REGULATION S-B









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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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



                                   FORM 10-KSB

     [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                   For the fiscal year ended December 31, 1997

                                       OR

        [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                         Commission file number 33-67848

                      ESSEX HOSPITALITY ASSOCIATES III L.P.
               (Exact name of registrant as specified in charter)


            Delaware                                  16-1442557
(State of other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                               100 Corporate Woods
                            Rochester, New York 14623
                     (Address of principal executive office)



Registrant's telephone number, including area code:  (716) 272-2300

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:  NONE

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.
         Yes    X          No
               ---            ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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- KSB or any
amendment to this Form 10-KSB [X]

State issuer's revenues for its most recent fiscal year: $3,950,000

As of March 24, 1998, a total of 3,989 Limited Partnership Units were held by
non-affiliates who purchased the Units from the issuer at an aggregate offering
price of $3,975,320. There is no trading market for the Units and none is
expected to develop.

Documents incorporated by reference:  NONE



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PART I

Certain of the information contained in this Form 10-KSB, including the
Management's Discussion and Analysis or Plan of Operation found in Item 6 of
this Report, contains forward-looking statements. A number of important factors
including, but not limited to actions of competitors and franchisors, adverse
changes in general economic conditions and adverse local conditions, increases
in real estate taxes and operating costs and adverse changes in real estate
zoning, health, safety, environmental and other laws and regulations, could
cause actual results to differ materially from the forward-looking statements.


Item 1.  Business

Essex Hospitality Associates III L.P., is a Delaware limited partnership,(the
"Partnership") formed on August 17, 1992 whose principal business is to own and
operate three hotel properties, a Microtel Inn hotel in Birmingham, Alabama, a
Hampton Inn hotel in Rochester, New York and a Microtel Inn hotel in
Chattanooga, Tennessee. The properties are operated pursuant to franchises or
licenses obtained from these national lodging chains. The General Partners of
the Partnership are Essex Partners Inc., a New York corporation (the "Managing
General Partner"), and John E. Mooney, an individual and president of Essex and
the Managing General Partner. The principal investment objectives of the
Partnership are to: (i) preserve, protect and return the Partnership's invested
capital and to meet debt service requirements; (ii) provide quarterly
distributions of available cash to the Limited Partners and (iii) provide
appreciation in the market value of the hotels which may be realized through
their sale or refinancing.

Construction of the hotels was financed through a combination of equity and debt
raised through the Partnership's public offering of first mortgage notes and
limited partnership units. The Partnership completed construction of one
property in 1994, and two properties in 1995. The first Partnership property to
open, a 102-room Microtel Inn hotel in Birmingham, Alabama, opened in September,
1994. The Birmingham Microtel Inn cost approximately $3,000,000 to build,
including all furniture, equipment, initial franchise fee and pre-opening costs
as well as the land costs and building construction, but excluding financing
costs. A 118-room Hampton Inn opened in Rochester, New York in April, 1995. The
Hampton Inn cost approximately $4.8 million to build, including all furniture,
equipment, initial franchise fee and pre-opening costs as well as the land costs
and building construction, but excluding financing costs. The third Partnership
property, a 100-room Microtel Inn located in Chattanooga Tennessee opened in
September, 1995. The Chattanooga Microtel Inn cost approximately $3.1 million to
build including all furniture, equipment, initial franchise fee and pre-opening
costs as well as the land costs and building construction, but excluding
financing costs. The Partnership's public offering of first mortgage notes and
class A limited partnership units was completed in 1995. Gross offering proceeds
of $13,986,320 were closed into the Partnership, representing $10,000,000 in
first mortgage notes and $3,986,320 in class A limited partnership units.

MICROTEL INN HOTELS
Microtel Inn hotel is an economy lodging chain. Microtel Inn hotels offer
downsized rooms with higher quality furnishings at rates generally below those
available at competing national lodging chains. The Microtel Inn hotel growth
strategy is to locate in areas where other budget hotels are operating
successfully, typically along major highways or near airports, and to compete
primarily on the basis of price. The lower rates are economically feasible since
the standardized, compact design of Microtel hotels and the elimination of
nonessential amenities (such as swimming pools, restaurants and large lobbies)
results in reduced construction, operating and overhead costs. Microtel Inn
hotels offer the value conscious traveler consistent, affordable and high
quality accommodations.

Each Microtel Inn hotel is of standardized new construction in accordance with
prototype plans developed by the franchisor and furnished to each franchisee.
Typically either two or three stories, Microtel Inn hotels are constructed of
either wood or metal frame. The guest rooms are approximately 30% smaller than
an average economy hotel room. Each guest room contains either one or two queen
size beds, a bay window seat, remote control color television, telephone,
built-in desk and bureau and a standard size hotel bathroom with tub and shower
combination, all packaged in a modern and attractive design. In 1995, the
Microtel Suites and Microtel Inn & Suites brands were added by the franchisor.

On October 6, 1995, Microtel Franchise and Development Corporation announced the
completion of a joint venture transaction with U.S. Franchise Systems Inc., a
new company founded by Michael Leven, former president and chief


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operating officer of Holiday Inn Worldwide. U.S. Franchise Systems Inc. has
assumed worldwide franchising and administration for the Microtel Inn chain of
hotels. The Microtel trademarks have been transferred to U.S. Franchise Systems
for its exclusive use in franchising the hotel chain. Microtel Inns and Suites
Franchising, Inc., a wholly-owned subsidiary of U.S. Franchise Systems, Inc., is
the franchisor and licensor of the Microtel Franchise System and Microtel
trademarks. Microtel Franchise and Development Corporation has changed its name
and operates under Hudson Hotels, and is responsible for building and managing
hotel properties.

Started in 1989 with the opening of its first property, there were 64 Microtel
Inn hotels in operation throughout the United States at the end of 1997. US
Franchise Systems has advised the Partnership that system-wide occupancy rates
for properties open for more than six months averaged 67.3% in 1997 as compared
to 69.4% in 1996, with an average daily rate of approximately $40.49 in 1997
compared to $37.91in 1996. The Microtel Inn hotel franchise competes primarily
in the economy sector of the lodging industry. For 1997 the economy sector
reported an average occupancy rate of 62.3% and an average daily rate of $
46.48.

HAMPTON INN
Hampton Inn hotels are high quality hotels with limited amenities and moderate
prices. Hampton Inn hotels are designed primarily to accommodate business
travelers with limited expense accounts, non-destination business and pleasure
travelers and value-conscious vacationers. Hampton Inn hotels are generally two
to six stories with 50 to 150 rooms and are located in high-visibility, high
traffic areas, typically near full-service restaurants.

Hampton Inn hotels have a strong commitment to guest satisfaction. According to
Promus Corporation ("Promus"), the Hampton Inn hotel was the first national
hotel to offer an unconditional 100% Satisfaction Guarantee. A toll-free number
provides access to a nationwide reservation system. Hampton Inn hotels offer a
national advertising and marketing program and are widely promoted on
television, in magazines and trade publications and through direct mail, which
increases travelers' awareness and trial usage. Major emphasis is also placed on
corporate and travel agent markets.

Hampton Inn hotels offer selected services and amenities, including a free,
self-serve continental breakfast in the lobby, free local telephone calls, a
free in-room movie channel and senior citizens' and frequent travelers' discount
programs. Most hotels offer a lobby/breakfast area and a variety of room types:
rooms with one or two double beds and rooms with king bed configurations. Most
Hampton Inn hotels offer a swimming pool and a hospitality suite, a
multi-purpose room that doubles as a guest room or a small gathering facility.

Started in 1984, there were 728 Hampton Inn hotels in operation throughout the
United States at the end of 1997. Promus has advised the Partnership that
system-wide occupancy rates averaged 70.5% in 1997 as compared to 72.1% in 1996,
with an average daily rate of approximately $64.60 in 1997 compared to $60.84 in
1996. The Hampton Inn hotel franchise started in the upper economy segment, but
over time, as its average daily rate has crossed over into the mid-scale segment
without food and beverage, the franchise has repeatedly exceeded the industry
averages for the mid-scale segment without food and beverage. For 1997 the
mid-scale segment without food and beverage reported an average occupancy rate
of 64.6% and an average daily rate of $68.04.


FRANCHISE AGREEMENT AND LICENSE AGREEMENTS
The following is a summary of the principal terms of the franchise and license
agreements for the Partnership's Hampton Inn and Microtel Inn hotels.

