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

                          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 March 31, 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 MARCH 31, 2004



                                                                           Page


Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Balance Sheets
           - March 31, 2004 and December 31, 2003.........................  1

         Statements of Operations and Accumulated Losses
           - for the three months ended March 31, 2004 and 2003 ..........  2

         Statements of Cash Flows
           - for the three months ended March 31, 2004 and 2003...........  3

         Notes to  Financial Statements
           - March 31, 2004 and 2003......................................  4

Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................... 10

Item 3.  Controls and Procedures.......................................... 12


Part II - OTHER INFORMATION

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

Item 5.  Other Information................................................ 13

Item 6.  Exhibits and Reports on Form 8-K................................. 13

Signature................................................................. 14


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


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                        March 31,     December 31,
                                                                                          2004            2003
                                                                                      -------------   ------------
                                                                                       (Unaudited)
<S>                                                                                   <C>             <C>
Investments in and advances to partnerships held for sale .........................   $    803,730    $    776,410
Cash and cash equivalents .........................................................      2,865,200       3,470,418
Notes receivable from local managing general partner ..............................        496,460              --
Other assets ......................................................................             46              48
                                                                                      ------------    ------------

      Total assets ................................................................   $  4,165,436    $  4,246,876
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' CAPITAL


Due on investments in partnerships ................................................   $  1,047,600    $  1,047,600
Accrued interest payable ..........................................................      2,075,197       2,024,065
Accounts payable and accrued expenses .............................................        202,592         167,400
                                                                                      ------------    ------------

      Total liabilities ...........................................................      3,325,389       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 ............................................................    (12,671,545)    (12,503,781)
                                                                                      ------------    ------------

      Total partners' capital .....................................................        840,047       1,007,811
                                                                                      ------------    ------------

      Total liabilities and partners' capital .....................................   $  4,165,436    $  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
                                                                                March 31,
                                                                     ----------------------------
                                                                         2004            2003
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
Share of income (loss) from partnerships .........................   $     21,414    $    (83,735)
                                                                     ------------    ------------

Other revenue and expenses:

  Revenue:
    Interest .....................................................         11,263          15,067
                                                                     ------------    ------------

  Expenses:
    Interest .....................................................         51,132          60,932
    General and administrative ...................................         51,201          49,981
    Management fee ...............................................         24,480          24,480
    Professional fees ............................................         73,628          45,250
    Amortization of deferred costs ...............................             --           2,904
                                                                     ------------    ------------

                                                                          200,441         183,547
                                                                     ------------    ------------

      Total other revenue and expenses ...........................       (189,178)       (168,480)
                                                                     ------------    ------------

Net loss .........................................................       (167,764)       (252,215)

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

Accumulated losses, end of period ................................   $(12,671,545)   $(12,066,147)
                                                                     ============    ============



Net loss allocated to General Partners (1.51%) ...................   $     (2,533)   $     (3,808)
                                                                     ============    ============


Net loss allocated to Initial and Special Limited Partners (2.49%)   $     (4,177)         (6,280)
                                                                     ============    ============


Net loss allocated to BAC Holders (96%) ..........................   $   (161,054)   $   (242,127)
                                                                     ============    ============


Net loss per BAC, based on 21,158 BACs outstanding ...............   $      (7.61)   $     (11.44)
                                                                     ============    ============
</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 three months ended
                                                                                         March 31,
                                                                                ---------------------------
                                                                                   2004            2003
                                                                                -----------    ------------
<S>                                                                             <C>            <C>
Cash flows from operating activities:
  Net loss ..................................................................   $  (167,764)   $  (252,215)

  Adjustments to reconcile net loss to net cash used in operating activities:
    Share of (income) loss from partnerships ................................       (21,414)        83,735
    Amortization of deferred costs ..........................................            --          2,904

