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 March 31, 1999
                               --------------
                                      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 (847) 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
                     March 31, 1999 and December 31, 1998
                                  (Unaudited)

                                    ASSETS

                                                   1999          1998
                                               ------------- -------------
Cash and cash equivalents                      $  1,627,000  $  1,646,332
Prepaid expenses                                      1,896
Accrued interest receivable                           6,537         7,033
                                               ------------- -------------
                                               $  1,635,433  $  1,653,365
                                               ============= =============


                       LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                               $     54,722  $     57,724
Due to affiliates                                    23,769        21,164
                                               ------------- -------------
    Total liabilities                                78,491        78,888
                                               ------------- -------------
Commitments and contingencies

Limited Partners' capital (59,092 
  Limited Partnership Interests
  issued and outstanding)                         1,865,459     1,882,994
General Partner's deficit                          (308,517)     (308,517)
                                               ------------- -------------
    Total partners' capital                       1,556,942     1,574,477
                                               ------------- -------------
                                               $  1,635,433  $  1,653,365
                                               ============= =============

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 March 31, 1999 and March 31, 1998
                                  (Unaudited)

                                                   1999          1998
                                               ------------- -------------
Income:
  Interest on short-term investments           $     19,402  $     20,168
  Other income                                                      7,972
                                               ------------- -------------
    Total income                                     19,402        28,140
                                               ------------- -------------
Expenses:
  Property operating                                               19,830
  Administrative                                     36,937        65,623
                                               ------------- -------------
    Total expenses                                   36,937        85,453
                                               ------------- -------------
Net loss                                       $    (17,535) $    (57,313)
                                               ============= =============
Net loss allocated to General Partner                 None          None 
                                               ============= =============
Net loss allocated to Limited Partners         $    (17,535) $    (57,313)
                                               ============= =============
Net loss per Limited Partnership Interest
  (59,092 issued and outstanding) -
  Basic and Diluted                            $      (0.30) $      (0.97)
                                               ============= =============
Distribution to Limited Partners                      None   $    719,778
                                               ============= =============
Distribution per Limited Partnership
  Interest (59,092 issued and outstanding)            None   $      12.18
                                               ============= =============

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 quarters ended March 31, 1999 and March 31, 1998
                                  (Unaudited)

                                                    1999          1998
                                               ------------- -------------
Operating activities:
Net loss                                       $    (17,535) $    (57,313)
  Adjustments to reconcile net loss
    to net cash used in operating
    activities:
      Net change in:
        Accounts and accrued interest
          receivable                                    496        50,994
        Prepaid expenses                             (1,896)         (557)
        Accounts payable                             (3,002)         (563)
        Due to affiliates                             2,605         3,972
                                               ------------- -------------
  Net cash used in operating activities             (19,332)       (3,467)
                                               ------------- -------------
Financing activity:
  Distribution to Limited Partners                               (719,778)
                                                             -------------
  Cash used in financing activity                                (719,778)
                                                             -------------
Net change in cash and cash equivalents             (19,332)     (723,245)
Cash and cash equivalents at beginning
  of period                                       1,646,332     2,414,280
                                               ------------- -------------
Cash and cash equivalents at end of period     $  1,627,000  $  1,691,035
                                               ============= =============

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 Policy:

In the opinion of management, all adjustments necessary for a fair presentation
have been made to the accompanying statements for the quarter ended March 31,
1999, and all such adjustments are of a normal and recurring nature.

2. Partnership Termination:

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in September
1997. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership, as well as establish a reserve
for contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in Note 4 of Notes to
Financial Statements. Due to this litigation, the Partnership will not be
dissolved and reserves will be held by the Partnership until the conclusion of
all contingencies. There can be no assurances as to the time frame for
conclusion of these contingencies.

3. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates during the
quarter ended March 31, 1999 are:
                                               
                                        Paid       Payable
                                      ---------   ---------       
   Reimbursement of expenses to                          
     the General Partner, at cost     $ 8,095     $ 23,769

4. Contingencies:

The Partnership is currently involved in two related lawsuits, Masri vs. Lehman
Brothers, Inc., et al. and Bruss, et al. vs. Lehman Brothers, Inc., et al.,
whereby the Partnership and certain affiliates have been named as defendants
alleging substantially similar claims involving certain state securities and
common law violations with regard to the property acquisition process of the
Partnership, and to the adequacy and accuracy of disclosures of information
concerning, as well as marketing efforts related to, the offering of the
Limited Partnership Interests of the Partnership. The defendants continue to
vigorously contest these actions. A plaintiff class has not been certified in 
<PAGE>
either action. With respect to the Masri case, no determinations upon any
significant issues have been made. The Bruss complaint was filed on January 25,
1999. It is not determinable at this time how the outcome of either action will
impact the remaining cash reserves of the Partnership. The Partnership believes
it has meritorious defenses to contest the claims.
<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 from the sale of Limited
Partnership Interests and utilized these proceeds to acquire eight real
properties and a minority joint venture interest in one additional real
property. As of March 31, 1999, the Partnership had no properties remaining in
it's portfolio.

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 1998 for a more complete understanding of
the Partnership's financial position.

