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, 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 1985 INCOME FUND
                             (A Limited Partnership)
                                 BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                          September 30,           December 31,
                                                                               1997                   1996
                                                                         ----------------------------------------
   <S>                                                                     <C>                  <C>               
   Assets:

   Equipment held for operating lease, at cost                             $    676,601         $    3,550,990    
     Less accumulated depreciation                                             (673,377 )           (3,427,418 )
                                                                          ---------------------------------------
       Net equipment                                                              3,224                123,572

   Cash and cash equivalents                                                    220,487                269,628
   Accounts receivable, net of allowance for doubtful accounts of
         $3,676 in 1997 and $5,082 in 1996                                      263,138                127,105
   Prepaid insurance                                                                140                  2,714
                                                                          ---------------------------------------

   Total assets                                                            $    486,989         $      523,019  
                                                                          =======================================

   Liabilities and partners' capital:

   Liabilities:
   Accounts payable and accrued expenses                                   $     30,297         $       32,221   
   Due to affiliate                                                               4,641                  4,641
   Lessee deposits and engine reserves                                               --                    615
                                                                          ---------------------------------------
       Total liabilities                                                         34,938                 37,477
                                                                          ---------------------------------------

   Partners' capital (deficit):
   Limited partners (22,276 units)                                              545,580                578,736
   General Partner                                                              (93,529 )              (93,194 )
                                                                          ---------------------------------------
       Total partners' capital                                                  452,051                485,542
                                                                          ---------------------------------------

   Total liabilities and partners' capital                                 $    486,989         $      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 Nine Months
                                                                 Ended September 30,              Ended September 30,
                                                               1997              1996             1997            1996
                                                           ----------------------------------------------------------------
   <S>                                                      <C>             <C>               <C>             <C>         
   Revenues:

   Lease revenue                                            $   58,365      $     94,091      $  241,370      $  289,005  
   Interest income                                               2,915             2,408          10,544           8,496
   Net gain on disposition of equipment                        292,684             3,040         518,392          32,674
                                                           ----------------------------------------------------------------
       Total revenues                                          353,964            99,539         770,306         330,175
                                                           ----------------------------------------------------------------

   Expenses:

   Depreciation                                                  8,312            52,357          46,373         160,238
   Repairs and maintenance                                      14,305            25,782          59,294          70,983
   Management fees to affiliate                                 13,922            16,331          41,767          41,767
   General and administrative
         expenses to affiliates                                  8,615            14,067          43,995          62,503
   Other general and administrative expenses                    12,594            13,948          49,118          40,931
   Provision for bad debt                                        9,831            19,502          16,060          12,646
                                                           ----------------------------------------------------------------
       Total expenses                                           67,579           141,987         256,607         389,068
                                                           ----------------------------------------------------------------

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

   Net income                                               $  286,385      $    203,284      $  513,699      $  206,215  
                                                           ================================================================

   Partners' share of net income:

   Limited  partners - 99%                                  $  283,521      $    201,251      $  508,562      $  204,153 
   General Partner - 1%                                          2,864             2,033           5,137           2,062
                                                           ----------------------------------------------------------------
   Total                                                    $  286,385      $    203,284      $  513,699      $  206,215 
                                                           ================================================================

   Net income per weighted-average limited
         partnership unit (22,276 units)                    $    12.73      $       9.03      $    22.83      $     9.16  
                                                           ================================================================

   Cash distributions                                       $       --      $     99,047      $   97,172      $  297,138   
                                                           ================================================================

   Cash distribution per weighted-average
         limited partnership unit                           $       --      $       4.40      $     4.32      $    13.21 
                                                           ================================================================

   Special cash distributions                               $  225,010      $         --      $  450,018      $  100,000 
                                                           ================================================================

   Special cash distributions per weighted-average
         limited partnership unit                           $    10.00      $         --      $    20.00      $     4.44 
                                                           ================================================================

