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, 1997
                               ------------------
                                      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, 1997 and December 31, 1996
                                  (Unaudited)

                                    ASSETS

                                                   1997           1996
                                             -------------- --------------
Cash and cash equivalents                    $   2,683,426  $   5,888,040
Escrow deposits                                    661,220        696,354
Accounts and accrued interest receivable           284,758         93,191
Prepaid expenses                                    14,972         59,888
Deferred expenses, net of accumulated
  amortization of $278,566 in 1997 and
  $250,656 in 1996                                 753,413        781,323
Investment in joint venture with an affiliate                   1,046,660
                                             -------------- --------------
                                                 4,397,789      8,565,456
                                             -------------- --------------
Investment in real estate:
  Land                                           3,161,992      3,161,992
  Buildings and improvements                    27,767,583     27,767,583
                                             -------------- --------------
                                                30,929,575     30,929,575
  Less accumulated depreciation                 11,955,657     11,739,654
                                             -------------- --------------
Investment in real estate, net of
  accumulated depreciation                      18,973,918     19,189,921
                                             -------------- --------------
                                             $  23,371,707  $  27,755,377
                                             ============== ==============

                       LIABILITIES AND PARTNERS' DEFICIT

Accounts payable                             $      22,024  $      39,006
Due to affiliates                                   82,997         85,504
Accrued real estate taxes                          116,335
Security deposits                                  165,488        159,650
Mortgage notes payable                          24,267,002     24,324,028
                                             -------------- --------------
    Total liabilities                           24,653,846     24,608,188

Affiliates' participation in joint ventures       (531,283)      (499,671)
                                             -------------- --------------
                                                24,122,563     24,108,517
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                                BALANCE SHEETS
                     March 31, 1997 and December 31, 1996
                                  (Unaudited)


                                                   1997           1996
                                               -------------- --------------
Commitments and contingencies

Limited Partners' (deficit) capital (59,092 
  Limited Partnership Interests issued 
  and outstanding)                                (401,940)     3,995,822
General Partner's deficit                         (348,916)      (348,962)
                                             -------------- --------------
    Total partners' (deficit) capital             (750,856)     3,646,860
                                             -------------- --------------
                                             $  23,371,707  $  27,755,377
                                             ============== ==============

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, 1997 and 1996
                                  (Unaudited)

                                                    1997           1996
                                             -------------- --------------
Income:
  Rental and service                         $   1,324,285  $   3,000,574
  Interest on short-term investments                36,698         33,251
  Participation in income of joint
    venture with an affiliate                                       3,741
                                             -------------- --------------
    Total income                                 1,360,983      3,037,566
                                             -------------- --------------

Expenses:
  Interest on mortgage notes payable               463,287      1,059,188
  Depreciation                                     216,003        436,847
  Amortization of deferred expenses                 27,910         35,331
  Property operating                               382,813        950,265
  Real estate taxes                                116,335        268,150
  Property management fees                          64,486        148,247
  Administrative                                    86,038         94,962
                                             -------------- --------------
    Total expenses                               1,356,872      2,992,990
                                             -------------- --------------
Income before affilates' participation
  in joint ventures                                  4,111         44,576
Affiliates' participation in losses from
  joint ventures                                       527          8,183
                                             -------------- --------------
Net income                                   $       4,638  $      52,759
                                             ============== ==============
Net income allocated to General Partner      $          46  $         528
                                             ============== ==============
Net income allocated to Limited Partners     $       4,592  $      52,231
                                             ============== ==============
Net income per Limited Partnership Interest
  (59,092 issued and outstanding)            $        0.08  $        0.88
                                             ============== ==============
Distribution to Limited Partners             $   4,402,354  $     443,190
                                             ============== ==============
Distribution per Limited Partnership
  Interest 59,092 issued and outstanding     $       74.50  $        7.50
                                             ============== ==============

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, 1997 and 1996
                                  (Unaudited)

