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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the fiscal year ended DECEMBER 31, 1996

[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

Commission File Number: 0 - 16777

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)

DELAWARE 52-1508601
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 301-380-2070

Securities registered pursuant to Section 12(b) of the Act:

Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Units of Limited Partnership Interest
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(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days: Yes No (Not Applicable). On August 25, 1992, the
--- ---
Registrant filed an application for relief from the reporting requirements of
the Securities Exchange Act of 1934 pursuant to Section 12(h) thereof. Because
of the pendency of such application, the Registrant was not required to, and did
not, make any filings pursuant to the Securities Exchange Act of 1934 from
October 23, 1989 until the application was voluntarily withdrawn on
August 29, 1997.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] (Not Applicable)

DOCUMENTS INCORPORATED BY REFERENCE
None

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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
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TABLE OF CONTENTS
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PAGE NO.
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PART I

Item 1. Business 1

Item 2. Property 4

Item 3. Legal Proceedings 5

Item 4. Submission of Matters to a Vote of Security Holders 5

PART II

Item 5. Market For Registrant's Common Equity and
Related Security Holder Matters 5

Item 6. Selected Financial Data 7

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7

Item 8. Financial Statements and Supplementary Data 15

Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 29

PART III

Item 10. Directors and Executive Officers of the Registrant 29

Item 11. Management Renumeration and Transactions 30

Item 12. Security Ownership of Certain Beneficial Owners and Management 30

Item 13. Certain Relationships and Related Transactions 31

PART IV

Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K 34

PART I

ITEM 1. BUSINESS

DESCRIPTION OF THE PARTNERSHIP
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Desert Springs Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership which was formed on February 26, 1987, owns Marriott's
Desert Springs Resort and Spa and approximately 185 acres of land on which the
Hotel and a golf course are located (the "Hotel"). Additionally, until April
24, 1996, the Partnership owned certain Trans World Airline, Inc. ("TWA")
equipment (the "Equipment"). See Item 8, "Financial Statements and
Supplementary Data."

The sole general partner of the Partnership, with a 1% interest in the
Partnership, is Marriott Desert Springs Corporation (the "General Partner"), a
Delaware corporation and a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The Partnership is currently engaged solely in the business
of leasing the Hotel and, therefore, is engaged in one industry segment. The
principal offices of the Partnership are located at 10400 Fernwood Road,
Bethesda, Maryland 20817.

The Hotel is leased to Marriott Hotel Services, Inc. ("MHSI" or the "Tenant"), a
wholly-owned direct subsidiary of Marriott International, Inc. ("MII"), under a
long-term lease agreement (the "Operating Lease"). A second golf course (the
"Second Golf Course") is leased by the Partnership from Marriott's Desert
Springs Development Corporation, a wholly-owned indirect subsidiary of MII. The
Hotel has the right to use the Marriott name pursuant to the lease agreements
and, if these agreements are terminated, the Partnership will lose that right
for all purposes (except as part of the Partnership's name). See Item 13,
"Certain Relationships and Related Transactions."

The Hotel is among the premier resorts in the Marriott system and caters
primarily to meetings/conventions, leisure and commercial travel. Since the
Hotel is located in southern California, operating results are higher during the
period from November to April each year. The Partnership has no plans to
acquire any new properties. See Item 2, "Property."

The Equipment was leased to TWA pursuant to the terms of an operating lease
which expired April 20, 1995. On April 20, 1995, the Partnership and TWA
entered into a new sales-type lease agreement which was to have expired on July
24, 1996. However, on April 24, 1996, TWA exercised its early termination
option under the equipment lease and paid the rent due on that date along with
the equipment lease termination value plus the $1 purchase option.

ORGANIZATION OF THE PARTNERSHIP
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The Partnership was formed to acquire and own the Hotel and the Equipment. The
Partnership purchased the Hotel from Desert Springs Hotel Services, a California
joint venture. The Equipment was purchased from TWA. Between March 20, 1987
and April 24, 1987, 900 limited partnership interests (the "Units"),
representing a 99% interest in the Partnership were subscribed pursuant to a
private placement offering. The offering price per Unit was $100,000; $25,000
payable at subscription with the balance due in three annual installments
through June 15, 1990; or, as an alternative, $87,715 in cash at closing as full
payment of the subscription price. Of the

total 900 Units, 740.5 Units were purchased on the installment basis and 159.5
Units were paid in full at closing. The General Partner contributed $909,100 in
cash for its 1% general partnership interest.

COMPETITION
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The lodging industry as a whole, and the upscale and luxury full-service
segments in particular, is benefitting from a cyclical recovery as well as a
shift in the supply/demand relationship with supply relatively flat and demand
strengthening. The lodging industry posted strong gains in revenues and profits
in 1996, as demand growth continued to outpace additions to supply. The General
Partner expects full-service hotel room supply growth to remain limited through
1998 and for the foreseeable future. This supply/demand imbalance will result
in improving occupancy and room rates which should result in improved operating
profit.

Current trends in the hotel industry indicate that, through at least 1998, the
outlook for the lodging industry remains positive. Demand increases are
expected to continue to outpace supply additions. Rooms supply growth,
especially for the luxury and upscale segment, is forecasted to be limited as
compared to growth in budget and mid-priced hotels. Acquisition prices for
first class and luxury price properties are still at a significant discount to
construction, or replacement cost. The favorable gap between demand increases
and supply additions should continue to drive room rate increases, with
occupancy rates leveling as targeted room rates are achieved.

The primary competition for the Hotel comes from the following first-class
resort lodging-oriented hotels: (i) Marriott's Rancho Las Palmas Resort and
Country Club with 450 guest rooms, (ii) Hyatt Grand Champions Resort with 336
guest rooms, (iii) La Quinta Hotel and Resort with 640 guest rooms, (iv) Ritz-
Carlton Rancho Mirage with 238 guest rooms, (v) Westin Mission Hills Resort with
512 guest rooms and (vi) Stouffers Renaissance Hotels International with 560
rooms. The La Quinta Resort is adding an additional 18,000 square foot ballroom
and a complete European health spa expected to open in 1997.

The Tenant believes that by emphasizing management and personnel development of
its staff and maintaining a competitive price structure, the Partnership's share
of the market will be maintained or increased. The inclusion of the Hotel
within the nationwide MII full-service hotel system provides advantages of name
recognition, centralized reservations and advertising, system-wide marketing and
promotion, centralized purchasing and training and support services. Additional
competitive information is set forth in Item 2, "Property," with respect to the
Hotel.

CONFLICTS OF INTEREST
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Because Host Marriott and its affiliates own and/or operate hotels other than
the Hotel owned by the Partnership, potential conflicts of interest exist. With
respect to these potential conflicts of interest, Host Marriott and its
affiliates retain a free right to compete with the Partnership's Hotel,
including the right to develop competing hotels now and in the future, in
addition to those existing hotels which may compete directly or indirectly.

Policies with Respect to Conflicts of Interest

It is the policy of the General Partner that the Partnership relationship with
the General Partner, any of its affiliates or persons employed by the General
Partner are conducted on terms which are fair to the Partnership and which are
commercially reasonable.

The Partnership Agreement provides that agreements, contracts or arrangements
between the Partnership and the General Partner, other than arrangements for
rendering legal, tax, accounting, financial, engineering, and procurement
services to the Partnership by the General Partner or its affiliates, which
agreements will be on commercially reasonable terms, will be subject to the
following conditions:

(a) the General Partner or any affiliate must be actively engaged in the
business of rendering such services or selling or leasing such goods,
independently of its dealings with the Partnership and as an ordinary
ongoing business or must enter into and engage in such business with MII
system hotels or hotel owners generally and not exclusively with the
Partnership;

(b) any such agreement, contract or arrangement must be fair to the
Partnership, and reflect commercially reasonable terms and shall be
embodied in a written contract which precisely describes the subject matter
thereof and all compensation to be paid therefor;

(c) no rebates or give-ups may be received by the General Partner or any
affiliate, nor may the General Partner or any affiliate participate in any
reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement;

(d) no such agreement, contract or arrangement as to which the limited partners
had previously given approval may be amended in such manner as to increase
the fees or other compensation payable to the General Partner or any
affiliate or to decrease the responsibilities or duties of the General
Partner or any affiliate in the absence of the consent of the limited
partners holding a majority of the Units (excluding those Units held by the
General Partner or certain of its affiliates); and

(e) any such agreement, contract or arrangement which relates to or secures any
funds advanced or loaned to any of the Partnership by the General Partner
or any affiliate must reflect commercially reasonable terms.

EMPLOYEES
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The Partnership has no employees; however, employees of Host Marriott are
available to perform administrative services for the Partnership. The
Partnership reimburses Host Marriott for the cost of providing such services.
See Item 11, "Executive Compensation," for information regarding payments to
Host Marriott for the cost of providing administrative services to the
Partnership.

The Hotel is staffed by employees of the Tenant.

ITEM 2. PROPERTY

THE HOTEL
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Location

Marriott's Desert Springs Resort and Spa is a full-service Marriott hotel and,
with the Second Golf Course, is located on approximately 185 acres of land. It
is located approximately 11 miles from the Palm Springs Airport and two hours
east of Los Angeles via Interstate 10. The Hotel is surrounded by the San
Jacinto Mountains to the west, the Santa Rosa Mountains to the east and south,
and the San Gorgonio Mountains to the north.

