      $  198,092  
                                                           ================================================================

   Cash distribution per weighted-average
         limited partnership unit                           $       --      $       4.40      $     4.32      $     8.80   
                                                           ================================================================

   Special cash distributions                               $  225,009      $    100,000      $  225,009      $  100,000 
                                                           ================================================================
   Special cash distributions per weighted-average
         limited partnership unit                           $    10.00      $       4.44      $    10.00      $     4.44  
                                                           ================================================================
   Total cash distributions per weighted-average
         limited partnership unit                           $    10.00      $       8.84      $    14.32      $    13.24 
                                                           ================================================================

</TABLE>

                       See accompanying notes to financial
                                  statements.


<PAGE>



             PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB INCOME FUND
                             (A Limited Partnership)
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                For the period from December 31, 1995 to June 30,
                                      1997


<TABLE>
<CAPTION>




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

   <S>                                                     <C>                     <C>                   <C>           
   Partners' capital (deficit) at December 31, 1995        $    931,401            $  (89,632 )          $    841,769  

   Net income                                                   235,702                 2,381                 238,083

   Cash distributions                                          (390,367 )              (3,943 )              (394,310 )

   Special distributions                                       (198,000 )              (2,000 )              (200,000 )
                                                           --------------------------------------------------------------

   Partners' capital (deficit) at December 31, 1996             578,736               (93,194 )               485,542

   Net income                                                   225,040                 2,273                 227,313

   Cash distributions                                           (96,200 )                (972 )               (97,172 )

   Special distributions                                       (222,759 )              (2,250 )              (225,009 )
                                                           --------------------------------------------------------------

   Partners' capital (deficit) at June 30, 1997            $    484,817            $  (94,143 )          $    390,674   
                                                           ==============================================================

</TABLE>









                       See accompanying notes to financial
                                  statements.


<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                                 For the Six Months
                                                                                   ended June 30,
                                                                             1997                  1996
                                                                        -------------------------------------
   <S>                                                                   <C>                    <C>        
   Operating activities:

   Net income                                                            $   227,313            $     2,931
   Adjustments to reconcile net income
         to net cash provided by operating activities:
     Net gain on disposition of equipment                                   (225,708 )              (29,634 )
     Depreciation                                                             38,061                107,881
     Equity in net income from unconsolidated special-purpose
           entity                                                                 --                (19,376 )
     Changes in operating assets and liabilities:
       Accounts receivable, net                                               (6,985 )               28,801
       Prepaid insurance                                                       1,670                  2,010
       Accounts payable and accrued expenses                                   4,531                 (2,768 )
       Lessee deposits and engine reserves                                     8,885                   (260 )
                                                                         -------------------------------------
           Net cash provided by operating activities                          47,767                 89,585
                                                                         -------------------------------------

   Investing activities:

   Distributions from unconsolidated special-purpose entity                       --                 51,539
   Proceeds from disposition of equipment                                    298,024                 48,577
                                                                         -------------------------------------
           Net cash provided by investing activities                         298,024                100,116
                                                                         -------------------------------------

   Financing activities:

   Cash distributions paid to limited partners                              (318,959 )             (295,111 )
   Cash distributions paid to General Partner                                 (3,222 )               (2,981 )
                                                                         -------------------------------------
           Net cash used in financing activities                            (322,181 )             (298,092 )
                                                                         -------------------------------------

   Net increase (decrease) in cash and cash equivalents                       23,610               (108,391 )

   Cash and cash equivalents at beginning of period                          269,628                293,808
                                                                         -------------------------------------

   Cash and cash equivalents at end of period                            $   293,238            $   185,417
                                                                         =====================================
</TABLE>




                       See accompanying notes to financial
                                  statements.

<PAGE>


           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                  June 30, 1997

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 financial  position of PLM  Transportation
     Equipment  Partners VIIB 1985 Income Fund (the  Partnership) as of June 30,
     1997 and December 31, 1996,  the statements of income for the three and six
     months ended June 30, 1997 and 1996, the statements of changes in partners'
     capital for the period from  December  31, 1995 to June 30,  1997,  and the
     statements  of cash flows for the six months  ended June 30, 1997 and 1996.
     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,  1996,  on file at the
     Securities and Exchange Commission.

