SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-Q
(Mark One)

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

For the quarterly period ended September 30, 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
                   September 30, 1997 and December 31, 1996
                                  (Unaudited)

                                    ASSETS

                                                  1997           1996
                                             -------------- --------------
Cash and cash equivalents                    $   5,130,396  $   5,888,040
Escrow deposits                                                   696,354
Accounts and accrued interest receivable           146,777         93,191
Prepaid expenses                                                   59,888
Deferred expenses, net of accumulated
  amortization of $250,656 in 1996                                781,323
Investment in joint venture with an affiliate                   1,046,660
                                             -------------- --------------
                                                 5,277,173      8,565,456
                                             -------------- --------------
Investment in real estate:
  Land                                                          3,161,992
  Buildings and improvements                                   27,767,583
                                                            --------------
                                                               30,929,575
  Less accumulated depreciation                                11,739,654
                                                            --------------
Investment in real estate, net of
  accumulated depreciation                                     19,189,921
                                             -------------- --------------
                                             $   5,277,173  $  27,755,377
                                             ============== ==============

                       LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                             $     132,706  $      39,006
Due to affiliates                                  235,673         85,504
Security deposits                                                 159,650
Mortgage notes payable                                         24,324,028
                                             -------------- --------------
     Total liabilities                             368,379     24,608,188

Affiliates' participation in joint ventures        156,230       (499,671)
                                             -------------- --------------
                                                   524,609     24,108,517
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

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


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

Limited Partners' capital 
  (59,092 Limited Partnership Interests 
  issued and outstanding)                        5,061,081      3,995,822
General Partner's deficit                         (308,517)      (348,962)
                                             -------------- --------------
    Total partners' capital                      4,752,564      3,646,860
                                             -------------- --------------
                                             $   5,277,173  $  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 nine months ended September 30, 1997 and 1996
                                  (Unaudited)

                                                  1997           1996
                                             -------------- --------------
Income:
  Rental and service                         $   2,914,033  $   7,864,170
  Interest on short-term investments               144,631        160,776
  Participation in income of joint
    venture with an affiliate                                      27,460
                                             -------------- --------------
    Total income                                 3,058,664      8,052,406
                                             -------------- --------------
Expenses:
  Interest on mortgage notes payable             1,122,982      2,716,613
  Depreciation                                     505,448      1,157,846
  Amortization of deferred expenses                 67,582        103,396
  Property operating                               984,639      2,453,937
  Real estate taxes                                259,058        736,689
  Property management fees                         147,902        399,871
  Administrative                                   304,287        324,931
                                             -------------- --------------
    Total expenses                               3,391,898      7,893,283
                                             -------------- --------------
(Loss) income before gains on sales,
  affiliates' participation in joint
  ventures and extraordinary items                (333,234)       159,123

Gains on sales of properties                    11,416,395     19,513,258

Affiliates' participation in income
  from joint ventures before 
  extraordinary items                           (1,448,795)    (1,231,126)
                                             -------------- --------------
Income before extraordinary items                9,634,366     18,441,255

Extraordinary items:
  Debt extinguishment expense                   (1,081,599)      (440,081)
  Affiliate's participation in debt
    extinguishment expense                         175,580          7,165
  Gain on forgiveness of debt                    1,350,000
  Affiliate's participation in gain on 
    forgiveness of debt                           (337,500)
                                             -------------- --------------
Total extraordinary items                          106,481       (432,916)
                                             -------------- --------------
Net income                                   $   9,740,847  $  18,008,339
                                             ============== ==============
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

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

                                                  1997           1996
                                             -------------- --------------
Income before extraordinary items
  allocated to General Partner               $      40,003  $     184,412
                                             ============== ==============
Income before extraordinary items
  allocated to Limited Partners              $   9,594,363  $  18,256,843
                                             ============== ==============
Income before extraordinary items 
  per Limited Partnership Interest (59,092 
  issued and outstanding)                    $      162.36  $      308.95
                                             ============== ==============
Extraordinary items allocated  
  to General Partner                         $         442  $      (4,329)
                                             ============== ==============
Extraordinary items allocated  
  to Limited Partners                        $     106,039  $    (428,587)
                                             ============== ==============
Extraordinary items per Limited Partnership 
  Interest (59,092 issued and outstanding)   $        1.79  $       (7.25)
                                             ============== ==============
Net income allocated to General Partner      $      40,445  $     180,083
                                             ============== ==============
Net income allocated to Limited Partners     $   9,700,402  $  17,828,256
                                             ============== ==============
Net income per Limited Partnership 
  Interest (59,092 issued and outstanding)   $      164.15  $      301.70
                                             ============== ==============
Distributions to Limited Partners            $   8,037,694  $   8,125,150
                                             ============== ==============
Distributions per Limited Partnership 
  Interest                                   $      136.02  $      137.50
                                             ============== ==============