Description

The Hotel opened on February 2, 1987. The Hotel consists of 884 large guest
rooms including 65 luxury suites. Each room has a private balcony, mini-bar and
other deluxe accommodations. The Hotel has an 18-hole championship golf course
owned by the Partnership, with an additional 18-hole course which is leased by
the Partnership. Twenty-three acres of man made lakes are interspersed
throughout the resort grounds and lower level of the Hotel's main lobby. Boats
depart from inside the main lobby and carry guests to the various resort
functions. There are a total of five outdoor pools divided between three guest
areas. The main guest pool area, the Oasis, was expanded during 1995 and now
has three pools and two spas, and the Spring Pool and Health Spa areas each have
one pool and one spa. The tennis complex includes a separate tennis pro shop
building, 20 tennis courts of various surfaces, and badminton and volleyball
courts. The health spa is housed in a separate one-story building. Within the
health spa are separate men's and women's facilities, lap pool, hot and cold
plunge pools, saunas, steam rooms, aerobics and exercise rooms, lounge, and
locker rooms. Food and beverage services within the resort include four fine
dining restaurants that range from casual American to Japanese sushi and
overlook the water. Additionally, there are two grille/snack bars at the
outdoor pools, two golf club snack bars, lobby lounge, coffee bar, and
entertainment lounge. The 40,000 square foot lobby has an eight-story high view
of the nearby mountains. The Hotel has a three-story garage with parking for
approximately 1,500 vehicles. The meeting and exhibit spaces total 51,300
square feet of flexible space with 33 meeting rooms, including the 25,000 square
foot "Desert" ballroom and the 21,000 square foot "Springs" ballroom.

Competition

THE TWA AIRLINE EQUIPMENT
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The Equipment consisted of a cross section of TWA's ground service equipment and
equipment used in the operation and maintenance of aircraft, including various
trucks, lifts, cargo loaders, cargo containers, general heavy maintenance
equipment, flight simulators, jetways, office equipment, testing materials,
vehicles and power units. The Equipment was located at various locations in the
United States with the majority of the Equipment located at John F. Kennedy
International Airport on Long Island, New York; Los Angeles (California)
International Airport; Lambert-St. Louis (Missouri) International Airport; and
two TWA facilities at or near an airport in Kansas City, Missouri. On April 24,
1996, TWA exercised its early termination option under the airline equipment
lease and paid the rent due on that date along with the termination value plus
the $1 purchase option.

ITEM 3. LEGAL PROCEEDINGS

Neither the Partnership nor the Hotel is presently subject to any material
litigation nor, to the General Partner's knowledge, is any material litigation
threatened against the Partnership or the Hotel, other than routine litigation
and administrative proceedings arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and which
collectively are not expected to have a material adverse effect on the business,
financial condition or results of operations of the Partnership.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the limited partners in 1996 or in prior
years. The Partnership instituted a consent solicitation on August 29, 1997,
to obtain the consent of the limited partners to certain matters and amend
certain provisions of the Partnership Agreement.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SECURITY HOLDER MATTERS

There is currently no public market for the Units and it is not anticipated that
a public market for the Units will develop. Transfers of Units are limited to
the first day of each accounting period, and are subject to approval by the
General Partner in its sole and absolute discretion and certain other
restrictions. As of August 28, 1997 there were 1,136 holders of record of the
900 limited partnership Units.

In accordance with Sections 4.06 and 4.09 of the Partnership Agreement, cash
available for distribution for any fiscal year will be distributed at least
annually, as soon as practicable after the close of each fiscal year, to the
partners of record at the end of each fiscal quarter during such fiscal year as
follows:

(i) first, 1% to the General Partner and 99% to the Limited Partners until
through and including the end of the fiscal quarter during which the
General Partner and the limited partners shall have received cumulative
distributions of refinancing and/or sales proceeds ("Capital Receipts")
equal to 50% of their capital contributions (this threshold has not been
met as of December 31, 1996);

(ii) thereafter, 10% to the General Partner and 90% to the limited partners.

Cash available for distribution means, with respect to any fiscal period, the
revenues of the Partnership from all sources during such fiscal period less (i)
all cash expenditures of the Partnership during such fiscal period, including,
without limitation, debt service and any fees for management services and
administrative expenses; and (ii) such reserves as may be determined by the
General Partner, in its sole discretion, to be necessary to provide for the
foreseeable needs of the Partnership, but shall not include Capital Receipts.

On October 31, 1995, the Partnership made an interim cash distribution solely
from the TWA equipment lease in the amount of $3,900,000 as follows: $39,000 to
the General Partner and $3,861,000 to the limited partners ($4,290 per Unit).
On April 15, 1996, the Partnership made a cash distribution in the amount of
$1,547,270, $15,470 to the General Partner and $1,531,800 to the limited
partners ($1,702 per Unit) representing a final cash distribution from the 1995
TWA equipment lease payments.

On October 31, 1994, the Partnership made an interim cash distribution solely
from the TWA equipment lease in the amount of $1,660,910 as follows: $16,610 to
the General Partner and $1,644,300 to the limited partners ($1,827 per Unit).
On April 15, 1995, the Partnership made a cash distribution in the amount of
$1,170,000, $11,700 to the General Partner and $1,158,300 to the limited
partners ($1,287 per Unit) representing a final cash distribution from the 1994
TWA equipment lease payments.

In accordance with section 4.07, 4.08 and 4.09 of the Partnership Agreement,
Capital Receipts not retained by the Partnership will be distributed to the
owners of record on the last day of the fiscal quarter in which the transaction
is completed, as follows:

(i) first, 1% to the General Partner and 99% to the limited partners until the
partners have received cumulative distributions of Capital Receipts equal
to their capital contributions; and

(ii) thereafter, 10% to the General Partner and 90% to the limited partners.

As of August 28, 1997, cumulative distributions of Capital Receipts equaled
$18,046,400 ($180,500 to the General Partner and $17,865,900 to the limited
partners ($19,851 per Unit)).

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data presents historical operating information
for the Partnership for each of the five years ended December 31, 1996:

1996 1995 1994 1993 1992
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(in thousands, except per Unit amounts)

Income.................................................. $ 25,781 $ 24,351 $ 22,641 $ 21,571 $ 21,947
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Net income (loss)....................................... $ 109 $ 1,585 $ (2,264) $ (3,099) $ (2,330)
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Net income (loss) per limited partner unit (900 Units).. $ 120 $ 1,743 $ (2,490) $ (3,409) $ (2,563)
======== ======== ======== ======== ========
Total Assets............................................ $164,882 $173,742 $172,238 $175,451 $181,549
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Total Obligations....................................... $186,519 $193,941 $188,951 $185,941 $183,962
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Cash Distributions per limited partner
Unit (900 Units)........................................ $ 1,702 $ 5,577 $ 4,404 $ 5,498 $ 3,213
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL
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The following discussion and analysis addresses the results of operations of the
Partnership for the fiscal years ended December 31, 1996, 1995 and 1994.

Growth in the Partnership's total Hotel room sales, and thus rental income, is
primarily a function of average occupancy and average room rates, as well as
control of hotel operating costs. In addition, due to the amount of
meeting/convention business at the Hotel, food and beverage and golf and spa
operations have a direct effect on the Partnership's rental income. REVPAR, or
revenue per available room, represents the combination of the average daily room
rate charged and the average daily occupancy achieved and is a commonly used
indicator of hotel performance (although it is not a GAAP measure of revenue).
REVPAR does not include food and beverage or other ancillary revenues generated
by the Hotel. REVPAR for the years ended December 31, 1994, 1995 and 1996 was
$102, $104 and $113, respectively. Food and beverage sales increased from $31.7
million in 1994 to $33.5 million in 1995 and to $38.4 million in 1996 due to
increased group sales.

Net rental income from the Hotel and Equipment rental is applied to debt
service, property taxes, partnership administrative costs, Partnership funded
capital expenditures and cash distributions to the partners.

RESULTS OF OPERATIONS
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1996 Compared to 1995

Hotel Rental Income. Hotel rental income for 1996 increased 18% from $19.9
million in 1995 to $23.4 million in 1996. For the year, total Hotel revenues
increased 15% due to increases in all areas of the Hotel including rooms, food
and beverage, golf and spa and other ancillary

revenues. REVPAR improved 9% to $113 due to a 5% increase in average room rate
to approximately $158 and a 2.0 percentage point increase in average daily
occupancy to approximately 71%. Food and beverage revenues increased 15% from
$33.5 million in 1995 to $38.4 million in 1996.

Airline Equipment Rental Income. Airline equipment rental income decreased
56% from $2.8 million in 1995 to $1.2 million in 1996 due to the termination of
the airline equipment lease in April 1996. On April 24, 1996, TWA, the lessee,
terminated the lease and purchased the equipment, as permitted under the lease
agreement.

Other Income. Other income decreased 34% from $1.6 million in 1995 to $1.1
million in 1996. The decrease is primarily due to $692,000 of income recognized
in 1995 on the funding of the pool expansion by Marriott Vacation Club
International ("MVCI") offset by a $108,000 increase in interest income earned
in 1996 on the Partnership's cash held for refinancing.

Interest Expense. Interest expense increased 16% from $13.4 million in 1995
to $15.5 million in 1996 due to an increase in the interest rate. The mortgage
debt matured on July 27, 1996 and went into default on the maturity date.
Pursuant to the loan documents, the mortgage debt accrued interest at the
default rate of 10.75% until the refinancing on December 23, 1996. The weighted
average interest rate on the first mortgage debt was 9.0% in 1996 and 7.8% in
1995.

Depreciation and amortization. Depreciation and amortization decreased by
$100,000 due to the write-off in 1995 of the airline equipment partially offset
by an increase in building and equipment depreciation due to the $9.1 million
rooms renovation.

Property Taxes. Property tax expense increased 61% to $2.0 million in 1996
from $1.2 million in 1995 primarily due to a nonrecurring $600,000 refund
received in 1995 related to property taxes paid in prior years.

Partnership administration and other. Partnership administration and other
increased 34% primarily due to an increase in administrative costs due to the
refinancing of the mortgage debt.

