--------------------------------------------------------------------------------
                          U. S. SECURITIES AND EXCHANGE
                        COMMISSION Washington, D.C. 20549


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



                                   FORM 10-QSB


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



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

                  For the quarterly period ended June 30, 2004


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



                         Commission file number 0-23766


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
             Organized pursuant to the Laws of the State of Maryland


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



        Internal Revenue Service - Employer Identification No. 52-1388957

                 11200 Rockville Pike, Rockville, Maryland 20852

                                 (301) 468-9200


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





Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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>


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                              INDEX TO FORM 10-QSB

                       FOR THE QUARTER ENDED JUNE 30, 2004



                                                                           Page


Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Balance Sheets
           - June 30, 2004 and December 31, 2003............................ 1

         Statements of Operations and Accumulated Losses
           - for the three and six months ended June 30, 2004 and 2003 ..... 2

         Statements of Cash Flows
           - for the six months ended June 30, 2004 and 2003................ 3

         Notes to  Financial Statements
           - June 30, 2004 and 2003......................................... 4

Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations........................................ 11

Item 3.  Controls and Procedures............................................ 13


Part II - OTHER INFORMATION

Item 3.  Defaults Upon Senior Securities.................................... 13

Item 5.  Other Information.................................................. 14

Item 6.  Exhibits and Reports on Form 8-K................................... 14

Signature................................................................... 15


<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                                     ASSETS


<TABLE>
<CAPTION>
                                                                                        June 30,      December 31,
                                                                                          2004            2003
                                                                                      ------------    ------------
                                                                                       (Unaudited)
<S>                                                                                   <C>             <C>
Investments in and advances to partnerships held for sale .........................   $    640,021    $    776,410
Cash and cash equivalents .........................................................      3,724,036       3,470,418
Other assets ......................................................................             83              48
                                                                                      ------------    ------------

      Total assets ................................................................   $  4,364,140    $  4,246,876
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' CAPITAL


Due on investments in partnerships ................................................   $    404,600    $  1,047,600
Accrued interest payable ..........................................................      1,111,873       2,024,065
Accounts payable and accrued expenses .............................................         63,246         167,400
                                                                                      ------------    ------------

      Total liabilities ...........................................................      1,579,719       3,239,065
                                                                                      ------------    ------------

Commitments and contingencies

Partners' capital:

  Capital paid in:
    General Partners ..............................................................          2,000           2,000
    Limited Partners ..............................................................     21,202,500      21,202,500
                                                                                      ------------    ------------

                                                                                        21,204,500      21,204,500

  Less:
    Accumulated distributions to partners .........................................     (5,122,373)     (5,122,373)
    Offering costs ................................................................     (2,570,535)     (2,570,535)
    Accumulated losses ............................................................    (10,727,171)    (12,503,781)
                                                                                      ------------    ------------

      Total partners' capital .....................................................      2,784,421       1,007,811
                                                                                      ------------    ------------

      Total liabilities and partners' capital .....................................   $  4,364,140    $  4,246,876
                                                                                      ============    ============

</TABLE>

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

                                       -1-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS

                             AND ACCUMULATED LOSSES

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                    For the three months ended       For the six months ended
                                                             June 30,                        June 30,
                                                   ----------------------------    ----------------------------
                                                       2004            2003            2004            2003
                                                   ------------    ------------    ------------    ------------
<S>                                                <C>             <C>             <C>             <C>
Share of income from partnerships ..............   $     20,146    $    152,038    $     41,560    $     68,303
                                                   ------------    ------------    ------------    ------------

Other revenue and expenses:

  Revenue:
    Interest ...................................         10,064          12,161          21,327          27,228
                                                   ------------    ------------    ------------    ------------

  Expenses:
    Interest ...................................         40,768          47,695          91,900         108,627
    General and administrative .................         50,988          58,092         102,189         108,073
    Management fee .............................         24,480          24,480          48,960          48,960
    Professional fees ..........................         22,384          77,007          96,012         122,257
    Amortization of deferred costs .............             --           2,904              --           5,808
                                                   ------------    ------------    ------------    ------------

                                                        138,620         210,178         339,061         393,725
                                                   ------------    ------------    ------------    ------------

      Total other revenue and expenses .........       (128,556)       (198,017)       (317,734)       (366,497)
                                                   ------------    ------------    ------------    ------------

Loss before gain on disposition of investment
  in partnership ...............................       (108,410)        (45,979)       (276,174)       (298,194)

Gain on disposition of investment in partnership      2,052,784              --       2,052,784              --
                                                   ------------    ------------    ------------    ------------

Net income (loss) ..............................      1,944,374         (45,979)      1,776,610        (298,194)

Accumulated losses, beginning of period ........    (12,671,545)    (12,066,147)    (12,503,781)    (11,813,932)
                                                   ------------    ------------    ------------    ------------

Accumulated losses, end of period ..............   $(10,727,171)   $(12,112,126)   $(10,727,171)   $(12,112,126)
                                                   ============    ============    ============    ============