2.   Reclassifications

     Certain amounts in the 1996 financial  statements have been reclassified to
conform to the 1997 presentation.

3.   Equipment

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

                                                           June 30,            December 31,
                                                             1997                  1996
                                                        --------------------------------------
   <S>                                                  <C>                   <C>          
   Equipment held for operating lease:

   Trailers                                             $   2,175,130         $   3,146,140
   Marine containers                                           76,056                86,201
   Rail equipment                                                  --               318,649
                                                        --------------------------------------
                                                            2,251,186             3,550,990
   Less accumulated depreciation                           (2,237,991 )          (3,427,418 )
                                                        --------------------------------------
   Net equipment                                        $      13,195         $     123,572
                                                        ======================================
</TABLE>

All  of the equipment  owned by the Partnership was either on lease or operating
     in  PLM-affiliated  short-term  rental  facilities  at June  30,  1997  and
     December 31, 1996.

During the six months ended June 30, 1997, the  Partnership  sold or disposed of
     railcars,  trailers and marine  containers with an aggregate net book value
     of $72,316 for proceeds of  $298,024.  During the six months ended June 30,
     1996, the  Partnership  sold or disposed of trailers and marine  containers
     with an  aggregate  net book value of $18,943  for  aggregate  proceeds  of
     $48,577.

4.   Liquidation and Special Distributions

     The  Partnership  is in its  liquidation  phase.  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  periodically  declare special  distributions  to distribute the
     sale proceeds to

<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIB 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                  June 30, 1997

4.   Liquidation and Special Distributions (continued)

     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 the  partners.  The
     amounts  reflected for assets and  liabilities of Partership  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 six months  ended June 30, 1997 and 1996,  the  General  Partner
     paid  special  distributions  of  $10.00  and  $4.44,   respectively,   per
     weighted-average limited partnership unit which were the result of proceeds
     from the sale of equipment.  During the liquidation  phase, 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 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 the sale of that  asset,  and, in
     some leases, the ability of the lessee to exercise purchase options.




<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                                 BALANCE SHEETS
<TABLE>
<CAPTION>



                                                                            June 30,             December 31,
                                                                              1997                   1996
                                                                         ---------------------------------------
   Assets:

   <S>                                                                   <C>                    <C>          
   Equipment held for operating lease, at cost                           $   2,327,317          $   4,069,971
     Less accumulated depreciation                                          (2,272,778 )           (3,861,489 )
                                                                         ---------------------------------------
       Net equipment                                                            54,539                208,482

   Cash and cash equivalents                                                   476,043                416,360
   Investments in unconsolidated special-purpose entity                         45,984                 99,974
   Accounts receivable, net of allowance for doubtful accounts of
         $4,945 in 1997 and $633 in 1996                                        45,343                 64,261
   Prepaid insurance                                                             1,346                  3,713
                                                                         ---------------------------------------

   Total assets                                                          $     623,255          $     792,790
                                                                         =======================================

   Liabilities and partners' capital:

   Liabilities:
   Accounts payable and accrued expenses                                 $       8,717          $      13,040
   Due to affiliate                                                              7,026                  7,026
                                                                         ---------------------------------------
       Total liabilities                                                        15,743                 20,066
                                                                         ---------------------------------------

   Partners' capital (deficit):
   Limited partners (33,727 units)                                             749,940                913,500
   General Partner                                                            (142,428 )             (140,776 )
                                                                         ---------------------------------------
       Total partners' capital                                                 607,512                772,724
                                                                         ---------------------------------------

   Total liabilities and partners' capital                               $     623,255          $     792,790
                                                                         =======================================

</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 six months
                                                                      ended June 30,                  ended June 30,
                                                                   1997            1996            1997            1996
                                                               -------------------------------------------------------------
       <S>                                                     <C>             <C>             <C>                <C>      
       Revenues:

       Lease revenue                                           $   54,668      $  110,557      $  126,863         219,749  
       Interest income                                              4,846           4,359           9,164          10,822
       Net gain on disposition of equipment                       211,449          20,189         252,407          54,634
                                                               -------------------------------------------------------------
           Total revenues                                         270,963         135,105         388,434         285,205
                                                               -------------------------------------------------------------