The Partnership entered into franchise agreements with Microtel Franchise and
Development Corporation (MFDC) for the Birmingham, Alabama and Chattanooga,
Tennessee sites which were assigned to U.S. Franchise Systems. The initial
franchise fees paid for the Birmingham and Chattanooga Microtel Inn hotels
totalled $50,500. In addition to the initial fee, the Partnership is required to
pay a monthly royalty fee of 2.5% of gross room revenues. The monthly royalty
fee increases to 3% of gross room revenues in the event between 50 and 100
Microtel Inn hotels are opened, and 3.5% of gross revenues in the event more
than 100 Microtel Inn hotels are opened. In the summer of 1997, the 50th
Microtel Inn was opened, and the royalty fee was increased to 3% with the
September, 1997 payment. In 1996, the U.S. Franchise Systems established a
system of advertising, thus requiring the Partnership to contribute an
additional 1% of gross room revenues monthly to pay for the cost of such a
system. The franchise agreement also requires the Partnership to maintain
certain insurance coverage, to meet certain standards with respect to furniture,

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fixtures, maintenance and repair, and to refurbish and upgrade the hotel not
more than once every 5 years to conform to the Microtel Inn hotel's then-current
public image. The term of the agreement is 10 years, with an option to renew for
an additional 10 years, subject to compliance with certain conditions.

The Partnership has also entered into a license agreement with Promus to operate
a Hampton Inn hotel for the Rochester, New York site. An initial franchise fee
of $35,000 was paid. In addition to the initial fee, the Partnership is required
to pay Promus a monthly royalty fee of 4% of gross room revenues, a monthly
marketing/reservation fee of 4% of gross room revenues and a monthly amount
equal to any sales tax or similar tax imposed on Hampton Inn on payments
received under the license agreement. The term of the license agreement is 20
years and is not renewable. Promus requires the Partnership to establish a
capital reserve account based on a percentage of gross room revenues generated
by the Hampton Inn which will be used for product quality requirements of the
hotel. Cumulative funding of the reserve for the first five years of operation
increases from 1% to 5% of gross room revenues and stabilizes at 5% for the term
of the agreement.

The franchise agreements impose certain restrictions on the transfer of limited
partnership units. MFDC and Promus restrict the sale, pledge or transfer of
units in excess of 10% and 25% per transfer, respectively, without their
consent.

All rights of the Partnership under the franchise and license agreements
automatically terminate upon the happening of certain events, which are
described in the agreements. Upon termination or expiration of such franchise or
license agreements the Partnership is required to immediately cease using the
franchisor's service marks and all confidential methods, procedures and
techniques provided by the franchisor and to remove and discontinue using all
signs, fixtures, advertising materials, stationery, supplies or other articles
which could cause the business to be associated with the franchisor. In
addition, if the termination occurs for reasons other then condemnation, the
Partnership may be required to pay a termination fee in a lump sum equal to the
amount of monthly royalties paid during the preceding 24 months (per the
Microtel Inn Franchise Agreement) or 36 months (per the Hampton Inn License
Agreement).


OPERATION OF THE HOTELS
The Partnership has entered into management agreements with respect to the
Partnership's hotel properties with Essex Partners or its assigns ("Essex
Partners"). The management agreements provide that Essex Partners will
investigate, hire, pay, supervise and discharge the personnel necessary to
properly maintain and operate the hotels. All such personnel will be employees
of the Partnership and compensation of such personnel will be an expense of the
Partnership.

The management agreements require Essex Partners to maintain the building and
grounds, to pay insurance premiums with respect to the hotel, to apply for,
obtain and maintain all required licenses and permits, to pay certain expenses
on behalf of the Partnership, to maintain a comprehensive system of office
records and books and to annually prepare an operating budget. In addition,
Essex Partners has the authority to enter into service contracts and other
contracts reasonably necessary or desirable in connection with the operation of
the hotels, with the approval of the Partnership in some cases. As compensation
for these services, Essex Partners will receive a fee equal to 4.5% of the gross
revenues from the hotels, consisting of room rentals, telephone charges, cable
charges and any other miscellaneous charges collected from guests.
Essex Partners will also receive an accounting fee equal to $675 per month, per
hotel.

Each management agreement has an initial term of five years with a series of one
(1) year renewal terms. The management agreements may be earlier terminated (i)
by either the Partnership or Essex Partners in the event of a default under the
management agreements which is not cured within 60 days after written notice
thereof, (ii) by Essex Partners, upon the failure of the Partnership to pay
compensation due to Essex Partners, (iii) by either party upon the bankruptcy or
insolvency of the other party, (iv) by either party upon the Partnership's
failure to repair or restore the subject hotel within 120 days after all or any
portion of such hotel is damaged or destroyed by fire or other casualty, or (v)
by either party if all or any portion of the subject hotel is condemned and the
remaining facilities are insufficient for the efficient and profitable operation
of such hotel. During any renewal term the management agreements may be
terminated at any time on 120 days written notice.

Each management agreement requires Essex Partners to devote such of its time as
it deems necessary to manage the subject hotel; however, it does not impose any
limitations on Essex Partners's other business activities, including other
commercial and residential real estate ventures which may compete with such
hotel. Pursuant to the management


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agreements, all expenses incurred thereunder shall be obligations of the
Partnership and Essex Partners will receive its management fee notwithstanding
that the Partnership may not have earned a profit or may be operating at a loss
and that the Limited Partners may not have received any distributions.

The Partnership has agreed to a broad indemnity of Essex Partners from
liabilities it may incur in connection with its services under the management
agreements.

COMPETITION
The operation of hotels is a highly competitive business. Competition in the
lodging industry is primarily based on price, location, quality of facilities
and overall range of services. The Partnership's hotels compete primarily in the
segment of the lodging industry often referred to as economy and mid-scale
segment of the limited service lodging. The Partnership's hotels are located in
areas that contain other competitive limited service lodging facilities. The
Microtel Inn hotels generally seek to compete by providing conveniently located,
limited service lodging at below market prices. There were 64 Microtel Inn
hotels open and operating through the end of 1997. The Hampton Inn hotels
generally seek to compete by providing conveniently located, limited service
lodging with superior service. Started in 1984, there were 728 Hampton Inn
hotels open and operating throughout the country at the end of 1997. Competitors
in the overall limited service lodging area include Days Inn, Comfort Inns,
Motel 6, Travelodge, Super 8, Red Roof Inns, Econo Lodge, Courtyard, Holiday
Inns, LaQuinta Inns and Fairfield Inns. These national chains have greater name
recognition than the Microtel Inn, may have operating advantages that the
Microtel Inn franchisor does not have, and may have greater financial resources
and more experienced personnel than either the Microtel or Hampton Inn
franchisors or the Partnership. Some of these hotels could have service and
architectural features similar to the Partnership's hotel properties and may
offer rates and services comparable to or lower than those at the Partnership's
hotel properties. Furthermore, there can be no assurance that competitors will
not offer lower room rates or that additional hotels which offer features
similar to that of the Partnership's hotels in competition with the
Partnership's hotel properties will not be developed near those properties and
that such development will not have an adverse effect on occupancy rates and
profitability.

The hotel industry was negatively impacted by the recession of the early 1990's.
Occupancies and rates dropped significantly. According to published reports,
occupancies began to improve in 1993. Occupancies and rates continued to
increase in 1995, producing the strongest year in five years, but room supply
increased at the greatest level since 1991. According to published reports,
since 1996, the increase in the supply of hotel rooms has exceeded the increase
in demand. This produced a decrease in average occupancy in both 1996 and 1997.
For 1997, the increase in demand was strongest in the luxury, upscale and
midprice rate segments, with the economy and budget segments experiencing weak
or reduced demand. According to published reports, the average daily rate
continued to increase in both 1996 and 1997, which has compensated for the
decreased demand such that the hotel industry has continued to experience
increasing revenues. The reports anticipate that supply growth will continue to
exceed growth in demand for the next few years. The reports predict the hotel
industry will continue to experience increases in annual revenues, but at a
reduced growth rate. According to the reports, industry profits have grown along
with revenues, and are expected to continue to grow, but at a reduced rate.

Advertising for the Partnership's Microtel Inn hotels is conducted through print
advertising (such as advertising in local business journals and distributing
brochures), signage, direct mail campaigns, listings in the American Automobile
Association brochures and by contacting local businesses. Advertising in local
business journals is done throughout the year. Brochures describing the property
are distributed throughout the area at visitor information booths, shopping
malls and rest areas. The Microtel Inn hotels also advertise in state travel
guides. Each of the Microtel Inn hotels has a visible exterior sign which
prominently displays the rate charged for single occupancy. Signage is also used
near highway exits where available. Billboards may be obtained along major
highways. Local businesses are visited by both the hotel manager and personnel
of the property manager. The focus is two fold, establishing new relationships
and maintaining current accounts. Special rates are available for corporate
customers with high usage. There is also a frequent stay program which provides
one free night after ten nights stay. Each hotel manager is required to become
an active member of the local chamber of commerce and convention and visitor's
bureau and other business organizations, providing access to local
businesspeople.