Net income (loss) allocated to
   General Partners (1.51%) ....................   $     29,360    $       (694)   $     26,827    $     (4,503)
                                                   ============    ============    ============    ============

Net income (loss) allocated to
   Initial and Special Limited Partners (2.49%)    $     48,415    $     (1,145)   $     44,238    $     (7,425)
                                                   ============    ============    ============    ============


Net income (loss) allocated to
   BAC Holders (96%) ...........................   $  1,866,599    $    (44,140)   $  1,705,545    $   (286,266)
                                                   ============    ============    ============    ============


Net income (loss) per BAC,
  based on 21,158 BACs outstanding .............   $      88.22    $      (2.09)   $      80.61    $     (13.53)
                                                   ============    ============    ============    ============
</TABLE>


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

                                       -2-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                 For the six months ended
                                                                                          June 30,
                                                                                 --------------------------
                                                                                    2004            2003
                                                                                 -----------    -----------
<S>                                                                              <C>            <C>
Cash flows from operating activities:
  Net income (loss) ..........................................................   $ 1,776,610    $  (298,194)

  Adjustments to reconcile net income (loss) to net cash used in operating
    activities:
    Share of income from partnerships ........................................       (41,560)       (68,303)
    Amortization of deferred costs ...........................................            --          5,808
    Gain on disposition of investment in partnership .........................    (2,052,784)            --


    Changes in assets and liabilities:
      Increase in accrued interest receivable on advances to partnerships ....       (10,100)       (11,813)
      (Increase) decrease in other assets ....................................           (35)            80
      Increase in accrued interest payable ...................................        91,900        108,627
      (Decrease) increase in accounts payable and accrued expenses ...........      (104,154)        40,673
                                                                                 -----------    -----------

        Net cash used in operating activities ................................      (340,123)      (223,122)
                                                                                 -----------    -----------

Cash flows from investing activities:
  Proceeds from disposition of investment in partnership,
    net of disposition fee of $507,112, paid to related party ................       460,153             --
  Loans to local managing general partner ....................................      (495,749)            --
  Collection of loans to local managing general partner ......................       495,749             --
  Receipt of distributions from partnerships .................................       133,588        134,812
  Advance to local partnership ...............................................            --       (100,000)
                                                                                 -----------    -----------

        Net cash provided by investing activities ............................       593,741         34,812
                                                                                 -----------    -----------

Net increase (decrease) in cash and cash equivalents .........................       253,618       (188,310)

Cash and cash equivalents, beginning of period ...............................     3,470,418      3,913,467
                                                                                 -----------    -----------

Cash and cash equivalents, end of period .....................................   $ 3,724,036    $ 3,725,157
                                                                                 ===========    ===========


Supplemental disclosure of cash flow information: Non-cash financing activity:
   Purchase money note principal and accrued interest
    payable assumed by purchaser of
    related investment in partnership ........................................   $ 1,647,092    $        --
                                                                                 ===========    -----------
</TABLE>



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

                                       -3-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2004 and 2003

                                   (Unaudited)


1.   BASIS OF PRESENTATION

     In the opinion of C.R.I.,  Inc. (CRI), the Managing  General  Partner,  the
accompanying unaudited financial statements reflect all adjustments,  consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-85 Limited Partnership (the Partnership) as
of June 30, 2004, and the results of its operations for the three and six months
ended June 30, 2004 and 2003,  and its cash flows for the six months  ended June
30, 2004 and 2003.  The results of operations  for the interim period ended June
30, 2004, are not  necessarily  indicative of the results to be expected for the
full year.

     The  accompanying  unaudited  financial  statements  have been  prepared in
conformity with accounting principles generally accepted in the United States of
America  and with the  instructions  to Form  10-QSB.  Certain  information  and
accounting  policies and  footnote  disclosures  normally  included in financial
statements prepared in conformity with accounting  principles generally accepted
in the United States of America have been condensed or omitted  pursuant to such
instructions. These condensed financial statements should be read in conjunction
with the financial  statements and notes thereto  included in the  Partnership's
annual report on Form 10-KSB at December 31, 2003.

     In December  2003,  the Financial  Accounting  Standards  Board issued FASB
Interpretation  No. 46  (revised  December  2003) (FIN 46-R),  Consolidation  of
Variable  Interest  Entities.  FIN 46-R clarifies the  application of Accounting
Research Bulletin 51, Consolidated  Financial  Statements,  for certain entities
that do not  have  sufficient  equity  at risk for the  entity  to  finance  its
activities without additional  subordinated financial support from other parties
or in which equity  investors do not have the  characteristics  of a controlling
financial interest  ("variable interest  entities").  Variable interest entities
within  the  scope of FIN 46-R  will be  required  to be  consolidated  by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives a majority of its expected  returns,  or both. The Partnership
must apply the  provisions  of FIN 46-R to all  entities  subject to FIN 46-R no
later than the end of the first  reporting  period that ends after  December 15,
2004 (as of December  31,  2004,  for the  Partnership).  The  Managing  General
Partner is in the process of  determining  what impact,  if any, the adoption of
the provisions of FIN 46-R will have on the  Partnership's  financial  condition
and results of operations  related to the  Partnership's  investments in limited
partnerships  (Local  Partnerships),   and  has  complied  with  the  disclosure
requirements of FIN 46-R in these financial statements. As of June 30, 2004, the
Partnership's  maximum loss exposure  related to its investments in partnerships
is limited to the remaining balance of $640,021.