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

                                                  1997           1996
                                             -------------- --------------
Income:
  Rental and service                         $     554,435  $   2,036,202
  Interest on short-term investments                49,282         58,716
  Participation in income of joint
     venture with an affiliate                                      2,193
                                             -------------- --------------
    Total income                                   603,717      2,097,111
                                             -------------- --------------

Expenses:
  Interest on mortgage notes payable               238,740        670,302
  Depreciation                                     106,457        306,296
  Amortization of deferred expenses                 14,044         32,735
  Property operating                               191,327        619,241
  Real estate taxes                                 46,747        149,630
  Property management fees                          31,262        111,083
  Administrative                                    88,461         90,083
                                             -------------- --------------
    Total expenses                                 717,038      1,979,370
                                             -------------- --------------
(Loss) income before gains on sales,
  affiliates' participation in joint
  ventures and extraordinary items                (113,321)       117,741

Gains on sales of properties                     6,569,949     10,439,697

Affiliates' participation in income
  from joint ventures before
  extraordinary items                           (1,460,587)    (1,226,356)
                                             -------------- --------------
Income before extraordinary items                4,996,041      9,331,082
                                                            
Extraordinary items:
  Debt extinguishment expense                     (702,319)      (315,081)
  Affiliate's participation in debt
    extinguishment expense                         175,580          7,165
  Gain on forgiveness of debt                    1,350,000
  Affiliate's participation in gain on 
    forgiveness of debt                           (337,500)
                                             -------------- --------------
Total extraordinary items                          485,761       (307,916)
                                             -------------- --------------
Net income                                   $   5,481,802  $   9,023,166
                                             ============== ==============
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                       STATEMENTS OF INCOME AND EXPENSES
              for the quarters ended September 30, 1997 and 1996
                                  (Unaudited)
                                  (Continued)

                                                  1997           1996
                                             -------------- --------------
(Loss) income before extraordinary items
  allocated to General Partner               $      (6,380) $      93,310
                                             ============== ==============
Income before extraordinary items
  allocated to Limited Partners              $   5,002,421  $   9,237,772
                                             ============== ==============
Income before extraordinary items per 
  Limited Partnership Interest (59,092 
  issued and outstanding)                    $       84.65  $      156.32
                                             ============== ==============
Extraordinary items allocated to 
  General Partner                            $       4,235  $      (3,079)
                                             ============== ==============
Extraordinary items allocated to 
  Limited Partners                           $     481,526  $    (304,837)
                                             ============== ==============
Extraordinary items per Limited Partnership
  Interest (59,092 issued and outstanding)   $        8.15  $       (5.15)
                                             ============== ==============
Net(loss)income allocated to General Partner $      (2,145) $      90,231
                                             ============== ==============
Net income allocated to Limited Partners     $   5,483,947  $   8,932,935
                                             ============== ==============
Net income per Limited Partnership 
  Interest (59,092 issued and outstanding)   $       92.80  $      151.17
                                             ============== ==============
Distribution to Limited Partners             $   2,954,600  $   7,238,770
                                             ============== ==============
Distribution per Limited Partnership                                     
  Interest                                   $       50.00  $      122.50
                                             ============== ==============

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 nine months ended September 30, 1997 and 1996
                                  (Unaudited)