                                                   1997           1996
                                             -------------- --------------
Operating activities:
  Net income                                 $       4,638  $      52,759
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Affiliates' participation in losses
        from joint ventures                           (527)        (8,183)
      Participation in income of joint
        venture with an affiliate                                  (3,741)
      Depreciation of properties                   216,003        436,847
      Amortization of deferred expenses             27,910         35,331
      Net change in:
        Escrow deposits                             35,134       (277,501)
        Accounts and accrued interest
          receivable                              (191,567)         5,582
        Prepaid expenses                            44,916         44,138
        Accounts payable                           (16,982)       (18,603)
        Due to affiliates                           (2,507)        15,466
        Accrued real estate taxes                  116,335        181,773
        Security deposits                            5,838         (2,129)
                                             -------------- --------------
  Net cash provided by operating activities        239,191        461,739
                                             -------------- --------------
Investing activity:
  Distribution from joint venture with 
    an affiliate                                 1,046,660        105,679
                                             -------------- --------------
  Net cash provided by investing
    activity                                     1,046,660        105,679
                                             -------------- --------------

Financing activities:
  Distribution to Limited Partners              (4,402,354)      (443,190)
  Principal payments on mortgage notes
    payable                                        (57,026)      (124,865)
  Distribution to joint venture partner
    - affiliate                                    (31,085)
  Contributions from joint venture partners 
    - affiliates                                                   54,711
                                             -------------- --------------
  Net cash used in financing activities         (4,490,465)      (513,344)
                                             -------------- --------------
<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, 1997 and 1996
                                  (Unaudited)
                                  (Continued)

                                                   1997           1996
                                             -------------- --------------
Net change in cash and cash equivalents         (3,204,614)        54,074
Cash and cash equivalents at beginning
  of period                                      5,888,040      2,310,596
                                             -------------- --------------
Cash and cash equivalents at end of period   $   2,683,426  $   2,364,670
                                             ============== ==============

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,
1997, 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. During 1996, the Partnership sold the Country Ridge, Park Place -
Phase II and Shadowridge apartment complexes. The Lakeville Resort Apartments,
in which the Partnership owned a minority joint venture interest, was also sold
during 1996. In addition, the Partnership sold the Howell Station Apartments in
May 1997, and is actively marketing the North Hill Apartments for sale. The
Partnership has retained a portion of the cash from 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 stemming from litigation involving the Partnership including,
but not limited to, the lawsuits discussed in Note 5 of Notes to Financial
Statements. In the absence of any such contingency, the reserves will be paid
within twelve months of the last property being sold. In the event a
contingency exists or arises, reserves may be held by the Partnership for a
longer period of time.

3. Interest Expense:

During the quarters ended March 31, 1997 and 1996, the Partnership
incurred and paid interest expense on mortgage notes payable of $463,287 and
$1,059,188, respectively.

4. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates during the
quarter ended March 31, 1997 are:
                                               
                                        Paid       Payable
                                    ------------  ---------       
   Reimbursement of expenses to                          
     the General Partner, at cost     $19,733      $82,997
<PAGE>
5. Contingencies:

The Partnership is currently involved in two lawsuits whereby the Partnership
and certain affiliates have been named as defendants alleging substantially
similar claims involving certain federal securities law violations with regard
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 either action and,
no determinations of the merits have been made. It is not determinable at this
time whether or not an unfavorable decision in either action would have a
material adverse impact on the financial position, operations and liquidity of
the Partnership. The Partnership believes it has meritorious defenses to
contest the claims.

6. Subsequent Events:

a) In April 1997, the Partnership made a distribution of $681,028 ($11.52 per
Interest) to the holders of Limited Partnership Interests. This amount includes
a regular quarterly distribution of available Net Cash Receipts of $7.50 per
Interest and a special distribution of Net Cash Proceeds of $4.02 per Interest,
primarily from the remaining available proceeds related to the sale of the
Lakeville Resort Apartments.

b) In May 1997, the Partnership sold the Howell Station Apartments in an all
cash sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$6,443,945 to the third party mortgage holder in full satisfaction of the first
mortgage loan and approximately $272,000 in selling costs. In addition, the
Partnership paid a state withholding tax of $214,203 relating to the gain on
the sale of the property which will be recorded as a deemed distribution for
financial statement purposes. The Partnership will recognize a gain of
approximately $4,846,000 for financial statement purposes, during the second
quarter of 1997. 
<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. The Partnership has since disposed of seven of these properties,
including the Howell Station Apartments which was sold in May 1997 and the
property in which the Partnership held a minority joint venture interest.
Currently, the Partnership continues to operate the North Hill Apartments.

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 1996 for a more complete understanding of
the Partnership's financial position.

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

Net income decreased during the quarter ended March 31, 1997 as compared to the
same period in 1996 primarily due to the sales of three of the Partnership's
properties during 1996. Further discussion of the Partnership's operations are
summarized below.