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS

a.   Due on investments in partnerships and accrued interest payable
     ---------------------------------------------------------------

                              Purchase money notes
                              --------------------

     The  Partnership's  remaining  obligation with respect to its investment in
Paradise Associates Limited Partnership (Paradise  Foothills),  in the form of a
nonrecourse  purchase  money note  having a principal  balance of $230,000  plus
accrued  interest of $1,036,473 as of June 30, 2004, is payable in full upon the
earliest of: (i) sale or refinancing of the Local Partnership's rental property;
(ii)  payment  in full of the  Local  Partnership's  permanent  loan;  or  (iii)
maturity. The purchase money note matures in 2008.

                                       -4-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     The  purchase  money note,  which is  nonrecourse  to the  Partnership,  is
secured  by the  Partnership's  interest  in  Paradise  Foothills.  There  is no
assurance that the underlying  property will have  sufficient  appreciation  and
equity to enable the Partnership to pay the purchase money note's  principal and
accrued  interest when due. If the purchase money note is not paid in accordance
with its terms,  the  Partnership  will either have to renegotiate  the terms of
repayment or risk losing its partnership interest in Paradise Foothills.  In the
event that the purchase money note remains unpaid upon maturity,  the noteholder
may have the  right to  foreclose  on the  Partnership's  interest  in  Paradise
Foothills.

     Interest  expense on the  Partnership's  purchase money notes for the three
and  six  month  periods   ended  June  30,  2004,   was  $40,768  and  $91,900,
respectively,  and $47,695 and  $108,627 for the three and six months ended June
30, 2003, respectively. The accrued interest payable on the purchase money notes
of  $1,036,473  and  $1,948,665  as of June 30,  2004  and  December  31,  2003,
respectively,  is due on the  respective  maturity  dates of the purchase  money
notes or earlier, in some instances, if (and to the extent of a portion thereof)
the related Local Partnership has distributable net cash flow, as defined in the
relevant Local Partnership agreement.

                               Paradise Foothills
                               ------------------

     The  Partnership  defaulted on its purchase money note relating to Paradise
Foothills when the note matured on January 30, 1996, and was not paid. Effective
March  31,  2003,  the  Managing  General  Partner  successfully  negotiated  an
agreement  to extend the maturity  date of the purchase  money note to March 31,
2008,  and to reduce the interest rate. The  Partnership  has begun  discussions
with the  local  managing  general  partner  to sell its  interest  in  Paradise
Foothills to the local managing  general  partner.  There is no assurance that a
sale of the Partnership's interest in Paradise Foothills will occur.

     Due  to the  possible  sale  of  the  Partnership's  interest  in  Paradise
Foothills,  the  Partnership's  basis in the Local  Partnership,  along with net
unamortized  acquisition fees and property  purchase costs,  which totaled $0 at
both June 30, 2004 and December 31, 2003, has been  reclassified  to investments
in and  advances  to  partnerships  held  for sale in the  accompanying  balance
sheets.

     The principal  amount due to a local general partner of Paradise  Foothills
of  $174,600,  plus accrued  interest of $75,400 at June 30, 2004,  will be paid
upon the occurrence of specified events, as outlined in the Local  Partnership's
partnership agreement.

                                   The Pointe
                                   ----------

     The  Partnership  defaulted  on its  purchase  money note  relating to Mesa
Residential  Partners  Limited  Partnership   (formerly  Mesa  Partners  Limited
Partnership)  (The Pointe) when the note matured on June 30, 2003,  as extended,
and was not paid. The default amount included  principal and accrued interest of
$643,000 and $877,602,  respectively. The maturity date of the note was extended
to September 30, 2004. On June 4, 2004, the Partnership's interest in The Pointe
was  sold to an  affiliate  of the  local  managing  general  partner.  Net cash
proceeds  received by the  Partnership in June 2004 totaled  $460,153.  The sale
resulted in gain on  disposition  of investment in partnership of $2,052,784 for
financial  statement purposes and in total gain of $7,075,301 for federal income
tax purposes in 2004. In accordance with the terms of the Partnership Agreement,
in June 2004 the Managing General Partner was paid a disposition fee of $507,112
related to the sale.  The fee was netted against the related gain on disposition
of investment in partnership at June 30, 2004.

                                       -5-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     Due to the impending sale of the Partnership's  interest in The Pointe, the
net unamortized  acquisition  fees and property  purchase  costs,  which totaled
$54,461 at December 31, 2003,  were  reclassified to investments in and advances
to partnerships held for sale in the accompanying balance sheet at that date.

b.   Advances to Local Partnerships
     ------------------------------

                               Paradise Foothills
                               ------------------

     In  connection  with the  refinancing  of the mortgage  loan secured by the
property  owned by Paradise  Foothills in March 2003, the  Partnership  advanced
$100,000  to the Local  Partnership  for  closing  costs and to  facilitate  the
repayment  of the  existing  mortgage  loan.  The  partners  modified  the Local
Partnership  agreement to give the new loan  priority in repayment  from sale or
refinancing  proceeds over all other  partner  loans.  For  financial  reporting
purposes,  this loan has been reduced to zero by the  Partnership as a result of
losses at the related Local Partnership level.