    Changes in assets and liabilities:
      Increase in accrued interest receivable on advances to partnerships ...        (6,617)        (7,156)
      Decrease in other assets ..............................................             2             56
      Increase in accrued interest payable ..................................        51,132         60,932
      Increase (decrease) in accounts payable and accrued expenses ..........        35,192        (29,955)
                                                                                -----------    -----------

        Net cash used in operating activities ...............................      (109,469)      (141,699)
                                                                                -----------    -----------

Cash flows from investing activities:
  Loans to local managing general partner ...................................      (495,749)            --
  Advance to Local Partnership ..............................................            --       (100,000)
                                                                                -----------    -----------

        Net cash used in investing activities ...............................      (495,749)      (100,000)
                                                                                -----------    -----------

Net decrease in cash and cash equivalents ...................................      (605,218)      (241,699)

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

Cash and cash equivalents, end of period ....................................   $ 2,865,200    $ 3,671,768
                                                                                ===========    ===========

</TABLE>

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

                                       -3-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             March 31, 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 March 31, 2004,  and the results of its operations and its cash flows for the
three month periods ended March 31, 2004 and 2003. The results of operations for
the interim period ended March 31, 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 March 31, 2004,
the   Partnership's   maximum  loss  exposure  related  to  its  investments  in
partnerships is limited to the remaining balance of $803,730.


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS

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

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

     The  Partnership's  obligations  with respect to its  investments  in Local
Partnerships,  in the  form  of  nonrecourse  purchase  money  notes  having  an
aggregate  principal  balance of $873,000  plus  aggregate  accrued  interest of
$1,999,797  as of March 31, 2004,  are payable in full upon the earliest of: (i)
sale or refinancing of the respective Local Partnership's rental property;  (ii)
payment in full of the respective Local  Partnership's  permanent loan; or (iii)
maturity.  The purchase money note related to Mesa Residential  Partners Limited
Partnership  (formerly Mesa Partners Limited  Partnership) (The Pointe),  in the
principal amount of $643,000,  which matured June 30, 2003, has been extended to
September 30, 2004. The remaining purchase money note matures in 2008.

                                       -4-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             March 31, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     The purchase money notes,  which are  nonrecourse to the  Partnership,  are
generally  secured  by  the  Partnership's  interest  in  the  respective  Local
Partnerships.  There is no assurance  that the underlying  properties  will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes'  principal and accrued  interest when due. If a 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
the  respective  Local  Partnership.  In the event  that a  purchase  money note
remains unpaid upon maturity,  the noteholder may have the right to foreclose on
the Partnership's interest in the related Local Partnership.

     The  Partnership's  inability  to pay  certain of the  purchase  money note
principal and accrued interest balances when due, and the resulting  uncertainty
regarding the Partnership's  continued  ownership  interest in the related Local
Partnerships,  does not adversely impact the Partnership's  financial  condition
because the  purchase  money  notes are  nonrecourse  and secured  solely by the
Partnership's interest in the related Local Partnerships.  Therefore, should the
investment in any of the Local  Partnerships  with matured or maturing  purchase
money notes not produce  sufficient  value to satisfy the related purchase money
notes, the  Partnership's  exposure to loss is limited because the amount of the
nonrecourse indebtedness of each of the matured or maturing purchase money notes
exceeds the carrying  amount of the  investment in, and advances to, each of the
related Local  Partnerships.  Thus,  even a complete  loss of the  Partnership's
interest in one of these Local  Partnerships  would not have a material  adverse
impact  on the  financial  condition  of the  Partnership.  In  the  event  of a
foreclosure or other transfer of the Partnership's  interest,  the excess of the
nonrecourse   indebtedness   over  the  carrying  amount  of  the  Partnership's
investment in the related Local  Partnership will result in a taxable gain. This
gain will be taxable to Limited  Partners  at a federal tax rate of up to 25.0%,
as it will reflect recapture of depreciation  deductions claimed in prior years.
Additionally,   in  the  event  of  a  foreclosure  or  other  transfer  of  the
Partnership's  interest,  the Partnership would lose its investment in the Local
Partnership and, likewise,  its share of any future cash flow distributed by the
Local Partnership from rental  operations,  mortgage debt  refinancings,  or the
sale of the real estate.