1995 Compared to 1994

Hotel Rental Income. Hotel rental income for 1995 increased 6.4% from $18.7
million in 1994 to $19.9 million in 1995. For the year, total Hotel revenues
increased 4% driven primarily by a 6% increase in food and beverage revenue
from $31.7 million in 1994 to $33.5 million in 1995. Room rates in the desert
market increased only slightly and occupancies remained virtually flat when
compared to 1994 due to the sluggish regional economy and continued competitive
constraints. Despite these factors, Hotel management was able to increase
REVPAR to $104 as a result of a 1.3% increase in average room rate to
approximately $150 and a slight increase in average occupancy to 69%. The Hotel
benefitted from a significant increase in ancillary sales to group guests,
particularly in catering, golf and spa, with sales in these areas increasing
$2.4 million over 1994. In addition, profit margins improved significantly over
1994 as a result of a 7% labor productivity increase. As a result, hotel
operating results (hotel sales net of hotel operating expenses) increased 10%
over the prior year.

Other Income. During 1995, other income increased 30% from $1.2 million in
1994 to $1.6 million in 1995. The increase is due primarily to $700,000 of
income recognized on MVCI's funding of the pool expansion and increased interest
income earned on the Partnership's refinancing reserve.

Depreciation and amortization. Depreciation and amortization decreased by
$1.1 million or 12.4%, when compared to 1994 due to the decrease in airline
equipment depreciation.

Property Taxes. Property tax expense decreased 36%, from $1.9 million in
1994 to $1.2 million in 1995, primarily due to reduced property tax assessments
combined with a $600,000 refund received in 1995 related to property taxes paid
in prior years.

Partnership administration and other. Partnership administration and other
decreased 49% primarily due to a $400,000 loss on the retirement of fixed assets
recorded in 1994.

CAPITAL RESOURCES AND LIQUIDITY
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Principal Sources and Uses of Cash

The Partnership's continuing principal source of cash is from the Hotel
Operating Lease. Prior to the Equipment Lease termination, the Partnership's
principal sources of cash included rents received under the Equipment Lease and
proceeds from Equipment sales. Its principal uses of cash are to fund the
property improvement fund, pay interest on mortgage debt and cash distributions
to the partners.

The Hotel Operating Lease provides for the payment of the greater of Basic
Rental or Owner's Priority. Basic Rental equals 80% of Operating Profit, as
defined. Owner's Priority equals the greater of (i) $20 million plus debt
service on certain additional debt to expand the Hotel or (ii) Debt Service, as
defined. (In no event will Owner's Priority for any year exceed operating
profit.)

The basis for computing the amounts paid pursuant to the Operating Lease is
expected to change in future periods. Pursuant to an agreement reached with MII
on December 23, 1996, for fiscal year 1997, the $20 million Owner's Priority
will be increased to $20.5 million. MII will be entitled only to the next $2
million of Operating Profit, as defined. Any additional Operating Profit in
excess of $22.5 million will be remitted entirely to the Partnership as
additional rent. MII has also agreed that once long-term refinancing of the
existing mortgage debt is consummated, Owner's Priority will be increased to
$21.5 million and MII will be entitled only to the next $1.8 million of
Operating Profit. Any additional Operating Profit in excess of $23.3 million
will be shared 75% to the Partnership and 25% to MII. In connection with and
concurrently with the consummation of the long-term financing in 1997, MII
agreed to waive any and all claims to Additional Rental, as defined, that have
accrued prior to the consummation of such loan.

Total cash provided by operations of the Hotel was $5.9 million, $6.7 million
and $7.0 million for the years ended December 31, 1994, 1995 and 1996,
respectively. Proceeds from the sale of airline equipment were less than
$100,000 for the year ended December 31, 1994, $4.0 million

for the year ended December 31, 1995 and $2.5 million for the year ended
December 31, 1996. There will be no sales in future periods due to the sale of
the Equipment. Cash contributed to the property improvement fund of the Hotel
was $3.7 million, $3.8 million and $4.4 million for the years ended December 31,
1994, 1995 and 1996, respectively. Cash distributed to the partners was $4.0
million, $5.0 million and $1.5 million during the years ended December 31, 1994,
1995 and 1996, respectively.

The General Partner expects that contributions to the property improvement fund
will be a sufficient reserve for the future capital repair and replacement needs
of the Hotel's property and equipment.

Pursuant to the terms of the Hotel Operating Lease, the Partnership is obligated
to fund major improvements for the Hotel's mechanical and heating systems.
During 1998, the Partnership expects to fund approximately $1.5 million for
improvements to the Hotel's HVAC system (heating, ventilating and air
conditioning). The Partnership has a reserve established to pay for these
improvements which is expected to be sufficient. There are currently no
additional Partnership funded capital expenditure items planned for 1997 or
1998.

DEBT FINANCING
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As of December 31, 1995, the Partnership's nonrecourse mortgage debt (the
"Mortgage Debt") balance was $168.2 million. The weighted average interest rate
was 7.76% through maturity on July 27, 1996. Debt service on the Mortgage Debt
required no principal amortization prior to maturity. Debt service was funded
by rental payments received from the Hotel.

The Mortgage Debt was secured by the Partnership's fee interest in the Hotel,
leasehold interest in the Second Golf Course, a security interest in certain
personal property associated with the Hotel including furniture and equipment,
contracts and other general intangibles, and a security interest in the
Partnership's rights under the Hotel operating lease, the Hotel purchase
agreement and other related agreements. The lender did not have a security
interest in the Equipment.

The Mortgage Debt matured on July 27, 1996. The General Partner's attempts to
negotiate a forbearance agreement with the lender were unsuccessful. Pursuant
to the terms of the Mortgage Debt, the debt was in default from the Maturity
Date until December 23, 1996, and carried interest at a rate of 10.75% which was
2.5 percentage points above the lender's corporate base rate.

On December 23, 1996, pursuant to an agreement with the Partnership, GMAC
Commercial Mortgage Corporation ("GMAC") purchased the existing Mortgage Debt of
the Partnership and amended and restated certain terms thereof (as amended and
restated, the "Bridge Loan"). The Bridge Loan consists of a $160 million
nonrecourse mortgage loan. The Partnership utilized $8.2 million from its
refinancing reserve to reduce the principal outstanding balance of the Mortgage
Debt to the $160 million outstanding under the Bridge Loan. In addition, the
Partnership utilized $2.6 million from the refinancing reserve to pay costs
associated with the financing including lender's fees, property appraisals,
environmental studies and legal fees. Approximately half of the $2.6 million
was for fees related to the long-term financing. The Bridge Loan was originated
by Goldman Sachs Mortgage Company ("GSMC"), matures on October 31, 1997 and
bears

interest at the London Interbank Offered Rate ("LIBOR") plus 2.75 percentage
points and requires that all excess cash from Hotel operations, if any, be held
in a debt service reserve for future debt service or to reduce the outstanding
principal balance of the Bridge Loan upon maturity. For the year ended December
31, 1996, the weighted-average interest rate on the Partnership's mortgage debt
was 9.0%. In 1995, the weighted-average interest rate on the Mortgage Debt was
7.8%. At December 31, 1996, the interest rate on the Bridge Loan was 8.4%.
Failure to refinance or extend the Bridge Loan upon maturity could result in
foreclosure of the Hotel by the Bridge Loan lender.

The Bridge Loan is secured by the Partnership's fee interest in the Hotel, a
security interest in certain personal property associated with the Hotel
including furniture and equipment, contracts and other general intangibles and a
security interest in the Partnership's rights under the Hotel operating lease,
the Hotel purchase agreement and other related agreements.

Pursuant to the terms of the debt refinancing there are no continuing
requirements for a debt service guarantee. Host Marriott and the General
Partner were released of their obligations to the Partnership under their
original debt service guarantee with the refinancing of the Partnership's
Mortgage Debt.

In conjunction with the refinancing of the Mortgage Debt, the General Partner
reaffirmed a foreclosure guarantee to the lender in the amount of $50 million.
Pursuant to the terms of the foreclosure guarantee, amounts would be payable
only upon a foreclosure of the Hotel and only to the extent that the gross
proceeds from a foreclosure sale were less than $50 million.

The General Partner is currently pursuing two alternatives to refinance the
Bridge Loan. Each alternative would require that certain amendments (the
"Amendments") be made to the Partnership's Amended and Restated Agreement of
Limited Partnership (the "Partnership Agreement").

Loan Alternative A. One of the two alternatives to refinance the Bridge Loan
would involve a loan from GSMC consisting of two tranches of debt: (i) a senior
loan to a newly formed 100% owned subsidiary ("New Sub") of the Partnership that
would own the Hotel, which senior loan would be secured by a first mortgage lien
on the Hotel in an amount up to $103 million (with the final amount to be
determined based upon the net cash flow at the Hotel and prevailing interest
rates) and (ii) a junior loan to the Partnership, which junior loan would be
secured by the Partnership's 100% direct and indirect ownership interests in the
Partnership's newly formed subsidiary, in an amount equal to $57 million or such
greater amount that, when combined with the principal amount of the senior loan,
would total $160 million ("Alternative A"). Alternative A would enable the
Partnership to refinance the Bridge Loan. In connection with the closing of the
Bridge Loan on December 23, 1996, the General Partner entered into a commitment
letter with GSMC setting forth the terms of Alternative A.