   Total cash distributions per weighted-average
         limited partnership unit                           $    10.00      $       4.40      $    24.32      $    17.65 
                                                           ================================================================

</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 September
                                    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                                                   508,562                 5,137                 513,699

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

   Special distributions                                       (445,518 )              (4,500 )              (450,018 )
                                                           --------------------------------------------------------------

   Partners' capital (deficit) at September 30, 1997       $    545,580            $  (93,529 )          $    452,051  
                                                           ==============================================================


</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 Nine Months
                                                                                ended September 30,
                                                                             1997                  1996
                                                                        -------------------------------------
   <S>                                                                   <C>                    <C>        
   Operating activities:

   Net income                                                            $   513,699            $   206,215
   Adjustments to reconcile net income
         to net cash provided by operating activities:
     Net gain on disposition of equipment                                   (518,392 )              (32,674 )
     Depreciation                                                             46,373                160,238
     Equity in net income from unconsolidated special-purpose
           entity                                                                 --               (265,108 )
     Changes in operating assets and liabilities:
       Accounts receivable, net                                               47,748                 56,609
       Prepaid insurance                                                       2,574                  2,864
       Accounts payable and accrued expenses                                  (1,924 )               (4,773 )
       Lessee deposits and engine reserves                                      (615 )                 (252 )
                                                                         -------------------------------------
           Net cash provided by operating activities                          89,463                123,119
                                                                         -------------------------------------

   Investing activities:

   Liquidation proceeds from unconsolidated special-purpose entity                --                344,224
   Proceeds from disposition of equipment                                    408,586                 52,805
                                                                         -------------------------------------
           Net cash provided by investing activities                         408,586                397,029
                                                                         -------------------------------------

   Financing activities:

   Cash distributions paid to Limited Partners                              (541,718 )             (393,167 )
   Cash distributions paid to General Partner                                 (5,472 )               (3,971 )
                                                                         -------------------------------------
           Net cash used in financing activities                            (547,190 )             (397,138 )
                                                                         -------------------------------------

   Net (decrease) increase in cash and cash equivalents                      (49,141 )              123,010

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

   Cash and cash equivalents at end of period                            $   220,487            $   416,818
                                                                         =====================================

   Supplemental disclosure of noncash investing and financing activities:
     Sales proceeds included in accounts receivable                      $   183,781            $        --
                                                                         =====================================

</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, 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 September
     30, 1997 and December 31, 1996,  the statements of income for the three and
     nine months ended September 30, 1997 and 1996, the statements of changes in
     partners'  capital for the period from  December 31, 1995 to September  30,
     1997, and the statements of cash flows for the nine months ended  September
     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>

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

   Trailers                                             $      614,072         $   3,146,140
   Marine containers                                            62,529                86,201
   Rail equipment                                                   --               318,649
                                                        ---------------------------------------
                                                               676,601             3,550,990
   Less accumulated depreciation                              (673,377 )          (3,427,418 )
                                                        ---------------------------------------
   Net equipment                                        $        3,224         $     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 September 30, 1997 and
     December 31, 1996.

During the nine  months  ended  September  30,  1997,  the  Partnership  sold or
     disposed of railcars,  trailers and marine containers with an aggregate net
     book value of $73,975  for  proceeds  of  $592,367.  During the nine months
     ended September 30, 1996, the Partnership  sold or disposed of trailers and
     marine containers with an aggregate net book value of $20,131 for aggregate
     proceeds of $52,805.