                                                  1997           1996
                                             -------------- --------------
Operating activities:
  Net income                                 $   9,740,847  $  18,008,339
  Adjustments to reconcile net income to
    net cash provided by operating activities:
      Gains on sales of properties             (11,416,395)   (19,513,258)
      Debt extinguishment expense                  798,141        315,081
      Affiliate's participation in 
        debt extinguishment expense               (175,580)        (7,165)
      Gain on forgiveness of debt               (1,350,000)
      Affiliate's participation in gain
        on forgiveness of debt                     337,500
      Affiliates' participation in income 
        from joint ventures                      1,448,795      1,231,126
      Participation in income of joint 
        venture with an affiliate                                 (27,460)
      Depreciation of properties                   505,448      1,157,846
      Amortization of deferred expenses             67,582        103,396
      Net change in:
        Escrow deposits                            696,354          7,370
        Accounts and accrued interest 
          receivable                               (53,586)      (175,433)
        Prepaid expenses                            59,888        137,270
        Accounts payable                            93,700        155,759
        Due to affiliates                          150,169         31,521
        Accrued liabilities, principally
          real estate taxes                                       105,992
        Security deposits                         (159,650)      (166,647)
                                             -------------  -------------
  Net cash provided by operating activities        743,213      1,363,737
                                             -------------  -------------
Investing activities:
  Proceeds from sales of properties             14,516,409     31,678,988
  Payment of selling costs                        (899,132)      (716,045)
  Distributions from joint venture with an
    affiliate                                    1,046,660        216,382
                                             -------------  -------------
  Net cash provided by 
    investing activities                        14,663,937     31,179,325
                                             -------------  -------------
<PAGE>
                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

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

                                                  1997           1996
                                             -------------- --------------
Financing activities:
  Distributions to Limited Partners             (8,037,694)    (8,125,150)
  Deemed distribution to Limited Partners         (597,449)
  Principal payments on mortgage notes
    payable                                       (130,892)      (321,210)
  Repayment of mortgage notes payable           (6,443,945)   (16,731,937)
  Distributions to joint venture 
    partners - affiliates                         (954,814)    (1,352,685)
  Contributions from joint venture
     partners - affiliates                                         54,711
  Release of capital improvement escrows                          639,000
                                             -------------  -------------
  Net cash used in financing activities        (16,164,794)   (25,837,271)
                                             -------------  -------------
Net change in cash and cash equivalents           (757,644)     6,705,791
Cash and cash equivalents at beginning
    of period                                    5,888,040      2,310,596
                                             -------------  -------------
Cash and cash equivalents at end of period   $   5,130,396  $   9,016,387
                                             ============== ==============

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

                         NOTES TO FINANCIAL STATEMENTS

1. Accounting Policies:

(a) For financial statement purposes, in previous years partners were allocated
income and  loss in  accordance with  the profit  and loss  percentages in  the
Partnership Agreement. In order for the capital accounts of the General Partner
and Limited  Partners  to  appropriately  reflect  their  respective  remaining
economic interests as  provided for  in the Partnership  Agreement, the  income
(loss) allocations  between  the  partners have  been  adjusted  for  financial
statement purposes in 1997.

(b) In  the  opinion  of  management, all  adjustments  necessary  for  a  fair
presentation have been made to the accompanying statements for the nine  months
and quarter ended September 30, 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  three  properties  and  the
property in which the  Partnership held a minority  joint venture interest.  In
addition, the Partnership sold  the Howell Station Apartments  in May 1997  and
its remaining property, the North Hill  Apartments, which was owned by a  joint
venture consisting of the Partnership and  an affiliate, was sold in  September
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
proceeds from the sales to satisfy  obligations of the Partnership, as well  as
establish a reserve for contingencies. 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  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 continues  to  exist  or  arises,  reserves  may  be  held  by  the
Partnership for a longer period of time.

3. Interest Expense:

During the  nine months  ended September  30, 1997  and 1996,  the  Partnership
incurred and paid interest expense on mortgage notes payable of $1,122,982  and
$2,716,613, respectively.

4. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates during  the
nine months and quarter ended September 30, 1997 are:
<PAGE>
                                           Paid
                                    ----------------------
                                    Nine Months    Quarter      Payable
                                    ------------  ---------    ----------

   Reimbursement of expenses to
     the General Partner, at cost   $   128,707   $ 40,511     $  66,837

As of September 30, 1997, the Partnership owed $168,836 to the affiliated joint
venture partner on North Hill Apartments  for its share of property  operations
for the third quarter of 1997. The Partnership distributed the cash flow to the
joint venture partner in November 1997.

5. Property Sales:

(a) 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 statement purposes, the Partnership recognized  a
gain of $4,846,446 from the sale of this property.