       Expenses:

       Depreciation                                                35,994          62,867          91,076         129,371
       Repairs and maintenance                                     14,160          23,225          28,986          46,936
       Management fees to affiliate                                21,079          22,525          42,159          37,823
       General and administrative
             expenses to affiliates                                14,743          29,951          38,049          67,082
       Other general and administrative expenses                   18,322          17,069          32,492          36,816
                                                               -------------------------------------------------------------
           Total expenses                                         104,298         155,637         232,762         318,028
                                                               -------------------------------------------------------------

       Equity in net income of unconsolidated
             special-purpose entities                              12,154          33,867          25,110          70,844
                                                               -------------------------------------------------------------

       Net income                                              $  178,819      $   13,335      $  180,782          38,021   
                                                               =============================================================

       Partners' share of net income:

       Limited partners - 99%                                  $  177,031      $   13,202      $  178,974          37,641  
       General Partner - 1%                                         1,788             133           1,808             380
                                                               =============================================================
       Total                                                   $  178,819      $   13,335      $  180,782          38,021  
                                                               =============================================================

       Net income per weighted-average limited
             partnership unit (33,727 units)                   $     5.25      $     0.39      $     5.31            1.12   
                                                               =============================================================

       Cash distributions                                      $       --      $  159,314      $   75,660         319,631  
                                                               =============================================================

       Cash distribution per weighted-average
             limited partnership unit                          $       --      $     4.68      $     2.22            9.38  
                                                               =============================================================

       Special cash distributions                              $  170,334      $  250,000      $  270,334         350,000  
                                                               =============================================================

       Special cash distributions per weighted-average
             limited partnership unit                          $     5.00      $     7.34      $     7.94           10.27   
                                                               =============================================================

       Total cash distributions per weighted-average
             limited partnership units                         $     5.00      $    12.02      $    10.16           19.65  
                                                               =============================================================

</TABLE>

                       See accompanying notes to financial
                                  statements.

<PAGE>


             PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC INCOME FUND
                             (A Limited Partnership)
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                For the period from December 31, 1995 to June 30,
                                      1997

<TABLE>
<CAPTION>


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

   <S>                                                     <C>                      <C>                   <C>          
   Partners' capital (deficit) at December 31, 1995        $   1,758,377            $  (132,241 )         $   1,626,136

   Net income                                                    594,935                  6,009                 600,944

   Cash distributions                                           (647,812 )               (6,544 )              (654,356 )

   Special distributions                                        (792,000 )               (8,000 )              (800,000 )
                                                           ----------------------------------------------------------------

   Partners' capital (deficit) at December 31, 1996              913,500               (140,776 )               772,724

   Net income                                                    178,974                  1,808                 180,782

   Cash distributions                                            (74,903 )                 (757 )               (75,660 )

   Special distributions                                        (267,631 )               (2,703 )              (270,334 )
                                                           ----------------------------------------------------------------

   Partners' capital (deficit) at June 30, 1997            $     749,940            $  (142,428 )         $     607,512
                                                           ================================================================


</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 Six Months
                                                                                   Ended June 30,
                                                                             1997                   1996
                                                                        --------------------------------------
   Operating activities:

   <S>                                                                   <C>                   <C>         
   Net income                                                            $   180,782           $    38,021 
   Adjustments to reconcile net income
         to net cash provided by operating activities:
     Net gain on disposition of equipment                                   (252,407 )             (54,634 )
     Depreciation                                                             91,076               129,371
     Equity in net income from unconsolidated special-purpose
           entities                                                          (25,110 )             (70,844 )
     Changes in operating assets and liabilities:
       Accounts receivable, net                                               18,918                55,484
       Prepaid insurance                                                       2,367                 3,925
       Accounts payable and accrued expenses                                  (4,323 )              (6,105 )
                                                                         -------------------------------------
           Net cash provided by operating activities                          11,303                95,218
                                                                         -------------------------------------

   Investing activities:

   Payment for capitalized repairs                                            (1,435 )                  --
   Distributions from unconsolidated special-purpose entities                 79,100               184,540
   Proceeds from disposition of equipment                                    316,709               101,238
                                                                         -------------------------------------
           Net cash provided by investing activities                         394,374               285,778
                                                                         -------------------------------------

   Financing activities:

   Cash distributions paid to limited partners                              (342,534 )            (662,935 )
   Cash distributions paid to General Partner                                 (3,460 )              (6,696 )
                                                                         -------------------------------------
           Net cash used in financing activities                            (345,994 )            (669,631 )
                                                                         -------------------------------------

   Net increase (decrease) in cash and cash equivalents                       59,683              (288,635 )

   Cash and cash equivalents at beginning of period                          416,360               551,094
                                                                         -------------------------------------

   Cash and cash equivalents at end of period                            $   476,043           $   262,459   
                                                                         =====================================

</TABLE>












                       See accompanying notes to financial
                                  statements.

<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                  June 30, 1997

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 financial  position of PLM  Transportation
     Equipment  Partners VIIC 1985 Income Fund (the  Partnership) as of June 30,
     1997 and December 31, 1996,  the statements of income for the three and six
     months ended June 30, 1997 and 1996, the statements of changes in partners'
     capital for the period from  December  31, 1995 to June 30,  1997,  and the
     statements  of cash flows for the six months  ended June 30, 1997 and 1996.
     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,  1996,  on file at the
     Securities and Exchange Commission.

2.   Reclassifications

     Certain amounts in the 1996 financial  statements have been reclassified to
conform to the 1997 presentation.

3.   Equipment

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

                                                          June 30,             December 31,
                                                             1997                  1996
                                                       ---------------------------------------
   Equipment held for operating lease:

   <S>                                                 <C>                    <C>          
   Trailers                                            $    2,176,082         $   3,870,247
   Marine containers                                          151,235               199,724
                                                       ---------------------------------------
                                                            2,327,317             4,069,971
   Less accumulated depreciation                           (2,272,778 )          (3,861,489 )
                                                       =======================================
   Net equipment                                       $       54,539         $     208,482
                                                       =======================================
</TABLE>

All  of the equipment  owned by the Partnership was either on lease or operating
     in  PLM-affiliated  short-term  rental  facilities  at June  30,  1997  and
     December 31, 1996.

During the six months ended June 30, 1997, the  Partnership  sold or disposed of
     marine  containers  and  trailers  with a net  book  value of  $64,302  for
     proceeds  of  $316,709.  During the six months  ended  June 30,  1996,  the
     Partnership  sold or disposed of marine  containers and trailers with a net
     book value of $46,604 for proceeds of $101,238.

4.   Liquidation and Special Distributions

     The  Partnership  is in its  liquidation  phase.  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  periodically  declare special  distributions  to distribute the
     sale proceeds to

<PAGE>



           PLM TRANSPORTATION EQUIPMENT PARTNERS VIIC 1985 INCOME FUND
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                  June 30, 1997

4.   Liquidation and Special Distributions (continued)

     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 the  partners.  The  amounts
     reflected  for  assets and  liabilities  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 six months ended June 30, 1997,  and 1996,  the General  Partner
     paid  special  distributions  of  $7.94  and  $10.27,   respectively,   per
     weighted-average limited partnership unit which were the result of proceeds
     from the sale of equipment.  During the liquidation  phase, 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 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.

5.   Investments in Unconsolidated Special-Purpose Entity

     The net investment in an unconsolidated  special-purpose  entity included a
     80% interest in a commuter aircraft at June 30, 1997.


<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 June 30, 1997 and 1996

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 for the quarter
ended June 30,  1997 when  compared to the same  period of 1996.  The  following
table presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                               For the Three Months
                                                                                  Ended June 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $   52,697          $   55,587
   Marine containers                                                          2,372               2,540
   Railcar equipment                                                             30               7,181

</TABLE>

Trailers:  Trailer lease revenues and direct  expenses were $82,045 and $29,348,
respectively,  for the  quarter  ended June 30,  1997,  compared  to $78,770 and
$23,183,  respectively,  during  the  same  period  of  1996.  The  decrease  in
contribution  was due to higher  repairs and  maintenance  expense for the three
months ended June 30, 1997 when compared to the same period of 1996.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$2,388 and $16,  respectively,  for the quarter ended June 30, 1997, compared to
$2,570  and $30,  respectively,  during the same  period of 1996.  The number of
marine containers owned by the Partnership  declined over the past twelve months
due  to  sales  and  dispositions.  In  addition,  the  marine  container  fleet
experienced  lower  utilization,  resulting  in a decrease  in marine  container
contribution.