Marketing activities for the Hampton Inn in Rochester are more extensive than
those for the Microtel Inns. Hampton Inn hotels have a full-time sales manager,
responsible for keeping in touch with current customers and promoting the hotel
throughout the community. Radio and print advertising are used year-round, some
in conjunction with


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advertising being placed by Promus and some specifically for a Partnership
property. Special rates are available for corporate customers with high usage.
Direct mail campaigns are used to target selected travelers. Brochures
describing the property are distributed locally. Local businesses are visited by
both the hotel manager and the sales manager, as well as marketing personnel
from the property manager.


ENVIRONMENTAL COMPLIANCE
The Partnership is not aware that it will have to undertake any unusual efforts
in order to comply with federal, state or local laws or regulations which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment.
Accordingly, the Partnership does not believe that any efforts undertaken by it
will have any material effect upon capital expenditures, earnings or the
competitive position of the Partnership.

EMPLOYEES
As of March 15, 1998, the Partnership had approximately 35 fulltime employees
and 30 part-time employees. The Partnership's Microtel Inn hotels have between
20 and 30 employees. The Hampton Inn has approximately 22 employees.


Item 2.  Properties

PARTNERSHIP PROPERTY  --  BIRMINGHAM, ALABAMA
The first Partnership hotel to be constructed is located in Birmingham, Alabama.
Birmingham is centrally located in the Southeast and is the largest city in
Alabama, with approximately 23% of the state's total population residing in the
five- county metropolitan area. Birmingham is accessible by highway, air and
rail transportation systems. The Birmingham area is a leading retail and
wholesale trade center, as well as one of the Southeast's major centers for
finance, education, health care, medical and high technology research,
telecommunications, transportation and distribution. Major employers include the
University of Alabama, Bell South, Alabama Power Company, Baptist Medical
Centers and various local, state and federal government agencies. The area also
offers a wide variety of cultural, entertainment and outdoor activities.

The 102-room Microtel Inn hotel is located in the City of Homewood, a southern
suburb of Birmingham with over 23,000 residents. The site is situated in a major
commercial area of Homewood, located on Summit Parkway off of Oxmoor Road,
within 0.5 miles west of Interstate 65. Interstate 65 is a major north-south
route that runs through Alabama. Oxmoor Road is a four-lane east-west
thoroughfare.

The immediate area in which the Birmingham Microtel Inn is located is
characterized by a mix of hotels, restaurants, professional office buildings and
light industrial facilities. A large shopping mall is located on Oxmoor Road,
just east of I-65, one mile from the site. A light industrial park is located
0.5 miles west of the site on Oxmoor Road and is undergoing expanded
infrastructure development. A number of national chain restaurants are located
near the site, including Shoney's, Bennigan's, Hardee's and Dunkin' Donuts, in
addition to several local restaurants. There are five other lodging properties
containing a total of approximately 595 rooms within a 0.25-mile radius of the
site. These include a 96-room Red Roof Inn, a 132-room Fairfield Inn, a 152-room
Comfort Inn, a 115-room Shoney's Inn and a 100-room Super 8 Motel. The Shoney's
Inn had the lowest estimated occupancy rates of the Microtel Inn competitors for
1997 at 40%, and both the Fairfield Inn and Red Roof Inn had the highest at
approximately 70%. The Comfort Inn and Super 8 Motel had estimated occupancy
rates in the low 60% range in 1997. The average daily rates ranged from the
Super 8 Motel at around $38.00, the Fairfield Inn and Red Roof Inn in the
mid-$40 and the Comfort Inn in the mid-$50. The average daily rate for the
Shoney's Inn is not available. There is also a 197-room full service Holiday
Inn, which is only indirectly competitive with the Partnership's hotel. An
80-room extended stay Studio Plus, a 129-room extended stay La Quinta Inn and a
Residence Inn are located about a mile from the hotel. These properties are also
only indirectly competitive with the Partnership's hotel.

The property is managed by Essex Partners Inc., the Managing General Partner of
the Partnership.

The Birmingham property is situated on approximately 2.37 acres and is owned in
fee by the Partnership. A bank, acting as trustee on behalf of the holders of
the Partnership's first mortgage notes, holds a first mortgage on the


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property, including fixtures, equipment and improvements, in the principal
amount of $2,800,000. The first mortgage notes are described below under
"Description of Real Estate and Operating Data."

PARTNERSHIP PROPERTY  -- ROCHESTER, NEW YORK
The second Partnership hotel to be constructed is located in Rochester, New York
and opened in April 1995. Rochester, the third largest city in New York, is
located in western New York, approximately mid-way between Buffalo and Syracuse.
 Rochester is accessible by highway, air and rail transportation systems. The
Rochester economy has benefited from a diversified employment base, bolstered by
Fortune 500 corporations and a large number of academic institutions. These
factors have buffered the Rochester area from cyclical national recessions.
Rochester is home to over 1,000 manufacturers. Much of this manufacturing
activity is concentrated in high technology-related industries, such as
photographic equipment, optics, graphics technology, communications, electronics
and pharmaceuticals. Major employers include Eastman Kodak Company, Xerox
Corporation, General Motors, Bausch & Lomb, Frontier Corporation, Mobil Chemical
Company, 3M and Paychex. Tourism is generated by regional attractions such as
the Finger Lakes, Lake Ontario, Niagara Falls, and the Erie Canal.

The 118-room Hampton Inn is located in the Town of Greece, a northwestern suburb
of Rochester and the second most populous municipality in Monroe County with
over 100,000 residents. The site is situated in the northeast quadrant of the
intersection between Route 390 and Ridge Road (Route 104). Route 390 becomes an
interstate highway approximately three miles south of Ridge Road. Ridge
Road/Route 104 is a four-lane arterial road in the Town of Greece, and is a
major east-west route across western New York. The site is a component of a
mixed-use project, Center Place Subdivision, encompassing 28 acres, which has
been approved for restaurant and hotel use. Within walking distance of the hotel
are several restaurants, a Bob Evans, an Applebees and an Olive Garden. In
addition, the Greece Towne Center Mall is about a mile from the hotel with over
100 stores and restaurants.

The Hampton Inn customer mix is primarily business. The largest customer is
Eastman Kodak, which contributed between 25-30% of the room nights sold in 1997.
The Hampton Inn expects the amount of Eastman Kodak business to decrease in
1998, due to corporate travel reductions. Marketing efforts have been increased
in order to replace the lost business. Although occupancy was lower in January,
1998 than the previous year, occupancy in March, 1998 has improved compared to
the prior two years.

There are four other lodging properties containing a total of approximately 517
rooms within a four-mile radius of the site. A 125-room Extended Stay of America
opened next to the Hampton Inn at the end of 1996. A 210-room full-service
Marriott hotel is located on the northwest corner of the same exit as the
Hampton Inn. Along Ridge Road is a 83-room Comfort Inn and a 99-room Wellesley
Inn. The Partnership's hotel is considered competitive with these lodging
properties. Of the Rochester Hampton Inn's competitors, the Wellesley Inn had
the lowest estimated 1997 occupancy rate with. The Extended Stay was next with
an estimated occupancy rate o 62.3% in 1997. The Marriott. Fairfield Inn and
Comfort Inn all had estimated 1997 occupancy rates in the 70% range, with the
Marriott at the low end with 71.7%, the Fairfield Inn in the mid-70% with 75.7%
and the Comfort Inn with the highest occupancy rate of 77.9%. The average daily
rates for 1997 of the Rochester Hampton Inn's competitors ranged from $36.39 for
the Extended Stay to $87.83 for the Marriott. The Comfort Inn and Wellesley Inn
had average daily rates in 1997 in the low $50.00 range, and the Fairfield Inn
had an average daily rate of just over $60.00. A 73-room Courtyard by Marriott
and 78-room Residence Inn are under construction within one mile of the Hampton
Inn. These properties are expected to open in May, 1998 and are expected to be
competitive with the Hampton Inn. In addition, there is a 63-room Fairfield Inn
located about 6 miles from the hotel at the Rochester International Airport
which is also considered competitive with the Hampton Inn.

The property is managed by Essex Partners Inc., the Managing General Partner of
the Partnership.

The Rochester property is situated on approximately 2.96 acres and is owned in
fee by the Partnership. A bank, acting as trustee on behalf of the holders of
the Partnership's first mortgage notes, holds a first mortgage on the property,
including fixtures, equipment and improvements, in the principal amount of
$4,100,000. The first mortgage notes are described below under "Description of
Real Estate and Operating Data".


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PARTNERSHIP PROPERTY -- CHATTANOOGA, TENNESSEE
The third Partnership hotel to be constructed is a 100-room Microtel Inn hotel,
opened in September, 1995 in Chattanooga, Tennessee. The hotel has rooms with
two double beds as well as with 1 queen size bed. Chattanooga is located in the
southeastern region of Tennessee, centrally located within the
Tennessee-Alabama-Georgia tri-state area. The region is accessible by highway,
water, air and rail transportation systems.