     Interest  expense on the  Partnership's  purchase money notes for the three
month  periods  ended  March  31,  2004  and  2003,  was  $51,132  and  $60,932,
respectively.  The  accrued  interest  payable on the  purchase  money  notes of
$1,999,797  and  $1,948,665  as  of  March  31,  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
Associates  Limited  Partnership  (Paradise  Foothills) when the note matured on
January 30, 1996, and was not paid. The default  amount  included  principal and
accrued  interest of $230,000 and $371,464,  respectively.  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 did not receive any distributions from
Paradise Foothills during the three month periods ended March 31, 2004 and 2003.
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.

                                       -5-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             March 31, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     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 March 31, 2004 and December 31, 2003, has been  reclassified  to investment
in and advances to partnerships held for sale in the accompanying balance sheets
at March 31, 2004 and December 31, 2003.

     The principal  amount due to a local general partner of Paradise  Foothills
of $174,600,  plus accrued  interest of $75,400 at March 31, 2004,  will be paid
upon the occurrence of specified  events,  as outlined in the  respective  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 has been
extended to September 30, 2004. The  Partnership  has entered into a contract to
sell its interest in The Pointe to an affiliate  of the local  managing  general
partner.  The sale is scheduled to close in the third quarter of 2004.  There is
no  assurance  that the sale of the  Partnership's  interest  in The Pointe will
occur.

     Due to the impending sale of the Partnership's  interest in The Pointe, the
Partnership's  basis  in the  Local  Partnership,  along  with  net  unamortized
acquisition  fees and property  purchase  costs,  which totaled  $54,461 at both
March 31, 2004 and December 31, 2003,  has been  reclassified  to  investment in
partnerships held for sale in the accompanying  balance sheets at March 31, 2004
and December 31, 2003.

                                 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).  The
sale is scheduled to close in August 2004.  There is no assurance  that the sale
of the property will occur.

     Due to the  impending  sale of the  property  related to the  Partnership's
interest in Semper Village,  the Partnership's  basis in the Local  Partnership,
along with net unamortized  acquisition fees and property purchase costs,  which
totaled  $42,667 at March 31, 2004 and December 31, 2003, has been  reclassified
to investment in partnerships  held for sale in the accompanying  balance sheets
at March 31, 2004 and December 31, 2003.

                                       -6-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             March 31, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

                                 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  $706,602  and
$679,282  at March  31,  2004 and  December  31,  2003,  respectively,  has been
reclassified  to investment in  partnerships  held for sale in the  accompanying
balance sheets at March 31, 2004 and December 31, 2003.

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 March 31, 2004 and December 31,
2003,  accrued interest was $393,469 and $387,563,  respectively.  For financial
reporting purposes,  these loans have been reduced to zero by the Partnership as
a result of losses at the related Local Partnership level.

c.   Property Matters
     ----------------

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

     On  July  9,  2003,  the  local  managing  general  partner  of The  Pointe
successfully refinanced the first mortgage loan related to the property owned by
the Pointe. The new first mortgage loan has a balloon maturity in July 2004, and
bears  interest  at 3.37% for the first six  months,  and then at LIBOR plus 225
basis points to maturity.


                                       -7-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             March 31, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

d.   Summarized financial information
     --------------------------------

     Combined  statements of operations for the four Local Partnerships in which
the Partnership was invested as of March 31, 2004 and 2003, follow. 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 two Local  Partnerships  which have  investment  basis
(equity  method),  and for two 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.