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
                               September 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 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,  1997 and 1996,  the General
     Partner paid special distributions of $20.00 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>


                                                                          September 30,           December 31,
                                                                               1997                   1996
                                                                         ----------------------------------------
   <S>                                                                   <C>                     <C>          
   Assets:

   Equipment held for operating lease, at cost                           $    1,787,489          $   4,069,971
     Less accumulated depreciation                                           (1,769,176 )           (3,861,489 )
                                                                         ----------------------------------------
       Net equipment                                                             18,313                208,482

   Cash and cash equivalents                                                    272,467                416,360
   Investments in unconsolidated special-purpose entity                          17,630                 99,974
   Accounts receivable, net of allowance for doubtful accounts of
         $3,227 in 1997 and $633 in 1996                                         38,166                 64,261
   Prepaid insurance                                                                111                  3,713
                                                                         ----------------------------------------

   Total assets                                                          $      346,687          $     792,790
                                                                         ========================================

   Liabilities and Partners' Capital:

   Liabilities:
   Accounts payable and accrued expenses                                 $       12,087          $      13,040
   Due to affiliate                                                               7,026                  7,026
                                                                         ----------------------------------------
       Total liabilities                                                         19,113                 20,066
                                                                         ----------------------------------------

   Partners' capital (deficit):
   Limited partners (33,727 units)                                              472,802                913,500
   General Partner                                                             (145,228 )             (140,776 )
                                                                         ----------------------------------------
       Total partners' capital                                                  327,574                772,724
                                                                         ----------------------------------------

   Total liabilities and partners' capital                               $      346,687          $     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 Nine Months
                                                                   Ended September 30,             Ended September 30,
                                                                   1997            1996            1997            1996
                                                               -------------------------------------------------------------
       <S>                                                     <C>             <C>             <C>             <C>         
       Revenues:

       Lease revenue                                           $   53,535      $   96,968      $  180,399      $  316,717  
       Interest income                                              5,052           3,768          14,216          14,590
       Net gain on disposition of equipment                        82,320          14,895         334,727          69,529
                                                               -------------------------------------------------------------
           Total revenues                                         140,907         115,631         529,342         400,836
                                                               -------------------------------------------------------------

       Expenses:

       Depreciation                                                26,571          60,477         117,647         189,848
       Repairs and maintenance                                     18,105          21,703          47,091          68,639
       Management fees to affiliate                                21,079          32,944          63,238          70,767
       General and administrative
             expenses to affiliates                                16,331          22,579          54,380          89,661
       Other general and administrative expenses                    9,534          11,981          37,712          44,846
       Provision for (recovery of) bad debt                         1,390             (79 )         5,702           3,872
                                                               -------------------------------------------------------------
           Total expenses                                          93,010         149,605         325,770         467,633
                                                               -------------------------------------------------------------

       Equity in net income of unconsolidated
             special-purpose entities                              12,843         569,504          37,953         640,348
                                                               -------------------------------------------------------------

       Net income                                              $   60,740      $  535,530      $  241,525      $  573,551 
                                                               =============================================================

       Partners' share of net income:

       Limited partners - 99%                                  $   60,133      $  530,175      $  239,110      $  567,815  
       General Partner - 1%                                           607           5,355           2,415           5,736
                                                                                            ---
                                                               =============================   =============================
       Total                                                   $   60,740      $  535,530      $  241,525      $  573,551  
                                                               =============================================================

       Net income per weighted-average limited
             partnership unit (33,727 units)                   $     1.78      $    15.72      $     7.09      $    16.84  
                                                               =============================================================

       Cash distributions                                      $       --      $  156,815      $   75,660      $  576,447  
                                                               =============================================================

       Cash distribution per weighted-average
             limited partnership unit                          $       --      $     4.60      $     2.22      $    16.92 
                                                               =============================================================

       Special cash distributions                              $  340,677      $  100,000      $  611,015      $  350,000  
                                                               =============================================================

       Special cash distributions per weighted-average
             limited partnership unit                          $    10.00      $     2.94      $    17.94      $    10.27  
                                                               =============================================================

       Total cash distributions per weighted-average
             limited partnership units                         $    10.00      $     7.54      $    20.16      $    27.19  
                                                               =============================================================

</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 September
                                    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                                                    239,110                  2,415                 241,525