Railcar equipment:  Railcar lease revenues and direct expenses were $89 and $59,
respectively,  for  quarter  ended June 30,  1997,  compared to $7,500 and $319,
respectively,   during  the  same  period  of  1996.  The  decrease  in  railcar
contribution resulted from the sale of all the Partnership's railcars during the
first quarter of 1997.

(B)  Indirect Expenses Related to Owned Equipment Operations

Total  indirect  expenses  of  $73,423  for the  quarter  ended  June 30,  1997,
decreased  from $78,294 for the same period in 1996. The variances are explained
as follows:

(1) a $38,561 decrease in depreciation  expense reflecting the sale of equipment
during 1997 and 1996.

(2) a $31,013  increase in bad debt  expense  was due to the  General  Partner's
evaluation of the collectibility of trade receivables.

(3) a  $2,677  increase  in  general  and  administrative  expenses  was  due to
increased license fee due to renewal of trailers  licenses,  partially offset by
decreased administrative costs associated with the short-term rental facilities.



<PAGE>


(C)  Net Gain on Disposition of Owned Equipment

For the quarter ended June 30, 1997, the Partnership realized a gain of $111,226
on the sale or  disposition of marine  containers and trailers,  compared to the
same period in 1996 when the Partnership  realized a gain of $10,304 on the sale
or disposition of trailers and a marine container.

(D) Equity in Net Income of Unconsolidated Special-Purpose Entity

Equity  in the net  income  of the  unconsolidated  special-purpose  entity  was
$10,045 for the quarter ended June 30, 1996, and  represents  the  Partnership's
share of income generated from the  partnership's  investment in an entity which
owned an aircraft,  accounted for under the equity method.  This  investment was
sold in the third quarter of 1996.

(E) Net Income

The  Partnership's net income of $97,003 in the second quarter of 1997 increased
from $9,998 in the second quarter of 1996. 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 second quarter of 1997 is not necessarily
indicative of future  periods.  In the second quarter of 1997,  the  Partnership
made a special  distribution of $222,759 to the limited partners,  or $10.00 per
weighted-average limited partnership 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 for the quarter
ended June 30,  1997 when  compared to the same  period of 1996.  The  following
table presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                               For the Three Months
                                                                                  Ended June 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $   37,189          $   84,541
   Marine containers                                                          2,508               1,876

</TABLE>

Trailers:  Trailer lease revenues and direct  expenses were $52,122 and $14,933,
respectively,  for the quarter  ended June 30,  1997,  compared to $108,630  and
$24,089,  respectively  during the same  period  during  1996.  The  decrease in
contribution  was due to lower  utilization  of trailers and the  disposition of
equipment during 1997 and 1996.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$2,546 and $38,  respectively,  for the quarter ended June 30, 1997, compared to
$1,927 and $51, respectively during the same period during 1996.

(B)  Indirect Expenses Related to Owned Equipment Operations

Total  indirect  expenses  of  $89,327  for the  quarter  ended  June 30,  1997,
decreased from $131,497 for the same period in 1996. The variances are explained
as follows:

(1) a $26,873 decrease in depreciation expenses reflecting the sale of equipment
during 1997 and 1996.

(2) a  $14,639  decrease  in the  general  and  administrative  expenses  due to
decreased  administrative costs associated with the short-term rental facilities
due to sale of equipment.

(C)  Net Gain on Disposition of Owned Equipment

For the quarter ended June 30, 1997, the Partnership realized a gain of $211,449
on the sale or  disposition of trailers and marine  containers,  compared to the
same period in 1996, when the Partnership realized a gain of $20,189 on the sale
or disposition of trailers.