1997 Compared to 1996
---------------------

Discussions of fluctuations between 1997 and 1996 refer to the quarters ended
March 31, 1997 and 1996.

The Partnership sold the Country Ridge, Shadowridge and Park Place - Phase II
apartment complexes during 1996. As a result, rental and service income,
interest expense on mortgage notes payable, depreciation, amortization,
property operating expense, real estate taxes and property management fees
decreased during 1997 as compared to 1996.

The Partnership owned a minority joint venture interest in the Lakeville Resort
Apartments. As a result of the 1996 sale of the property, participation in
income of joint venture with an affiliate ceased during 1996.

The North Hill Apartments is owned by a joint venture consisting of the
Partnership and an affiliate. Roof repairs and carpet replacement expenditures
incurred at the property in 1996 and lower payroll costs in 1997 resulted in a
decrease in affiliates' participation in losses from joint venture during 1997
as compared to 1996.
<PAGE>
Liquidity and Capital Resources
-------------------------------

The cash position of the Partnership as of March 31, 1997 decreased by
approximately $3,205,000 when compared to December 31, 1996, primarily due to  
the distribution during January 1997 to the Limited Partners from proceeds
received from the 1996 property sales. Cash flow of approximately $239,000 was
provided by operating activities consisting of cash flow from the operations of
the Partnership's remaining properties, which were partially offset by the
payment of administrative expenses. Cash provided by the investing activity
consisted of a distribution from joint venture with an affiliate of
approximately $1,047,000. The Partnership used cash to fund its financing
activities which consisted of a payment of a distribution totaling
approximately $4,402,000 to the Limited Partners, principal payments on
mortgage notes payable of approximately $57,000, and a distribution to the
joint venture partner of approximately $31,000. In addition, the Partnership
made a special distribution of $681,028 to the Limited Partners in April 1997. 

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 property's revenue
receipts less property related expenditures, which include debt service
payments. During 1997 and 1996, the Partnership's two remaining properties
generated positive cash flow. The Country Ridge, Shadowridge and Park Place -
Phase II apartment complexes generated positive cash flow prior to their sales
in 1996. In addition, Lakeville Resort Apartments, in which the Partnership
held a minority joint venture interest, generated positive cash flow in 1996
prior to its sale. As of March 31, 1997, the occupancy rates of Howell Station
and North Hill apartment complexes were 91% and 92%, respectively.

North Hill Apartments is owned through the use of third party mortgage loan
financing and, therefore, the Partnership is subject to the financial
obligations required by such loan. This loan matures in 2024.

During 1996, the Partnership sold three properties, and the property in which
the Partnership held a minority joint venture interest. The Partnership sold
the Howell Station Apartments during May 1997 and expects to sell its only
remaining property, North Hill Apartments, during 1997. 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. 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. Such contingencies may include legal and other fees stemming
from litigation involving the Partnership including, but not limited to, the
lawsuits discussed in Note 5 of Notes to Financial Statements. In the absence
of any such contingency, the reserves will be paid within twelve months of the
last property being sold. In the event a contingency exists or arises, reserves
may be held by the Partnership for a longer period of time.
<PAGE>
The Lakeville Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. Pursuant to the sale agreement for the Lakeville
Resort Apartments, $500,000 of the sale proceeds was retained by the joint
venture and was unavailable for distribution until February 1997, at which time
the funds were released in full to the joint venture. The Partnership's share
of the funds was $201,250.

In May 1997, the Partnership sold the Howell Station Apartments in an all cash
sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$6,443,945 to the third party mortgage holders in full satisfaction of the
first mortgage loan and approximately $272,000 in selling costs. In addition,
the Partnership paid a state withholding tax of $214,203 relating to the gain
on the sale of the property. Pursuant to the terms of the sale, the Partnership
will retain $100,000 of the proceeds until August 1997. The remainder of the
available proceeds are expected to be distributed to Limited Partners in July
1997.