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

   Special distributions                                        (604,905 )               (6,110 )              (611,015 )
                                                           ----------------------------------------------------------------

   Partners' capital (deficit) at September 30, 1997       $     472,802            $  (145,228 )         $     327,524
                                                           ================================================================

</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,
                                                                             1997                    1996
                                                                        -----------------------------------------
   <S>                                                                   <C>                     <C>            
   Operating activities:

   Net income                                                            $   241,525             $    573,551   
   Adjustments to reconcile net income
         to net cash provided by operating activities:
     Net gain on disposition of equipment                                   (334,727 )                (69,529 )
     Depreciation                                                            117,647                  189,848
     Equity in net income from unconsolidated special-purpose
           entities                                                          (37,953 )               (640,348 )
     Changes in operating assets and liabilities:
       Accounts receivable, net                                               29,095                   70,381
       Prepaid insurance                                                       3,602                    5,198
       Accounts payable and accrued expenses                                    (953 )                 (3,786 )
                                                                         ---------------------------------------
           Net cash provided by operating activities                          18,236                  125,315
                                                                         ---------------------------------------

   Investing activities:

   Payment for capitalized repairs                                            (1,435 )                     --
   Distributions from unconsolidated special-purpose entities                120,297                  939,728
   Proceeds from disposition of equipment                                    405,684                  121,454
                                                                         ---------------------------------------
           Net cash provided by investing activities                         524,546                1,061,182
                                                                         ---------------------------------------

   Financing activities:

   Cash distributions paid to limited partners                              (679,808 )               (917,183 )
   Cash distributions paid to General Partner                                 (6,867 )                 (9,264 )
                                                                         ---------------------------------------
           Net cash used in financing activities                            (686,675 )               (926,447 )
                                                                         ---------------------------------------

   Net (decrease) increase in cash and cash equivalents                     (143,893 )                260,050

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

   Cash and cash equivalents at end of period                            $   272,467             $    811,144 
                                                                         =======================================

   Supplemental disclosure of noncash investing and financing activities:
     Sales proceeds included in accounts receivable                      $     3,000             $         -- 
                                                                         =======================================

</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, 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 September
     30, 1997 and December 31, 1996,  the statements of income for the three and
     nine months ended September 30, 1997 and 1996, the statements of changes in
     partners'  capital for the period from  December 31, 1995 to September  30,
     1997, and the statements of cash flows for the nine months ended  September
     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>

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

   Trailers                                            $    1,636,254          $   3,870,247
   Marine containers                                          151,235                199,724
                                                       ----------------------------------------
                                                            1,787,489              4,069,971
   Less accumulated depreciation                           (1,769,176 )           (3,861,489 )
                                                       ========================================
   Net equipment                                       $       18,313          $     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 September 30, 1997 and
     December 31, 1996.

During the nine  months  ended  September  30,  1997,  the  Partnership  sold or
     disposed of marine containers and trailers with a net book value of $73,957
     for proceeds of $408,684.  During the nine months ended September 30, 1996,
     the Partnership  sold or disposed of marine  containers and trailers with a
     net book value of $51,925 for proceeds of $121,454.

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
                               September 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 nine months  ended  September  30, 1997,  and 1996,  the General
     Partner paid special distributions of $17.94 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 as of September  30, 1997 and December
     31, 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, 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 September 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 September 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $   40,852          $   60,225
   Marine containers                                                          2,610                  36
   Railcar equipment                                                            (57 )             7,455

</TABLE>

Trailers:  Trailer lease revenues and direct  expenses were $55,740 and $14,888,
respectively,  for the quarter ended September 30, 1997, compared to $86,526 and
$26,301,  respectively,  during  the  same  period  of  1996.  The  decrease  in
contribution  was due to the  disposition of trailers over the preceding  twelve
months.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$2,625 and $15, respectively, for the quarter ended September 30, 1997, compared
to $66 and $30, respectively, during the same period of 1996.

