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 June 30, 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
                      June 30, 1997 and December 31, 1996
                                  (Unaudited)

                                    ASSETS

                                                    1997          1996
                                               ------------- -------------
Cash and cash equivalents                      $  5,188,986  $  5,888,040
Escrow deposits                                     564,857       696,354
Accounts and accrued interest receivable             35,319        93,191
Prepaid expenses                                                   59,888
Deferred expenses, net of accumulated
  amortization of $210,654 in 1997 
  and $250,656 in 1996                              631,963       781,323
Investment in joint venture with an affiliate                   1,046,660
                                               ------------- -------------
                                                  6,421,125     8,565,456
                                               ------------- -------------
Investment in real estate:
  Land                                            2,404,824     3,161,992
  Buildings and improvements                     20,434,160    27,767,583
                                               ------------- -------------
                                                 22,838,984    30,929,575
  Less accumulated depreciation                   8,929,130    11,739,654
                                               ------------- -------------
Investment in real estate, net of
  accumulated depreciation                       13,909,854    19,189,921
                                               ------------- -------------
                                               $ 20,330,979  $ 27,755,377
                                               ============= =============

                       LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                               $    124,359  $     39,006
Due to affiliates                                    90,017        85,504
Accrued real estate taxes                           153,702
Security deposits                                   120,165       159,650
Mortgage notes payable                           17,776,676    24,324,028
                                               ------------- -------------
     Total liabilities                           18,264,919    24,608,188

Affiliates' participation in joint ventures        (542,548)     (499,671)
                                               ------------- -------------
                                                 17,722,371    24,108,517
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                                BALANCE SHEETS
                      June 30, 1997 and December 31, 1996
                                  (Unaudited)
                                  (Continued)


Commitments and contingencies

Limited Partners' captial (59,092 Interests
  issued and outstanding)                         2,914,980     3,995,822
General Partner's deficit                          (306,372)     (348,962)
                                               ------------- -------------
    Total partners' capital                       2,608,608     3,646,860
                                               ------------- -------------
                                               $ 20,330,979  $ 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 six months ended June 30, 1997 and 1996
                                  (Unaudited)


                                                     1997         1996
                                               ------------- -------------
Income:
  Rental and service                           $  2,359,598  $  5,827,968
  Interest on short-term investments                 95,349       102,060
  Participation in income of joint 
    venture with an affiliate                                      25,267
                                               ------------- -------------
    Total income                                  2,454,947     5,955,295
                                               ------------- -------------
Expenses:
  Interest on mortgage notes payable                884,242     2,046,311
  Depreciation                                      398,991       851,550
  Amortization of deferred expenses                  53,538        70,661
  Property operating                                793,312     1,834,696
  Real estate taxes                                 212,311       587,059
  Property management fees                          116,640       288,788
  Administrative                                    215,826       234,848
                                               ------------- -------------
    Total expenses                                2,674,860     5,913,913
                                               ------------- -------------
(Loss) income before gain on sales of properties, 
  affiliates' participation in joint ventures 
  and extraordinary item                           (219,913)       41,382

Gain on sales of properties                       4,846,446     9,073,561

Affiliates' participation in loss (income) from
  joint ventures before extraordinary item           11,792        (4,770)
                                               ------------- -------------
Income before extraordinary item                  4,638,325     9,110,173

Extraordinary item:
  Debt extinguishment expense                      (379,280)     (125,000)
                                               ------------- -------------
Net income                                     $  4,259,045  $  8,985,173
                                               ============= =============
Income before extraordinary item
  allocated to General Partner                 $     46,383  $     91,102
                                               ============= =============
Income before extraordinary item
  allocated to Limited Partners                $  4,591,942  $  9,019,071
                                               ============= =============
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
                for the six months ended June 30, 1997 and 1996
                                  (Unaudited)
                                  (Continued)


Income before extraordinary item per
  Limited Partnership Interest (59,092 issued
  and outstanding)                             $      77.71  $     152.63
                                               ============= =============
Extraordinary item allocated to
  General Partner                              $     (3,793) $     (1,250)
                                               ============= =============
Extraordinary item allocated to
  Limited Partners                             $   (375,487) $   (123,750)
                                               ============= =============
Extraordinary item per Limited Partnership
  Interest (59,092 issued and outstanding)     $      (6.36) $      (2.10)
                                               ============= =============
Net income allocated to General Partner        $     42,590  $     89,852
                                               ============= =============
Net income allocated to Limited Partners       $  4,216,455  $  8,895,321
                                               ============= =============
Net income per Limited Partnership
  Interest (59,092 issued and outstanding)     $      71.35  $     150.53
                                               ============= =============
Distributions to Limited Partners              $  5,083,094  $    886,380
                                               ============= =============
Distributions per Limited Partnership
  Interest (59,092 issued and outstanding)     $      86.02  $      15.00
                                               ============= =============