Chattanooga is located in Hamilton County, Tennessee at the crossroads of
several major U.S. highways, including Interstates 75, 24 and 59. Atlanta,
Birmingham, Nashville and Knoxville are all within 140 miles. The city is within
one day's drive of nearly one-third of the major U.S. markets and population.
Chattanooga is one of the nation's oldest manufacturing cities, producing a
variety of goods, including food, textile and apparel, chemical, fabricated
metal, and paper products. Other major industries are represented by the
printing and publishing sector, insurance and medical service sectors. Major
employers include the Tennessee Valley Authority, the nation's largest utility,
Red Food Stores, Provident Life & Accident, McKee Foods, Roper Corporation,
Dixie Yarns and Blue Cross/Blue Shield of Tennessee. Tourists to the tri-state
region enjoy the area's recreation and attraction resources which include
museums and parks, in addition to a number of craft and music festivals,
orchestral performances and theatrical productions.

The Microtel Inn hotel is located in the eastern section of the City of
Chattanooga. It is located on McCutcheon Road just north of Interstate 75,
approximately one-quarter mile from the Shallowford Road exit. Route 11, which
parallels I-75, intersects Shallowford Road and is a five lane thoroughfare with
heavy commercial development on both sides.

The immediate area in which the Chattanooga Microtel Inn is characterized by a
mix of hotels, restaurants, retail, professional office buildings and light
industrial facilities. Hamilton Place, Tennessee's largest shopping mall, is
within 1 mile of the hotel. There are seventeen hotels located within a
one-quarter mile radius of the hotel, with a total of 1,451 rooms. There are
eight other lodging properties containing a total of approximately 695 rooms
within a one-quarter mile radius of the hotel that were open for the entire 1997
year which the Managing General Partner believes are directly competitive with
the Partnership's hotel. These include a 126-room Hampton Inn, a 105-room
Fairfield Inn, a 112-room Red Roof Inn, a 75-room Days Inn, a 44-room Ramada
Limited, a 132-room La Quinta Inn, a 51-room Holiday Inn Express and a 50-room
Sleep Inn. The occupancy and average daily rates for the Red Roof Inn and Sleep
Inn are not available. The other five properties generally had average daily
rates in the mid to upper $50 range in 1997. The occupancies range from the La
Quinta Inn and Days Inn with an occupancy of approximately 55% in 1997, to the
Fairfield Inn with with an occupancy of approximately 70% in 1997. During the
last quarter of 1997, four new properties opened within about a mile of the
hotel. One of the new hotels is a Wingate Inn, which is a full-service suites
product that is not considered competitive with the Microtel Inn. Two of the new
hotels are budget extended-stay properties, a Hamilton Inn and a Suburban Lodge,
which are only somewhat competitive with the Microtel Inn. The fourth new hotel
is a Knights Inn, which is considered directly competitive. The Knights Inn
opened in December, 1997. In addition, a Holiday Inn, a Courtyard by Marriott
and a Country Suites are located near theMicrotel Inn, however the Managing
General Partner believes these properties are only indirectly competitive with
the Partnership's hotel. There are five budget properties at the next exit north
on I-75, a Comfort Inn, Motel 6, Best Western, Quality Inn and Econo Lodge,
totaling approximately 400 rooms. While these properties are in a less desirable
location, the Managing General Partner believes are considered competitive with
the Partnership's hotel.

The property is managed by Essex Partners Inc., the Managing General Partner of
the Partnership.

The Chattanooga property is situated on approximately 2.4 acres and is owned in
fee by the Partnership. The Partnership sold an approximately one acre parcel of
land adjacent to the hotel in 1996. A bank, acting as trustee on behalf of the
holders of the Partnership's first mortgage notes, holds a first mortgage on the
property, including fixtures, equipment and improvements, in the principal
amount of $3,100,000. The first mortgage notes are described below under
"Description of Real Estate and Operating Data".



DESCRIPTION OF REAL ESTATE AND OPERATING DATA

Operations of the Birmingham Microtel Inn



<PAGE>

LOCATION:            City of Homewood Alabama, south of the City of Birmingham,
                     Alabama

NUMBER OF
GUEST ROOMS:         102-rooms

CONSTRUCTED:         Construction completed in September 1994.

SCHEDULED RENOVATION
EXPENDITURES:        Under the franchise agreement, the hotel may be required by
                     the franchisor to upgrade the property as the franchisor
                     deems necessary but not more than once every five years (at
                     the expense of the Birmingham Microtel Inn) .

AVERAGE OCCUPANCY                                   AVERAGE RENTAL
RATE FOR THE FISCAL                                 RATE FOR THE FISCAL
YEAR ENDED                                          YEAR ENDED
DECEMBER 31, 1997:       68.4%                      DECEMBER 31, 1997:  $34.86
-----------------                                   ------------------

Total Room Revenues
Per Available Rooms
for the Fiscal Year Ended
DECEMBER 31, 1997:       $23.85


OPERATIONS OF THE ROCHESTER HAMPTON INN

LOCATION:               Town of Greece, New York, northwest of the City of
                        Rochester

NUMBER OF
GUEST ROOMS:             118-rooms.

CONSTRUCTED:             Construction completed in April 1995.

Scheduled Renovation
EXPENDITURES:           Under the License Agreement with Promus Hotel,
                        the hotel may be required to make such
                        renovations at any time during the term of the
                        License Agreement (at the expense of the
                        Rochester Hampton Inn) as Promus Hotel deems
                        necessary to upgrade the hotel.

AVERAGE OCCUPANCY                             AVERAGE RENTAL
RATE FOR THE FISCAL                           RATE FOR THE FISCAL
YEAR ENDED                                    YEAR ENDED
DECEMBER 31, 1997:       72.0%                DECEMBER 31, 1997:  $63.89
-----------------                             -----------------


TOTAL ROOM REVENUES
PER AVAILABLE ROOMS
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997:        $46.00


OPERATIONS OF THE CHATTANOOGA MICROTEL INN

LOCATION:            City of Chattanooga, Tennessee



<PAGE>

NUMBER OF
GUEST ROOMS:         100-rooms

CONSTUCTED           Construction completed in September, 1995.

SCHEDULED:           Under the franchise agreement, the
RENOVATION           hotel may be required by the franchisor to upgrade the
EXPENDITURES         property as the franchisor deems necessary but not more
                     than once every five years (at the expense of the
                     Chattanooga Microtel Inn) .

AVERAGE OCCUPANCY                                   AVERAGE RENTAL
RATE FOR THE FISCAL                                 RATE FOR THE FISCAL
YEAR ENDED                                          YEAR ENDED
DECEMBER 31, 1997:      67.1%                       DECEMBER 31, 1997:$36.10
-----------------                                   -----------------


TOTAL ROOM REVENUES
PER AVAILABLE ROOMS
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997:      $24.22

Included above is the description of each of the Partnership's hotel properties,
except for the description of the first mortgage debt issued by the Partnership
to finance the acquisition and development of the hotel properties. The
Partnership issued $10,000,000 of 10% first mortgage notes (the "Mortgage
Notes"), which are secured by first mortgage liens on each of the hotel
properties owned by the Partnership. The Mortgage Notes require monthly payments
of interest only at the rate of 10%. All outstanding Mortgage Notes are due and
payable upon maturity on December 31, 1998 unless the notes are extended by the
Partnership until December 31, 1999 upon the payment of an extension fee equal
to .5% of the principal amount outstanding, or December 31, 2000 upon the
payment of an additional extension fee equal to 1% of the principal amount
outstanding. The Mortgage Notes may be redeemed in whole or in part at the
option of the Partnership at any time upon payment of a redemption premium of 1%
of the amount of the principal prepayment if the redemption occurs before
December 31, 1997, and thereafter without payment of any premium, together with
accrued interest to the redemption date. A first mortgage lien is recorded on
the Birmingham property in the amount of $2,800,000. A first mortgage lien is
recorded on the Rochester property in the amount of $4,100,000. A first mortgage
lien is recorded on the Chattanooga property in the amount of $3,100,000. The
Partnership may not incur additional mortgage indebtedness if the effect thereof
would be to cause the total amount of such indebtedness at any time to exceed
the sum of (i) 85 percent of the acquisition and construction cost of all hotels
which have not been refinanced and (ii) 85 percent of the aggregate fair market
value of all refinanced hotels as determined by the Managing General Partner.
This policy can only be changed with an affirmative vote of at least a majority
in interest of Limited Partners.

The Managing General Partner obtains property, liability, crime, umbrella,
excess umbrella, unowned auto and boiler insurance for each hotel property, as
well as workers' compensation insurance. The amount of property insurance
obtained is based on the replacement cost of the building and its contents, plus
lost income. The liability and umbrella insurance provide coverage up to
$15,000,000. In the opinion of the Managing General Partner, the hotel
properties are adequately covered by insurance.