(D)  Equity in Net Income of Unconsolidated Special-Purpose Entities

Equity in net income of unconsolidated  special-purpose  entities of $12,154 and
$33,867 for the quarter  ended June 30,  1997 and June 30,  1996,  respectively,
represents the  Partnership's  share of income  generated  from the  partnership
investment  in  entities  which own  aircraft,  accounted  for under the  equity
method. The decrease is due to the Partnership liquidating its 69% investment in
an aircraft as a result of the General Partner's sale of the asset during 1996.

(E)  Net Income

The  Partnership's  net income  increased  to $178,819 in the second  quarter of
1997, from $13,335 in the second quarter of 1996. 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  second  quarter  of  1997  is not
necessarily  indicative of future  periods.  In the second  quarter of 1997, the
Partnership made a special distribution of $168,631 to the limited partners,  or
$5.00 per weighted-average limited partnership unit.

Comparison of the Partnerships'  Operating Results for the Six Months Ended June
30, 1997 and 1996

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
six months of 1997 when compared to the same period of 1996. The following table
presents lease revenues less direct expenses by owned equipment type:
<TABLE>
<CAPTION>

                                                                                For the six months
                                                                                  ended June 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $  129,266          $  126,112
   Marine containers                                                          3,716               7,777
   Railcar equipment                                                          3,595              14,636

</TABLE>

Trailers:  Trailer lease revenues and direct expenses were $175,505 and $46,239,
respectively,  for the six months ended June 30, 1997,  compared to $172,077 and
$45,965,  respectively,  during the same  period of 1996.  The  increase  of net
contribution was due to higher lease rates of trailers in the short-term  rental
facilities  in the first six months of 1997 when  compared to the same period of
1996. The increase was partially offset by the disposition of trailers and lower
utilization.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$3,750 and $34, respectively,  for the six months ended 1997, compared to $7,837
and $60,  respectively,  during  the same  period of 1996.  The number of marine
containers owned by the Partnership  declined over the past twelve months due to
sales and  dispositions.  In addition,  the marine  container fleet  experienced
lower utilization, resulting in a decrease in marine container contribution.

Railcar  equipment:  Railcar lease revenues and direct  expenses were $3,750 and
$155, respectively,  for the six months ended June 30, 1997, compared to $15,000
and $364, respectively,  during the same period of 1996. The decrease in railcar
contribution resulted from the sale of all the Partnership's railcars during the
first quarter of 1997.

(B)  Indirect Expenses Related to Owned Equipment Operations

Total  indirect  expenses of $142,601  for the six months  ended June 30,  1997,
decreased from $200,692 for the same period in 1996. The variances are explained
as follows:

(1) a $69,820 decrease in depreciation  expense from 1996 levels  reflecting the
sale of equipment during 1997 and 1996.

(2) a decrease of general and administrative expenses of $3,766 from 1996 levels
was due to decreased  administrative costs associated with the short-term rental
facilities, partially offset by increased license fee due to renewal of trailers
licenses.

(3) an increase of bad debt expense of $13,086 was due to the General  Partner's
evaluation of the collectibility of trade receivables.

(C)  Net Gain on Disposition of Owned Equipment

For the six  months  ended June 30,  1997,  the  Partnership  realized a gain of
$225,708 on the sale or disposition of railcars, marine containers and trailers,
compared  to the same  period in 1996 where the  Partnership  realized a gain of
$29,634 on the sale or disposition of marine containers and trailers.

(D) Equity in Net Income of Unconsolidated Special-Purpose Entity

Equity  in the net  income  of the  unconsolidated  special-purpose  entity  was
$19,376 for the six months ended June 30, 1996, and represents the Partnership's
share of income generated from the  partnership's  investment in an entity which
owned an aircraft,  accounted for under the equity method.  This  investment was
sold in the third quarter of 1996.

