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








                    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, 2001


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



                         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, 2001


                                                                           PAGE



PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

           Balance Sheets
              - June 30, 2001 and December 31, 2000........................   1

           Statements of Operations and Accumulated Losses
              - for the three and six months ended June 30, 2001 and 2000 .   2

           Statements of Cash Flows
              - for the six months ended June 30, 2001 and 2000............   3

           Notes to  Financial Statements
              - June 30, 2001 and 2000.....................................   4

Item 2.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations....................................   9


PART II - OTHER INFORMATION

Item 3.    Defaults Upon Senior Securities.................................  11

Item 5.    Other Information...............................................  11

Item 6.    Exhibits and Reports on Form 8-K................................  12

Signature     .............................................................  13

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


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                                 BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                        June 30,      December 31,
                                                                                         2001            2000
                                                                                      -----------     -----------
                                                                                      (Unaudited)
<S>                                                                                   <C>             <C>
Investments in and advances to partnerships .......................................   $  1,151,604    $    588,661
Cash and cash equivalents .........................................................      8,312,268       8,501,288
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $118,173 and $114,318, respectively ..........        113,182         117,037
Property purchase costs,
  net of accumulated amortization of $107,860 and $104,380 respectively ...........        100,901         104,381
Other assets ......................................................................          1,541           3,444
                                                                                      ------------    ------------

      Total assets ................................................................   $  9,679,496    $  9,314,811
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $  2,522,600    $  2,522,600
Accrued interest payable ..........................................................      9,657,147       8,923,271
Accounts payable and accrued expenses .............................................         61,298          78,324
                                                                                      ------------    ------------

      Total liabilities ...........................................................     12,241,045      11,524,195
                                                                                      ------------    ------------

Commitments and contingencies

Partners' capital (deficit):

  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 .........................................     (4,908,656)     (4,908,656)
    Offering costs ................................................................     (2,570,535)     (2,570,535)
    Accumulated losses ............................................................    (16,286,858)    (15,934,693)
                                                                                      ------------    ------------

      Total partners' deficit .....................................................     (2,561,549)     (2,209,384)
                                                                                      ------------    ------------

      Total liabilities and partners' deficit .....................................   $  9,679,496    $  9,314,811
                                                                                      ============    ============
</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,
                                                 -----------------------------   ----------------------------
                                                     2001             2000           2001            2000
                                                 ------------    -------------   ------------    ------------
<S>                                              <C>             <C>             <C>             <C>
Share of income from partnerships ............   $    174,106    $     64,022    $    304,935    $     90,565
                                                 ------------    ------------    ------------    ------------

Other revenue and expenses:

 Revenue:
    Interest .................................         82,350         126,169         189,406         242,204
                                                 ------------    ------------    ------------    ------------

  Expenses:
    Interest .................................        366,938         324,284         733,876         648,567
    General and administrative ...............         32,878          37,451          68,975          73,256
    Management fee ...........................         24,480          24,483          48,960          48,965
    Professional fees ........................         17,137          15,567          34,275          31,133
    Amortization of deferred costs ...........          3,668           3,668           7,335           7,335
                                                 ------------    ------------    ------------    ------------

                                                      445,101         405,453         893,421         809,256
                                                 ------------    ------------    ------------    ------------

      Total other revenue and expenses .......       (362,751)       (279,284)       (704,015)       (567,052)
                                                 ------------    ------------    ------------    ------------

Loss before extraordinary gain
  from extinguishment of debt ................       (188,645)       (215,262)       (399,080)       (476,487)

Extraordinary gain from extinguishment of debt           --              --            46,915            --
                                                 ------------    ------------    ------------    ------------

Net loss .....................................       (188,645)       (215,262)       (352,165)       (476,487)

Accumulated losses, beginning of period ......    (16,098,213)    (15,371,621)    (15,934,693)    (15,110,396)
                                                 ------------    ------------    ------------    ------------

