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, 2000
                               ------------------
                                      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.)

2333 Waukegan Road, Suite 100
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
    -----     -----


                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                                 BALANCE SHEETS
                    September 30, 2000 and December 31, 1999
                                  (Unaudited)

                                     ASSETS

                                            2000                1999
                                         -----------         -----------
Cash and cash equivalents                $1,547,588          $1,605,903
Accounts and accrued interest receivable      8,371               7,902
                                         -----------         -----------
                                         $1,555,959          $1,613,805
                                         ===========         ===========

                       LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                         $   73,695          $   74,305
Due to affiliates                             7,348              31,581
                                         -----------         -----------
    Total liabilities                        81,043             105,886
                                         -----------         -----------

Commitments and contingencies

Limited Partners' capital (59,092
  Interests issued and outstanding)       1,783,433           1,816,436
General Partner's deficit                  (308,517)           (308,517)
                                         -----------         -----------
    Total partners' capital               1,474,916           1,507,919
                                         -----------         -----------
                                         $1,555,959          $1,613,805
                                         ===========         ===========

The accompanying notes are an integral part of the financial statements.


                    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, 2000 and 1999
                                 (Unaudited)

                                                 2000            1999
                                              -----------     -----------
Income:
  Interest on short-term investments          $   71,096      $   58,184
                                              -----------     -----------
    Total income                                  71,096          58,184
                                              -----------     -----------
Expenses:
  Administrative                                 104,099         108,639
                                              -----------     -----------
    Total expenses                               104,099         108,639
                                              -----------     -----------
Net loss                                      $  (33,003)     $  (50,455)
                                              ===========     ===========
Net loss allocated to General Partner               None            None
                                              ===========     ===========
Net loss allocated to Limited Partners        $  (33,003)     $  (50,455)
                                              ===========     ===========
Net loss per Limited Partnership Interest
  (59,092 issued and oustanding) -
  Basic and Diluted                           $    (0.56)     $    (0.85)
                                              ===========     ===========

The accompanying notes are an integral part of the financial statements.


                    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, 2000 and 1999
                                 (Unaudited)

                                                  2000            1999
                                               -----------     -----------
Income:
  Interest on short-term investments           $   25,290      $   19,939
                                               -----------     -----------
    Total income                                   25,290          19,939
                                               -----------     -----------
Expenses:
  Administrative                                   28,105          32,626
                                               -----------     -----------
    Total expenses                                 28,105          32,626
                                               -----------     -----------
Net loss                                       $   (2,815)     $  (12,687)
                                               ===========     ===========
Net loss allocated to General Partner                None            None
                                               ===========     ===========
Net loss allocated to Limited Partners         $   (2,815)     $  (12,687)
                                               ===========     ===========
Net loss per Limited Partnership Interest
  (59,092 issued and oustanding) -
  Basic and Diluted                            $    (0.04)     $    (0.21)
                                               ===========     ===========

The accompanying notes are an integral part of the financial statements.

                    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, 2000 and 1999
                                 (Unaudited)

                                                   2000           1999
                                                -----------    -----------
Operating activities:
  Net loss                                      $  (33,003)    $  (50,455)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
      Net change in:
        Accounts and accrued interest
          receivable                                  (469)           345
        Accounts payable                              (610)         5,083
        Due to affiliates                          (24,233)         2,832
                                                -----------    -----------
  Net cash used in operating activities            (58,315)       (42,195)
                                                -----------    -----------
Net change in cash and cash equivalents            (58,315)       (42,195)

Cash and cash equivalents at beginning
  of year                                        1,605,903      1,646,332
                                                -----------    -----------
Cash and cash equivalents at end of period      $1,547,588     $1,604,137
                                                ===========    ===========

The accompanying notes are an integral part of the financial statements.

                     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 nine months and quarter
ended September 30, 2000, and all such adjustments are of a normal and
recurring nature.

2. Partnership Termination:

As previously reported, class action litigation involving the Partnership was
originally filed in February 1996. This litigation has existed over the past
four and 1/2 years in three separate but related cases and continues to exist
today. Since inception of this litigation, the general partner has stated that
the Partnership would not be dissolved until the conclusion of this litigation
and that the general partner has a contingent right to seek recovery from the
Partnership of the legal fees it expends in defending against this litigation.
The general partner believed that this litigation would have been completed and
resolved before now. Despite the fact that the general partner has prevailed
twice on motions to dismiss the litigation for failure to state a cause of
action, the plaintiffs have continued to re-file the litigation and assert
claims and, in so doing, have protracted the litigation. There is presently
pending the general partner's and remaining defendants' third motion to dismiss
the litigation for failure to state a cause of action, on which the court heard
argument in April 2000. Defendants believe this motion to be meritorious. Given
the actions of plaintiffs' counsel to date, at this point in time the general
partner does not believe that the litigation will be concluded in the near
future. As a result, the general partner has decided that it will dissolve the
Partnership in December 2000 and distribute all remaining cash reserves to the
limited partners.