(E) Net Income

The  Partnership's net income of $227,313 in the six months ended June 30, 1997,
increased from $2,931 in the first six months of 1996. 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  six  months  of 1997 is not
necessarily  indicative  of future  periods.  For the six months  ended June 30,
1997, the Partnership  distributed  $318,959 to the limited partners,  or $14.32
per   weighted-average   limited  partnership  unit  which  included  a  special
distribution of $10.00 per weighted-average limited partnership 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
six months of 1997 when compared to the same period of 1996. The following table
presents lease revenues less direct expenses by owned equipment type:

<TABLE>
<CAPTION>

                                                                                For the six months
                                                                                  ended June 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $   92,375          $  167,681
   Marine containers                                                          3,806               3,114

</TABLE>

Trailers:  Trailer lease revenues and direct expenses were $122,977 and $30,602,
respectively,  for the six months ended 1997,  compared to $216,522 and $48,841,
respectively  during the same quarter of 1996. The decrease in net  contribution
was due to lower  utilization of trailers in the short-term rental facilities in
the first six months of 1997 when  compared to the same period of 1996,  and the
disposition of trailers.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$3,886 and $80, respectively,  for the six months ended 1997, compared to $3,227
and $113, respectively during the same period of 1996.

(B)  Indirect Expenses Related to Owned Equipment Operations

Total  indirect  expenses of $202,080  for the six months  ended June 30,  1997,
decreased from $269,073 for the same period in 1996. The variances are explained
as follows:

(1) a $38,295  decrease in  depreciation  and  amortization  expenses  from 1996
levels reflecting the sale of equipment during 1997 and 1996.

(2) a $33,395  decrease  in the general and  administrative  expenses  from 1996
levels was due to decreased  administrative costs associated with the short-term
rental facilities.

(3) a $4,336  increase in management  fee 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 Owned Equipment

For the six  months  ended June 30,  1997,  the  Partnership  realized a gain of
$252,407 on the sale or disposition of trailers and marine containers,  compared
to the same period in 1996, where the Partnership  realized a gain of $54,634 on
the sale or disposition of trailers and marine containers.

(D)  Equity in Net Income of Unconsolidated Special-purpose Entities

Equity in net income of unconsolidated  special-purpose  entities of $25,110 and
$70,844 for the six months ended June 30, 1997 and June 30, 1996,  respectively,
represents the  Partnership's  share of income  generated  from the  partnership
investment  in  entities  which own  aircraft,  accounted  for under the  equity
method. The decrease is due to the Partnership liquidating its 69% investment in
an aircraft as a result of the General Partner's sale of the asset during 1996.

(E)  Net Income

The Partnership's net income increased to $180,782 for the six months ended June
30, 1997, from $38,021 in the same period in 1996. 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 six months ended June 30, 1997 is not
necessarily  indicative  of future  periods.  For the six months  ended June 30,
1997, the Partnership  distributed  $342,534 to the limited partners,  or $10.16
per   weighted-average   limited  partnership  unit  which  included  a  special
distribution of $7.94 per weighted-average limited partnership unit.



<PAGE>


(II) ASSET SALES

The General Partner is actively marketing the remaining equipment portfolio with
the intent of maximizing sale proceeds. As discussed in Note 4, the Partnerships
entered  the  liquidation  phase in 1995.  During the six months  ended June 30,
1997, TEP VIIB sold or disposed of railcars,  trailers and marine containers for
$298,024,  and TEP VIIC sold or disposed of trailers and marine  containers  for
$316,709.

(III) MARKET VALUES

As of June 30, 1997, the General Partner estimated the fair market value of each
Partnerships'  equipment  portfolio to be  approximately:  $0.5 million and $1.2
million for TEP VIIB and TEP VIIC respectively.

(IV)  OUTLOOK FOR THE FUTURE

Pursuant to the original  operating  plan, the  Partnerships  entered into their
liquidation  phase in 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.

(V)  FORWARD LOOKING INFORMATION

Except for historical  information contained herein, the discussion in this Form
10-Q contains  forward-looking  statements that involve risks and uncertainties,
such as statements of the Partnership's  plans,  objectives,  expectations,  and
intentions.  The cautionary  statements made in this Form 10-Q should be read as
being applicable to all related forward-looking  statements wherever they appear
in this Form 10-Q. The Partnership's actual results could differ materially from
those discussed here.



<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:  August 7, 1997                   By:      /s/ Richard Brock
                                                 -----------------
                                                 Richard Brock
                                                 Vice President and
                                                 Corporate Controller