Accumulated losses, end of period ............   $(16,286,858)   $(15,586,883)   $(16,286,858)   $(15,586,883)
                                                 ============    ============    ============    ============


Net loss allocated to General
  Partners (1.51%) ...........................   $     (2,849)   $     (3,250)   $     (5,318)   $     (7,195)
                                                 ============    ============    ============    ============

Net loss allocated to Initial and Special
  Limited Partners (2.49%) ...................   $     (4,697)   $     (5,360)   $     (8,769)   $    (11,865)
                                                 ============    ============    ============    ============

Net loss allocated to BAC Holders (96%) ......   $   (181,099)   $   (206,652)   $   (338,078)   $   (457,427)
                                                 ============    ============    ============    ============

Net loss per BAC based on 21,158 BACs
  outstanding ................................   $      (8.56)   $      (9.77)   $     (15.98)   $     (21.62)
                                                 ============    ============    ============    ============
</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,
                                                                                   ---------------------------
                                                                                       2001           2000
                                                                                   ------------   ------------
<S>                                                                                <C>            <C>
Cash flows from operating activities:
  Net loss .....................................................................   $  (352,165)   $  (476,487)

  Adjustments to reconcile  net loss to net cash provided by (used in) operating
    activities:
    Share of income from partnerships ..........................................      (304,935)       (90,565)
    Amortization of deferred costs .............................................         7,335          7,335
    Extraordinary gain from extinguishment of debt .............................       (46,915)          --

    Changes in assets and liabilities:
      Increase in accrued interest receivable on advances to partnerships ......       (11,813)       (11,988)
      Decrease (increase) in other assets ......................................         1,903         (1,445)
      Increase in accrued interest payable .....................................       733,876        648,567
      Payment of purchase money note interest ..................................          --          (17,771)
      Decrease in accounts payable and accrued expenses ........................       (17,026)       (58,535)
                                                                                   -----------    -----------

        Net cash provided by (used in) operating activities ....................        10,260           (889)
                                                                                   -----------    -----------


Cash flows from investing activities:
  Additional investment in partnership .........................................      (575,000)          --
  Receipt of distributions from partnerships ...................................       375,720        116,598
                                                                                   -----------    -----------

        Net cash (used in) provided by investing activities ....................      (199,280)       116,598
                                                                                   -----------    -----------

Net (decrease) increase in cash and cash equivalents ...........................      (189,020)       115,709

Cash and cash equivalents, beginning of period .................................     8,501,288      8,086,701
                                                                                   -----------    -----------

Cash and cash equivalents, end of period .......................................   $ 8,312,268    $ 8,202,410
                                                                                   ===========    ===========
</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, 2001 and 2000

                                   (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, 2001, and the results of its operations for the three and six months
ended June 30, 2001 and 2000,  and its cash flows for the six months  ended June
30, 2001 and 2000. The results of operations for the interim  periods ended June
30, 2001, 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
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 have been  condensed  or omitted  pursuant to such  instructions.
These  condensed  financial  statements  should be read in conjunction  with the
consolidated   financial   statements   and  notes   thereto   included  in  the
Partnership's annual report on Form 10-KSB at December 31, 2000.


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 purchase money notes having an aggregate principal
balance of $2,348,000 plus aggregate  accrued  interest of $9,581,747 as of June
30, 2001,  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 the  Paradise  Associates,  L.P.  (Paradise  Foothills)
property, in the principal amount of $230,000,  matured on January 30, 1996, but
has not been paid or extended,  as discussed below. The two purchase money notes
related  to Willow  Creek II  Limited  Partnership  (Willow  Creek  II),  in the
aggregate principal amount of $1,475,000,  matured on January 14, 2001, but have
not been paid or extended,  as discussed  below. The purchase money note related
to Mesa Partners Limited  Partnership  (The Pointe),  in the principal amount of
$643,000, matures in 2003.

     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.