Railcar equipment: Railcar lease revenues and direct expenses were zero and $57,
respectively,  for the quarter ended September 30, 1997,  compared to $7,500 and
$45,  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 $52,620 for the quarter  ended  September 30, 1997,
decreased from $115,611 for the same period in 1996. The variances are explained
as follows:

(1) a $44,045 decrease in depreciation  expense reflecting the sale of equipment
during 1997 and 1996.

(2) a $9,671  decrease  in bad debt  expense  was due to the  General  Partner's
evaluation of the collectibility of trade receivables.

(3) a  $6,866  decrease  in  general  and  administrative  expenses  was  due to
decreased administrative costs associated with the short-term rental facilities.



<PAGE>


(C)  Net Gain on Disposition of Owned Equipment

For the quarter ended  September 30, 1997,  the  Partnership  realized a gain of
$292,684 on the sale or disposition of marine containers and trailers,  compared
to the same period in 1996 when the Partnership realized a gain of $3,040 on the
sale or disposition of a trailer 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
$245,732  for  the  quarter  ended   September  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 $286,385 in the third quarter of 1997 increased
from $203,284 in the third 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 third quarter of 1997 is not  necessarily
indicative  of  future  periods.  In the  third  quarter  of  1997,  no  regular
distributions  were  made but the  Partnership  made a special  distribution  of
$222,760  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 September 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 September 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $   32,062          $   74,056
   Marine containers                                                          2,588                 420

</TABLE>

Trailers:  Trailer lease revenues and direct  expenses were $50,911 and $18,849,
respectively,  for the quarter ended September 30, 1997, compared to $96,503 and
$22,447,  respectively,  during the same period  during  1996.  The  decrease in
contribution  was  due to  lower  utilization  of  trailers  in  1997,  and  the
disposition of equipment during 1997 and 1996.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$2,624 and $36, respectively, for the quarter ended September 30, 1997, compared
to $465 and $45, respectively, during the same period during 1996.

(B)  Indirect Expenses Related to Owned Equipment Operations

Total  indirect  expenses of $74,125 for the quarter  ended  September 30, 1997,
decreased from $127,113 for the same period in 1996. The variances are explained
as follows:

(1) a $33,906 decrease in depreciation expenses reflecting the sale of equipment
during 1997 and 1996.



<PAGE>


(2) a $11,865  decrease in management  fee due to lower 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.

(3) a  $8,686  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  September 30, 1997,  the  Partnership  realized a gain of
$82,320 on the sale or disposition  of trailers,  compared to the same period in
1996, when the Partnership realized a gain of $14,895 on the sale or disposition
of marine containers and trailers.

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

Equity in net income of unconsolidated  special-purpose  entities of $12,843 and
$569,504  for the quarter  ended  September  30, 1997 and  September  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 enitity  which  owned an  aircraft  as a result of the General
Partner's sale of the asset during 1996.

(E)  Net Income

The  Partnership's net income decreased to $60,740 in the third quarter of 1997,
from $535,530 in the third 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 third quarter of 1997 is not  necessarily
indicative  of  future  periods.  In the  third  quarter  of  1997,  no  regular
distributions  were  made but the  Partnership  made a special  distribution  of
$337,270  to the  limited  partners,  or  $10.00  per  weighted-average  limited
partnership unit.

Comparison  of the  Partnerships'  Operating  Results for the Nine Months  Ended
September 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
nine  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 nine months
                                                                               ended September 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $  170,119          $  186,338
   Marine containers                                                          6,325               7,811
   Railcar equipment                                                          3,538              22,091

</TABLE>

Trailers:  Trailer lease revenues and direct expenses were $231,246 and $61,127,
respectively, for the nine months ended September 30, 1997, compared to $258,604
and $72,266,  respectively,  during the same period of 1996. The decrease of net
contribution was due to the disposition of trailers and lower utilization in the
first nine months of 1997 when compared to the same period of 1996.