The Partnership has accrued on its financial statements the legal fees expended
to date by the general partner in defending against this litigation. The
general partner would be entitled to place such amounts, along with an amount
representing anticipated future legal fees, in a trust account to be held until
the conclusion of this litigation. Because the general partner believes such an
action would not be in the best interests of the limited partners, it has
decided not to do so and will distribute to limited partners such amounts
accrued for legal fees. The general partner does not in any way waive its claim
for indemnification under the partnership agreement; however, the general
partner will not seek to recover from the limited partners any amounts
distributed to them in attempting to satisfy the general partner's
indemnification rights.

3. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates for the
nine months and quarter ended September 30, 2000 are:

                                              Paid
                                   -------------------------
                                     Nine Months    Quarter    Payable
                                    ------------   --------- ----------

   Reimbursement of expenses to
     the General Partner, at cost    $ 47,985      $ 8,107    $ 7,348

                     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 sold its final real estate investment 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 1999 for a more complete understanding of
the Partnership's financial position.

Operations
----------

2000 Compared to 1999
---------------------

The operations of the Partnership in 2000 and 1999 consisted of administrative
expenses which were partially offset by interest income earned on short-term
investments.

As a result of higher interest rates in 2000, interest income on short-term
investments increased during the nine months and quarter ended September 30,
2000 as compared to the same periods in 1999.

Primarily as a result of lower accounting and accrued legal fees,
administrative expenses decreased during the nine months and quarter ended
September 30, 2000 as compared to the same periods in 1999. This decrease was
partially offset by an increase in printing costs.

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

The cash position of the Partnership decreased by approximately $58,000 as of
September 30, 2000 as compared to December 31, 1999 due to cash used in
operating activities for the payment of administrative expenses, which was
partially offset by interest income earned on short-term investments.

As previously reported, class action litigation involving the Partnership was
originally filed in February 1996. This litigation has existed over the past
four and 1/2 years in three separate but related cases and continues to exist
today. Since inception of this litigation, the general partner has stated that
the Partnership would not be dissolved until the conclusion of this litigation
and that the general partner has a contingent right to seek recovery from the

Partnership of the legal fees it expends in defending against this litigation.
The general partner believed that this litigation would have been completed and
resolved before now. Despite the fact that the general partner has prevailed
twice on motions to dismiss the litigation for failure to state a cause of
action, the plaintiffs have continued to re-file the litigation and assert
claims and, in so doing, have protracted the litigation. There is presently
pending the general partner's and remaining defendants' third motion to dismiss
the litigation for failure to state a cause of action, on which the court heard
argument in April 2000. Defendants believe this motion to be meritorious. Given
the actions of plaintiffs' counsel to date, at this point in time the general
partner does not believe that the litigation will be concluded in the near
future. As a result, the general partner has decided that it will dissolve the
Partnership in December 2000 and distribute all remaining cash reserves to the
limited partners.

The Partnership has accrued on its financial statements the legal fees expended
to date by the general partner in defending against this litigation. The
general partner would be entitled to place such amounts, along with an amount
representing anticipated future legal fees, in a trust account to be held until
the conclusion of this litigation. Because the general partner believes such an
action would not be in the best interests of the limited partners, it has
decided not to do so and will distribute to limited partners such amounts
accrued for legal fees. The general partner does not in any way waive its claim
for indemnification under the partnership agreement; however, the general
partner will not seek to recover from the limited partners any amounts
distributed to them in attempting to satisfy the general partner's
indemnification rights.

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

                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                          PART II - OTHER INFORMATION

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

(a) Exhibits:

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

(27) Financial Data schedule of the Partnership for the nine months ended
September 30, 2000 is attached hereto.

(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended September 30, 2000.

SIGNATURES

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

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

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

                         By:/s/Jayne A. Kosik
                              ---------------------------------
                              Jayne A. Kosik
                              Senior Managing Director and Chief Financial
                              Officer (Principal Accounting and Financial
                              Officer) of Balcor Partners-XVIII, the General
                              Partner



Date: November 13, 2000
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