                                       -4-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2001 and 2000

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     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.  However,  if these notes
remain  unpaid,  the  noteholders  may  have  the  right  to  foreclose  on  the
Partnership's  interest in the  related  Local  Partnerships.  In the event of a
foreclosure, the excess of the nonrecourse indebtedness over the carrying amount
of the Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness  income, which would be taxable to Limited Partners
at a  federal  tax  rate  of  up to  39.6%.  Additionally,  in  the  event  of a
foreclosure,  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
and  six  month   periods  ended  June  30,  2001  was  $366,938  and  $733,876,
respectively,  and $324,284  and  $648,567  for the three and six month  periods
ended June 30, 2000, respectively.  The accrued interest payable on the purchase
money notes of  $9,581,747  and  $8,847,871 as of June 30, 2001 and December 31,
2000,  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.  The
default amount included principal and accrued interest of $230,000 and $371,464,
respectively.  As of August 1, 2001,  principal  and accrued  interest  totaling
$230,000 and  $786,834,  respectively,  were due. The Managing  General  Partner
proposed an  extension of the purchase  money note  maturity  date until May 31,
2003,  coterminous  with  the  expiration  of the  related  Local  Partnership's
provisional  workout  agreement  related to its mortgage  loan.  As of August 1,
2001,  the  Managing  General  Partner  continues  to await a response  from the
purchase  money  noteholder.  There is no assurance  that the  Managing  General
Partner will reach an agreement of any kind with the noteholder. The Partnership
did not receive any distributions  from Paradise  Foothills during the six month
periods  ended June 30, 2001 and 2000,  and its  aggregate  share of income from
this Local  Partnership was $0 for the six month periods ended June 30, 2001 and
2000.

     The local managing  general  partner is exploring  options to refinance the
mortgage loan. As of August 1, 2001, the local managing  general partner has not
received a commitment for a refinancing.

                                       -5-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2001 and 2000

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     The  amount  due to a  local  general  partner  of  Paradise  Foothills  of
$174,600,  plus accrued  interest of $75,400 at June 30, 2001, will be paid upon
the  occurrence  of  specified  events,  as  outlined  in the  respective  Local
Partnership's partnership agreement.

                                 WILLOW CREEK II
                                 ---------------

     The Partnership defaulted on its two purchase money notes related to Willow
Creek II on  January  14,  2001 when the notes  matured  and were not paid.  The
default  amount  included  principal  and  accrued  interest of  $1,475,000  and
$7,583,743,  respectively.  As of August 1, 2001, principal and accrued interest
totaling  $1,475,000  and  $8,271,493  were  due.  On  February  28,  2001,  the
Partnership  offered the  noteholders a discounted  payoff of the purchase money
notes, which offer the noteholders  countered on April 25, 2001. As of August 1,
2001,  the  Partnership   continues  to  negotiate  settlement  terms  with  the
noteholders.  There is no assurance that the Managing General Partner will reach
an  agreement  of any  kind  with  the  noteholders.  The  Partnership  received
distributions  from Willow Creek II of $86,289 and $116,598 during the six month
periods ended June 30, 2001 and 2000, respectively, and its share of income from
this Local  Partnership  was  $73,508 and  $103,487  for the three and six month
periods ended June 30, 2001, respectively, and $64,022 and $90,741 for the three
and six month periods ended June 30, 2000, respectively.

b.   ADDITIONAL INVESTMENT IN LOCAL PARTNERSHIP
     ------------------------------------------

     The Partnership has an investment in Sheridan West L.P. (Semper), the Local
Partnership which owns Semper Village Apartments in Westminster,  Colorado.  The
Local Partnership, in turn, was the maker of two purchase money notes related to
the acquisition of the property. The security for these two purchase money notes
included the  Partnership's  limited partner interest in Semper.  In conjunction
with the discounted  payoff of these two purchase money notes, in December 2000,
the Partnership agreed to make an additional  investment in Semper in the amount
of $574,000,  which amount was disbursed to Semper in January 2001.  Semper,  in
turn,  paid off the two purchase  money notes at a discount in January 2001. The
discounted  payoff of the purchase  money notes resulted in  extraordinary  gain
from extinguishment of debt of $46,915 for financial statement purposes in 2001.