                                   The Pointe
                                   ----------

     Mesa  Residential  Partners  Limited  Partnership  (formerly  Mesa Partners
Limited  Partnership)  (The Pointe),  which owns apartments  located in El Paso,
Texas,  modified its mortgage loan in 1987. In connection with the mortgage loan
modification,  the  Partnership  advanced  a  total  of  $262,500  to the  Local
Partnership in 1987.  Repayment of these loans,  with simple  interest at 9% per
annum, was expected to occur upon sale or refinancing of the property.  However,
in July 2003,  when the first  mortgage  was  refinanced,  there were not enough
proceeds to repay the loans.  Therefore,  the Partnership contracted to sell its
loans  receivable  together  with its  interest in the Local  Partnership  to an
affiliate  of the local  general  partner.  As of  December  31,  2003,  accrued
interest was $387,563.  For financial reporting  purposes,  these loans had been
reduced to zero by the  Partnership  as a result of losses at the related  Local
Partnership level. On June 4, 2004, the Partnership's interest in The Pointe was
sold. See Note 2.a. hereof for additional information concerning the sale.

c.   Other Partnership Matters
     -------------------------

                                 Willow Creek II
                                 ---------------

     The  Partnership  has begun  discussions  with the local  managing  general
partner to sell its  interest  in Willow  Creek II Limited  Partnership  (Willow
Creek II) to the local managing  general  partner.  There is no assurance that a
sale of the Partnership's interest in Willow Creek II will occur.

     Due to the possible sale of the Partnership's  interest in Willow Creek II,
the  Partnership's  basis in the Local  Partnership,  along with net unamortized
acquisition  fees and  property  purchase  costs,  which  totaled  $597,354  and
$679,282  at June  30,  2004  and  December  31,  2003,  respectively,  has been
reclassified to investments in and advances to partnerships held for sale in the
accompanying balance sheets.


                                       -6-

<PAGE>


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

d.   Property Matters
     ----------------

                                 Semper Village
                                 --------------

     On December 19, 2003, the Local Partnership entered into a contract to sell
the property owned by Sheridan West Limited  Partnership  (Semper  Village).  On
July 1,  2004,  the  property  related  to Semper  Village  was  sold.  Net cash
proceeds,  including  a  $20,000  Local  Partnership  reserve,  received  by the
Partnership  in July 2004  totaled  $6,301,892.  The sale will result in gain on
disposition  of  investment  in  partnership  of  approximately  $6,239,000  for
financial statement purposes and in total gain of approximately  $10,267,000 for
federal  income  tax  purposes  in 2004.  In  accordance  with the  terms of the
Partnership  Agreement,  in July 2004 the  Managing  General  Partner was paid a
disposition fee of $706,250  related to the sale. The fee will be netted against
the related gain on disposition of investment in partnership.

         Due to the impending sale of the property related to the Partnership's
interest in Semper Village, the net unamortized acquisition fees and property
purchase costs, which totaled $42,667 at June 30, 2004 and December 31, 2003,
have been reclassified to investments in and advances to partnerships held for
sale in the accompanying balance sheets.

e.   Summarized financial information

     Combined statements of operations for the three and four Local Partnerships
in  which  the   Partnership  was  invested  as  of  June  30,  2004  and  2003,
respectively,  follow.  The combined  statements of operations for the three and
six month  periods  ended  June 30,  2004,  include  information  for The Pointe
through  the  date of sale  of the  Partnership's  interest  in June  2004.  The
combined  statements  have  been  compiled  from  information  supplied  by  the
management agents of the projects and are unaudited. The information for each of
the periods is  presented  separately  for those Local  Partnerships  which have
investment basis (equity method), and for those Local Partnerships for which the
Partnership's  carrying value is zero (equity method suspended).  Appended after
the combined  statements is a reconciliation of the sources of the Partnership's
share of income (loss) from partnerships.

                                       -7-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued


                                         COMBINED STATEMENTS OF OPERATIONS
                                                    (Unaudited)
<TABLE>
<CAPTION>
                                                                 For the three months ended
                                                                         June 30,
                                                  ------------------------------------------------------------
                                                             2004                             2003
                                                  ------------------------------------------------------------
                                                   Equity                            Equity
                                                   Method          Suspended         Method         Suspended
                                                  ----------       ----------       ----------      ----------
         <S>                                      <C>              <C>               <C>            <C>
         Number of Local Partnerships                1                 2               2                2
                                                     =                 =               =                =

         Revenue:
           Rental                                 $  267,983       $1,015,976       $  733,186      $  754,337
           Other                                       5,689           84,947           60,725          34,975
                                                  ----------       ----------       ----------      ----------