Loan Alternative B. The other alternative ("Alternative B") would involve a
refinancing consisting of the senior loan from GSMC as described in Alternative
A, a subordinate tranche of debt from GSMC to the Partnership in the amount of
$20 million (the "Mezzanine Loan") secured by the Partnership's 100% direct and
indirect ownership interests in the Partnership's newly formed subsidiary, and a
subordinate junior tranche to the Partnership (the "HM Junior Loan")

from DSM Finance LLC (the "Junior Lender"), a single member Maryland limited
liability company of which the General Partner is the sole member. The HM Junior
Loan would be in the amount of $59.7 million, and if consented to by the lender
of the Mezzanine Loan would be secured by a subordinate pledge of the
Partnership's 100% direct and indirect ownership interests in the New Sub. would
be secured by a subordinate pledge of the Partnership's 100% direct and indirect
ownership interests in the New Sub. Alternative B is expected to result in $22.7
million of proceeds in excess of that needed to refinance the Bridge Loan, which
would be distributed by the Partnership to its partners resulting in a
distribution to holders (the "Unitholders") of units of limited partnership
interest in the Partnership ("Units") of $25,000 per Unit.

The terms of the Senior Loan contemplate that, consistent with applicable rating
agency requirements, the Hotel would be contributed to the New Sub in exchange
for 100% of the direct and indirect interests in the New Sub. This structure
would create a bankruptcy remote entity which would be the borrower under the
Senior Loan. The Partnership Agreement does not currently permit this
contribution and, accordingly, each of Alternative A and Alternative B is
contingent on the approval by the Limited Partners of an amendment that would
permit such a contribution. On August 29, 1997, the General Partner initiated
the solicitation of consents of the limited partners of the Partnership,
pursuant to which the General Partner has sought approval of amendments to
refinance the Bridge Loan under either Alternative A or Alternative B and
proposed Alternative B to fund the DSM Junior Loan together with other
amendments to the Partnership Agreement.

The proposed Amendments also would allow the Partnership to reorganize the
ownership structure of the Hotel to provide additional tiers of structured
financing. GSMC has indicated that it would prefer a structured financing under
Alternative B whereby (i) the New Sub would own the Hotel and would be the
Debtor on the Senior Loan, GSMC has indicated that it might prefer a structured
financing under Alternative B whereby (i) the New Sub would own the Hotel and
whould be the Debtor on the Senior Loan, (ii) a new bankruptcy remote subsidiary
of the Partnership (the "Tier 2 Sub") would be formed to own the New Sub and be
the debtor on the Mezzanine Loan, and (iii) the Partnership would own the Tier 2
Sub (and indirectly own the New Sub and the Hotel) and would be the debtor on
the HM Junior Loan. As of the date of the consent solicitation statement, no
determination has been made as to whether a tiered subsidiary structure would be
utilized under Alternative B. However, under the proposed terms of the
Mezzanine Loan, the interest rate for the Mezzanine Loan would be increased by
one percentage point if a tiered subsidiary structure has not been implemented
on or before March 31, 1998. The effect of the refinancing to the Limited
Partners would be the same under either structure. If these proposed Amendments
are approved, the General Partner would be able to create a new wholly owned
subsidiary such as the Tier 2 Sub to provide for the current or future
restructuring of the Partnership's mortgage debt.

Debt to MII

On April 30, 1996, the Partnership entered into a short-term loan with MII in
the amount of $1,700,000 to fund a portion of the Hotel's rooms refurbishment
project. The loan's stated maturity was June 13, 1997, bearing interest at 8.5%
and was to be repaid from the property improvement fund as contributions are
made during the year. At December 31, 1996, the loan balance was $900,000. The
loan was fully repaid on March 28, 1997.

Property Improvement Fund

The Partnership is required to maintain the Hotel in good repair and condition.
The Hotel Operating Lease agreement requires the Tenant to make annual
contributions to the property improvement fund for the Hotel on behalf of the
Partnership. Contributions to the fund are equal to 4.5% of Hotel gross
revenues through 1997 increasing to 5.5% thereafter. Total contributions to the
fund were $3.7 million for 1994, $3.8 million for 1995, and $4.4 million in
1996. The balance of the Hotel's property improvement fund was $1.0 million as
of December 31, 1996.

During the summer of 1996, a $9.1 million rooms refurbishment was completed at
the Hotel. The property improvement fund was not sufficient to fund the
refurbishment. The Partnership arranged a short-term loan from MII of up to
$1.7 million at a fixed rate of 8.5% to finance the anticipated shortfall. The
loan was to be repaid from the property improvement fund, and the loan has been
fully repaid prior to its maturity on June 13, 1997. The General Partner
believes that funds available from the property improvement fund will be
adequate for anticipated renewal and replacement expenditures.

During 1995, the Hotel's main swimming pool was expanded. This $2.1 million
expansion was funded partially with $692,000 in proceeds received from MVCI
pursuant to an agreement between the Partnership and MVCI for the development of
additional time share units on land adjacent to the Hotel. The Partnership
funded the remaining $1.4 million from cash reserves.

Equipment Lease

The Partnership leased airline equipment to TWA under an operating lease which
expired in April 1995. On April 20, 1995, the Partnership reached an agreement
with TWA whereby TWA was obligated to pay quarterly payments of $780,000 plus
interest in arrears at 17%. At the end of the lease in July 1996 (or earlier if
a termination option was exercised), TWA had the option to purchase the
equipment for one dollar ($1). The lease generated $5.4 million in cash flow
during the 1995 fiscal year. As a result of the lease renewal terms, the
Partnership recorded a receivable for the future lease payments due from TWA and
deferred the gain on the transaction. The deferred gain was recognized as
income as lease payments were received. Total rental income recognized in 1995
and 1996 on the lease was $2.8 million and $1.2 million, respectively. The
original cost of the airline equipment was depreciated over the life of the
operating lease. Depreciation expense on the airline equipment was $526,000 for
the year ended December 31, 1995.

On April 24, 1996, TWA exercised its early termination option under the airline
equipment lease and paid the rent due on that date of $847,000 along with the
termination value of $780,000 plus the $1 purchase option. Rental income of
$1,248,000 was generated by the lease in 1996.

INFLATION
- ---------

For the three fiscal years ended December 31, 1996, the rate of inflation has
been relatively low and, accordingly, has not had a significant impact on the
Partnership's gross income and net income. The Operating Tenant is generally
able to pass through increased costs to customers through higher room rates. In
1996, the increase in average room rates at the Hotel exceeded

those of direct competitors as well as the general level of inflation.

SEASONALITY
- -----------

Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of November
through April than during the remainder of the year. This seasonality tends to
affect the results of operations, increasing the revenue and rental income
during these months. In addition, this seasonality may also increase the
liquidity of the Partnership during these months.

NEW STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
- -----------------------------------------------

During 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.

FORWARD LOOKING STATEMENTS
- --------------------------

Certain matters discussed in this Management's Discussion and Analysis section
are forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Partnership believes the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be attained. The Partnership
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index Page
- ----- ----

Report of Independent Public Accountants......................... 16

Statement of Operations.......................................... 17

Balance Sheet.................................................... 18

Statement of Changes in Partners' (Deficit) Capital.............. 19

Statement of Cash Flows.......................................... 20

Notes to Financial Statements.................................... 21

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

- --------------------------------------------------------------------------------
TO THE PARTNERS OF DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP:

We have audited the accompanying balance sheet of Desert Springs Marriott
Limited Partnership (a Delaware limited partnership) as of December 31, 1996 and
1995, and the related statements of operations, changes in partners' (deficit)
capital and cash flows for each of the three years in the period ended December
31, 1996. These financial statements and the schedule referred to below are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Desert Springs Marriott Limited
Partnership as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index at Item 14(a)(2)
(Schedule III Real Estate and Accumulated Depreciation) is presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
March 21, 1997

STATEMENT OF OPERATIONS

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
- --------------------------------------------------------------------------------

1996 1995 1994
------- ------- -------

INCOME
Rentals
Hotel............................................ $23,433 $19,851 $18,676
Airline equipment (Note 6)....................... 1,248 2,837 2,731
Other............................................. 1,100 1,663 1,234
------- ------- -------

25,781 24,351 22,641
------- ------- -------

EXPENSES
Interest.......................................... 15,501 13,371 13,371
Depreciation...................................... 7,732 7,823 8,932
Property taxes.................................... 1,965 1,219 1,914
Partnership administration and other.............. 474 353 688
------- ------- -------

25,672 22,766 24,905
------- ------- -------

NET INCOME (LOSS).................................. $ 109 $ 1,585 $(2,264)
======= ======= =======

ALLOCATION OF NET INCOME (LOSS)
General Partner................................... $ 1 $ 16 $ (23)
Limited Partners.................................. 108 1,569 (2,241)
------- ------- -------

$ 109 $ 1,585 $(2,264)
======= ======= =======

NET INCOME (LOSS) PER LIMITED PARTNER
UNIT (900 Units).................................. $ 120 $ 1,743 $(2,490)
======= ======= =======

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

BALANCE SHEET

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
- --------------------------------------------------------------------------------

1996 1995
-------- --------

ASSETS

Property and equipment, net............................... $155,441 $153,184
Due from Marriott International, Inc...................... 8 2,295
Property improvement fund................................. 1,041 5,425
Deferred financing, net of accumulated amortization....... 2,637 83
Rent receivable from airline equipment lessee............. -- 2,542
Cash and cash equivalents................................. 5,755 10,213
-------- --------

$164,882 $173,742
======== ========

LIABILITIES AND PARTNERS' DEFICIT

LIABILITIES
Mortgage debt............................................ $160,000 $168,239
Additional rental paid by hotel lessee................... 25,013 21,848
Due to Marriott International, Inc....................... 1,022 122
Accounts payable and accrued interest.................... 484 2,451
Deferred gain on equipment lease......................... -- 1,281
-------- --------

Total Liabilities...................................... 186,519 193,941
-------- --------

PARTNERS' DEFICIT
General Partner
Capital contribution.................................... 909 909
Capital distributions................................... (602) (587)
Cumulative net losses................................... (398) (399)
-------- --------

