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

(Mark One)

  X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
     EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 1995
                               ------------------

                                      OR

     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 0-14350
                       -------

                   BALCOR REALTY INVESTORS 85-SERIES III
                     A REAL ESTATE LIMITED PARTNERSHIP         
          -------------------------------------------------------
          (Exact name of registrant as specified in its charter)

          Illinois                                      36-3333344    
-------------------------------                     -------------------
(State or other jurisdiction of                      (I.R.S. Employer  
incorporation or organization)                      Identification No.)

2355 Waukegan Road
Bannockburn, Illinois                                     60015    
----------------------------------------            ------------------- 
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code (708) 267-1600
                                                   --------------

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>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                                BALANCE SHEETS
                   September 30, 1995 and December 31, 1994
                                  (UNAUDITED)

                                    ASSETS
                                                    1995          1994
                                                ------------  ------------
Cash and cash equivalents                       $ 3,023,158   $ 1,965,737
Escrow deposits                                   1,531,505     1,371,141
Accounts and accrued interest receivable             49,712         5,712
Prepaid expenses                                    369,724       227,783
Deferred expenses, net of accumulated
  amortization of $327,043 in 1995 and
  $221,054 in 1994                                1,263,041     1,369,030
                                                ------------  ------------
                                                  6,237,140     4,939,403
                                                ------------  ------------
Investment in real estate, at cost:
  Land                                            6,536,422     6,536,422
  Buildings and improvements                     56,884,371    56,884,371
                                                ------------  ------------
                                                 63,420,793    63,420,793
  Less accumulated depreciation                  21,974,482    20,663,941
                                                ------------  ------------
Investment in real estate, net of
  accumulated depreciation                       41,446,311    42,756,852
                                                ------------  ------------
                                                $47,683,451   $47,696,255
                                                ============  ============

                       LIABILITIES AND PARTNERS' DEFICIT

Accounts payable                                $    88,613   $   129,946
Due to affiliates                                    20,293        64,125
Accrued liabilities, principally 
  real estate taxes                                 170,038
Security deposits                                   326,462       295,948
Loss in excess of investment in joint venture
  with an affiliate                               1,168,714     1,124,922
Mortgage notes payable                           50,550,369    50,987,329
                                                ------------  ------------
     Total liabilities                           52,324,489    52,602,270

Affiliates' participation in joint ventures        (143,290)      (58,326)

Partners' deficit (59,092 Limited
  Partnership Interests issued
  and outstanding)                               (4,497,748)   (4,847,689)
                                                ------------  ------------
                                                $47,683,451   $47,696,255
                                                ============  ============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
             for the nine months ended September 30, 1995 and 1994
                                  (UNAUDITED)

                                                    1995          1994
                                                ------------  ------------
Income:
  Rental and service                            $ 8,890,299   $ 8,212,370
  Interest on short-term investments                124,022        69,207
                                                ------------  ------------
    Total income                                  9,014,321     8,281,577
                                                ------------  ------------

Expenses:
  Interest on mortgage notes payable              3,197,466     3,098,938
  Depreciation                                    1,310,541     1,310,539
  Amortization of deferred expenses                 105,989       168,217
  Property operating                              2,497,121     2,350,023
  Real estate taxes                                 731,378       798,310
  Property management fees                          443,549       411,515
  Administrative                                    308,857       288,950
  Participation in loss of joint venture with 
    an affiliate                                     18,067       112,289
                                                ------------  ------------
    Total expenses                                8,612,968     8,538,781
                                                ------------  ------------
Income (loss) before affiliates' participation
  in joint ventures and extraordinary items         401,353      (257,204)

Affiliates' participation in (income) loss
  from joint ventures                               (41,477)        1,446
                                                ------------  ------------
Income (loss) before extraordinary items            359,876      (255,758)