In April 1997, the Partnership made a distribution of $681,028 ($11.52 per
Interest) to the holders of Limited Partnership Interests for the first quarter
of 1997. The regular quarterly Net Cash Receipts distribution of $443,190
($7.50 per Interest) remained unchanged from the amount distributed since
commencement of distributions in the fourth quarter of 1995. In addition, Net
Cash Proceeds of $237,838 ($4.02 per Interest) were distributed to the Limited
Partners from the remaining available proceeds related to the sale of the
Lakeville Resort Apartments. Including the April 1997 distribution, Limited
Partners have received cumulative distributions of Net Cash Receipts of $52.50
per $1,000 Interest, and Net Cash Proceeds of $271.02 per $1,000 Interest
totaling $323.52 per $1,000 Interest. Future distributions will be made from
available proceeds from the sales of the Howell Station and North Hill
Apartments, as to which there can be no assurances. In light of results to
date, investors will not recover all of their original investment. 

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 5.  Other Information
--------------------------

Howell Station Apartments
-------------------------

As previously reported, on February 26, 1997, the Partnership contracted to
sell the Howell Station Apartments, Duluth, Georgia (the "Property") to an
unaffiliated party, Group One Investments, Inc., an Illinois corporation, for a
sale price of $9,000,000. In addition, the Partnership executed an agreement to
sell to the purchaser the personal property located at the Property for a sale
price of $1,000,000. The sale closed on May 9, 1997. Title to the improvements
on the property was conveyed to Howell Investments, L.L.C. and WP Howell
Station, L.L.C., both Georgia limited liability companies, and title to the
land was conveyed to William Garmisa, all of which are affiliates of Group One
Investments, Inc. From the proceeds of the sale, the Partnership repaid the
outstanding principal balance of the first mortgage loan collateralized by the
Property of $6,443,945 and paid $150,000 to an unaffiliated party as a
brokerage commission, $100,000 to an affiliate of the third party providing
property management services for the property as a fee for services rendered in
connection with the sale of the Property and $22,478 in closing costs. In
addition, the Partnership paid a Georgia state withholding tax of $214,203
relating to the gain on the sale of the property. The Partnership received
approximately $3,069,000 of remaining sale proceeds. Of such proceeds, $100,000
is being retained by the Partnership and will not be available for use or
distribution by the Partnership until 90 days after closing.

North Hill Apartments
---------------------

As previously reported, on February 21, 1997, a joint venture consisting of the
Partnership and an affiliate (the "Joint Venture") contracted to sell the North
Hill Apartments, DeKalb County, Georgia, to an unaffiliated party, EEA
Development, Inc., a Delaware corporation, for a sale price of $22,750,000. On
March 27, 1997, the purchaser exercised its option to terminate the agreement
of sale. On April 1, 1997, the agreement was reinstated by the Joint Venture
and the purchaser. On April 4, 1997, the purchaser again exercised its option
to terminate the agreement and the agreement has not been reinstated. Pursuant
to the agreement, the earnest money previously deposited by the purchaser and
interest accrued thereon has been returned to the purchaser.

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

(a) Exhibits:
<PAGE>
(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 September 30, 1992 (Commission File No. 0-14350) are
incorporated herein by reference.

(10) Material Contracts:

(a)(i) Agreement of Sale and attachment thereto relating to the sale of Country
Ridge Apartments previously filed as Exhibit (2)(a) to the Partnership's
Current Report on Form 8-K dated April 23, 1996, is incorporated herein by
reference.

(ii) Master Amendment and Agreement dated May 22, 1996 relating to the sale of
Country Ridge Apartments previously filed as Exhibit (99)(a) to the
Partnership's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.

(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the sale
of Country Ridge Apartments previously filed as Exhibit (99)(b) to the
Partnership's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.

(b)(i) Agreement of Sale and attachment thereto relating to the sale of
Lakeville Resort Apartments previously filed as Exhibit (2)(b) to the
Partnership's Current Report on Form 8-K dated April 23, 1996, is incorporated
herein by reference.

(ii) Letter Agreements dated May 22, 1996 and July 8, 1996 relating to the sale
of Lakeville Resort Apartments previously filed as Exhibit (99)(c) to the
Partnership's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.

(iii) Letter Agreement dated August 20, 1996 relating to the sale of Lakeville
Resort Apartments previously filed as Exhibit (99)(a) to the Partnership's
Current Report on Form 8-K dated August 20, 1996 is incorporated herein by
reference.

(iv) Letter Agreement dated September 19, 1996 relating to the sale of
Lakeville Resort Apartments previously filed as Exhibit (10)(b)(iv) to the
Partnership's Report on Form 10-Q for the quarter ended September 30, 1996 is
incorporated herein by reference.