<TABLE>
<CAPTION>

                                         COMBINED STATEMENTS OF OPERATIONS
                                                    (Unaudited)

                                                                  For the three months ended
                                                                          March 31,
                                                  -------------------------------------------------------------
                                                             2004                              2003
                                                  ---------------------------       ---------------------------
                                                   Equity                            Equity
                                                   Method          Suspended         Method          Suspended
                                                  ----------       ----------       ----------       ----------
         <S>                                      <C>              <C>              <C>              <C>
         Number of Local Partnerships                2                 2               2                 2
                                                     =                 =               =                 =

         Revenue:
           Rental                                 $  733,678       $  720,317       $  760,066       $  754,337
           Other                                      29,708           73,070           54,025           34,974
                                                  ----------       ----------       ----------       ----------

             Total revenue                           763,386          793,387          814,091          789,311
                                                  ----------       ----------       ----------       ----------

         Expenses:
           Operating                                 402,370          480,717          488,014          388,687
           Interest                                  159,927          242,308          168,130          327,905
           Depreciation and amortization             163,755          171,850          134,285          152,979
                                                  ----------       ----------       ----------       ----------

             Total expenses                          726,052          894,875          790,429          869,571
                                                  ----------       ----------       ----------       ----------

         Net income (loss)                        $   37,334       $ (101,488)      $   23,662       $  (80,260)
                                                  ==========       ==========       ==========       ==========

         Partnership's share of Local
           Partnership net income (loss)          $   27,320       $       --       $   23,421       $       --

         Advance to Paradise Foothills                    --               --               --         (100,000)

         Interest receivable -- The Pointe                --          (5,906)               --          (7,156)
                                                  --------------------------        --------------------------

         Share of income (loss) from
           partnerships                                    $21,414                           $(83,735)
                                                           =======                           ========
</TABLE>


     As of March 31, 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
$7,851,482  and  $7,049,725,  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.

                                       -8-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             March 31, 2004 and 2003

                                   (Unaudited)


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 $40,437 and
$42,837 for the three month periods ended March 31, 2004 and 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.

     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 March 31, 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.

     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,  and the General Partners expect
to receive such  opinion  during the second  quarter of 2004,  at which time the
Partnership will reimburse the General Partners for their costs. A total accrual
of  $138,933  is  included  in  accounts  payable  and  accrued  expenses in the
accompanying  balance  sheet at March 31, 2004, of which $48,503 was expensed in
the three month period ended March 31, 2004, as professional fees.

     In connection with the local managing general partner's discounted purchase
of two bank  loans  owed by the  Local  Partnership,  the  Partnership  advanced
$218,000 in February  2004,  and $277,749 in March 2004,  to the local  managing
general  partner.  Repayment of these loans,  with simple  interest at 1.62% and
1.58% per annum,  respectively,  is  expected  to occur upon the  earlier of (i)
September  30,  2004,  or (ii)  the  date of  sale of (a) the  interests  of the
Partnership  in The Pointe or (b) the real property  owned by The Pointe.  As of
March 31, 2004, accrued interest was $711.

                                      # # #

                                       -9-

<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 $2,865,200
as of March 31, 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 April 29, 2004,  there were no material
commitments for capital expenditures.

     The  Partnership's  obligations  with respect to its  investments  in Local
Partnerships,  in the  form  of  nonrecourse  purchase  money  notes  having  an
aggregate  principal  balance of $873,000,  plus aggregate  accrued  interest of
$1,999,797  as of March 31, 2004,  are payable in full upon the earliest of: (i)
sale or refinancing of the respective Local Partnership's rental property;  (ii)
payment in full of the respective Local  Partnership's  permanent loan; or (iii)
maturity.  The purchase money note related to Mesa Residential  Partners Limited
Partnership  (formerly Mesa Partners Limited  Partnership) (The Pointe),  in the
principal  amount of  $643,000,  has been  extended to September  30, 2004.  The
remaining  purchase  money  note  matures  in 2008.  See the notes to  financial
statements for additional information concerning these purchase money notes.

                                                       -10-

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


     The purchase money notes,  which are  nonrecourse to the  Partnership,  are
generally  secured  by  the  Partnership's  interest  in  the  respective  Local
Partnerships.  There is no assurance  that the underlying  properties  will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes'  principal and accrued  interest when due. If a 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
the  respective  Local  Partnership.  In the event  that a  purchase  money note
remains unpaid upon maturity,  the noteholder may have the right to foreclose on
the Partnership's interest in the related Local Partnership.