The tax basis and depreciation of the Partnership's assets are presented on the
following table. The table presents the total amount of each type of asset owned
by the Partnership, classified by asset life.

         LIFE                     TAX BASIS           TAX RATE        METHOD
         ----                     ---------           --------        ------
7-year FF&E                          55,606           14.29%          200DB
10-year FF&E                      1,849,493           10%             S/L
20-year land improvements           438,234            5%             S/L
39-year building                      2,176            1.177%         S/L
40-year building                  7,328,937            2.5%           S/L



<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

A complaint was filed on December 13, 1996 in the Circuit Court of Jefferson
County in the state of Alabama against Microtel Inns and Suites Franchising,
Inc. (an affiliate of U.S. Franchise Systems, Inc.) by Larry Owens arising from
a gunshot wound Mr. Owens received during a robbery at the Partnership's hotel
in Birmingham, Alabama. The Partnership was notified by U.S. Franchise Systems,
Inc. that per the franchise agreement, the Partnership has an obligation to
indemnify and hold U.S. Franchise Systems, Inc. harmless in connection with the
above lawsuit because the claim arises directly from the franchisee's operation
of the franchised business. Mr. Owens is seeking relief in the amount of
$2,500,000. The Partnership has insurance coverage substantially in excess of
the relief being sought. The Partnership is working with its insurance company
to vigorously defend the matter.


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

NONE


Part II

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

There is no established trading market for the limited partnership units and it
is not anticipated that any public market will exist for the units. The
Partnership Agreement imposes a number of restrictions on the transferability of
limited partnership units, including among others, the following: (1) an
assignment may only be made on the first day of a fiscal quarter of the
Partnership; (ii) limited partners desiring to assign less than all of their
units must assign a sufficient number of units such that, after the assignment,
both the assignor and the assignee would hold at least five units (except in
cases of inheritanceand family dissolution); (iii) no limited partner units may
be assigned if the unit sought to be assigned, when added to the total of all
other units assigned within a period of 12 consecutive months prior to the
proposed date of assignment, would, in the opinion of counsel for the
Partnership, result in the termination of the Partnership under Section 708 of
the Internal Revenue Code (dealing with transfers of 50% or more of the
outstanding interests of the Partnership); and (iv) no units may be assigned
unless, in the opinion of counsel for the Partnership, such proposed assignment
could not result in the characterization of the Partnership as "publicly traded"
under Section 7704 of the Internal Revenue Code.

Further restrictions on the assignment of limited partnership units are imposed
under state securities laws upon the residents of such states, including the
requirement of certain states that the suitability standards applied to initial
purchasers of the limited partnership units be applied to assignees where the
assignment involves residents of such states. In addition, the current Microtel
Inn franchise agreement provides that no more than 10% of the total outstanding
units of the Partnership may be sold, pledged or otherwise transferred by a
limited partner in any single transaction without the franchisor's prior written
consent, which may not be unreasonably withheld. The current Hampton Inn license
agreement provides that for "publicly-traded equity interest," no consent of the
franchisor is required with respect to any transfers of less than a 25% interest
in the Partnership unless the transferee owns, or would own after the transfer
is completed, an interest in the Partnership of 25% or more. This franchisor has
advised the Partnership that, solely for purposes of the license areement, the
limited partnership units would be considered "publicly-traded equity interests"
since they were sold in a large real estate syndication transaction.

As of the date of this filing, there are approximately 320 limited partners
owning 4,000 limited partnership units. The limited partners received
distributions of $62,303 in 1994, $314,415 in 1995, $400,000 in 1996 and
$300,000 in 1997. The Partnership's Mortgage Notes prohibit the Partnership from
making distributions (i) at any time when an event of default under the
mortgages or the indenture relating to the Mortgage Notes has occurred and is
continuing or (ii) unless it has established an adequate reserve to pay any
amounts payable under the Mortgage Notes during the month in which the proposed
distribution is to occur.




<PAGE>




ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The first Partnership hotel to be constructed, a 102-room Microtel Inn hotel in
Birmingham, Alabama, opened in September 1994. The two remaining Partnership
hotels opened in 1995, a 118-room Hampton Inn in Rochester, New York in April
and a 100-room Microtel in Chattanooga in September.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The major revenue source for the Partnership's hotel properties is room
revenues, which generated 95% of the operating revenues for the Partnership in
1997. Room revenues generated are dependent on a hotel property's average
occupancy and average daily rate. Room revenues increased 6% in 1997, from
$3,532,000 in 1996 to $3,754,000 in 1997.

The Birmingham Microtel Inn achieved an average occupancy rate of 68% in 1997
with an average daily rate of $34.86, as compared with an average occupancy rate
of 65% in 1996, and an average daily rate of $34.07. With the increase in both
occupancy rate and average daily rate, room revenues increased $61,000. A new
manager was hired in the spring of 1996, who made several improvements, which
started to have an impact on revenues by the end of the summer of 1996. The
property had a very strong winter and spring, with occupancy of 75% through June
1997, compared to 65% during the same period in 1996. Revenues for the first six
months of 1997 exceeded the first six months of 1996 by $61,000. Unfortunately,
that manager left the property in the spring of 1997. The manager returned to
the property in March 1998. During the manager's absence, the performance of the
hotel began to deteriote. The revenues for the last six months were the same as
the last six months of 1996. Although revenues were the same in the last six of
1997 as the same period in 1996, operating income declined in the last six
months of 1997 compared to the same period in 1996 due to ineffective cost
controls. With the return of the hotel manager in 1998, the Managing General
Partner expects that costs will be better controlled. The revenue for the first
two months of 1998 is 8% less than the first two months of 1997. The Managing
General Partner expects the property's performance to improve by the summer of
1998. The Birmingham Microtel generated approximately 24% of the Partnership's
1997 room revenues.

The Hampton Inn achieved an average occupancy rate of 72% in 1997 with an
average daily rate of $63.89, as compared to an average occupancy rate of 71% in
1996 with an average daily rate of $63.80. With the slight increase in both
occupancy and average daily rate, room revenues for 1997 were $18,000 higher
than 1996. Although other hotels in the Hampton Inn market segment increased
rates in 1997, the Rochester Hampton Inn rates were flat due to the opening of
an Extended Stay of America hotel next to the Hampton Inn at the end of 1996.
The Extended Stay of America offers long-term customers rates similar to the
Hampton Inn. Fortunately, the Hampton Inn lost very few customers to the
Extended Stay of America. The major issues facing the Hampton Inn for 1998 are
increasing supply in its market and travel reductions by its largest customer.
In 1998, a Courtyard by Marriott and Residence Inn will be opening within a mile
of the Hampton Inn. The Courtyard is expected to be directly competitive with
the Hampton Inn. The Hampton Inn expects it may lose some customers to the
Courtyard, but is planning to replace the lost revenue by more aggressively
marketing the property and raising rates from 2%-3%. Although the rates for the
Courtyard and Residence Inn have not yet been announced, the typical Courtyard
and Residence Inn offer rooms at rates higher than those charged at the Hampton
Inn. Therefore, the Hampton Inn believes a slight increase in rates will not be
detrimental. In addition, the Hampton Inn is planning to add additional signage
to better direct customers to the hotel. The Hampton Inn's largest customer is
the Eastman Kodak Company. In the fourth quarter 1997, Eastman Kodak announced a
goal to reduce corporate travel by 20%. The Hampton Inn felt some of the effects
of this through reduced occupancy in December 1997 and January 1998 compared to
the same period in the prior year. However, the staff at the Hampton Inn have
increased their marketing efforts, with the result that in March 1998, new
business has been secured and the occupancy and revenues through March 15, 1998
are higher than either of the last two years. The Hampton Inn generated around
53% of the Partnership's room revenues in 1997.

The average occupancy for the Chattanooga Microtel Inn for 1997, at 67%, was 27%
better than the 1996 occupancy rate of 53%. The average daily rate was 5% less,
$36.10 as compared to the 1996 average daily rate of $38.10. Revenues increased
19%, from $741,000 in 1996 to $884,000 in 1997. The Managing General Partner
believes the improvement was due to extensive marketing efforts by the general
manager hired in October 1996. The manager is from the Chattanooga area and has
several years of experience in the hotel industry. The manager's efforts were
successful on two fronts, both increasing awareness of the property in the
Chattanooga community and capitalizing on the rooms with two beds by marketing
the property to a broader range of customers. As a result of the manager's


<PAGE>


affiliations within the Chattanooga community, additional occupancy was obtained
by offering packages to guests which included tickets to local tourist
attractions. The increased supply entering the market in late 1997 started to
impact the hotel by January 1998. The occupancy for January and February 1998
was 37%, compared to occupancy of 52% for the same period in 1997. In response
to the increased supply, the Chattanooga Microtel Inn is planning to obtain
additional signage to increase awareness of and to direct customers to the
hotel, and will be leasing a van. There are several local companies that have
expressed an interest in using the Microtel Inn if a means of transportation is
provided. Extensive marketing efforts will also be continued in 1998. The
Chattanooga Microtel Inn generated around 23% of the Partnership's room revenues
in 1997.