Marine  containers:  Marine  container  lease revenues and direct  expenses were
$6,374 and $49, respectively, for the nine months ended 1997, compared to $7,901
and $90,  respectively,  during the same period of 1996.  The decrease in marine
containers  contribution was due to 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
$212,  respectively,  for the nine months ended September 30, 1997,  compared to
$22,500 and $409, 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 $195,219  for the nine months ended  September  30,
1997,  decreased  from  $316,303 for the same period in 1996.  The variances are
explained as follows:

(1) a $113,865 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 $10,633  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 $3,414 was due to the General  Partner's
evaluation of the collectibility of trade receivables.

(C)  Net Gain on Disposition of Owned Equipment

For the nine months ended September 30, 1997, the Partnership realized a gain of
$518,392  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 $32,674 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
$265,108  for the nine months  ended  September  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 $513,699 in the nine months ended September 30,
1997,   increased   from  $206,215  in  the  first  nine  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 nine
months of 1997 is not  necessarily  indicative of future  periods.  For the nine
months ended  September 30, 1997, the  Partnership  distributed  $541,718 to the
limited partners, or $24.32 per weighted-average  limited partnership unit which
included  a  special  distribution  of  $20.00  per   weighted-average   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 first
nine  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 nine months
                                                                               ended September 30,
                                                                             1997                1996
                                                                         ---------------------------------
   <S>                                                                   <C>                 <C>       
   Trailers                                                              $  124,437          $  241,758
   Marine containers                                                          6,396               3,533

</TABLE>

Trailers:  Trailer lease revenues and direct expenses were $173,888 and $49,451,
respectively,  for the nine months ended 1997, compared to $313,025 and $71,267,
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 nine 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
$6,511 and $115,  respectively,  for the nine  months  ended  1997,  compared to
$3,692 and $159, respectively during the same period of 1996.

(B)  Indirect Expenses Related to Owned Equipment Operations

Total  indirect  expenses of $276,204  for the nine months ended  September  30,
1997,  decreased  from  $396,207 for the same period in 1996.  The variances are
explained as follows:

(1) a $72,201 decrease in depreciation  expenses from 1996 levels reflecting the
sale of equipment during 1997 and 1996.

(2) a $42,103  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 $7,529  decrease in management  fee due to lower 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 nine months ended September 30, 1997, the Partnership realized a gain of
$334,727 on the sale or disposition of trailers and marine containers,  compared
to the same period in 1996, where the Partnership  realized a gain of $69,529 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 $37,953 and
$640,348 for the nine months ended  September  30, 1997 and 1996,  respectively,
represents the  Partnership's  share of income  generated  from the  partnership
investment  in entities  which own an aircraft,  accounted  for under the equity
method. The decrease is due to the Partnership liquidating its 69% investment in
an entity which owned an aircraft as a result of the General  Partner's  sale of
the asset during 1996.



<PAGE>


(E)  Net Income

The  Partnership's  net income  decreased  to $241,525 for the nine months ended
September 30, 1997, from $573,551 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 nine months ended September
30, 1997, is not necessarily  indicative of future periods.  For the nine months
ended  September 30, 1997, the Partnership  distributed  $679,808 to the limited
partners, or $20.16 per weighted-average limited partnership unit which included
a special distribution of $17.94 per weighted-average limited partnership unit.

(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 nine months ended September
30, 1997, TEP VIIB sold or disposed of railcars,  trailers and marine containers
for  $592,367,  and TEP VIIC sold or disposed of trailers and marine  containers
for $408,684.

(III) MARKET VALUES

As of September 30, 1997, the General Partner estimated the fair market value of
each  Partnerships'  equipment  portfolio to be approximately:  $0.2 million and
$1.1 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. 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:  November 11, 1997             By:      /s/ Richard Brock
                                              -----------------
                                              Richard Brock
                                              Vice President and
                                              Corporate Controller