(91) (77)
======== ========

Limited Partners
Capital contributions, net of offering costs of $10,576. 77,444 77,444
Investor notes receivable............................... (22) (22)
Capital distributions................................... (59,584) (58,052)
Cumulative net losses................................... (39,384) (39,492)
-------- --------

(21,546) (20,122)
======== ========

Total Partners' Deficit.................................. (21,637) (20,199)
-------- --------

$164,882 $173,742
======== ========

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

STATEMENT OF CHANGES IN
PARTNERS' (DEFICIT) CAPITAL

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
- --------------------------------------------------------------------------------

General Limited
Partners Partners Total
--------- --------- ---------

Balance, December 31, 1993........................................ $ 21 $ (10,511) $ (10,490)

Payments received on investor notes receivable................... -- 45 45

Net loss......................................................... (23) (2,241) (2,264)

Capital distributions............................................ (40) (3,964) (4,004)
--------- --------- ---------

Balance, December 31, 1994........................................ (42) (16,671) (16,713)

Net income....................................................... 16 1,569 1,585

Capital distributions............................................ (51) (5,020) (5,071)
--------- --------- ---------

Balance, December 31, 1995........................................ (77) (20,122) (20,199)

Net income....................................................... 1 108 109

Capital distributions............................................ (15) (1,532) (1,547)

Balance, December 31, 1996........................................ $ (91) $ (21,546) $ (21,637)
========= ========= =========

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

STATEMENT OF CASH FLOWS

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
- --------------------------------------------------------------------------------

1996 1995 1994
--------- --------- ---------

OPERATING ACTIVITIES
Net income (loss).............................................. $ 109 $ 1,585 $ (2,264)
Noncash items:
Depreciation.................................................. 7,732 7,823 8,932

Amortization of deferred financing costs as interest expense.. 104 135 135
(Gain) loss on dispositions of property and equipment......... (1,248) (1,972) 408
Changes in operating accounts:
Due to/from Marriott International, Inc. and affiliates....... 2,287 (2,241) (113)
Due from airline equipment lessee............................. -- 1,357 (1,122)
Accounts payable and accrued interest......................... (1,967) 37 (117)
--------- --------- ---------

Cash provided by operations.................................. 7,017 6,724 5,859
--------- --------- ---------

INVESTING ACTIVITIES
Additions to property and equipment............................ (9,989) (3,979) (2,851)
Change in property improvement fund............................ 4,384 (2,035) (1,628)
Proceeds from sales of airline equipment....................... 2,509 3,964 42
--------- --------- ---------

Cash used in investing activities............................ (3,096) (2,050) (4,437)
--------- --------- ---------

FINANCING ACTIVITIES
Repayment of mortgage debt..................................... (168,239) -- --
Proceeds from mortgage loan.................................... 160,000 -- --
Refinancing costs.............................................. (2,658) -- --
Capital distributions to partners.............................. (1,547) (5,071) (4,004)
Additional rental paid by hotel lessee......................... 3,165 3,672 3,219
Advances from Marriott International, Inc...................... 1,700 -- --
Repayment of note payable to Marriott International, Inc....... (800) -- --
Payments received on investor notes receivable................. -- -- 45
--------- --------- ---------

Cash used in financing activities............................ (8,379) (1,399) (740)
--------- --------- ---------

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................ (4,458) 3,275 682

CASH AND CASH EQUIVALENTS at beginning of year.................. 10,213 6,938 6,256
--------- --------- ---------

CASH AND CASH EQUIVALENTS at end of year........................ $ 5,755 $ 10,213 $ 6,938
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest................................ $ 17,372 $ 13,237 $ 13,237
========= ========= =========

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

NOTES TO FINANCIAL STATEMENTS

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------

NOTE 1. THE PARTNERSHIP

Description of the Partnership

Desert Springs Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and own Marriott's Desert Springs
Resort and Spa and the land on which the 884-room hotel and a golf course are
located (the "Hotel") and airline equipment. On December 29, 1995, Host
Marriott Corporation's operations were divided into two separate companies:
Host Marriott Corporation ("Host Marriott") and Host Marriott Services
Corporation. The sole general partner of the Partnership, with a 1% interest,
is Marriott Desert Springs Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott. The Hotel is leased to Marriott Hotel Services,
Inc. (the "Tenant"), a wholly-owned indirect subsidiary of MII, along with a
second golf course leased by the Partnership from Marriott Desert Springs
Development Corporation, also a wholly-owned subsidiary of MII. The airline
equipment was leased to Trans World Airlines, Inc. ("TWA") pursuant to the terms
of an operating lease through April 20, 1995. On April 20, 1995, the
Partnership entered into a new sales-type lease agreement which was due to
expire on June 24, 1996. On April 24, 1996, TWA exercised its early termination
option under the airline equipment lease and paid the rent due on that date of
$847,000 along with the termination value of $780,000 plus the $1 purchase
option (see Note 6).

The Partnership was formed on February 26, 1987, and operations commenced on
April 24, 1987 (the "Unit Offering Closing Date"). Between March 20, 1987, and
the Unit Offering Closing Date, 900 limited partnership interests (the "Units")
were subscribed pursuant to a private placement offering. The offering price
per Unit was $100,000; $25,000 payable at subscription with the balance due in
three annual installments through June 15, 1990, or, as an alternative, $87,715
in cash at closing as full payment of the subscription price. Of the total 900
Units, 740.5 were purchased on the installment basis and 159.5 Units were paid
in full. The General Partner contributed $909,100 in cash for its 1% general
partnership interest.

Partnership Allocations and Distributions

Under the partnership agreement, Partnership allocations, for Federal income tax
purposes, and distributions are generally made as follows:

a. Cash available for distribution will generally be distributed (i) first, 1%
to the General Partner and 99% to the limited partners until the General
Partner and the limited partners (collectively, the "Partners") have
received cumulative distributions of sale or refinancing proceeds ("Capital
Receipts") equal to $45,454,545; and (ii) thereafter, 10% to the General
Partner and 90% to the limited partners.

b. Refinancing proceeds and proceeds from the sale or other disposition of
less than substantially all of the assets of the Partnership, not retained
by the Partnership, will be distributed (i) first, 1% to the General
Partner and 99% to the limited partners, until the Partners have received
cumulative distributions of Capital Receipts equal to $90,909,100; and (ii)
thereafter, 10% to the General Partner and 90% to the limited partners.

Proceeds from the sale or other disposition of all or substantially all of
the assets of the Partnership or from the sale or other disposition of all
or substantially all of the Hotel will be distributed to the Partners pro
rata in accordance with their capital account balances as defined in the
partnership agreement.

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

c. Net profits will be allocated as follows: (i) first, through and including
the year ended December 31, 1990, 99% to the General Partner and 1% to the
limited partners; (ii) next, through and including the year ending December
31, 1992, 70% to the General Partner and 30% to the limited partners; and
(iii) thereafter, 10% to the General Partner and 90% to the limited
partners.

d. Net losses will be allocated 100% to the General Partner through December
31, 1990, and thereafter, 70% to the General Partner and 30% to the limited
partners, subject to certain limitations, as specified in the partnership
agreement, regarding allocations to the limited partners.

e. The deduction for interest on the Purchase Note, as defined, which
cumulatively will not exceed $12,285 per Unit will be allocated to those
limited partners owning the Units purchased on the installment basis.

f. In general, gain recognized by the Partnership will be allocated as
follows: (i) first, to all Partners whose capital accounts have negative
balances until such negative balances are brought to zero; (ii) next, to
all Partners up to the amount necessary to bring their respective capital
account balances to an amount equal to their respective invested capital,
as defined; (iii) third, in the case of gain arising from the sale or other
disposition (or from a related series of sales or dispositions) of all or
substantially all of the assets of the Partnership, (a) to the limited
partners in an amount equal to the excess, if any, of (1) the sum of the
product of 12% times the weighted-average of the limited partners' invested
capital, as defined, each year, minus (2) the sum of cumulative
distributions to the limited partners of cash available for distribution,
and (b) next, to the General Partner until it has been allocated an amount
equal to 10/90 times the amount allocated to the limited partners in (a);
and (iv) thereafter, 12% to the General Partner and 88% to the limited
partners.

For financial reporting purposes, profits and losses are allocated among the
Partners based upon their stated interests in cash available for distribution.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The Partnership records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the following
estimated useful lives of the assets less an estimated residual value of 10% on
the original building cost and 20% on the airline equipment cost:

Building and improvements 50 years
Furniture and equipment 4 to 10 years
Airline equipment 8 years

All Hotel property and equipment is pledged as security for the Mortgage Debt
described in Note 5.

The Partnership assesses impairment of its real estate property based on whether
estimated undiscounted future cash flow from the hotel will be less than its net
book value. If the property is impaired, its basis is adjusted to fair market
value.

Deferred Financing Costs

Deferred financing costs represent the costs incurred in connection with
obtaining debt financing and are amortized over the term thereof. The original
Mortgage Debt (see Note 5) matured on July 27, 1996. Deferred financing costs
associated with that debt, totaling $943,000, were fully amortized at maturity
and removed from the Partnership's books. Costs associated with the refinanced
Mortgage Debt totaled $2,658,000 at December 31, 1996. At December 31, 1996 and
1995, accumulated amortization of deferred financing costs totalled $21,000 and
$859,000, respectively.

Additional Rental

Under the terms of the Hotel operating lease (see Note 7), the Tenant pays
Additional Rental to the Partnership which is subject to possible repayment
under defined conditions; therefore, Additional Rental has been recorded as a
liability in the financial statements.

Cash and Cash Equivalents

The Partnership considers all highly liquid investments with a maturity of less
than three months at date of purchase to be cash equivalents.