(v) Letter Agreement dated September 30, 1996 relating to the sale of Lakeville
Resort Apartments previously filed as Exhibit (10)(b)(v) to the Partnership's
Report on Form 10-Q for the quarter ended September 30, 1996 is incorporated
herein by reference.

(c)(i) Agreement of Sale and attachment thereto relating to the sale of Park
Place Apartments - Phase II previously filed as Exhibit (2)(c) to the
Partnership's Current Report on Form 8-K dated April 23, 1996, is incorporated
herein by reference.
<PAGE>
(ii) Letter Agreements dated May 22, 1996 and July 8, 1996 relating to the sale
of Park Place Apartments - Phase II previously filed as Exhibit (99)(d) to the
Partnership's Current Report on Form 8-K dated July 5, 1996, is incorporated
herein by reference.

(iii) First Amendment to Agreement of Sale relating to the sale of Park Place
Apartments - Phase II previously filed as Exhibit (10)(c)(iii) to the
Partnership's Report on Form 10-Q for the quarter ended September 30, 1996 is
incorporated herein by reference.

(d)(i) Agreement of Sale and attachment thereto relating to the sale of
Shadowridge Apartments previously filed as Exhibit (2)(a) to the Partnership's
Current Report on Form 8-K dated July 5, 1996, is incorporated herein by
reference.

(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of Shadowridge Apartments previously filed as Exhibit (99) to the
Partnership's Form 10-Q dated June 30, 1996 is incorporated herein by
reference.

(e)(i) Agreement of Sale relating to the sale of North Hill Apartments
previously filed as Exhibit (2)(a)(i) to the Partnership's Current Report on
Form 8-K dated February 21, 1997, is incorporated herein by reference.

(ii) Due Diligence Termination Notice dated February 27, 1997 relating to the
sale of North Hill Apartments previously filed as Exhibit (2)(a)(ii) to the
Partnership's Current Report on Form 8-K dated February 21, 1997 is
incorporated herein by reference.

(iii) Reinstatement and First Amendment to Agreement of Sale and Escrow
Agreement relating to the sale of North Hill Apartments previously filed as
Exhibit (2)(a)(iii) to the Partnership's Current Report on Form 8-K dated
February 21, 1997 is incorporated herein by reference.

(iv) Second Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, previously filed as Exhibit (2)(e)(iv) to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 is
incorporated herein by reference.

(v) Termination Notice dated March 27, 1997 relating to the sale of North Hill
Apartments is attached hereto.

(vi) Reinstatement and Third Amendment to Agreement of Sale and Escrow
Agreement relating to the sale of North Hill Apartments is attached hereto.

(vii) Termination Notice dated April 4, 1997 relating to the sale of North Hill
Apartments is attached hereto.

(f)(i) Agreement of Sale relating to the sale of Howell Station Apartments
previously filed as Exhibit (2)(b)(ii) to the Partnership's Current Report on
Form 8-K dated February 21, 1997 is incorporated herein by reference.
<PAGE>
(ii) Amendment No.1 relating to the sale of Howell Station Apartments
previously filed as Exhibit (2)(b)(ii) to the Partnership's Current Report on
Form 8-K dated February 21, 1997 is incorporated herein by reference.  

(iii) Agreement relating to the sale of Howell Station Apartments previously
filed as Exhibit (2)(b)(iii) to the Partnership's Current Report on Form 8-K
dated February 21, 1997 is incorporated herein by reference.

(iv) Amendment No. 2 to Agreement of Sale relating to the sale of Howell
Station Apartments previously filed as Exhibit (2)(b)(iv) to the Partnership's
Current Report on Form 8-K dated February 21, 1997 is incorporated herein by
reference.

(v) Amendment No. 3 to Agreement of Sale relating to Howell Station Apartments,
previously filed in Exhibit (10)(f)(v) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 is incorporated herein by
reference.

(vi) Amendment No. 4 to Agreement of Sale relating to Howell Station Apartments
is attached hereto.

(vii) Amendment No. 5 to Agreement of Sale relating to Howell Station
Apartments is attached hereto.

(27) Financial Data schedule of the Partnership for the three months ended
March 31, 1997 is attached hereto.

(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended March 31, 1997.
<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
                              Managing Director and Chief Financial Officer 
                              (Principal Accounting Officer) of Balcor 
                              Partners-XVIII, the General Partner


Date: May 15, 1997                    
      ------------
<PAGE>