Extraordinary items:
  Gain on forgiveness of debt                        69,409
  Affiliate's participation in gain on 
    forgiveness of debt                             (20,823)
  Participation in debt extinguishment expense      (58,521)
                                                ------------ 
Total extraordinary items                            (9,935)
                                                ------------  ------------
Net income (loss)                               $   349,941   $  (255,758)
                                                ============  ============
Net income (loss) before extraordinary items
  allocated to General Partner                  $     3,599   $    (2,558)
                                                ============  ============
Net income (loss) before extraordinary items
  allocated to Limited Partners                 $   356,277   $  (253,200)
                                                ============  ============
Net income (loss) before extraordinary items 
  per Limited Partnership Interest (59,092 
  issued and outstanding)                       $      6.03   $     (4.28)
<PAGE>
                                                ============  ============
Extraordinary items allocated  
  to General Partner                            $       (99)         NONE
                                                ============  ============
Extraordinary items allocated  
  to Limited Partners                           $    (9,836)         NONE
                                                ============  ============
Extraordinary items per Limited Partnership 
  Interest (59,092 issued and outstanding)      $     (0.17)         NONE
                                                ============  ============
Net income (loss) allocated to General Partner  $     3,500   $    (2,558)
                                                ============  ============
Net income (loss) allocated to Limited Partners $   346,441   $  (253,200)
                                                ============  ============
Net income (loss) per Limited Partnership 
  Interest (59,092 issued and outstanding)      $      5.86   $     (4.28)
                                                ============  ============




The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
              for the quarters ended September 30, 1995 and 1994
                                  (UNAUDITED)

                                                    1995          1994
                                                ------------  ------------
Income:
  Rental and service                            $ 3,013,754   $ 2,820,801
  Interest on short-term investments                 48,618        27,851
                                                ------------  ------------
    Total income                                  3,062,372     2,848,652
                                                ------------  ------------

Expenses:
  Interest on mortgage notes payable              1,063,836     1,043,898
  Depreciation                                      436,848       436,846
  Amortization of deferred expenses                  35,327        56,073
  Property operating                                953,751       894,181
  Real estate taxes                                 250,621       217,231
  Property management fees                          151,712       143,584
  Administrative                                     92,691        54,529
  Participation in loss of joint venture          
    with an affiliate                                 2,332        63,024
                                                ------------  ------------
    Total expenses                                2,987,118     2,909,366
                                                ------------  ------------
Income (loss) before affiliates' participation
  in joint ventures                                  75,254       (60,714)
Affiliates' participation in loss from
  joint ventures                                      6,736         1,229
                                                ------------  ------------
Net income (loss)                               $    81,990   $   (59,485)
                                                ============  ============
Net income (loss) allocated  
  to General Partner                            $       820   $      (595)
                                                ============  ============
Net income (loss) allocated  
  to Limited Partners                           $    81,170   $   (58,890)
                                                ============  ============
Net income (loss) per Limited Partnership 
  Interest (59,092 issued and outstanding)      $      1.37   $     (1.00)
                                                ============  ============








The accompanying notes are an integral part of the financial statements.
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                           STATEMENTS OF CASH FLOWS
             for the nine months ended September 30, 1995 and 1994
                                  (UNAUDITED)

                                                    1995          1994
                                                ------------  ------------
Operating activities:
  Net income (loss)                             $   349,941   $  (255,758)
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
      Gain on forgiveness of debt                   (69,409)
      Affiliate's participation in gain
        on forgiveness of debt                       20,823
      Participation in debt extinguishment
        expense                                      58,521
      Affiliates' participation in income 
        (loss) from joint ventures                   41,477        (1,446)
      Participation in loss of joint venture
        with an affiliate                            18,067       112,289
      Depreciation of properties                  1,310,541     1,310,539
      Amortization of deferred expenses             105,989       168,217
      Net change in:
        Escrow deposits                            (160,364)     (671,215)
        Accounts and accrued interest 
          receivable                                (44,000)
        Prepaid expenses                           (141,941)       59,210
        Accounts payable                            (41,333)      (24,186)
        Due to affiliates                           (43,832)       49,383
        Accrued liabilities, principally
          real estate taxes                         170,038       168,256
        Security deposits                            30,514          (160)
                                                ------------  ------------
  Net cash provided by operating activities       1,605,032       915,129
                                                ------------  ------------
Investing activities:
  Distributions from joint venture with an
    affiliate                                       328,378        91,516
  Contributions to joint venture with an
    affiliate                                      (361,174)
                                                ------------  ------------
  Net cash used in or provided by
    investing activities                            (32,796)       91,516
                                                ------------  ------------
Financing activities:
  Principal payments on mortgage notes
    payable                                        (367,551)     (229,134)
  Distributions to joint venture 
    partners - affiliates                          (147,264)     (153,460)
                                                ------------  ------------
  Net cash used in financing activities            (514,815)     (382,594)
                                                ------------  ------------

Net change in cash and cash equivalents           1,057,421       624,051
<PAGE>
Cash and cash equivalents at beginning
    of period                                     1,965,737     1,916,800
                                                ------------  ------------

Cash and cash equivalents at end of period      $ 3,023,158   $ 2,540,851
                                                ============  ============











The accompanying notes are an integral part of the financial statements.
<PAGE>
                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                         NOTES TO FINANCIAL STATEMENTS

1. Accounting Policies:

A reclassification has been made to the previously reported 1994 statements in
order to provide comparability with the 1995 statements.  This reclassification
has not changed the 1994 results.  In the opinion of management, all
adjustments necessary for a fair presentation have been made to the
accompanying statements for the nine months and quarter ended September 30,
1995, and all such adjustments are of a normal and recurring nature.