The Partnership's operating income increased from a $1,073,000 in 1996 (before
depreciation and amortization of $429,000) to $1,254,000 in 1997 (before
depreciation and amortization of $434,000) due to the increase in room revenues.
Net interest expense in 1997 was the same as in 1996, since the Partnership debt
requires payments of interest only at a fixed 10% rate. In 1996, the Partnership
sold land adjacent to the Chattanooga Microtel Inn with a cost basis of $154,000
for $87,000 (net of sales commission), resulting in a loss of $67,000. The
amortization of debt acquisition costs of $238,000 was also the same as 1996.
The Partnership's net loss for 1997 was $415,000, $243,000 less than the net
loss in 1996 of $658,000 due to the increase in room revenues and the loss on
the sale of land in 1996. The Partnership generated cash flow from operations of
$316,000 in 1997, compared to a cash flow of $240,000 in 1996. The net cash used
in financing and investing activities was $317,000 in 1997 causing cash to
decrease only $1,000. Investing activities included an increase in restricted
cash of $35,000, which represented the net increase in the Hampton Inn capital
reserve escrow account. Also, capital improvements totalling $48,000 were
completed in 1997. Financing activities included the payment of limited partner
distributions of $300,000, and a cash overdraft of 66,000 at the end of the
1997. Financing and investing activities in 1996 included capital improvements
of $37,000, the payment of $400,000 in limited partner distributions and the
receipt of $119,000 of limited partnership capital contributions. The
Partnership expects to generate significant cash flow from operations again in
1998.

Total assets decreased $639,000 in 1997 due primarily to the $671,000 in
depreciation and amortization. Total liabilities increased $75,000 from an
increase due to affiliate. Partners' equity decreased $715,000 from the payment
of $300,000 in distributions to limited partners and the 1997 net loss of
$415,000.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total assets decreased $847,000 in 1996 due primarily to the $667,000 in
depreciation and amortization, the sale of land with a cost basis of $154,000 by
the Chattanooga Microtel Inn and a $96,000 decrease in cash. Total liabilities
increased $92,000 from an increase in accounts payable, accrued expenses and due
to affiliate. Partners' equity decreased $939,000 from several factors, the
payment of $400,000 in distributions to limited partners and the 1996 net loss
of $658,000 which caused a decrease of $1,058,000 in partners' equity, and
capital contributions of $119,000 which offset the decrease in partners' equity.

For further information on the properties, please refer to Part I, Item 2.
Properties.

YEAR 2000 DISCLOSURE
The Partnership is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Partnership's
computerized information systems. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Partnership's financial position, results of operations or
cash flows in future periods. However, if the Partnership, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk. Accordingly, the Partnership plans to
devote the necessary resources to resolve all significant year 2000 issues in a
timely manner.

CAPITAL RESOURCES AND LIQUIDITY
The Partnership expects to obtain sufficient liquidity from operations to fund
all operating costs. In addition to operations, the Partnership will require
liquidity to provide for repayment of outstanding debt. The Partnership's first
mortgage notes ("the Mortgage Notes") in the principal amount of $10,000,000
mature on December 31, 1998. The Managing General Partner intends to replace the
outstanding Mortgage Notes with first mortgage financing from an institutional
lender combined with unsecured subordinated note financing raised through a
private offering. The Managing General Partner has made an application to an
institutional lender for first mortgage financing in the amount of approximately
$7.9 million, and intends to offer unsecured subordinated notes in the amount of
approximately $3,100,000 to private investors. The Managing General Partner
believes the Partnership can obtain first mortgage


<PAGE>



financing from an institutional lender given that the Managing General Partner
obtained $12 million in institutional financing in 1996 and 1997 for other hotel
properties, and a commitment for an additional $4.7 million in institutional
financing in 1997. The Managing General Partner, believes given that affiliates
of the Managing General Partner have raised debt financing in excess of $32
million from private investors, it is also likely that the Partnership would be
able to obtain the necessary note financing. However, if the institutional
financing and/or note financing is not available, the Partnership can extend the
maturity date of the Mortgage Notes for up to two years upon payment of
extension fees.

The Microtel franchise agreements require the Partnership to refurbish and
upgrade its Microtel Inn hotels not more than once every five years. The upgrade
would include replacing soft goods such as bedspreads and drapes, new carpeting,
equipment such the front desk system, telephone system and the key system. The
Partnership is replacing soft goods as needed and expects it will satisfy the
Microtel franchisor's requirements without any major additional expenditures.
The front desk system, telephone system and key system at the Partnership's
properties were new at the time the properties were constructed and are expected
to meet Franchisor specifications for the next several years. Equipment such as
televisions and heating and cooling units are expected to have a life of between
five and ten years and can replaced as required. Not all units will need to be
replaced in the same year, so that management expects that the expenditures can
be spread over several years.

The Hampton Inn license agreement requires the Partnership to establish a
capital reserve escrow account based on a percentage of gross revenues generated
by the Hampton Inn hotel which will be used for product quality requirements of
the hotel. Cumulative funding of the reserve for the first five years increases
from 1% to 5% of gross revenues and stabilizes at 5% for the term of the
agreement. The Partnership expects to fund the reserve from cash from
operations, and the reserve should be sufficient to fund major capital
improvements as required. At December 31, 1997, the capital reserve escrow
account was $52,219.


ITEM 7.  FINANCIAL STATEMENTS

The following Partnership financial statements are filed as part of this Report:

    Balance Sheets at December 31, 1997 and 1996
    Statements of Operations for the years ended December 31, 1997 and 1996
    Statements of Changes in Partners' Capital for the years ended
              December 31, 1997 and 1996
    Statements of Cash Flows for the years ended December 31, 1997 and 1996
    Notes to Financial Statements
    Independent Auditors' Report issued by Coopers & Lybrand, LLP as of
              and for the year ended December 31, 1997
    Independent Auditors' Report issued by KPMG Peat Marwick LLP as of
              and for the year ended December 31, 1996

The following Managing General Partner financial statements are filed as part of
this Report:

    Balance Sheets at December 31, 1997 and 1996
    Statements of Operations and Changes in Retained Earnings for the
            years ended December 31, 1997 and 1996
    Statements of Cash Flows for the years ended December 31, 1997 and 1996
    Notes to Financial Statements
    Independent Auditors' Report









                      ESSEX HOSPITALITY ASSOCIATES III L.P.
                        (A Delaware Limited Partnership)

                                     -----
                              Financial Statements

                           December 31, 1997 and 1996







<PAGE>











REPORT OF INDEPENDENT ACCOUNTANTS


To the Partners
Essex Hospitality Associates III L.P.


We have audited the accompanying balance sheet of Essex Hospitality Associates
III L.P. (A Delaware limited partnership) as of December 31, 1997, and the
related statements of operations, changes in partners' capital and cash flows
for the year then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements for the
year ended December 31, 1996 were audited by other accountants, who expressed an
unqualified opinion on them in their report dated February 13, 1997.

We conducted our audit 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 audit provides 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 Essex Hospitality Associates
III L.P. as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.







                                          /S/ COOPERS & LYBRAND L.L.P.
                                          ----------------------------

                                          COOPERS & LYBRAND L.L.P.




Rochester, New York

February 20, 1998


                                       1

<PAGE>





                          INDEPENDENT AUDITORS' REPORT



   The Partners
   Essex Hospitality Associates III L.P.:


   We have audited the accompanying balance sheet of Essex Hospitality
   Associates III L.P. (a Delaware limited partnership) as of December 31, 1996
   and the related statements of operations, changes in partners' capital and
   cash flows for the year then ended. These financial statements are the
   responsibility of the Partnership's management. Our responsibility is to
   express an opinion on these financial statements based on our audit.

   We conducted our audit 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 audit provides 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 Essex Hospitality Associates
   III L.P. as of December 31, 1996 and the results of its operations and its
   cash flows for the year then ended in conformity with generally accepted
   accounting principles.