             Total revenue                           273,672        1,100,923          793,911         789,312
                                                  ----------       ----------       ----------      ----------

         Expenses:
           Operating                                 148,992          632,567          333,217         388,686
           Interest                                   45,396          318,663          168,131         327,903
           Depreciation and amortization              54,696          244,555          134,285         152,981
                                                  ----------       ----------       ----------      ----------

             Total expenses                          249,084        1,195,785          635,633         869,570
                                                  ----------       ----------       ----------      ----------

         Net income (loss)                        $   24,588       $ (94,862)       $  158,278      $  (80,258)
                                                  ==========       =========        ==========      ==========

         Cash Distributions                       $  133,588       $       --       $  134,812      $       --
                                                  ==========       ==========       ==========      ==========

         Cash distributions recorded as
           reduction of investment in
           partnerships                           $  133,588       $       --       $  134,812      $       --
                                                  ==========       ==========       ==========      ==========

         Partnership's share of Local
           Partnership net income                 $   24,340       $       --       $  156,695      $       --

         Miscellaneous                                    --           (4,194)              --          (4,657)
                                                  ---------------------------       --------------------------

         Share of income from partnerships                   $20,146                          $152,038
                                                             =======                          ========

</TABLE>



                                       -8-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                                                                  For the six months ended
                                                                          June 30,
                                                  ------------------------------------------------------------
                                                              2004                             2003
                                                  ------------------------------------------------------------
                                                    Equity                            Equity
                                                    Method         Suspended          Method        Suspended
                                                  ----------       ----------       ----------      ----------
         <S>                                      <C>              <C>              <C>             <C>
         Number of Local Partnerships                  1               2                 2              2
                                                       =               =                 =              =

         Revenue:
           Rental                                 $  558,174       $2,179,780       $1,493,252      $1,508,674
           Other                                      17,784          175,629          114,750          69,949
                                                  ----------       ----------       ----------      ----------

             Total revenue                           575,958        2,355,409        1,608,002       1,578,623
                                                  ----------       ----------       ----------      ----------

         Expenses:
           Operating                                 323,587        1,341,058          821,231         777,373
           Interest                                   90,792          675,502          336,261         655,808
           Depreciation and amortization             109,392          525,463          268,570         305,960
                                                  ----------       ----------       ----------      ----------

             Total expenses                          523,771        2,542,023        1,426,062       1,739,141
                                                  ----------       ----------       ----------      ----------

         Net income (loss)                        $   52,187       $ (186,614)      $  181,940      $ (160,518)
                                                  ==========       ==========       ==========      ==========

         Cash distributions                       $  133,588       $       --       $  134,812      $       --
                                                  ==========       ==========       ==========      ==========

         Cash distributions recorded as
           reduction of investment in
           partnerships                           $  133,588       $       --       $  134,812      $       --
                                                  ==========       ==========       ==========      ==========

         Partnership's share of Local
           Partnership net income                 $   51,660       $       --       $  180,116      $       --

         Advance to Local Partnership                     --               --         (100,000)

         Miscellaneous                                    --          (10,100)              --         (11,813)
                                                  ---------------------------       --------------------------

         Share of income from partnerships                  $41,560                           $68,303
                                                            =======                           =======

</TABLE>

     As of June 30, 2004 and 2003, the Partnership's  share of cumulative losses
to  date  for  two  of  the  Local  Partnerships  exceeded  the  amount  of  the
Partnership's  investments  in and  advances  to  those  Local  Partnerships  by
$6,052,443  and  $7,129,172,  respectively.  As the  Partnership  has no further
obligation  to advance funds or provide  financing to these Local  Partnerships,
the  excess  losses  have  not  been  reflected  in the  accompanying  financial
statements.


3.   RELATED PARTY TRANSACTIONS

     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to reimburse the Managing  General  Partner for its direct expenses
in connection with managing the  Partnership.  The Partnership  paid $40,763 and
$81,200 for the three and six month periods  ended June 30, 2004,  respectively,
and $49,320 and $92,157 for the three and six month periods ended June 30, 2003,
respectively,  to the  Managing  General  Partner  as  direct  reimbursement  of
expenses  incurred on behalf of the  Partnership.  Such expenses are included in
the  accompanying   statements  of  operations  as  general  and  administrative
expenses.


                                       -9-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2004 and 2003

                                   (Unaudited)


3.   RELATED PARTY TRANSACTIONS - Continued

     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to pay the Managing General Partner an annual incentive  management
fee  (Management  Fee) after all other expenses of the Partnership are paid. The
Partnership  paid the Managing  General  Partner a Management Fee of $24,480 for
each of the three month periods  ended June 30, 2004 and 2003,  $48,960 for each
of the six month periods ended June 30, 2004 and 2003.