2. Interest Expense:

During the nine months ended September 30, 1995 and 1994, the Partnership
incurred interest expense on mortgage notes payable of $3,197,466 and
$3,098,938 and paid interest expense of $3,197,466 and $3,081,407,
respectively.

3. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates during the
nine months and quarter ended September 30, 1995 are:


                                          Paid          
                                    -------------------------
                                    Nine Months    Quarter     Payable
                                    -------------  ----------  ----------   
   Reimbursement of expenses to
     the General Partner, at cost       $ 147,168    $ 20,112    $ 20,293


4. Subsequent Event:

In October 1995, the Partnership commenced quarterly distributions and paid
$443,190 ($7.50 per Interest) to the holders of Limited Partnership Interests
for the third quarter of 1995.
<PAGE>
                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                     MANAGEMENT'S DISCUSSION AND ANALYSIS

Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Partnership") was formed in 1984 to invest in and operate income-producing
real property. The Partnership raised $59,092,000 through the sale of Limited
Partnership Interests to the public and utilized these proceeds to acquire
eight real properties and a minority joint venture interest in one additional
real property. During prior years, titles to three of these properties were
relinquished through foreclosure. The Partnership continues to operate its five
remaining properties and its minority joint venture interest.

Inasmuch as the management's discussion and analysis below relates primarily to
the time period since the end of the last fiscal year, investors are encouraged
to review the financial statements and the management's discussion and analysis
contained in the annual report for 1994 for a more complete understanding of
the Partnership's financial position.

Summary of Operations
---------------------

Improved operations at four of the Partnership's five properties resulted in
the recognition of net income for the nine months and quarter ended September
30, 1995 as compared to a net loss for the same periods in 1994. Further
discussion of the Partnership's operations are summarized below.

1995 Compared to 1994
---------------------

Unless otherwise noted, discussions of fluctuations between 1994 and 1995 refer
to both the quarter and nine months ended September 30, 1995 and 1994.

Rental and service income and, consequently, property management fees increased
during 1995 as compared to 1994 as a result of higher average rental rates and
stable occupancy at each of the Partnership's five remaining properties.

Interest income on short-term investments increased during 1995 as compared to
1994 due to an increase in short-term interest rates and higher average cash
balances available for investment.  

During December 1994, the North Hill Apartments mortgage loan was refinanced
and the remaining deferred expenses relating to the previous mortgage loan were
recognized. As a result, amortization expense decreased during 1995 as compared
to 1994.

Real estate tax expense decreased during the nine months ended September 30,
1995 as compared to the same period in 1994 as a result of lower tax rates at
the Country Ridge and Park Place - Phase II apartment complexes.  An increase
in the assessed value at the North Hill Apartments partially offset the
decrease for the nine months ended September 30, 1995 and resulted in an
increase in real estate tax expense for the quarter ended September 30, 1995.

Increased legal and accounting fees resulted in higher administrative expenses
during 1995 as compared to 1994.
<PAGE>
The Partnership holds a minority interest in the Lakeville Resort Apartments.
The loss from joint venture with an affiliate decreased during 1995 as compared
to 1994 due to an increase in average rental rates and a decrease in exterior
painting costs. In June 1995, the mortgage note was refinanced with a new
lender.  In connection with this transaction, the Partnership recognized an
extraordinary debt extinguishment expense of $58,521.

The Shadowridge and North Hill apartment complexes are both owned by joint
ventures consisting of the Partnership and an affiliate.  Improved operations
at these properties resulted in affiliates' participation in income from joint
ventures during the nine months ended September 30, 1995 as compared to a loss
for the same period in 1994.

In connection with a settlement reached with the seller of the Shadowridge
Apartments, the Partnership recognized an extraordinary gain on forgiveness of
debt in 1995 of $69,409, of which $20,823 represents the affiliate's share.

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

The cash position of the Partnership increased as of September 30, 1995 when
compared to December 31, 1994 due to increased cash flow from property
operations.  The Partnership commenced quarterly distributions to Limited
Partners in October 1995 as discussed below.