                                              KPMG Peat Marwick LLP

   Rochester, New York
   February 13, 1997


<PAGE>




<TABLE>
<CAPTION>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Balance Sheets
December 31, 1997 and 1996

                                    ASSETS                     1997              1996
                                    ------
                                                        ----------------    ----------------

Investment in real estate, at cost:
<S>                                                       <C>               <C>
     Land                                                 $       1546151   $       1546151
     Land improvements                                             438234            438234
     Buildings                                                    7239290           7247114
     Furniture, fixtures and equipment                            1996925           1941321
                                                          ---------------   ---------------
                                                                 11220600          11172820
     Less accumulated depreciation                                1094296            681714
                                                          ---------------   ---------------
                Net investment in real estate                    10126304          10491106

Cash                                                                26414             27771
Cash - restricted                                                   52219             17115

Deferred costs:
     Debt issuance                                                1131134           1131134
     Franchise fees                                                 85500             85500
                                                          ---------------   ---------------
                                                                  1216634           1216634
     Less accumulated amortization                                 879069            620154
                                                          ---------------   ---------------
                                                                   337565            596480

Other assets                                                       138885            188366
                                                          ---------------   ---------------

                                                          $      10681387   $      11320838
                                                          ===============   ===============

                      LIABILITIES AND PARTNERS' CAPITAL
                      ---------------------------------

Liabilities:
     Cash overdraft                                                 65533              --
     Due to affiliate                                              150069             66238
     Accounts payable and accrued expenses                         137108            211122
     Mortgage notes payable                                      10000000          10000000
                                                          ---------------   ---------------

          Total liabilities                                      10352710          10277360
                                                          ---------------   ---------------

Commitments and contingencies

Partners' capital, net                                             328677           1043478
                                                          ---------------   ---------------

                                                          $      10681387   $      11320838
                                                          ===============   ===============

</TABLE>

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




                                       2
<PAGE>

<TABLE>
<CAPTION>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Statements of Operations
For the Years Ended December 31, 1997 and 1996

                                                         1997                1996
                                                    ----------------    ----------------

Revenue
<S>                                                 <C>                 <C>
       Room revenue                                 $       3753750     $       3531946


       Telephone and other commissions                       201124              205855
                                                     ---------------     ---------------
               Total income                                 3954874             3737801
                                                     ---------------     ---------------

Operating expenses:
       Room expense                                          995794             1012113
       Depreciation and amortization                         433554              429153
       Administrative expenses                               364096              367514
       Utilities expense                                     209273              205764
       Advertising and promotion                             200623              173752
       Repairs and maintenance                               185677              182103
       Property management fees                              177953              168192
       Property taxes                                        174873              182548
       Telephone and other commissions                       147104              138680
       Royalty fees                                          126028              117550
       Partnership management fees                            49431               46720
       Professional                                           29066               27064
       Insurance                                              26452               28344
       Miscellaneous                                          14355               14594
                                                     ---------------     ---------------
               Total operating expenses                     3134279             3094091
                                                     ---------------     ---------------

Income before interest and loss on sale of land              820595              643710
                                                     ---------------     ---------------

Interest:
       Income                                                  2547                3302
       Expense                                             (1000000)           (1000000)
Loss on sale of land                                       --                    (67218)
Amortization                                                 237943              237943
                                                     ---------------     ---------------

Net loss                                            $       (414801)    $       (658149)
                                                    ================     ===============

Net loss - general partners                         $         (4148)    $         (6581)
                                                    ================     ===============

Net loss - limited partners                         $       (410653)    $       (651868)
                                                    ================     ===============

Net loss per limited partner unit                   $         (103)     $         (163)
                                                    ================     ===============


</TABLE>




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


                                       3

<PAGE>

<TABLE>
<CAPTION>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Statements of Changes in Partners' Capital
For the Years Ended December 31, 1997 and 1996


                                                               PARTNERS' CAPITAL (DEFICIT)
                                   -------------------------------------------------------------------------------------
                                                                               NOTES        SYNDICATION        NET
                                                                                                            PARTNERS'
                                    GENERAL       LIMITED        TOTAL      RECEIVABLE         COSTS         CAPITAL
                                   ----------   ------------  ------------  ------------    ------------   -------------


<S>                              <C>          <C>           <C>           <C>           <C>             <C>
Balance at January 1, 1996         $   22387    $   2603265   $   2625652   $  (151352)   $    (491473)   $    1982827

     Capital contributions             --            --            --           118800          --              118800

     Distribution to Partners         (23232)       (400000)      (423232)       23232          --             (400000)

     Net loss                          (6581)       (651568)      (658149)       --             --             (658149)
                                    ---------    -----------  -----------   ----------    ------------    ------------

Balance at December 31, 1996           (7426)       1551697       1544271        (9320)        (491473)        1043478

     Distribution to Partners          (3030)       (300000)      (303030)        3030          --             (300000)

     Net loss                          (4148)      (4106530)      (414801)       --             --             (414801)
                                    ---------    -----------  -----------  -----------     ------------    ------------

Balance at December 31, 1997       $  (14604)   $    841044   $    826440   $    (6290)    $   (491473)   $    (328677)
                                   =========    ===========   ===========   ==========     ===========    ============



</TABLE>

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



                                       4

<PAGE>

<TABLE>
<CAPTION>


ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 1997 and 1996

                                                                    1997                1996
                                                             -----------------    ----------------

Cash flows from operating activities:
<S>                                                           <C>                 <C>
     Cash received from customers                             $        4007415    $       3796978
     Cash paid to vendors and employees                               (2694042)          (2560672)
     Interest received                                                    2547               3302
     Interest paid                                                    (1000000)          (1000000)
                                                              ----------------    ---------------

          Net cash provided by operating activities                     315920             239608
                                                              ----------------    ---------------

Cash flows from investing activities:
     Increase in cash - restricted                                      (35104)            (17115)
     Investments in real estate                                         (47780)            (37263)
     Decrease (increase) in deposits                                        74                (25)
                                                              ----------------    ---------------

          Net cash used in investing activities                         (82810)            (54403)
                                                              ----------------    ---------------

Cash flows from financing activities:
     Cash overdraft                                                      65533                 --
     Partners' capital contributions                                      3030             142032
     Distributions to Partners                                         (303030)           (423232
                                                              ----------------    ---------------

          Net cash used in financing activities                        (234467)           (281200)
                                                              ----------------    ---------------

Net decrease in cash                                                     (1357)            (95995)

Cash - beginning of year                                                 27771             123766
                                                              ----------------    ---------------

Cash - end of year                                            $          26414    $         27771
                                                              ================    ===============

Reconciliation of net loss to net cash flows from
     operating activities:
        Net loss                                                       (414801)           (658149)
        Adjustments to reconcile net loss to net cash
     provided by operating activities:
             Depreciation and amortization                              671497             667096
             Loss on sale of land                                         --                67218
             Cash provided (used) by changes in:
                Other assets                                             49407              70945
                Due to affiliate                                         83831              34942
                Accounts payable and accrued expenses                   (74014)             57556
                                                              ----------------    ---------------

                  Net cash provided by operating activities   $         315920    $        239608
                                                              ================    ===============

Supplemental schedule for noncash investing and
     financing activities:
     Receivable from sale of land                             $          --      $         86782
                                                              ===============      ===============


</TABLE>


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




                                       5


<PAGE>


ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997


1.     ORGANIZATION

       Essex Hospitality Associates III L.P. (the Partnership) is a Delaware
       limited partnership formed in August 1993 for the purpose of purchasing,
       leasing, or subleasing undeveloped land and constructing, owning and
       operating up to four new Hampton Inn, Homewood Suites or Microtel hotels
       under franchises or licenses to be obtained from those national lodging
       chains. The Partnership financed its activities through a public offering
       of notes and limited partnership units. Microtel hotels were constructed
       in Birmingham, Alabama and Chattanooga, Tennessee which began operations
       in September 1994 and September 1995, respectively. In April 1995,
       construction of a Hampton Inn hotel in Rochester, New York was completed
       and the hotel began operations. The Partnership does not anticipate
       raising additional capital and, therefore, no additional hotels are
       expected to be developed.

       The Partnership's general partners are Essex Partners Inc. (Essex
       Partners), a subsidiary of Essex Investment Group, Inc. (Essex), and John
       E. Mooney, President of Essex Partners and Essex. Management of the
       Partnership and the hotels is the sole responsibility of Essex Partners.

       The following is a general description of the allocation of income and
       loss. For a more comprehensive description see the Partnership Agreement:

             Income from operations will be allocated 99% to the limited
             partners and 1% to the general partners until the amount allocated
             to the limited partners equals the cumulative annual return of 8%
             of their contribution. Any remaining income from operations is
             allocated 80% to the limited partners and 20% to the general
             partners. Income on the sale of any or all of the hotels is
             allocated 99% to the limited partners until each Limited partner
             has been allocated income in an amount equal to his or her pro rata
             share of the nondeductible syndication expenses and sales
             commissions and 1% to the general partners. Thereafter, income on
             the sale of any or all the hotels is allocated in the same manner
             as income from operations.

             Losses from operations will be allocated 80% to the limited
             partners and 20% to the general partners in the amounts sufficient
             to offset all income, if any, which was allocated 80% to the
             limited partners. Thereafter, operating losses are allocated 99% to
             the limited partners and 1% to the general partners. Loss on the
             sale of any or all of the hotels will be first allocated in the
             same manner as losses from operations, except that the allocation
             of such loss would be made prior to allocations of income from
             operations. All other losses are allocated 99% to the limited
             partners and 1% to the general partners.