     The  Partnership  also  agreed to  purchase  for $1,000  the 0.01%  general
partner  interest in Semper held by the  developer  and original  local  general
partner of Semper.  This agreement was made in December 2000, and the funds were
disbursed in January 2001. The Local Partnership has converted the 0.01% general
partner interest to a limited partner  interest,  so the Partnership now holds a
99.00% limited partner interest in Semper.

                                       -6-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2001 and 2000

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

c.   ADVANCES TO LOCAL PARTNERSHIP
     -----------------------------

     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 $262,500 to the
Local  Partnership in 1987.  Repayment of this loan,  with simple interest at 9%
per annum, is expected to occur upon sale or refinancing of the property.  As of
June 30, 2001 and December 31, 2000, accrued interest was $328,501 and $316,688,
respectively.

d.   PROPERTY MATTERS
     ----------------

     The local managing  general partner of The Pointe received a default notice
on May 25,  2001,  with  respect to a  subordinate  note which is secured by the
economic interests of the partners in the Pointe. The alleged default relates to
monthly debt service  payments out of surplus cash, and the alleged  overfunding
of the replacement  reserve account.  The Local Partnership resumed debt service
payments in June, and the local managing general partner is negotiating with the
holder of the subordinate note to obtain a retraction of the default notice.

e.   SUMMARIZED FINANCIAL INFORMATION
     --------------------------------

     Combined  statements of operations for the four Local Partnerships in which
the Partnership is invested as of June 30, 2001 and 2000,  follow.  The combined
statements have been compiled from information supplied by the management agents
of the projects and are unaudited.

<TABLE>
<CAPTION>


                        COMBINED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                       For the three months ended         For the six months ended
                                                 JUNE 30,                          JUNE 30,
                                       ---------------------------       ---------------------------
                                          2001             2000             2001             2000
                                       ----------       ----------       ----------       ----------
<S>                                    <C>              <C>              <C>              <C>
Revenue:
  Rental                               $1,547,543       $1,468,849       $3,088,138       $2,920,727
  Other                                    96,031          101,975          191,692          202,904
                                       ----------       ----------       ----------       ----------

     Total revenue                      1,643,574        1,570,824        3,279,830        3,123,631
                                       ----------       ----------       ----------       ----------

Expenses:
  Operating                               738,215          731,938        1,513,084        1,483,537
  Interest                                507,927          513,075        1,015,853        1,026,149
  Depreciation and amortization           277,164          271,231          554,327          542,462
                                       ----------       ----------       ----------       ----------

     Total expenses                     1,523,306        1,516,244        3,083,264        3,052,148
                                       ----------       ----------       ----------       ----------

Net income                             $  120,268       $   54,580       $  196,566       $   71,483
                                       ==========       ==========       ==========       ==========
</TABLE>


                                       -7-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2001 and 2000

                                   (Unaudited)


     As of June 30, 2001 and 2000, the Partnership's  share of cumulative losses
to date for two and three, respectively,  of the Local Partnerships exceeded the
amount  of  the  Partnership's  investments  in  and  advances  to  those  Local
Partnerships by $6,664,237 and $6,687,901,  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 $21,241 and
$51,831 for the three and six month periods  ended June 30, 2001,  respectively,
and $22,184 and $46,755 for the three and six month periods ended June 30, 2000,
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 and
$48,960 for the three and six month periods  ended June 30, 2001,  respectively,
and $24,483 and $48,965 for the three and six month periods ended June 30, 2000,
respectively.



                                      # # #

                                       -8-

<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 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.