(b) The North Hill Apartments  was owned by a  joint venture consisting of  the
Partnership  and  an  affiliate.  The   Partnership  and  the  affiliate   held
participating percentages in the joint venture of 75% and 25%, respectively. In
September 1997,  the joint  venture sold  the  property for  a sales  price  of
$21,000,000. The purchaser of the property  took title subject to the  existing
first mortgage loan in  the amount of $16,483,591,  which represents a  noncash
transaction to  the  Partnership.  Accordingly,  the  noncash  aspect  of  this
transaction is not  presented in  the Partnership's Statements  of Cash  Flows.
From the proceeds of the sale, the joint venture paid $164,705 in fees relating
to the assumption of the mortgage loan by the purchaser and $461,949 in selling
costs. In addition, a  state withholding tax of  $383,246 was paid 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
$13,803,397, which  is  net  of accumulated  depreciation  of  $9,035,587.  For
financial statement purposes, the joint venture recognized a gain of $6,569,949
from the  sale of  this property,  of which  $1,481,822 is  the minority  joint
venture partner's share.

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 its share of repair escrows released during 1997.
<PAGE>
7. Extraordinary Items:

(a) In connection  with the sale  of the Howell  Station Apartments during  May
1997, the Partnership  wrote off  the remaining unamortized  financing fees  of
$95,822 and paid a prepayment penalty of $283,458. In connection with the  sale
of the North  Hill Apartments  during September  1997, the  joint venture  that
owned the property wrote off the remaining unamortized deferred financing  fees
of $617,919, of which  $154,480 represents the  North Hill Apartments  minority
joint venture partner's share. Additionally,  in connection with the 1994  bond
refinancing of  the  North Hill  Apartments,  the  joint venture  paid  a  bond
discount fee of  $84,400 which was  recorded as a  reduction of the  underlying
mortgage balance. In connection  with the 1997 sale  of the property, the  bond
discount fee was  written off. The  minority joint venture  partner's share  of
this amount was $21,100.  These amounts were recognized as extraordinary  items
and classified as debt extinguishment expense for financial statement purposes.

(b) In connection with the 1994 bond refinancing of the North Hill  Apartments,
the joint venture was  obligated under a  $1,350,000 non-interest bearing  note
from an unaffiliated party, which was to be repaid only to the extent that  net
sales proceeds  exceeded  a  certain  predetermined  level.  The  net  proceeds
received from  the  sale of  the  property did  not  meet the  required  level.
Therefore, the note will not be repaid and has been forgiven, which resulted in
an extraordinary  gain  on forgiveness  of  debt of  $1,350,000  for  financial
statement purposes, of  which $337,500  represents the  minority joint  venture
partner's share.

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 October 1997, the Partnership paid  $2,245,496 ($38.00 per Interest) to  the
holders of Limited Partnership  Interests, representing a special  distribution
of Net Cash Proceeds  received from the  sale of the  North Hill Apartments  in
September 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. Prior to 1997, the Partnership had disposed of six properties and the
property in which it  held a minority joint  venture interest. The  Partnership
sold the Howell Station Apartments in May 1997 and its remaining property,  the
North Hill Apartments, in September 1997.

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  and North  Hill apartment  complexes
during the  nine  months  ended  September 30,  1997  and  the  Country  Ridge,
Shadowridge and  Park Place  - Phase  II apartment  complexes during  the  nine
months ended September 30,  1996. The gains recognized  in connection with  the
1996 sales were higher  than the gains recognized  in connection with the  1997
sales. This was the primary reason for the decrease in net income for the  nine
months and quarter ended September 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 nine months and quarters ended September 30, 1997 and 1996.

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

Due to  higher average  cash  balances resulting  from  the investment  of  the
proceeds from the 1996 sales of the Country Ridge, Shadowridge and Park Place -
Phase II  apartment  complexes  prior  to  distribution  to  Limited  Partners,
interest income on short-term investments decreased during 1997 as compared  to
1996.
<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  and North  Hill apartment  complexes
during the  nine  months  ended  September 30,  1997  and  the  Country  Ridge,
Shadowridge and Park Place-Phase II apartment complexes during the same  period
in 1996. As a result, the  Partnership recognized gains on sales of  properties
of $11,416,395 during 1997 and $19,513,258 during 1996.