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

The operations of the Partnership in 1999 and 1998 consisted primarily of
administrative expenses and operating expenses related to sold properties which
were partially offset by interest income earned on short-term investments. The
Partnership also recognized other income in 1998. Primarily as a result of
lower administrative expenses in 1999 and operating expenses related to sold
properties paid in 1998, the Partnership's net loss decreased during 1999 as
compared to 1998. Further discussion of the Partnership's operations is
summarized below.

1999 Compared to 1998
---------------------

Discussions of fluctuations between 1999 and 1998 refer to the quarters ended
March 31, 1999 and 1998. 

The Partnership recognized other income during 1998 in connection with a refund
of state income taxes relating to the gain on the sale of the Country Ridge
Apartments during 1996.

During 1998, the Partnership paid its share of property operating expenses
relating to North Hill Apartments, in which the Partnership held a joint
venture interest. The property was sold in 1997.

Primarily due to a decrease in accounting fees, administrative expenses
decreased during 1999 when compared to 1998.
 
Liquidity and Capital Resources
-------------------------------

The cash position of the Partnership decreased by approximately $19,000 as of
March 31, 1999 as compared to December 31, 1998 due to cash used in operating 
<PAGE>
activities for the payment of administrative expenses, which was partially
offset by interest income earned on short-term investments. 

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in September
1997. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership, as well as establish a reserve
for contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuits discussed in Note 4 of Notes to
Financial Statements. Due to this litigation, the Partnership will not be
dissolved and reserves will be held by the Partnership until the conclusion of
all contingencies. There can be no assurances as to the time frame for
conclusion of these contingencies.

Limited Partners have received cumulative distributions of Net Cash Receipts of
$59.75 per $1,000 Interest and Net Cash Proceeds of $363.95 per $1,000
Interest, totaling $423.70 per $1,000 Interest. No additional distributions are
anticipated to be made prior to the termination of the Partnership. However,
after paying final partnership expenses, any remaining cash reserves will be
distributed. Limited Partners will not recover a substantial portion of their
original investment.

The Partnership sold all of its remaining real property investments and
distributed a majority of the proceeds from these sales to Limited Partners in
1996 and 1997. Since the Partnership no longer has any operating assets, the
number of computer systems and programs necessary to operate the Partnership
has been significantly reduced. The Partnership relies on third party vendors
to perform most of its functions and has implemented a plan to determine the
Year 2000 compliance status of these key vendors. The Partnership is within its
timeline for having these plans completed prior to the year 2000.

The Partnership's plan to determine the Year 2000 compliance status of its key
vendors involves the solicitation of information from these vendors through the
use of surveys, follow-up discussions and review of data where needed. The
Partnership has sent out surveys to these vendors and received back a majority
of these surveys. While the Partnership cannot guarantee Year 2000 compliance
by its key vendors, and in many cases will be relying on statements from these
vendors without independent verification, preliminary surveys indicate that the
key vendors performing services for the Partnership are aware of the issues and
are working on a solution to achieve compliance before the year 2000. The
Partnership is in the process of developing a contingency plan in the event any
of its key vendors are not Year 2000 compliant prior to the year 2000. As part
of its contingency plan, the Partnership will identify replacement vendors in
the event that current vendors are not substantially Year 2000 compliant by
June 30, 1999. The Partnership does not believe that failure by any of its key
vendors to be Year 2000 compliant by the year 2000 would have a material effect
on the business, financial position or results of operations of the
Partnership.
<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 Partnership'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 Partnership's Report on Form 10-Q
for the quarter ended June 30, 1992 (Commission File No. 0-14350) are
incorporated herein by reference.

(10) Material Contracts:

(a)(i) Agreement of Sale relating to the sale of North Hill Apartments, DeKalb
County, Georgia, previously filed as Exhibit (2) to the Registrant's Current
Report on Form 8-K dated May 22, 1997, is incorporated herein by reference.

(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(ii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(iii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(iv) Third Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(iv) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(v) Fourth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(v) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(vi) Fifth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(vi) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(vii) Sixth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(vii) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.
<PAGE>
(viii) Letter Agreement dated June 30, 1997 relating to the sale of North Hill
Apartments, DeKalb County, Georgia, previously filed as Exhibit (10)(e)(viii)
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, is incorporated herein by reference.

(ix) Seventh Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, DeKalb County, Georgia, previously filed as
Exhibit (10)(e)(ix) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, is incorporated herein by reference.

(x) Eighth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, DeKalb County, Georgia,  previously filed as
Exhibit (10)(e)(x) to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, is incorporated herein by reference.

(27) Financial Data schedule of the Partnership for the quarter ended March 31,
1999 is attached hereto.

(b) Reports on Form 8-K:  No reports were filed on Form 8-K during the quarter
ended March 31, 1999.
<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/Jayne A. Kosik                        
                              ---------------------------------
                              Jayne A. Kosik
                              Senior Managing Director and Chief Financial 
                              Officer (Principal Accounting and Financial 
                              Officer) of Balcor Partners-XVIII, the General 
                              Partner



Date: May 7, 1999                    
      -----------
<PAGE>