                          FINANCIAL CONDITION/LIQUIDITY
                          -----------------------------

     The Partnership's liquidity, with unrestricted cash resources of $8,312,268
as of June 30, 2001, 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 1, 2001,  there were no material  commitments
for capital expenditures.

     The  Partnership's  obligations  with respect to its  investments  in Local
Partnerships,  in the form of purchase money notes having an aggregate principal
balance of $2,348,000 plus aggregate  accrued  interest of $9,581,747 as of June
30, 2001,  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 the  Paradise  Associates,  L.P.  (Paradise  Foothills)
property, in the principal amount of $230,000,  matured on January 30, 1996, but
has not been paid or extended.  The two purchase  money notes  related to Willow
Creek II Limited  Partnership  (Willow  Creek II),  in the  aggregate  principal
amount of  $1,475,000,  matured on January 14,  2001,  but have not been paid or
extended.  The purchase money note related to Mesa Partners Limited  Partnership
(The Pointe),  in the principal  amount of $643,000,  matures in 2003.  See Note
2.a. of the notes to financial  statements  contained in Part I, Item 1, hereof,
for additional  information concerning the Partnership's default on the purchase
money notes related to Paradise Foothills and Willow Creek II.

     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.

     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.  However,  if these notes
remain  unpaid,  the  noteholders  may  have  the  right  to  foreclose  on  the
Partnership's  interest in the  related  Local  Partnerships.  In the event of a
foreclosure, the excess of the nonrecourse indebtedness over the carrying amount
of the Partnership's investment in the related Local Partnership would be deemed
cancellation of

                                       -9-

<PAGE>
PART I. FINANCIAL INFORMATION

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


indebtedness income, which would be taxable to Limited Partners at a federal tax
rate  of  up  to  39.6%.  Additionally,  in  the  event  of a  foreclosure,  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.

     The  Managing  General  Partner  is  continuing  to  investigate   possible
alternatives to reduce the Partnership's  debt obligations.  These  alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note  requirements,  paying off certain purchase money notes at a
discounted  price,  extending the due dates of certain  purchase money notes, or
refinancing   the  respective   properties'   underlying   debt  and  using  the
Partnership's  share of the  proceeds  to pay off or pay down  certain  purchase
money note obligations.

     Included in due on investments in  partnerships  is $174,600 due to a local
general  partner  related  to  Paradise  Foothills  at both June 30,  2001,  and
December 31, 2000; accrued interest payable thereon was $75,400 at both June 30,
2001,  and December 31, 2000.  These amounts will be paid upon the occurrence of
certain  specified  events,  as outlined in the respective  Local  Partnership's
partnership agreement.

     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  periods  ended  June 30,  2001 and  2000,  cash  provided  by
operating  activities and the receipt of distributions  from  partnerships  were
adequate  to support  operating  cash  requirements.  Cash and cash  equivalents
decreased  during  the six  months  ended  June 30,  2001,  primarily  due to an
additional  investment  in Sheridan West L.P.  (Semper),  which was disbursed in
January 2001.

     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.

                              RESULTS OF OPERATIONS
                              ---------------------

     The  Partnership's  net loss for the three and six month periods ended June
30, 2001  decreased from the  corresponding  periods in 2000 primarily due to an
increase in share of income from  partnerships  as a result of higher  operating
income at one property  which had  previously  been excluded due to  accumulated
unallowable  losses.  Contributing  to the decrease in net loss for both periods
was a decrease in general  and  administrative  expenses  due to lower costs for
annual  reporting;  contributing  to the  decrease in net loss for the six month
period was  extraordinary  gain from  extinguishment  of debt related to Semper.
Offsetting  the  decrease  in the  Partnership's  net loss were an  increase  in
interest  expense on purchase money notes due to the compounding of interest and
a decrease in interest  revenue due to lower cash and cash  equivalent  balances
and lower interest rates in 2001.

     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,  2001 did not  include  losses of $60,704 and
$121,401, respectively,  compared to excluded losses of $80,799 and $161,595 for
the three and six month periods ended June 30, 2000, respectively.