Income Taxes

Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual partners.
Significant differences exist between the net loss/net income for financial
reporting purposes and the net loss/net income reported in the Partnership's
tax return. These differences are due primarily to the use for income tax
purposes of accelerated depreciation methods, shorter depreciable lives for the
assets and differences in the timing of recognition of rental income. As a
result of these differences, the excess of the tax basis in net Partnership
liabilities and the net liabilities reported in the accompanying financial
statements at December 31, 1996 and 1995 was $26.0 million and $24.5 million,
respectively.

New Statements of Financial Accounting Standards

The Partnership adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," during
1994. Adoption of this statement did not have a material effect on the
Partnership's financial statements.

The Partnership adopted SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" during 1996. Adoption
of SFAS No. 121 did not have any effect on the Partnership's financial
statements.

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31 (in
thousands):

1996 1995
--------- ---------

Land and land improvements.................. $ 13,690 $ 13,551
Building and improvements................... 155,570 153,388
Furniture and equipment..................... 47,800 40,132
-------- --------
217,060 207,071

Less accumulated depreciation............... (61,619) (53,887)
-------- --------
$155,441 $153,184
======== ========

NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of financial instruments are shown below. Fair values
of financial instruments not included in this table are estimated to be equal to
their carrying amounts (in thousands):

As of December 31, 1996 As of December 31, 1995
------------------------ -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------

FINANCIAL ASSETS:

Property improvement fund $ 1,041 $ 1,041 $ 5,425 $ 5,425

FINANCIAL LIABILITIES:

Mortgage debt $ 160,000 $ 160,000 $ 168,239 $ 168,239
Note Payable to MII $ 900 $ 900 $ -- $ --
Additional rental paid by Hotel lessee $ 25,013 $ -- $ 21,848 $ --

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

The estimated fair value of Mortgage Debt obligations is based on the expected
future debt service payments discounted at estimated market rates. Additional
rental paid by the Hotel lessee is valued based on the expected future payments
from operating cash flow discounted at a risk-adjusted rate. As further
explained in Note 7, upon closing of the permanent financing to take place in
1997, MII agreed to waive all claims to Additional Rental that has accrued prior
to the consummation of the loan. Consequently, the estimated fair value of
Additional Rental paid by the Hotel lessee is zero.

As further explained in Note 7, the Partnership is required to maintain a
property improvement fund for the purpose of funding capital expenditures. As
of December 31, 1995, a portion of the Partnership's property improvement fund
was invested in debt securities which matured in 1996. Pursuant to the
provisions of SFAS No. 115, the securities were classified as held-for-sale and
adjusted to their fair market value. The proceeds from the sale of the
securities were used to fund a portion of the rooms refurbishment project which
was completed in the fourth quarter of 1996.

NOTE 5. DEBT

Mortgage Debt

As of December 31, 1995, Partnership debt consisted of a $168.2 million
nonrecourse mortgage loan (the "Mortgage Debt") which matured on July 27, 1996.
The Mortgage Debt bore interest at a fixed rate of 7.76% and required no
amortization of principal prior to maturity.

The Mortgage Debt matured on July 27, 1996, and went into default on the
maturity date as the Partnership was unable to secure replacement financing or
negotiate a forbearance agreement with the lender. Pursuant to the loan
documents, the Mortgage Debt began to accrue interest at the Default Rate, as
defined, of 10.75% which is 2.5 percentage points above the Lender's Corporate
Base Rate, as defined, from the maturity date through December 23, 1996.

The Partnership's debt was refinanced on December 23, 1996. The Mortgage Debt
was fully repaid with the proceeds from a $160 million nonrecourse mortgage loan
(the "Bridge Loan") combined with a principal paydown in the amount of $8.2
million from the Partnership's refinancing reserve. The new loan was originated
by Goldman, Sachs & Co. ("Goldman Sachs") and the lender is GMAC Commercial
Mortgage Corporation. The debt refinancing will take place in two stages. The
first stage, which took effect on December 23, provides an interim $160 million
mortgage loan that matures on October 31, 1997. This debt will bear interest at
LIBOR plus 2.75 percentage points and requires that all excess cash from Hotel
operations, if any, be held in a debt service reserve for future debt service or
to reduce the outstanding principal balance upon maturity. For the year, the
weighted-average interest rate on the Partnership's Mortgage Debt was 9.0%. In
1995 the weighted-average interest rate on the Mortgage Debt was 7.8%. At
December 31, 1996, the interest rate on the Bridge Loan was 8.4%.

The second stage of the refinancing will involve securing long-term financing
for the Hotel. Concurrently with entering into the interim loan agreement, the
Partnership signed a commitment letter with Goldman Sachs which outlines the
possible terms of a long-term loan to be finalized prior to October 31, 1997.
Under the terms of the commitment letter, the long-term debt would consist of
two notes: a $99 million "Senior Note" and a $61 million "Junior Note."
Pursuant to the terms of the commitment, the Senior Note will be provided by
Goldman Sachs, will bear interest at 12-year U.S. Treasuries plus 1.9
percentage points (currently 8.7%) and will require principal amortization on a
25-year term.

- --------------------------------------------------------------------------------
Pursuant to the terms of the commitment letter, the Partnership has certain
options available to finance the Junior Note. One option is for Goldman Sachs
to provide the Junior Note in two tranches of debt. The first tranche of $39.1
million would bear interest at 12-year U.S. Treasuries plus 6.5 percentage
points with amortization based upon a 12.5 year term. The second tranche of
debt approximating $21.9 million would bear interest at 20% with principal
amortization to be paid from excess cash flow as defined in the commitment
letter. Other options available to finance the Junior Note amount include Host
Marriott or a subsidiary or MII providing a loan to the Partnership.

The Partnership utilized $2.6 million from the refinancing reserve to pay costs
associated with the financing including lender or a subsidiary fees, property
appraisals, environmental studies and legal fees. Approximately half of the
$2.6 million was for fees related to the long-term financing.

Debt to MII

On April 30, 1996, the Partnership entered into a short-term loan with MII in
the amount of $1,700,000 to fund a portion of the Hotel's rooms refurbishment
project. The loan matures on June 13, 1997, bears interest at 8.5% and will be
repaid from the property improvement fund as contributions are made during the
year. The Partnership was required to make principal payments of $200,000 on
the last day of each Accounting Period in 1996, as defined, beginning on October
4, 1996. Thereafter, principal payments of $300,000 per Accounting Period are
scheduled to be paid. At December 31, 1996, the loan balance was $900,000.

NOTE 6. AIRLINE EQUIPMENT LEASE

The Partnership leased airline equipment to TWA under the terms of an operating
lease which expired in April 1995. Pursuant to the terms of the airline
equipment lease, TWA was obligated to make semi-annual payments, in arrears,
based upon specified percentages of the Partnership's cost of the airline
equipment. Rental income under the operating lease is included in "Airline
equipment income" in the statement of operations and was $852,000 in 1995, and
$2,731,000 in 1994.

- --------------------------------------------------------------------------------
On April 20, 1995, the Partnership reached an agreement with TWA whereby TWA was
obligated to pay renewal rents under a 15-month lease agreement. The renewal
rents consisted of quarterly payments of $780,000 plus 17% interest paid in
arrears, all of which totalled $6.5 million. At the end of the lease term, TWA
had the option to purchase the equipment for one dollar ($1). The Partnership
classified the new lease as a sales-type lease and recorded a receivable for the
future lease payments due from TWA, along with a deferred gain on the
transaction. The deferred gain is recognized as income as lease payments are
received on the installment method as a component of the line item "Airline
Equipment Income" in the statement of operations. Deferred gain amortization
was $1,248,000 in 1996 and $1,985,000 in 1995. On April 24, 1996, TWA exercised
its early termination option under the airline equipment lease and paid the rent
due on that date of $847,000 along with the termination value of $780,000 plus
the $1 purchase option.

NOTE 7. OPERATING LEASE

The Partnership leases the Hotel to the Tenant pursuant to an agreement which
commenced on April 24, 1987, with an initial term of 25 years (the "Operating
Lease"). The lease may be renewed at the Tenant's option for five successive
periods of 10 years each.

Annual Rental is equal to the greater of Basic Rental or Owner's Priority, as
described below:

1. Basic Rental equals 85% of Operating Profit, as defined, until December 31,
1993, and 80% thereafter.

2. Owner's Priority equals the greater of (i) $20 million plus debt service on
certain additional debt to expand the Hotel ("Expansion Debt Service") or
(ii) Debt Service, as defined. If there is a new mortgage (in an amount which
exceeds the outstanding balance of the existing mortgage by at least
$45,455,000), Owner's Priority will equal the greater of (i) $20 million plus
Expansion Debt Service, (ii) Debt Service or (iii) the lesser of Debt Service
on the new mortgage or $24 million plus Expansion Debt Service. In no event
will Owner's Priority for any year exceed Operating Profit.

3. Additional Rental equals the cumulative amount by which Owner's Priority
exceeds Basic Rental plus $268,000 and is recorded as a liability in the
accompanying financial statements. If in any year Basic Rental exceeds
Owner's Priority, Annual Rental will be reduced to equal Basic Rental minus
the lower of (i) Additional Rental then outstanding or (ii) 25% of the amount
by which Basic Rental exceeds Owner's Priority.

Rental income for 1996 included Basic Rental of $16,836,000 and Additional
Rental of $3,164,000. Operating Profit in 1996 totaled $21,045,000. In
accordance with the lease agreement, the Partnership was entitled to receive
Owner's Priority of $20,000,000 and MII was entitled to the remaining
$1,045,000.