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 INCOME AND EXPENSES
                 for the quarters ended June 30, 1997 and 1996
                                  (Unaudited)

                                                    1997          1996
                                               ------------- -------------
Income:
  Rental and service                           $  1,035,313  $  2,827,394
  Interest on short-term investments                 58,651        68,809
  Participation in income of joint
    venture with an affiliate                                      21,526
                                               ------------- -------------
    Total income                                  1,093,964     2,917,729
                                               ------------- -------------
Expenses:
  Interest on mortgage notes payable                420,955       987,123
  Depreciation                                      182,988       414,703
  Amortization of deferred expenses                  25,628        35,330
  Property operating                                410,499       884,431
  Real estate taxes                                  95,976       318,909
  Property management fees                           52,154       140,541
  Administrative                                    129,788       139,886
                                               ------------- -------------
    Total expenses                                1,317,988     2,920,923
                                               ------------- -------------
(Loss) before gain on sales of properties, 
  affiliates' participation in joint ventures 
  and extraordinary item                           (224,024)       (3,194)

Gain on sales of properties                       4,846,446     9,073,561

Affiliates' participation in loss (income) from
  joint ventures before extraordinary item           11,265       (12,953)
                                               ------------- -------------
Income before extraordinary item                  4,633,687     9,057,414

Extraordinary item:
  Debt extinguishment expense                      (379,280)     (125,000)
                                               ------------- -------------
Net income                                     $  4,254,407  $  8,932,414
                                               ============= =============
Income before extraordinary item
  allocated to General Partner                 $     46,337  $     90,574
                                               ============= =============
Income before extraordinary item
  allocated to Limited Partners                $  4,587,350  $  8,966,840
                                               ============= =============
<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 June 30, 1997 and 1996
                                  (Unaudited)
                                  (Continued)


Income before extraordinary item per
  Limited Partnership Interest (59,092 issued
  and outstanding)                             $      77.63  $     151.75
                                               ============= =============
Extraordinary item allocated to
  General Partner                              $     (3,793) $     (1,250)
                                               ============= =============
Extraordinary item allocated to
  Limited Partners                             $   (375,487) $   (123,750)
                                               ============= =============
Extraordinary item per Limited Partnership
  Interest (59,092 issued and outstanding)     $      (6.36) $      (2.10)
                                               ============= =============
Net income allocated to General Partner        $     42,544  $     89,324
                                               ============= =============
Net income allocated to Limited Partners       $  4,211,863  $  8,843,090
                                               ============= =============
Net income per Limited Partnership
  Interest (59,092 issued and outstanding)     $      71.27  $     149.65
                                               ============= =============
Distribution to Limited Partners               $    680,740  $    443,190
                                               ============= =============
Distribution per Limited Partnership
  Interests (59,092 issued and outstanding)    $      11.52  $       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 six months ended June 30, 1997 and 1996
                                  (Unaudited)

                                                    1997          1996
                                               ------------- -------------
Operating activities:
  Net income                                   $  4,259,045  $  8,985,173
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Gain on sales of properties                (4,846,446)   (9,073,561)
      Debt extinguishment expense                    95,822
      Affiliates' participation in (loss) 
        income from joint ventures                  (11,792)        4,770
      Participation in income of joint
        venture with an affiliate                                 (25,267)
      Depreciation of properties                    398,991       851,550
      Amortization of deferred expenses              53,538        70,661
      Net change in:
        Escrow deposits                             131,497      (161,970)
        Accounts and accrued interest receivable     57,872       (92,035)
        Prepaid expenses                             59,888           (64)
        Accounts payable                             85,353       (13,882)
        Due to affiliates                             4,513        18,092
        Accrued real estate taxes                   153,702       231,993
        Security deposits                           (39,485)      (16,582)
                                               ------------- -------------
    Net cash provided by operating activities       402,498       778,878
                                               ------------- -------------
Investing activities:
  Proceeds from sales of properties              10,000,000    15,950,000
  Payment of selling costs                         (272,478)     (134,625)
  Distributions from joint venture with
    an affiliate                                  1,046,660       151,982
                                               ------------- -------------
    Net cash provided by investing activities    10,774,182    15,967,357
                                               ------------- -------------
Financing activities:
  Distributions to Limited Partners              (5,083,094)     (886,380)
  Deemed distribution to Limited Partners          (214,203)
  Principal payments on mortgage
    notes payable                                  (103,407)     (247,146)
  Repayment of mortgage notes payable            (6,443,945)   (8,770,310)
  Distributions to joint venture
    partners - affiliates                           (31,085)      (31,443)
  Contributions from joint venture
    partners - affiliates                                          54,711
                                               ------------- -------------
    Net cash used in financing activities       (11,875,734)   (9,880,568)
                                               ------------- -------------
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                           STATEMENTS OF CASH FLOWS
                for the six months ended June 30, 1997 and 1996
                                  (Unaudited)
                                  (Continued)