     The  Partnership's  inability  to pay  certain of the  purchase  money note
principal and accrued interest balances when due, and the resulting  uncertainty
regarding the Partnership's  continued  ownership  interest in the related Local
Partnerships,  does not adversely impact the Partnership's  financial  condition
because the  purchase  money  notes are  nonrecourse  and secured  solely by the
Partnership's interest in the related Local Partnerships.  Therefore, should the
investment in any of the Local  Partnerships  with matured or maturing  purchase
money notes not produce  sufficient  value to satisfy the related purchase money
notes, the  Partnership's  exposure to loss is limited because the amount of the
nonrecourse indebtedness of each of the matured or maturing purchase money notes
exceeds the carrying  amount of the  investment in, and advances to, each of the
related Local  Partnerships.  Thus,  even a complete  loss of the  Partnership's
interest in one of these Local  Partnerships  would not have a material  adverse
impact  on the  financial  condition  of the  Partnership.  In  the  event  of a
foreclosure or other transfer of the Partnership's  interest,  the excess of the
nonrecourse   indebtedness   over  the  carrying  amount  of  the  Partnership's
investment in the related Local  Partnership will result in a taxable gain. This
gain will be taxable to Limited  Partners  at a federal tax rate of up to 25.0%,
as it will reflect recapture of depreciation  deductions claimed in prior years.
Additionally,   in  the  event  of  a  foreclosure  or  other  transfer  of  the
Partnership's  interest,  the Partnership would lose its investment in the Local
Partnership and, likewise,  its share of any future cash flow distributed by the
Local Partnership from rental  operations,  mortgage debt  refinancings,  or the
sale of the real estate.

     Included in due on investments in  partnerships  is $174,600 due to a local
general  partner  related to  Paradise  Foothills  at both March 31,  2004,  and
December 31, 2003;  accrued  interest  payable thereon was $75,400 at both March
31, 2004, and December 31, 2003.  These amounts will be paid upon the occurrence
of certain specified  events, as outlined in the respective 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 obligations, 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 three month period ended March 31, 2004,  existing cash  resources  were
adequate to support  operating and investing  cash  requirements.  Cash and cash
equivalents  decreased  $605,218  during the three month  period ended March 31,
2004,  primarily  due to operating  expenses  paid in cash and loans made to the
local general  partner of Mesa  Residential  Partners  Limited  Partnership,  as
discussed in Note 3 of the notes to financial statements at March 31, 2004.


                                      -11-

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


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

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

     The Partnership's net loss decreased from the corresponding period in 2003,
primarily due to an increase in share of income from partnerships, a decrease in
interest  expense  due to a reduced  interest  rate on the  purchase  money note
related to Paradise Foothills and a nominal decrease in amortization of deferred
costs;  these factors were partially offset by an increase in professional legal
fees, a nominal  decrease in interest  revenue and a nominal increase in general
and administrative  expenses.  The increase in share of income from partnerships
was  primarily a result of the 2003  reduction  to zero of a $100,000  loan to a
Local Partnership due to losses at the Local Partnership level.

     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 month
periods  ended March 31, 2004 and 2003,  did not include  losses of $100,465 and
$20,268, respectively.

     No other  significant  changes in the  Partnership's  operations have taken
place during the three month period ended March 31, 2004.


Item 3. Controls and Procedures

     In April  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  April  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.

                                      -12-

<PAGE>
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  defaults on one
purchase money note.


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 March 31, 2004.

All other Items are not applicable.

                                      -13-

<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




April 29, 2004                         by:  /s/ Michael J. Tuszka
--------------                              ------------------------------------
DATE                                        Michael J. Tuszka
                                              Vice President
                                              and Chief Accounting Officer
                                              (Principal Financial Officer
                                              and Principal Accounting Officer)

                                      -14-