Pursuant to an agreement reached with MII, for fiscal year 1997 the $20 million
Owner's Priority will be increased to $20.5 million. MII will be entitled only
to the next $2 million of Operating Profit. Any additional Operating Profit in
excess of $22.5 million will be remitted entirely to the Partnership as
additional rent. MII has also agreed once the long-term refinancing with
Goldman Sachs is consummated, Owner's Priority will be increased to $21.5
million and MII will be entitled only to the next $1.8 million of Operating
Profit. Any additional Operating Profit in excess of $23.3 million will be
shared 75% to the Partnership and 25% to MII. In connection with and
concurrently with the consummation of the long-term financing in 1997, MII
agreed to waive any and all claims to Additional Rental that have accrued prior
to the consummation of such loan.

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

In addition to the Annual Rental, the Tenant is required to pay property taxes,
make annual contributions equal to a percentage of Hotel sales to a property
improvement fund (4.5% through 1997 and 5.5% thereafter) and pay rental on the
second golf course.

Pursuant to the terms of the Hotel purchase agreement, the Tenant and its
affiliates may utilize a portion of the land adjacent to the Hotel for
development of residences and timeshare condominiums. Purchasers of the
residences have the opportunity to use certain Hotel facilities and services for
a fee. Purchasers of the timeshare condominiums also have the ability to use
the Hotel's facilities but such use is subject to the same fees charged to Hotel
guests.

During 1995, the Hotel's main swimming pool was expanded at a cost of
approximately $2.1 million. The project was funded partially by proceeds
received from Marriott Vacation Club International ("MVCI"), a wholly-owned
indirect subsidiary of MII, pursuant to an agreement between the Partnership and
MVCI for the development of additional timeshare units on land adjacent to the
Hotel. As part of this agreement, the Hotel's spa was also expanded during
1994. Pursuant to the terms of the agreement, MVCI contributed a total of $1.3
million towards the pool expansion and the spa expansion projects; the remaining
costs were funded by Partnership cash reserves. Amounts funded by MVCI in 1995
and 1994 were $692,000 and $623,000, respectively, and were included in "Other
Income" in the statement of operations.

NOTE 8. COMPARATIVE HOTEL OPERATING RESULTS

The following is a summary of Hotel Operating Profit, as defined in the Hotel
lease agreement, for the three years ended December 31, 1996 (in thousands):

1996 1995 1994
------- ------- -------

REVENUES
Rooms........................... $37,031 $33,495 $33,101
Food and beverage............... 38,431 33,453 31,701
Other........................... 22,437 18,450 17,281
------- ------- -------
97,899 85,398 82,083
------- ------- -------

EXPENSES
Departmental direct costs
Rooms.......................... 8,545 7,715 8,156
Food and beverage.............. 26,623 23,335 22,243
Other operating expenses........ 41,686 35,987 35,589
------- ------- -------
76,854 67,037 65,988
------- ------- -------

OPERATING PROFIT............... $21,045 $18,361 $16,095
======= ======= =======

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Partnership has no directors or officers. The business policy making
functions of the Partnership are carried out through the directors and executive
officers of Marriott Desert Springs Corporation, the General Partner, who are
listed below:

Current Position in Age at
Name Marriott Desert Springs Corp. December 31, 1996
- ------------------------- --------------------------------------- -----------------

Bruce F. Stemerman President and Director 41
Robert E. Parsons, Jr. Vice President and Director 41
Christopher G. Townsend Vice President, Director, and Secretary 49
Patricia K. Brady Vice President, Chief Accounting
Officer and Treasurer 35

Business Experience

Bruce F. Stemerman was elected President of the General Partner in November
1995. He has been a Director of the General Partner since October 1993. Mr.
Stemerman joined Host Marriott in 1989 as Director--Partnership Services. He
was promoted to Vice President--Lodging Partnerships in 1994 and to Senior Vice
President--Asset Management in 1996. Prior to joining Host Marriott, Mr.
Stemerman spent ten years with Price Waterhouse. He also serves as a director
and an officer of numerous Host Marriott subsidiaries.

Robert E. Parsons, Jr. has been a Vice President of the General Partner since
November 1995 and a Director of the General Partner since September 1988. From
1988 to October 1995, Mr. Parsons was President of the General Partner. Mr.
Parsons joined Host Marriott's Corporate Financial Planning staff in 1981, was
made Director-Project Finance of Host Marriott's Treasury Department in 1984,
and in 1986 he was made Vice President-Project Finance of Host Marriott's
Treasury Department. He was made Assistant Treasurer of Host Marriott in 1988.
Mr. Parsons was named Senior Vice President and Treasurer of Host Marriott in
1993. He was named Executive Vice President and Chief Financial Officer of Host
Marriott in October 1995. He also serves as a director and an officer of
numerous Host Marriott subsidiaries.

Christopher G. Townsend has been Vice President, Director and Secretary of the
General Partner since September 1988. Mr. Townsend joined Host Marriott's Law
Department in 1982 as a Senior Attorney. In 1984, Mr. Townsend was made
Assistant Secretary of Host Marriott and in 1986 was made Assistant General
Counsel. In 1993, he was made Senior Vice President, Corporate Secretary and
Deputy General Counsel of Host Marriott. In November 1996, Mr. Townsend was
named General Counsel of Host Marriott. He also serves as a director and an
officer of numerous Host Marriott subsidiaries.

Patricia K. Brady has been Vice President, Chief Accounting Officer and
Treasurer of the General Partner since October 10, 1996. Ms. Brady joined Host
Marriott in 1989 as Assistant Manager--Partnership Services. She was promoted
to Manager in 1990 and to Director--Asset Management in June, 1996. Ms. Brady
also serves as an officer of numerous Host Marriott subsidiaries.

ITEM 11. MANAGEMENT RENUMERATION AND TRANSACTIONS

As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the Operating Lease described in Items 1 and 13.
The General Partner is required to devote to the Partnership such time as may be
necessary for the proper performance of its duties, but the officers and the
directors of the General Partner are not required to devote their full time to
the performance of such duties. No officer or director of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or director does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
Any such costs may include a charge for overhead, but without a profit to the
General Partner. For the fiscal years ending December 31, 1996, 1995 and 1994,
administrative expenses reimbursed to the General Partner totaled $250,000,
$67,000 and $124,000, respectively. For information regarding all payments made
by the Partnership to Host Marriott and subsidiaries, see Item 13 "Certain
Relationships and Related Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of August 28, 1997 no person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of Units. The
General Partner does not own any Units.

There are no Units owned by the executive officers and directors of the General
Partner, as a group.

The officers and directors of MII, as a group, own the following units:

Amount and Nature of Percent
Title of Class Beneficial Ownership of Class
- -------------- -------------------- --------
Limited Partnership Units 1 Unit 0.1%

There are no Units owned by individuals who are directors of both the General
Partner and MII.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

OPERATING LEASE AGREEMENT
- -------------------------

As described below, the Partnership is party to important ongoing agreements
with MII pursuant to which the Hotel is leased to MHSI.

Prior to October 8, 1993, MII was a wholly-owned subsidiary of Host Marriott,
which was then known as Marriott Corporation. On October 8, 1993, Marriott
Corporation's operations were divided into two separate companies, Host Marriott
and MII. MII now conducts its management business as a separate, publicly-
traded company and is not a parent or subsidiary of Host Marriott, although the
two corporations have various business and other relationships. In accordance
with the terms of the Partnership Agreement, each of the agreements discussed
below were entered into based upon the General Partner's belief that such
agreements were fair to the Partnership and reflect commercially reasonable
terms. However, as a result of the fact that the Hotel Operating Lease, Golf
Course Lease and Homeowners Agreement described below were entered into at a
time when the counter-party to each of these agreement was a subsidiary of Host
Marriott (then known as Marriott Corporation), the General Partner has made no
further investigation toward forming a belief as to whether these agreements
were on terms at least as favorable as the Partnership would have been able to
obtain from an independent third party. The General Partner believes that the
terms of the Office Space Rental Agreement and Transaction with MCVI for Pool
Facilities described below were on terms at least as favorable as the
Partnership would have been able to obtain from an independent third party.

The Hotel Operating Lease

The Partnership entered into the Operating Lease with MHSI, a subsidiary of MII,
on April 23, 1987, to operate the Hotel. The Operating Lease is for a term of
25 years from the opening of the hotel with renewal terms, at the option of
MHSI, of up to five additional 10-year periods.

The Hotel Operating Lease provides for the payment of the greater of Basic
Rental or Owner's Priority. Basic Rental equals 80% of Operating Profit, as
defined. Owner's Priority equals the greater of (i) $20 million plus debt
service on certain additional debt to expand the Hotel or (ii) debt service, as
defined. (In no event will Owner's Priority for any year exceed Operating
Profit, as defined.)

The basis for computing the amounts paid pursuant to the Operating Lease is
expected to change in future periods. Pursuant to an agreement reached with MII
on December 23, 1996, for fiscal year 1997, the $20 million Owner's Priority
will be increased to $20.5 million. MII will be entitled only to the next $2
million of Operating Profit, as defined. Any additional Operating Profit in
excess of $22.5 million will be remitted entirely to the Partnership as
Additional Rent. MII has also agreed that once long-term refinancing of the
existing mortgage debt is consummated, Owner's Priority will be increased to
$21.5 million and MII will be entitled only to the next $1.8 million of
Operating Profit. Any additional Operating Profit in excess of $23.3 million
will be shared 75% to the Partnership and 25% to MII. In connection with and
concurrently with the consummation of the long-term financing in 1997, MII
agreed to waive any and all claims to Additional Rental, as defined, that have
accrued prior to the consummation of such loan.

For the operating lease years ended December 31, 1996, 1995 and 1994 Basic
Rental was $16.8 million, $14.7 million and $12.9 million, respectively.