Net change in cash and cash equivalents            (699,054)    6,865,667
Cash and cash equivalents at beginning
  of period                                       5,888,040     2,310,596
                                               ------------- -------------

Cash and cash equivalents at end of period     $  5,188,986  $  9,176,263
                                               ============= =============

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 six months and quarter
ended June 30, 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. Currently, the joint venture, which consists of the Partnership and
an affiliate, has entered into a contract to sell the North Hill Apartments,
the Partnership's remaining property. 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 8 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 six months ended June 30, 1997 and 1996, the Partnership incurred
and paid interest expense on mortgage notes payable of $884,242 and $2,046,311,
respectively.

4. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates during the
six months and quarter ended June 30, 1997 are:

                                           Paid
                                    ----------------------
                                     Six Months    Quarter      Payable
                                    ------------  ---------    ----------
   Reimbursement of expenses to
     the General Partner, at cost   $  88,196      $ 68,463   $   90,017
<PAGE>
5. Property sale:

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, $283,458 of prepayment penalties and $272,478 in selling costs.
In addition, the Partnership paid a state withholding tax of $214,203 on behalf
of the Limited Partners relating to the gain on sale of the property which has
been recorded as a deemed distribution for financial statement purposes.  The
basis of the property was $4,881,076 which is net of accumulated depreciation
of $3,209,515.  For financial purposes, the Partnership recognized a gain of
$4,846,446 from the sale of this property.

6. Investment in Joint Venture with an Affiliate:

The Lakeville Resort Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. During October 1996, the joint venture sold the
property. Pursuant to the sale agreement, $500,000 of the sale proceeds were
retained by the joint venture until February 1997 at which time the funds were
released in full. The Partnership's share of the holdback was $201,250. The
Partnership also received a distribution from the joint venture of $845,410,
principally consisting of it's share of repair escrows released during 1997. 

7. Extraordinary item:

During the quarter ended June 30, 1997, the Partnership paid a prepayment
penalty of $283,458 and wrote off the remaining unamortized deferred financing
fees of $95,822 in connection with the sale of the Howell Station Apartments.
These amounts were recognized as an extraordinary item and classified as debt
extinguishment expense for financial statement purposes. 

8. 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.

9. Subsequent Event:

In July 1997, the Partnership made a special distribution of $2,954,600 ($50.00
per Interest) to the holders of Limited Partnership Interests primarily from
Net Cash Proceeds received in connection with the sale of the Howell Station
Apartments during May 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 joint venture, which consists of the Partnership and an
affiliate, has entered into a contract for the sale of the North Hill
Apartments, the Partnership's remaining property.

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
---------------------

The Partnership sold the Howell Station Apartments in May 1997 and the Country
Ridge Apartments in June 1996. The gain recognized in connection with the 1996
sale was higher than the gain recognized in connection with the 1997 sale. This
was the primary reason for the decrease in net income for the six months and
quarter ended June 30, 1997 as compared to the same periods in 1996. Further
discussion of the Partnership's operations is summarized below.

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

Unless otherwise noted, discussions of fluctuations between 1997 and 1996 refer
to both the six months and quarters ended June 30, 1996 and 1995.

The Partnership sold the Country Ridge, Shadowridge and Park Place - Phase II
apartment complexes during 1996 and the Howell Station Apartments in 1997. 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.

Interest income on short-term investments decreased for the quarter ended June
30, 1997 as compared to the same period in 1996 due to higher net proceeds
received in connection with the 1996 property sale as compared to the 1997
property sale, which was invested in short-term investments prior to being
distributed to Limited Partners.
<PAGE>
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 Partnership sold the Howell Station Apartments during 1997 and the Country
Ridge Apartments during 1996. The Partnership recognized gains of $4,846,446
and $9,073,561 during 1997 and 1996, respectively, in connection with these
sales.

North Hill Apartments is owned by a joint venture consisting of the Partnership
and an affiliate. Lower rental and service income due to decreased occupancy
resulted in affiliates' participation in loss during 1997 as compared to
affiliates' participation in income during 1996. 

In connection with the sales of the Howell Station Apartments in 1997 and the
Country Ridge Apartments in 1996, the Partnership wrote-off the remaining
unamortized deferred financing fees in the amounts of $95,822 and $125,000,
respectively, and in connection with the sale of the Howell Station Apartments
in 1997, paid prepayment penalties of $283,458. These amounts were recognized
as an extraordinary item and classified as debt extinguishment expense for
financial statement purposes.

