NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION

American Insured Mortgage Investors - Series 85, L.P. (the Partnership) was formed under the Uniform Limited Partnership Act of the state of California on June 26, 1984. The Partnership will terminate on December 31, 2009, unless previously terminated under the provisions of the Partnership Agreement.

Effective September 6, 1991, CRIIMI, Inc. (the General Partner) succeeded the former general partners to become the sole general partner of the Partnership. CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. (CRIIMI MAE).

The Partnership's investment in mortgages consists of participation certificates evidencing a 100% undivided beneficial interest in government insured multifamily mortgages issued or sold pursuant to Federal Housing Administration (FHA) programs (FHA-Insured Certificates), mortgage-backed securities guaranteed by the Government National Mortgage Association (GNMA) (GNMA Mortgage-Backed Securities) and FHA-insured mortgage loans (FHA-Insured Loans and together with FHA-Insured Certificates and GNMA Mortgage-Backed Securities referred to herein as Insured Mortgages). The mortgages underlying the FHA-Insured Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are non-recourse first liens on multifamily residential developments or retirement homes.

2. BASIS OF PRESENTATION

In the opinion of the General Partner, the accompanying unaudited financial statements contain all adjustments of a normal recurring nature necessary to present fairly the financial position of the Partnership as of June 30, 1997 and December 31, 1996 and the results of its operations for the three and six months ended June 30, 1997 and 1996 and its cash flows for the six months ended June 30, 1997 and 1996.

These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. While the General Partner believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the financial statements and the notes to the financial statements included in the Partnership's Annual Report filed on Form 10-K for the year ended December 31, 1996.

During 1997, FASB issued SFAS No. 129 "Disclosure of Information about Capital Structure" ("FAS 129"). FAS 129 continues the existing requirements to disclose the pertinent rights and privileges of all securities other than ordinary common stock but expands the number of companies subject to portions of its requirements. The Partnership does

AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. BASIS OF PRESENTATION - Continued

not anticipate an impact to its current disclosures.

During 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" ("FAS 130"). FAS 130 states that all items that are required to be recognized under accounting standards as components of comprehensive income are to be reported in either the statement of income or another statement of comprehensive income. This would include net income as currently reported by the Partnership adjusted for unrealized gains and losses related to the Partnership's mortgages accounted for as "available for sale". FAS 130 is effective beginning January 1, 1998.

3. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE- BACKED SECURITIES

                                               June 30,     December 31,
                                                 1997           1996
                                            ------------    ------------
Fully Insured Acquired:
  Number of
    GNMA Mortgage-Backed Securities                    9               9
    FHA-Insured Certificates (1)(2)                   60              62
  Amortized Cost                            $150,503,507    $151,866,819
  Face Value                                 156,194,471     157,889,594
  Fair Value                                 157,970,619     159,959,297


Fully Insured Originated:
  Number of
    GNMA Mortgage-Backed Securities                    1               1
    FHA-Insured Certificates                           1               1
  Amortized Cost                            $ 17,072,988    $ 17,126,685
  Face Value                                  16,716,372      16,770,069
  Fair Value                                  16,596,012      16,646,943

AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

3. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-
BACKED SECURITIES - Continued

(1) On October 11, 1996, the servicer of the mortgage on Meadow Park Apartments I filed a Notice of Default and Election to Assign the mortgage with HUD. On January 24, 1997, the Partnership received approximately $628,000 representing approximately 90% of the assignment proceeds. The Partnership recognized a gain of approximately $139,000 for the six months ended June 30, 1997. A distribution of $0.05 per Unit related to this assignment, was declared in February 1997 and was paid to Unitholders in May 1997. The remaining 9% of proceeds due from HUD were received in May 1997, since the distribution was less than $0.01 per Unit, these proceeds were distributed with regular cash flow in August 1997.

(2) In late February 1997, the mortgage on Security Apartments was prepaid. The Partnership received net proceeds of approximately $304,000, and recognized a gain of approximately $66,000 for the six months ended June 30, 1997. A distribution of approximately $0.02 per Unit related to this prepayment was declared in March 1997 and was paid to Unitholders in May 1997. The remaining 9% due on assignment is expected to be received.

As of August 6, 1997, all of the fully insured FHA-Insured Certificates and GNMA Mortgage-Backed Securities are current with respect to the payment of principal and interest except for the mortgages on Portervillage I Apartments, which has been delinquent since January 1997, as discussed below, and Country Club Terrace Apartments and Isle of Pines Village Apartments, which are delinquent with respect to the June 1997 payment of principal and interest. The Partnership expects to receive the payments from the latter two mortgages. In May 1997, the servicer of the mortgage on Portervillage I Apartments filed a Notice of Default and an Election to Assign the mortgage with HUD. The face value of this mortgage was approximately $1.2 million at December 31, 1996. The Partnership expects to receive 99% of this amount plus accrued interest.

4. INVESTMENT IN FHA-INSURED LOANS

                                         June 30,      December 31,
                                           1997            1996
                                      ------------     ------------
Fully Insured Acquired:
  Number of Loans                               12               12
  Amortized Cost                      $ 14,488,457     $ 14,556,595
  Face Value                            17,287,508       17,405,640
  Fair Value                            17,330,771       17,706,486

Fully Insured Originated:
  Number of Loans                                3                3
  Amortized Cost                      $ 12,980,371     $ 13,030,131
  Face Value                            12,636,333       12,681,532
  Fair Value                            12,896,879       12,969,589

As of August 6, 1997, all of the Partnership's FHA-Insured Loans, recorded at amortized cost, were current with respect to the payment of principal and interest.