The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments unless otherwise indicated. A deficit is
considered to be significant if it exceeds $250,000 annually or 20% of the
property's rental and service income.  The Partnership defines cash flow
generated from its properties as an amount equal to the properties' revenue
receipts less property related expenditures, which include debt service
payments.  For the nine months ended September 30, 1995 and 1994, all of the
Partnership's properties generated positive cash flow. In addition, Lakeville
Resort Apartments, in which the Partnership holds a minority joint venture
interest, also generated positive cash flow for the nine months ended September
30, 1995 as compared to a marginal deficit for the same period in 1994.  The
improvement in cash flow was primarily due to exterior painting expenditures
incurred during 1994. 

While the cash flow of the Partnership's properties has improved, the General
Partner continues to pursue a number of actions aimed at further improving the
cash flow of the Partnership's properties, including refinancing mortgage
loans, improving operating performance, and seeking rent increases where market
conditions allow. As of September 30, 1995, the occupancy rates of the
Partnership's properties ranged from 95% to 99%. Despite improvements in the
local economies and rental markets where certain of the Partnership's
properties are located, the General Partner believes that continued ownership
of many properties is in the best interest of the Partnership in order to
maximize returns to Limited Partners. As a result, the Partnership may continue
to own these properties for longer than the holding period for the assets
originally described in the prospectus. 

Each of the Partnership's properties is owned through the use of third party
mortgage loan financing and, therefore, the Partnership is subject to the
financial obligations required by such loans. In certain instances, it may be
difficult for the Partnership to refinance a property in an amount sufficient
<PAGE>

to retire in full the current mortgage financing with respect to the property.
In the event negotiations with the existing lender for a loan modification or
with new lenders for a refinancing are unsuccessful, the Partnership may sell
the collateral property or other properties to satisfy an obligation, or may
relinquish title to the collateral property in satisfaction of the outstanding
mortgage loan balance. The third-party financing of approximately $8,765,000 on
the Country Ridge apartments matures in 1996 and the General Partner expects to
refinance the mortgage loan.  

The Lakeville Resort Apartments is owned by a joint venture consisting of the
Partnership and an affiliate.  In June 1995 the mortgage note was refinanced
with a new lender.  The interest rate decreased from a variable rate of
approximately 10.4% to a fixed rate of 8.2%, the maturity date was extended
from April 1997 to July 2030 and the monthly payment of principal and interest
decreased from a variable payment which was $208,555 at the time of the
refinancing to a fixed payment of $151,727.  A portion of the proceeds from the
new $20,932,600 first mortgage loan was used to repay the existing mortgage
note of $18,728,280 as well as pay deferred loan fees of $499,868 and fund an
improvement escrow of $1,604,551.   

During October 1995, the Partnership commenced distributions and paid $443,190
($7.50 per Interest) to the holders of Limited Partnership Interests for the
third quarter of 1995.  The General Partner expects to continue quarterly
distributions to Limited Partners based on the current performance of the
Partnership's properties.  However, the level of future distributions, if
available, will depend on cash flow from the Partnership's remaining
properties, successful refinancing of certain mortgage loans and proceeds from
future property sales, as to all of which there can be no assurances.

Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sales prices,
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
<PAGE>
                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                          PART II - OTHER INFORMATION

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

(a) Exhibits:

(4) Form of Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1
to the Registrant's Registration Statement on Form S-11 dated August 2, 1985
(Registration No. 2-97249), and Form of Confirmation regarding Interests in the
Partnership set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q
for the quarter ended September 30, 1992 (Commission File No. 0-14350) are
incorporated herein by reference.

(27) Financial Data schedule of the Registrant for the nine month period ending
September 30, 1995 is attached hereto.

(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended September 30, 1995.
<PAGE>

SIGNATURES


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


                         BALCOR REALTY INVESTORS 85-SERIES III
                         A REAL ESTATE LIMITED PARTNERSHIP



                         By:  /s/Thomas E. Meador                        
                              ---------------------------------
                              Thomas E. Meador
                              President and Chief Executive Officer (Principal
                              Executive Officer) of Balcor Partners-XVIII, the
                              General Partner



                         By:  /s/Brian D. Parker
                              ---------------------------------
                              Brian D. Parker
                              Senior Vice President, and Chief Financial
                              Officer (Principal Accounting and Financial
                              Officer) of Balcor Partners-XVIII, the General
                              Partner



Date: November 14, 1995
      -----------------------
<PAGE>