     In  accordance  with the  terms of a  Definitive  Proxy  Statement  for the
Liquidation  and Dissolution of the Partnership  (Definitive  Proxy  Statement),
which has been approved by a majority of the units of Limited Partner  Interest,
the Managing  General Partner may receive an incentive  disposition fee of up to
five percent of the sales prices of the  properties  if it markets and sells the
properties in which the Partnership  holds  interests  instead of having a third
party do so. In June 2004, the Managing  General  Partner was paid a disposition
fee of $507,112 related to the sale of the Partnership's  interest in The Pointe
on June 4, 2004.  The fee was netted  against the related gain on disposition of
investment in partnership  at June 30, 2004. In July 2004, the Managing  General
Partner was paid a  disposition  fee of $706,250  relating to the sale of Semper
Village on July 1, 2004.  The fee will be netted  against  the  related  gain on
disposition of investment in partnership.

     CRI,  William B. Dockser and H. William  Willoughby are General Partners of
the  Partnership.  In  connection  with a proxy seeking the  liquidation  of the
Partnership, in January 2003, one Limited Partner filed a purported class action
and derivative  lawsuit against these three General  Partners  alleging  certain
deficiencies in the Definitive  Proxy Statement.  After various  motions,  cross
motions,  and appeals,  on February 19, 2004,  the U.S. Court of Appeals for the
Fourth Circuit  granted the  Partnership's  motion to dismiss,  and the case has
been  closed.  The  Partnership's   Partnership  Agreement  contains  provisions
pursuant to which the General Partners may seek indemnification for their costs,
including the  requirement  that they obtain an opinion of  independent  counsel
that the matter is subject to  indemnification.  A total accrual of $138,933 was
included in accounts payable and accrued  expenses in the  accompanying  balance
sheet at March 31,  2004.  The  required  opinion  of  independent  counsel  was
received  during the  second  quarter of 2004,  at which time the  $138,933  was
reimbursed to the General Partners.

     In connection with the local managing general partner's discounted purchase
of two bank  loans owed by the Local  Partnership  which  owns The  Pointe,  the
Partnership  advanced  $218,000 in February 2004, and $277,749 in March 2004, to
the local managing general partner.  These advances were repaid,  with interest,
at the time of the sale of the  Partnership's  interest  in The  Pointe  in June
2004.

                                      # # #

                                      -10-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
          of Financial Condition and Results of Operations


     Capital  Realty  Investors-85   Limited   Partnership's  (the  Partnership)
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  section  is  based  on  the  financial   statements,   and  contains
information  that  may  be  considered  forward  looking,  including  statements
regarding  the effect of  governmental  regulations.  Actual  results may differ
materially from those  described in the forward  looking  statements and will be
affected  by  a  variety  of  factors  including  national  and  local  economic
conditions,  the  general  level of  interest  rates,  governmental  regulations
affecting  the  Partnership  and  interpretations  of  those  regulations,   the
competitive  environment in which the Partnership operates, and the availability
of working capital.

                          Critical Accounting Policies
                          ----------------------------

     The  Partnership has disclosed its selection and application of significant
accounting  policies in Note 1 of the notes to financial  statements included in
the  Partnership's  annual  report on Form  10-KSB at  December  31,  2003.  The
Partnership accounts for its investments in partnerships (Local Partnerships) by
the equity  method  because the  Partnership  is a limited  partner in the Local
Partnerships.  As such the  Partnership  has no control over the  selection  and
application  of  accounting  policies,  or the use of  estimates,  by the  Local
Partnerships.  Environmental  and operational  trends,  events and uncertainties
that  might  affect the  properties  owned by the Local  Partnerships  would not
necessarily have a significant  impact on the  Partnership's  application of the
equity method of accounting,  since the equity method has been suspended for two
Local  Partnerships  in which the  Partnership's  investment  balances have been
reduced to zero.

                          New Accounting Pronouncement
                          ----------------------------

     In December  2003,  the Financial  Accounting  Standards  Board issued FASB
Interpretation  No. 46  (revised  December  2003) (FIN 46-R),  Consolidation  of
Variable  Interest  Entities.  FIN 46-R clarifies the  application of Accounting
Research Bulletin 51, Consolidated  Financial  Statements,  for certain entities
that do not  have  sufficient  equity  at risk for the  entity  to  finance  its
activities without additional  subordinated financial support from other parties
or in which equity  investors do not have the  characteristics  of a controlling
financial interest  ("variable interest  entities").  Variable interest entities
within  the  scope of FIN 46-R  will be  required  to be  consolidated  by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives a majority of its expected  returns,  or both. The Partnership
must apply the  provisions  of FIN 46-R to all  entities  subject to FIN 46-R no
later than the end of the first  reporting  period that ends after  December 15,
2004 (as of December  31,  2004,  for the  Partnership).  The  Managing  General
Partner is in the process of  determining  what impact,  if any, the adoption of
the provisions of FIN 46-R will have on the  Partnership's  financial  condition
and results of operations  related to the  Partnership's  investments in limited
partnerships (Local Partnerships).

                          Financial Condition/Liquidity
                          -----------------------------

     The Partnership's liquidity, with unrestricted cash resources of $3,724,036
as of June 30, 2004, along with anticipated future cash distributions from Local
Partnerships,  is expected  to be  adequate to meet its current and  anticipated
operating cash needs. As of August 3, 2004,  there were no material  commitments
for capital expenditures.