The North Hill  and Shadowridge apartment  complexes were both  owned by  joint
ventures consisting of the Partnership and an affiliate. Primarily as a  result
of the larger gain  recognized in connection  with the 1997  sale of the  North
Hill Apartments as compared to the gain recognized in connection with the  1996
sale of the  Shadowridge Apartments, affiliates'  participation in income  from
joint ventures increased during 1997 as compared to 1996.

In connection with the sale of  the Howell Station Apartments during May  1997,
the Partnership wrote off the  remaining unamortized deferred financing fees
of  $95,822 and paid a prepayment penalty of $283,458. In connection with 
the sale of the North Hill Apartments during September 1997, the joint
venture that owned the property wrote off the remaining unamortized deferred  
financing  fees  of $617,919, of which $154,480 represents the North Hill 
Apartments minority joint venture partner's  share.  Additionally, in 
connection with the 1994 bond refinancing of  the  North Hill  Apartments,  
the  joint venture  paid  a  bond discount fee of  $84,400 which was  
recorded as a  reduction of the  underlying mortgage balance. In connection 
with the 1997 sale  of the property, the  bond discount fee was  written off. 
The  minority joint venture  partner's share  of this amount was $21,100. 
During  1996, the Partnership wrote-off the  remaining unamortized deferred 
financing fees of $440,081 in connection with the sales of the Country Ridge,
Shadowridge and Park  Place - Phase II apartment  complexes, of which $7,165 
represents the  Shadowridge Apartments' minority joint  venture partner's 
share. These amounts were recognized as extraordinary items and classified as
debt extinguishment expense for financial statement purposes.

As a  result  of  the  sale  of the  North  Hill  Apartments,  the  Partnership
recognized an extraordinary gain on forgiveness of debt of $1,350,000, of which
$337,500 represents the North Hill Apartments' minority joint venture partner's
share. See Note 7 of Notes to Financial Statements for additional information.

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

The cash position of the Partnership decreased by approximately $758,000 as  of
September 30,  1997  when  compared  to December  31,  1996  primarily  due  to
distributions paid to  Limited Partners  during January, April,  and July  1997
from proceeds received  from the  1996 and 1997  property sales.  Cash flow  of
approximately $743,000 was provided  by the Partnership's operating  activities
which consisted  primarily of  cash flow  generated from  property  operations,
interest income on  short-term investments  and the  release of  funds held  in
escrow on  the Partnership's  properties,  which was  partially offset  by  the
payment of expenses on sold  properties and administrative expenses.  Investing
activities consisted  primarily of  net proceeds  of approximately  $13,617,000
received from the 1997 property sales and a distribution from the joint venture
<PAGE>
with an affiliate of  approximately $1,047,000. Financing activities  consisted
primarily of  the  payment  of distributions  of  approximately  $8,038,000  to
Limited Partners, the repayment of mortgage notes payable in connection with  a
1997 sale of  approximately $6,444,000,  principal payments  on mortgage  notes
payable of  approximately  $131,000  and distributions  to  the  joint  venture
partner - affiliate of approximately $955,000. In October 1997, the Partnership
made a  special  distribution  of $2,245,496  to  Limited  Partners  consisting
primarily of available proceeds received in  connection with the sale of  North
Hill Apartments. 

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 three  properties,  and  the
property in which the  Partnership held a minority  joint venture interest.  In
addition, the Partnership sold its remaining properties, the Howell Station and
North Hill apartment complexes  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 proceeds  from the sales to  satisfy
obligations  of  the  Partnership,   as  well  as   establish  a  reserve   for
contingencies. 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 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 continues to  exist
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  its 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,
$100,000 of the proceeds  was retained by the  Partnership and was  unavailable
for distribution until August  1997, at which time  the funds were released  in
full. The  remainder of  the  available proceeds  were distributed  to  Limited
Partners in July 1997.