     No other  significant  changes in the  Partnership's  operations have taken
place during this period.


                                      -10-

<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 default on certain
purchase money notes.


Item 5. Other Information

     There is no established market for the purchase and sale of 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.

     On January 26, 2001, Equity Resources Lexington Fund (Lexington)  initiated
an unregistered  tender offer to purchase up to 994 of the outstanding BAC units
at a price of $125 per unit;  the offer expired  February 26, 2001. On April 23,
2001,  Lexington initiated an unregistered tender offer to purchase up to 589 of
the outstanding BAC units at a price of $150 per unit; the offer expired May 22,
2001.  On June 22, 2001,  Lexington  initiated an  unregistered  tender offer to
purchase up to 330 of the outstanding BAC units at a price of $225 per unit; the
offer expired July 22, 2001.  Lexington is unaffiliated  with the Partnership or
the Managing General Partner.  The prices offered were determined  solely at the
discretion of Lexington and do not  necessarily  represent the fair market value
of each BAC.

     On May 14,  2001,  Bond  Purchase,  L.L.C.  (Bond  Purchase)  initiated  an
unregistered  tender offer to purchase up to 1,000 of the  outstanding BAC units
at a price of $156 per unit;  the offer expired June 30, 2001.  Bond Purchase is
unaffiliated  with the Partnership or the Managing  General  Partner.  The price
offered was  determined  solely at the  discretion of Bond Purchase and does not
necessarily represent the fair market value of each BAC.

     On June 8, 2001, Peachtree Partners  (Peachtree)  initiated an unregistered
tender  offer to  purchase a limited  number of the  outstanding  BAC units at a
price  of  $200  per  unit;  the  offer  expired  July  6,  2001.  Peachtree  in
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.

     Although  previously  the Managing  General  Partner had not  expressed any
opinion toward any offer for the purchase of BACs such as those described above,
on May 25, 2001, and July 9, 2001, the Managing  General Partner sent letters to
all BAC holders  recommending  that the May 14 tender offer by Bond Purchase and
the June 22 tender offer by Lexington be rejected as inadequate in price.

     During 2001, a number of investors sold their BAC units in the  Partnership
to other investors, as a result of unregistered tender offers. If more than five
percent of the total  outstanding  BAC units in the  Partnership are transferred
due to sale in any one calendar year (not counting  certain  exempt  transfers),
the  Partnership  could  be  taxed  as a  "publicly  traded  partnership,"  with
potentially  severe tax  implications  for the  Partnership  and its  investors.
Specifically,  the Partnership  could be taxed as a corporation  and, if so, the
income and losses from the  Partnership  would no longer be considered a passive
activity.  From January 1, 2001, through June 27, 2001, the Partnership received
sale transfer  requests for  approximately  4.6% of the  outstanding  BAC units.
Accordingly,  to remain within the five percent safe harbor,  effective June 27,
2001,  the Managing  General  Partner  halted  recognition of any transfers that
would exceed the safe harbor  limit  through  December  31,  2001.  As a result,
transfers of BAC units due to sales transactions are not being recognized by the
Partnership between June 28, 2001 and December 31, 2001. The halt will be lifted
effective January 1, 2002.

                                      -11-

<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K

     a.   None

     b.   A report on Form 8-K was dated  May 14,  2001 and filed May 24,  2001;
          the report discussed a tender offer initiated by Bond Purchase, L.L.C.
          on May  14,  2001.  See  Part  II,  Item  5,  hereof,  for  additional
          information concerning the tender offer.

     All other items are not applicable.

                                      -12-

<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 1, 2001                by:  /S/ MICHAEL J. TUSZKA
------------------                 ---------------------------------------------
DATE                               Michael J. Tuszka
                                     Vice President
                                     and Chief Accounting Officer
                                     (Principal Financial Officer
                                     and Principal Accounting Officer)

                                      -13-