                                      -11-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
          of Financial Condition and Results of Operations - Continued


     The  Partnership's  remaining  obligation with respect to its investment in
Paradise Associates Limited Partnership (Paradise  Foothills),  in the form of a
nonrecourse  purchase  money note  having a principal  balance of $230,000  plus
accrued  interest of $1,036,473 as of June 30, 2004, is payable in full upon the
earliest of: (i) sale or refinancing of the Local Partnership's rental property;
(ii)  payment  in full of the  Local  Partnership's  permanent  loan;  or  (iii)
maturity.  The purchase  money note matures in 2008.  See the notes to financial
statements for additional information concerning this purchase money note.

     The  purchase  money note,  which is  nonrecourse  to the  Partnership,  is
secured  by the  Partnership's  interest  in  Paradise  Foothills.  There  is no
assurance that the underlying  property will have  sufficient  appreciation  and
equity to enable the Partnership to pay the purchase money note's  principal and
accrued  interest when due. If the purchase money note is not paid in accordance
with its terms,  the  Partnership  will either have to renegotiate  the terms of
repayment or risk losing its partnership interest in Paradise Foothills.  In the
event that the purchase money note remains unpaid upon maturity,  the noteholder
may have the  right to  foreclose  on the  Partnership's  interest  in  Paradise
Foothills.

     Included in due on investments in  partnerships  is $174,600 due to a local
general  partner  related  to  Paradise  Foothills  at both June 30,  2004,  and
December 31, 2003; accrued interest payable thereon was $75,400 at both June 30,
2004,  and December 31, 2003.  These amounts will be paid upon the occurrence of
certain  specified events,  as outlined in the Local  Partnership's  partnership
agreement.

     The Managing  General  Partner has received  consent from a majority of BAC
Holders for the  liquidation  of the  Partnership.  It is  anticipated  that the
Partnership's  remaining  obligation,  discussed  above,  would  be  retired  in
conjunction with such Liquidation. Implementation of the liquidation was delayed
by a  lawsuit,  which has been  dismissed.  There can be no  assurance  that the
Liquidation  will  be  completed   pursuant  to  the  Plan  of  Liquidation  and
Dissolution.

     The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient  cash is available for operating  requirements.
For the six month  period ended June 30,  2004,  net cash  provided by investing
activities was adequate to support  operating cash  requirements.  Cash and cash
equivalents  increased $253,618 during the six month period ended June 30, 2004,
primarily  due  sales  proceeds  received  from  the  sale of the  Partnership's
interest  in The Pointe  and the  receipt of  distributions  from  partnerships,
partially offset by net cash used in operating activities.

     The  Managing  General  Partner  currently  intends  to  retain  all of the
Partnership's  remaining  undistributed  cash  for the  possible  prepayment  or
payment of the  Partnership's  outstanding  purchase money note, for its Plan of
Liquidation, and for operating cash reserves.

                              Results of Operations
                              ---------------------

     The  Partnership  recognized  net income of $1,944,374  for the three month
period  ended  June  30,  2004,   compared  to  net  loss  of  $45,979  for  the
corresponding period in 2003, primarily due to gain on disposition of investment
in partnership  related to the sale of the Partnership's  interest in The Pointe
in June 2004, a decrease in professional  legal fees due to the dismissal of the
lawsuit related to the  Partnership's  proxy for liquidation of the Partnership,
and nominal decreases in interest expense,  general and administrative expenses,
and amortization of deferred costs.  Partially  offsetting the net income were a
decrease in share of income from  partnerships  due to the cessation of share of
income from Semper  Village  which was  accounted for under the equity method in
2003,  but for which the equity  method was  suspended  in 2004 as result of the
Partnership's  investment basis being reduced to zero by operating losses at the
property, and a nominal decrease in interest revenue.

                                      -12-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
          of Financial Condition and Results of Operations - Continued


     The  Partnership  recognized  net  income of  $1,776,610  for the six month
period  ended  June  30,  2004,  compared  to  net  loss  of  $298,194  for  the
corresponding period in 2003, primarily due to gain on disposition of investment
in partnership and a decrease in professional  legal fees, as discussed above, a
decrease in interest  expense due to lower  purchase  money note  balances,  and
nominal  decreases in general and  administrative  expenses and  amortization of
deferred costs.  Partially offsetting the net income were a decrease in share of
income from partnerships, as discussed above, and a nominal decrease in interest
revenue.

     For financial reporting purposes, the Partnership,  as a limited partner in
the Local  Partnerships,  does not record losses from the Local  Partnerships in
excess of its  investment  to the  extent  that the  Partnership  has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result,  the  Partnership's  share of income from partnerships for the three and
six month  periods ended June 30, 2004,  did not include  losses of $100,465 and
$200,930  respectively,  compared to excluded  losses of $38,628 and $58,896 for
the three and six month periods ended June 30, 2003, respectively.

     No other  significant  changes in the  Partnership's  operations have taken
place during the six month period ended June 30, 2004.