The North  Hill Apartments  was owned  by  a joint  venture consisting  of  the
Partnership and an  affiliate. In September  1997, the joint  venture sold  the
property for a sales price of  $21,000,000. The purchaser of the property  took
title subject to the existing first mortgage loan in the amount of $16,483,591.
Since the sales proceeds  did not exceed a  certain predetermined level as  set
forth in the loan agreement, the $1,350,000 non-interest bearing note from an
<PAGE>
unaffiliated party was forgiven in connection with the sale. From the  proceeds
of the sale, the joint venture paid $164,705 in fees relating to the assumption
of the  mortgage  loan by  the  purchaser and  $461,949  in selling  costs.  In
addition, a state withholding tax of $383,246 was paid relating to the gain  on
the sale  of  the property.  The  joint  venture received  the  remaining  sale
proceeds of $3,506,509, of which approximately $2,630,000 was the Partnership's
share. In addition, pursuant to the terms of the sale, $500,000 of the proceeds
will be retained by the Partnership  and be unavailable for distribution  until
December 1997. The Partnership distributed the joint venture partners' share of
the available sales proceeds in September 1997. The Partnership's share of  the
available proceeds was distributed to the Limited Partners in October 1997.  In
addition, the Partnership paid a distribution  to its joint venture partner  in
November 1997  representing its  share  of property  operations for  the  third
quarter of 1997. This amount  is included in due  to affiliate - joint  venture
partner in the financial statements at September 30, 1997. See Note 4 of  Notes
to Financial Statements for additional information.

In October 1997, the Partnership paid  $2,245,496 ($38.00 per Interest) to  the
holders of Limited Partnership  Interests, representing a special  distribution
of available Net Cash Proceeds from the  sale of the North Hill Apartments.  To
date, including the October 1997  distribution, Limited Partners have  received
cumulative distributions of Net Cash Receipts of $52.50 per $1,000 Interest and
Net Cash Proceeds of $359.02 per  $1,000 Interest, totaling $411.52 per  $1,000
Interest. Since  all  of  the  Partnership's  properties  have  been  sold,  no
additional quarterly distributions are expected.  Investors will not recover  a
substantial portion of their original investment. 
<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  (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. The closing was extended and the  sale
closed on September 4, 1997. The purchaser assumed the existing first  mortgage
loan collateralized by the property which had an outstanding principal  balance
of $16,483,591 at  closing. From the  proceeds of the  sale, the Joint  Venture
paid $164,705 in fees relating  to the assumption of  the mortgage loan by  the
purchaser, $420,000 as  a brokerage  commission to  an affiliate  of the  third
party providing property management  services for the  property and $41,949  in
closing costs. In addition, the Joint  Venture paid state withholding taxes  of
$383,246 in connection with the sale. The Joint Venture received the  remaining
sale proceeds of $3,506,509.  Of such proceeds, $500,000  is being retained  by
the Joint Venture  and will not  be available  for use or  distribution by  the
Joint Venture until December  1997. The Partnership's share  of the total  sale
proceeds will be approximately $2,630,000. 

Pursuant to a refinancing of the  property in 1994, the Joint Venture  received
the  proceeds  of  a  $1,350,000   non-interest  bearing  note  funded  by   an
unaffiliated  party.  The  net  proceeds  of  the  sale  does  not  exceed  the
predetermined level requiring repayment of the note. No sale proceeds has  been
utilized towards repayment of the note and the note has been forgiven.  

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 Registrant's Current
Report on Form 8-K dated April 23, 1996, is incorporated herein by reference.
<PAGE>
(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
Registrant'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
Registrant'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
Registrant'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
Registrant'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  Registrant'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
Registrant's Current 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  Registrant's
Current 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
Registrant'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
Registrant'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
Registrant's Current 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  Registrant's
Current Report  on Form  8-K dated  July  5, 1996,  is incorporated  herein  by
reference.
<PAGE>
(ii) First Amendment to Agreement of Sale and Escrow Agreement relating to  the
sale of  Shadowridge  Apartments  previously  filed  as  Exhibit  (99)  to  the
Registrant's Current Report on 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,  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 Current Report on Form 10-Q dated  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 Current Report on Form 10-Q dated 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 Current Report on Form 10-Q dated  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 Current  Report on Form 10-Q dated  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 Current Report on Form 10-Q dated  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 Current Report on Form 10-Q dated June
30, 1997, is incorporated herein by reference.

(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  Current Report  on  Form 10-Q  dated  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 Current Report on Form 10-Q dated  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, 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  Registrant'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  Registrant'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  Registrant'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  Registrant'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  Registrant's Current 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 Registrant's Current
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  Registrant's
Current 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 nine  months  ended
September 30, 1997 is attached hereto.

(b) Reports on Form 8-K: No Reports  on Form 8-K were filed during the  quarter
ended September 30, 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: November 13, 1997                    
      -----------------------
<PAGE>