In addition to base interest payments under Originated Insured Mortgages, the Partnership is entitled to additional interest based on a percentage of the net cash flow from the underlying development (referred to as Participations). During the three and six months ended June 30, 1997, the Partnership received additional interest of $89,222 from the Participations, as compared to $42,417 for the corresponding periods in 1996. These amounts, if any, are included in mortgage investment income on the accompanying statements of operations.

                                    1997           1996
                                   ------         ------
Quarter ended March 31,            $ 0.39(1)      $ 0.33
Quarter ended June 30,               0.30           0.64(2)
                                   ------         ------
                                   $ 0.69         $ 0.97
                                   ======         ======

(1) This amount includes approximately $0.07 per Unit return of capital and gain from the disposition of the following mortgages: Meadow Park Apartments I $0.05 and Security Apartments $0.02.
(2) This amount includes approximately $0.31 per Unit representing proceeds from the prepayment of the mortgages on Harbor View Estates, Bear Creek Apartments II and Cambridge Arms Apartments.

The basis for paying distributions to Unitholders is net proceeds from mortgage dispositions, if any, and cash flow from operations, which includes regular interest income and principal from Insured Mortgages. Although the Insured Mortgages yield a fixed monthly mortgage payment once purchased, the

AMERICAN INSURED MORTGAGE INVESTORS L.P. - SERIES 85

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

5. DISTRIBUTIONS TO UNITHOLDERS - Continued

cash distributions paid to the Unitholders will vary during each quarter due to
(1) the fluctuating yields in the short-term money market where the monthly mortgage payment receipts are temporarily invested prior to the payment of quarterly distributions, (2) the reduction in the asset base and monthly mortgage payments resulting from monthly mortgage payments received or mortgage dispositions, (3) variations in the cash flow attributable to the delinquency or default of Insured Mortgages and professional fees and foreclosure costs incurred in connection with those Insured Mortgages and (4) variations in the Partnership's operating expenses.

6. TRANSACTIONS WITH RELATED PARTIES

The General Partner and certain affiliated entities, during the three and six months ended June 30, 1997 and 1996, earned or received compensation or payments for services from the Partnership as follows:

                                           COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
                                           -----------------------------------------------

                                                                             For the                      For the
                                                                       three months ended            six monthes ended
                                    Capacity in Which                        June 30,                     June 30,
Name of Recipient                     Served/Item                   1997             1996            1997          1996
-----------------            ----------------------------        ----------       ----------      ----------    ----------
CRIIMI, Inc.                 General Partner/Distribution        $  147,066      $   313,741      $  338,252    $  475,513

AIM Acquisition              Advisor/Asset Management Fee           476,952          502,066         954,845     1,010,056
  Partners, L.P.(1)

CRIIMI MAE                   Affiliate of General Partner/           18,081           50,431          35,024        65,673
Management, Inc.               Expense Reimbursement

(1)  The Advisor, pursuant to the Partnership Agreement, effective June 26, 1984, is entitled to an Asset Management Fee equal to
     0.95% of Total Invested Assets (as defined in the Partnership Agreement).  CRIIMI MAE Services Limited Partnership, the sub-
     advisor to the Partnership (the Sub-advisor) is entitled to a fee of 0.28% of Total Invested Assets.  Of the amounts paid to
     the Advisor, the Sub-advisor earned a fee equal to $140,349 and $281,205 for the three and six months ended June 30, 1997,
     respectively, and $147,977 and $297,707 for the three and six months ended June 30, 1996, respectively.  The Sub-advisor is an
     affiliate of CRIIMI MAE.

7. INVESTMENT IN AFFILIATE, NOTE PAYABLE AND DUE TO AFFILIATE

Integrated Funding, Inc. (IFI), an affiliate of the Partnership, was the coinsurance lender for coinsured mortgages previously held by the Partnership. In order to capitalize IFI with sufficient net worth under HUD regulations, in April 1994, American Insured Mortgage Investors L.P. - Series 88 (AIM 88), an affiliate of the Partnership, transferred a GNMA mortgage-backed security in the amount of $2.0 million to IFI. The Partnership and American Insured Mortgage Investors L.P. - Series 86 (AIM 86), an afffiliate of the Partnership, each issued a demand note payable to AIM 88 and recorded an investment in IFI through an affiliate (AIM Mortgage, Inc.) in proportion to each entity's coinsured mortgages for which IFI was mortgagee of record as of April 15, 1994. Interest expense on the note payable was based on an interest rate of 7.25% per annum.

IFI had entered into an expense reimbursement agreement with the Partnership, AIM 86 and AIM 88 (collectively the AIM Funds) whereby IFI reimburses the AIM Funds for general and administrative expenses incurred on behalf of IFI. The expense reimbursement is allocated to the AIM Funds based on an amount proportionate to each entity's IFI coinsured mortgages. The expense reimbursement, interest from the two notes and the Partnership's equity interest in IFI's net income or loss, substantially equals the mortgage principal and interest on the GNMA mortgage-backed security transferred to IFI.

The final coinsured mortgages held by the Partnership were prepaid in late 1996. As a result, the aforementioned demand note payable to AIM 88 and the expense reimbursement agreement from IFI were cancelled as of April 1, 1997.

PART I. FINANCIAL INFORMATION