Item 3. Controls and Procedures

     In July  2004,  representatives  of the  Managing  General  Partner  of the
Partnership  carried out an  evaluation of the  effectiveness  of the design and
operation of the Partnership's  disclosure controls and procedures,  pursuant to
Exchange Act Rules  13a-15 and 15d-15.  The  Managing  General  Partner does not
expect that the  Partnership's  disclosure  controls and procedures will prevent
all error and all fraud.  A control  system,  no matter how well  conceived  and
operated,  can provide only  reasonable  assurance  that the  objectives  of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource  constraints,  and the benefits of controls must be
considered relative to their costs.  Because of the inherent  limitations in all
control systems,  no evaluation of controls can provide absolute  assurance that
all control issues have been detected.  These inherent  limitations  include the
realities that judgments in  decision-making  can be faulty, and that breakdowns
can occur  because  of simple  error or  mistake.  The  design of any  system of
controls also is based in part upon certain  assumptions about the likelihood of
future  events,  and there can be no  assurance  that any design will succeed in
achieving its stated goals under all  potential  future  conditions.  Over time,
controls may become inadequate  because of changes in conditions,  or the degree
of compliance  with the policies or procedures may  deteriorate.  Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or fraud may occur and not be detected. Based on the July 2004 evaluation,
and subject to the  foregoing,  the  Principal  Executive  Officer and Principal
Financial  Officer  concluded  that the  Partnership's  disclosure  controls and
procedures  are effective as of the end of the period  covered by this report to
alert  them in a timely  manner  to any  material  information  relating  to the
Partnership that must be included in the Partnership's periodic SEC filings, and
particularly  during  the  period in which  this  report is being  prepared.  In
addition,  there have been no significant changes in the Partnership's  internal
control over financial  reporting that occurred  during the  Partnership's  most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Partnership's internal control over financial reporting.


Part II. OTHER INFORMATION
Item 3. Defaults upon Senior Securities

     See Note 2.a. of the notes to  financial  statements  contained  in Part I,
Item 1, hereof,  for  information  concerning the  Partnership's  default on one
purchase money note.

                                      -13-

<PAGE>
Part II. OTHER INFORMATION
Item 5. Other Information


     There is no  established  market for the  purchase  and sale of  Beneficial
Assignee  Certificates  (BACs),   although  various  informal  secondary  market
services exist. Due to the limited markets, however,  investors may be unable to
sell or otherwise dispose of their BACs.

                           Unregistered tender offers
                           --------------------------

     On September 15, 2003, Equity Resource  Arlington Fund Limited  Partnership
(Arlington)  initiated an unregistered tender offer to purchase up to 215 of the
outstanding BAC units at a price of $350 per unit; the offer expired October 15,
2003. On January 10, 2003,  Arlington  initiated an unregistered tender offer to
purchase up to 369 of the outstanding BAC units at a price of $350 per unit; the
offer expired February 10, 2003.  Arlington is unaffiliated with the Partnership
or the Managing  General Partner.  The prices offered were determined  solely at
the  discretion  of Arlington and do not  necessarily  represent the fair market
value of each BAC.

     On  January  21,  2003,   Peachtree  Partners   (Peachtree)   initiated  an
unregistered  tender offer to purchase an  unspecified  number of BAC units at a
price of $375  per  unit;  the  offer  expired  March  12,  2003.  Peachtree  is
unaffiliated  with the Partnership or the Managing  General  Partner.  The price
offered  was  determined  solely at the  discretion  of  Peachtree  and does not
necessarily represent the fair market value of each BAC.

     The  Managing  General  Partner did not  express  any opinion and  remained
neutral  toward  the  unregistered  tender  offers  for the  purchase  of  Units
described above.


Item 6. Exhibits and Reports on Form 8-K

     a.   Exhibits

          Exhibit No.    Description
          -----------    -----------

              31.1       Certification of Principal Executive Officer, pursuant
                         to 18 U.S.C. Section 1350, as adopted pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.

              31.2       Certification of Principal Financial Officer, pursuant
                         to 18 U.S.C. Section 1350, as adopted pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.

              32         Certification of Principal Executive
                         Officer and Principal Financial Officer,
                         pursuant to 18 U.S.C. Section 1350, as
                         adopted pursuant to Section 906 of the
                         Sarbanes-Oxley Act of 2002.

     b.   No reports of on Form 8-K were  filed with the  Commission  during the
          quarter ended June 30, 2004.

All other Items are not applicable.

                                      -14-

<PAGE>
                                    SIGNATURE


     In accordance  with the  requirements  of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                                  CAPITAL REALTY INVESTORS-85 LIMITED
                                      PARTNERSHIP
                                  ----------------------------------------------
                                  (Registrant)

                                  by:  C.R.I., Inc.
                                       -----------------------------------------
                                       Managing General Partner




August 3, 2004                         by:  /s/ Michael J. Tuszka
--------------                              ------------------------------------
DATE                                        Michael J. Tuszka
                                              Vice President
                                              and Chief Accounting Officer
                                              (Principal Financial Officer
                                              and Principal Accounting Officer)

                                      -15-