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

The cash position of the Partnership decreased by approximately $699,000 as of
June 30, 1997 when compared to December 31, 1996, primarily due to the
distributions to Limited Partners during January and April 1997 from proceeds
received from the 1996 property sales which was partially offset by the net
proceeds from the sale of the Howell Station Apartments. Cash flow of
approximately $402,000 was provided by operating activities consisting of cash
flow from the operations of the Partnership's remaining properties and interest
income on short-term investments, which was partially offset by the payment of
administrative expenses. Cash provided by investing activities consisted
primarily of net proceeds of approximately $9,728,000 received from the sale of
Howell Station Apartments and a distribution from joint venture with an
affiliate of approximately $1,047,000. The Partnership used cash to fund its
financing activities which consisted primarily of the payment of distributions
totaling approximately $5,083,000 to the Limited Partners and the repayment of
a mortgage note payable of approximately $6,444,000 with proceeds from the
property sale.  

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. 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. The Howell Station Apartments generated positive
cash flow in 1996 and prior to its sale in 1997. During 1997 and 1996, the
<PAGE>
Partnership's remaining property, the North Hill Apartments, 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 June 30, 1997, the occupancy rate at the North Hill Apartments was 90%.

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. Currently, the joint venture,
which consists of the Partnership and an affiliate, has entered into a contract
to sell the North Hill Apartments, the Partnership's remaining property for
$21,000,000. 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 8 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.

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. The Partnership also received a distribution from
the joint venture of $845,410, principally consisting of it's share of repair
escrows released during 1997.

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, $238,458 of prepayment penalties and $272,478 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 were distributed to Limited Partners in
July 1997.

The Partnership's remaining property, the 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 the loan which
matures in 2024. Currently, the Partnership has entered into a contract to sell
the property.

In July 1997, the Partnership made a special distribution of $2,954,600 ($50.00
per Interest) to the holders of Limited Partnership Interests primarily from
Net Cash Proceeds received in connection with the sale of the Howell Station
Apartments during May 1997. Including the July 1997 distribution, Limited
<PAGE>
Partners have received cumulative distributions of Net Cash Receipts of $52.50
per $1,000 Interest, and Net Cash Proceeds of $321.02 per $1,000 Interest
totaling $373.52 per $1,000 Interest. Since all of the Partnership's properties
except the North Hill Apartments have been sold, no additional regular
quarterly distributions from Net Cash Receipts will be made. However, a
distribution may be made from available proceeds from the sale of the North
Hill Apartments, as to which there can be no assurances. 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
--------------------------

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

As previously reported, on May 22, 1997, the joint venture consisting of the
Partnership and an affiliate which owns the North Hill Apartments, DeKalb
County, Georgia, contracted to sell the property to ERP Operating Limited
Partnership, an Illinois limited partnership, for a sale price of $22,500,000.
The joint venture and the purchaser subsequently agreed to reduce the sale
price to $21,000,000. In addition, the closing has been extended to August 20,
1997.

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 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.
<PAGE>
(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.

(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) to the Partnership'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, Georgia, is attached hereto.

(iii) Second Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, Georgia, is attached hereto.
<PAGE>
(iv) Third Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, Georgia, is attached hereto.

(v) Fourth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, Georgia, is attached hereto.

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

(vii) Sixth Amendment to Agreement of Sale and Escrow Agreement relating to the
sale of North Hill Apartments, Georgia, is attached hereto.

(viii) Letter Agreement dated June 30, 1997 relating to the sale of North Hill
Apartments, Georgia, is attached hereto.

(ix) Seventh Amendment to Agreement of Sale and Escrow Agreement relating to
the sale of North Hill Apartments, Georgia, 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.

(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 as Exhibit (10)(f)(v) to the Partnership'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, previously filed as Exhibit (10)(f)(vi) to the Partnership's Report
on Form 10-Q for the quarter ended March 31, 1997 is incorporated herein by
reference.

(vii) Amendment No. 5 to Agreement of Sale relating to Howell Station
Apartments, previously filed as Exhibit (10)(f)(vii) to the Partnership's
Report on Form 10-Q for the quarter ended March 31, 1997 is incorporated herein
by reference.

(27) Financial Data schedule of the Partnership for the six months ended June
30, 1997 is attached hereto.

(b) Reports on Form 8-K: 

A Current Report of Form 8-K dated June 2, 1997 was filed reporting the
contract to sell the North Hill Apartments, Georgia.
<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:  August 14, 1997                   
      ---------------------
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