The Operating Lease provides that the Partnership may terminate the Operating
Lease and remove the Operating Tenant if the payments of Annual Rental in any
two of three consecutive fiscal years beginning with fiscal year 1991 are less
than $15 million. The Operating Tenant may, however, prevent termination by
paying to the Partnership such amounts as are necessary to achieve the above
performance standards. Annual Rental for the fiscal years ended December 31,
1991 was $15.9 million, December 31, 1992 was $15.5 million, December 31, 1993
was $14.2 million,

December 31, 1994 was $16.1 million, December 31, 1995 was $18.4 million and
December 31, 1996 was $20 million.

Golf Course Lease

The Second Golf Course is located near the Hotel on approximately 100 acres of
land and is leased to the Partnership by a subsidiary of MII. The Second Golf
Course and related facilities are subleased by the Partnership to the Operating
Tenant pursuant to an operating lease with annual rental equal to $100,000. The
term of the lease for the Second Golf Course expires on December 31, 2011, with
five 10-year renewal periods at the option of the Partnership. Under the terms
of the lease for the Second Golf Course, the Partnership pays annual rent equal
to $100,000 and is responsible for all costs of operating and maintaining the
Second Golf Course. Upon termination of the lease for the Second Golf Course,
the Second Golf Course and all facilities and improvements thereon will become
the property of Marriott's Desert Springs Development Corporation. All costs of
operating and maintaining the course are deductions from gross revenues and all
revenues from operation of the course are items of gross revenues of the Hotel.

Homeowners Agreement

A subsidiary of MII, Marriott Vacation Club International, Inc. ("MVCI") has
been developing a portion of land adjacent to the golf courses for time shares.
The Partnership, MII, Marriott's Desert Springs Development Corporation and MVCI
entered into an Agreement (the "Homeowners Agreement") whereby it was agreed
that each purchaser of a time share unit will receive certain golf course and
other privileges (including preferred tee times at the golf courses equal to one
tee time per week per time share unit) at the Hotel. Time share purchasers will
not pay membership fees, but rather will pay regular green fees for use of the
golf courses, and do not receive preferred tennis court times or free access to
the health spa. Time share purchasers will have use of the latter facilities
and other Hotel facilities, if they are available, on the same basis as regular
Hotel guests and will pay the same fees as regular Hotel guests.

Office Space Rental Agreement

On January 27, 1995, the Partnership entered into an agreement with MVCI whereby
MVCI occupies the space of eleven guest rooms and built a Vacation Gallery. The
initial term of the agreement is April 1, 1995 to March 31, 1999, with initial
annual rental of $150,000. The annual rental may be increased in the second,
third and fourth year of the lease by the local area Consumer Price Index plus
1% subject to a maximum of 10%. The annual rental for 1996 was $154,350.

Transaction With MVCI for Pool Facilities

During 1994 and 1995, the Hotel's spa and main swimming pool facilities were
expanded. The total $580,000 for the spa expansion was funded entirely with
proceeds from MVCI pursuant to an agreement between the Partnership and MVCI for
the development of time share units on the land adjacent to the Hotel. As part
of this agreement, MVCI also paid $692,000 toward the $2.1 million pool
expansion. The remainder of the pool expansion was funded by the Partnership's
cash reserves.

PAYMENTS TO HOST MARRIOTT, MII AND THEIR AFFILIATES
- ---------------------------------------------------

The following table sets forth amounts paid by the Partnership to Host Marriott,
MII and their subsidiaries for the years ended December 31, 1996, 1995 and 1994
(in thousands):

Year Ended December 31,
1996 1995 1994
------- ------- -------

Payments to Host Marriott and affiliates:

Administrative expenses................................ $ 250 $ 67 $ 124
Capital distributions.................................. 15 51 40
------- ------- -------
$ 265 $ 118 $ 164
======= ======= =======
Payments to MII and affiliates:

Golf course rent....................................... $ 100 $ 100 $ 138
Interest on note payable to MII........................ $ 48 -- --
------- ------- -------
$ 148 $ 100 $ 138
======= ======= =======

PART IV

ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

(a) List of Documents Filed as Part of This Report

(1) Financial Statements
All financial statements of the registrant as set forth under Item 8 of
this Report on Form 10-K.

(2) Financial Statement Schedules
The following financial information is filed herewith on the pages
indicated.

III. Real Estate and Accumulated Depreciation

All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.

(3) Exhibits

Exhibit # Description
--------- -----------

3.1 Amended and Restated Agreement of Limited
Partnership of Desert Springs Marriott Limited
Partnership dated April 24, 1987. Incorporated by
reference from Exhibit 3 to Form 10 dated April
27, 1988

10.1 Lease Agreement between Desert Springs Marriott
Limited Partnership and Desert Springs Hotel
Services dated April 23, 1987. Incorporated by
reference from Exhibit 10a to Form 10 dated April
27, 1988.

10.2 Golf Course Lease Agreement between Marriott's
Desert Springs Development Corporation and Desert
Springs Marriott Limited Partnership dated April
24, 1987. Incorporated by reference from Exhibit
10b to Form 10 dated April 27, 1988.

10.2.1 First Amendement to Golf Course Lease between
Marriott's Desert Springs Development Corporation
and Desert Springs Marriott Limited Partnership
dated March 31, 1994.

10.2.2 Second Amendment to Golf Course Lease between
Marriott's Desert Springs Development Corporation
and Desert Springs Marriott Limited Partnership
dated November 25, 1996.

10.3 Lease Agreement between Desert Springs Marriott
Limited Partnership and Trans World Airlines,
Inc. dated March 3, 1987; accepted April 24,
1987. Incorporated by reference from Exhibit 10c
to Form 10 dated April 27, 1988.

10.4 Home Owners Agreement among Marriott Corporation,
Marriott's Desert Springs Development
Corporation, Desert Springs Hotel Services and
Desert Springs Marriott Limited Partnership;
accepted April 24, 1987.

10.5 Loan Agreement between The First National Bank of
Chicago; Credit Lyonnais, New York Branch and
Credit Lyonnais, Cayman Island Branch; Societe
Generale, Chicago Branch; Sumitomo Trust &
Banking Co., Ltd., Los Angeles Agency; and Desert
Springs Marriott Limited Partnership dated July
26, 1989.

10.6 Modification of Loan Agreement and Other Loan
Documents between GMAC Commercial Mortgage
Corporation and Desert Springs Marriott Limited
Partnership dated as of December 23, 1996.

10.7 Agreement for Use of Resort Facilities among
Desert Springs Hotel Services, Marriott Ownership
Resorts, Inc., and Marriott Desert Springs
Limited Partnership dated January 1, 1994.

10.8 Amended and Restated Recreational License among
Desert Springs Hotel Services, Marriott
Ownership Resorts, Inc., Desert Springs Villas
Timeshare Association and Marriott Desert Springs
Limited Partnership dated January 1, 1994.

10.9 Office Space Rental Agreement between Marriott
Ownership Resorts, Inc., and Desert Springs
Marriott Limited Partnership dated January 27,
1995.

27. Financial Data Schedule

(b) Reports on Form 8-K

No reports on Form 8-K were filed during 1996.

SIGNATURE
---------

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on August 28, 1997.

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP

By: MARRIOTT DESERT SPRINGS CORPORATION
General Partner

By: /s/ Patricia K. Brady
------------------------------------------------------
Patricia K. Brady
Vice President, Chief Accounting Officer and Treasurer
(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on August 28, 1997.
----------------

Signature Title
- --------- -----
(Marriott Desert Springs Corporation)
/s/ Bruce F. Stemerman
- --------------------------- President and Director
Bruce F. Stemerman (Principal Executive Officer)

/s/ Robert E. Parsons, Jr.
- --------------------------- Vice President and Director
Robert E. Parsons, Jr.

/s/ Christopher G. Townsend
- --------------------------- Vice President, Director and Secretary
Christopher G. Townsend

SCHEDULE III

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
PALM DESERT, CALIFORNIA

REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)

Gross Amount at December 31, 1996
---------------------------------

Initial Costs
---------------------------- Subsequent
Buildings & Costs Buildings &
Encumbrances Land Improvements Capitalized Land Improvements
------------- ------------- ------------- ------------- ------------- -------------

Marriott Desert Springs
Resort & Spa
Palm Desert, CA $ 160,000 $ 11,459 $ 146,687 $ 11,114 $ 11,459 $ 157,801

Gross Amount at December 31, 1996
---------------------------------

Date of
Accumulated Completion of Date Depreciation
Total Depreciation Construction Acquired Life
------------- ------------- ------------- ------------- -------------

Marriott Desert Springs
Resort & Spa
Palm Desert, CA $ 169,260 $ 29,230 1987 1987 50 years

SCHEDULE III
PAGE 2 OF 2

DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)

1994 1995 1996
-------- -------- --------

NOTES:

(a) The changes in the total cost of land, buildings and improvements for the
three years ended December 31, 1996 were as follows:

Balance at beginning of year.................................................................. $163,331 $164,527 $166,939
Capital expenditures......................................................................... 1,196 2,412 2,321
Dispositions................................................................................. -- -- --
-------- -------- --------
Balance at end of year........................................................................ $164,527 $166,939 $169,260
======== ======== ========

(b) The changes in accumulated depreciation and amortization for the three
years ended December 31, 1996 were as follows:

Balance at beginning of year.................................................................. $ 18,657 $ 22,096 25,597
Depreciation and amortization................................................................ 3,439 3,501 3,633
Dispositions and other....................................................................... -- -- --
-------- -------- --------
Balance at end of year........................................................................ $ 22,096 $ 25,597 $ 29,230
======== ======== ========

(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes was approximately $169,735,000 at December 31, 1996.