             In 1997 and 1996 losses from operations were allocated 99% to the
             limited partners and 1% to the general partners.




                                       6
<PAGE>




ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997



1.     ORGANIZATION - CONTINUED

       Under the Partnership Agreement, cash distributions will initially be
       made 99% to the limited partners and 1% to the general partners. After
       the limited partners have received a minimum cumulative annual return of
       8% of their contribution, additional distributions may then be made 80%
       to the limited partners and 20% to the general partners. The limited
       partners have received the minimum cumulative return of 8% due through
       December 31, 1997.

       Under the Partnership's initial offering from 1993 to 1995, Limited
       partnership capital of $3,986,320 was raised, less syndication fees
       including selling commissions and legal, accounting, printing, and other
       filing costs of $491,473. Cumulative distributions to limited partners
       through December 31, 1997 were $1,076,718.

       Essex Partners and its affiliates received substantial fees in connection
       with the offering of notes and limited partnership units and the
       acquisition and development of the hotels. Management and other fees
       related to the operation of the hotels and the Partnership are due
       annually to Essex Partners (see Note 6).


2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       BASIS OF ACCOUNTING

       The financial statements of the Partnership were prepared on the accrual
       basis of accounting in conformity with generally accepted accounting
       principles.

       INVESTMENTS IN REAL ESTATE

       Investments in real estate are stated at cost. Depreciation is calculated
       using the straight-line method over the following estimated useful lives
       of the assets:

                  Building                           39  Years
                  Land improvements                  15  Years
                  Equipment and furnishings          5-7 Years

       The cost of property and equipment retired or otherwise disposed of and
       the related accumulated depreciation are removed from the accounts.

       DEFERRED COSTS

       Costs of issuing the mortgage notes payable are amortized on a
       straight-line basis over the term of the notes.

       Franchise fees paid for the right to own and operate the hotels are
       amortized on a straight-line basis over the term of each franchise
       agreement, beginning when a hotel is placed in service.





<PAGE>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997


2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       SYNDICATION COSTS

       The Partnership incurred legal fees and other costs related to the
       syndication which were treated as a reduction to Partners' capital. These
       costs will be included in the Partners' basis upon termination of the
       Partnership.

       RECOGNITION OF REVENUE

       Revenues are recognized as earned in accordance with contractual
       arrangements for each transaction.

       ADVERTISING COSTS

       Advertising costs of the Partnership are expensed as incurred.
       Advertising expense for the years ended December 31, 1997 and 1996 was
       $200,623 and $173,752, respectively.

       INCOME TAXES

       No provision for income taxes has been provided since any liability is
       the individual responsibility of the Partners.

       LIMITED PARTNERSHIP PER UNIT DATA

       Net loss per limited partner unit is calculated by dividing net loss by
       the weighted average number of units outstanding during the period. The
       weighted average number of units outstanding was 4,000 for the years
       ended December 31, 1997 and 1996.

       USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

       RECLASSIFICATIONS

       Certain amounts in the prior year's financial statements were
       reclassified to conform with the current year's presentation.

3.     SALE OF LAND

       In 1996, the Partnership sold land adjacent to the hotel in Chattanooga
       with final settlement in January 1997 of $86,782. A loss of $67,218 was
       recognized on the transaction.




                                       8
<PAGE>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997


4.     MORTGAGE NOTES PAYABLE

       Mortgage notes payable bear interest at a rate of 10% per annum and
       mature December 31, 1998, unless extended by the Partnership to December
       31, 1999 upon payment of an extension fee equal to .5% of the principal
       amount outstanding, or December 31, 2000 upon payment of an extension fee
       equal to 1% of the principal amount outstanding. The notes are
       collateralized by first mortgages on the hotels and underlying land.


5.     FRANCHISE, ROYALTY AND MARKETING FEES

       The Partnership entered into franchise agreements with Microtel Franchise
       and Development Corporation (MFDC) for the Birmingham, Alabama and
       Chattanooga, Tennessee sites. Total initial franchise fees paid were
       $50,500. In addition to the initial fee, the Partnership is required to
       pay a monthly royalty fee of 2.5% of gross room revenues. The monthly
       royalty fee increases to 3% of gross room revenues in the event between
       50 and 100 Microtel hotels are opened for business by franchisees and up
       to 3.5% in the event 100 or more Microtel hotels are opened. The monthly
       royalty fee increased to 3% in 1997. In 1996, the Franchisor established
       a system of advertising, thus requiring the Partnership to contribute an
       additional 1% of gross room revenues to pay for the cost of such a
       system.

       The franchise agreement also requires the Partnership to maintain certain
       insurance coverage, to meet certain standards with respect to furniture,
       fixtures, maintenance and repairs, and to refurbish and upgrade the hotel
       not more than once every 5 years to conform to Microtel hotel's
       then-current public image. The term of the agreement is 10 years, with an
       option to renew for an additional 10 years, subject to compliance with
       certain conditions. Microtel royalty fees totaled $46,756 in 1997 and
       $39,027 in 1996 and advertising fees were $17,665 in 1997 and $14,600 in
       1996.

       The Partnership also entered into a license agreement with Promus
       Corporation (Promus) to operate a Hampton Inn Hotel for the Rochester,
       New York site with a term of twenty years. An initial franchise fee of
       $35,000 was paid. In addition to the initial fee, the Partnership is
       required to pay Promus a monthly royalty fee of 4% of gross room
       revenues, a monthly marketing/reservation fee of 4% of gross room revenue
       and a monthly amount equal to any sales tax or similar tax imposed on the
       Hampton Inn on payments received under the license agreement. The
       Partnership incurred royalty fees of $79,272 in 1997 and $78,523 in 1996.
       Marketing/reservation fees included in advertising and promotion expense
       totaled $79,272 in 1997 and $78,523 in 1996.

       Promus requires the Partnership to establish a capital reserve escrow
       account based on a percentage of gross revenues generated by the Hampton
       Inn hotel which will be used for product quality requirements of the
       hotel. Cumulative funding of the reserve for the first five years of
       operation increases from 1% to 5% of gross revenues and stabilizes at 5%
       for the term of the agreement. The capital reserve cash escrow account at
       December 31, 1997 and 1996 was $52,219 and $17,115, respectively.



<PAGE>

ESSEX HOSPITALITY ASSOCIATES III L.P.
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1997



5.     FRANCHISE, ROYALTY AND MARKETING FEES - CONTINUED

       The franchise agreements impose certain restrictions on the transfer of
       limited partnership units. MFDC and Promus restrict the sale, pledge or
       transfer of units in excess of 10% and 25%, respectively, without their
       consent.


6.     RELATED PARTY TRANSACTIONS

       A summary of the fees earned by Essex Partners in 1997 and 1996 under the
       terms of the Partnership and management agreements is as follows:


<TABLE>
<CAPTION>

                TYPE OF FEE                             AMOUNT OF FEE                        1997            1996
       ------------------------------  ------------------------------------------------  --------------  --------------

<S>                                    <C>                                                <C>            <C>
       Property Management Fee         4.5% of gross operating revenues from the hotel    $ 177953       $     168192

       Partnership Management Fee      1.25% of gross operating revenues from the
                                       hotels                                                49431              46720

       Accounting Fee                  $2,025 per month                                      24300              24300
                                                                                          --------        ------------

                                                                                          $ 251684       $     239212
</TABLE>

       The accounting fees for the year ended December 31, 1997 and 1996 has
       been included in administrative expenses.

       Organization and offering fees are allocated between syndication costs
       and debt issuance costs based on the pro-rata share of limited partners'
       units and notes payable to the total offering.

       In addition, Essex Partners will receive refinancing fees equal to 1% of
       the gross proceeds from any refinancing of the hotels and a sales fee of
       up to 3% of the gross price if the hotel is sold.


7.     CONTINGENCY

       The Partnership is involved in a litigation matter arising from the
       normal course of business. In management's opinion, resolution of
       litigation will not materially affect the Partnership's financial
       position or results of operations.










                                     10








<PAGE>








                              ESSEX PARTNERS INC.
                         (A Wholly Owned Subsidiary of
                         Essex Investment Group, Inc.)

                              Financial Statements

                           December 31, 1997 and 1996

                  (With Independent Auditors' Report Thereon)










<PAGE>






KPMT PEAT MARWICK LLP
     600 Clinton Square
     Rochester, NY  14604











                          INDEPENDENT AUDITORS' REPORT



The Board of Directors of
Essex Partners Inc.:


We have audited the accompanying balance sheets of Essex Partners Inc. (a wholly
owned subsidiary of Essex Investment Group, Inc.) as of December 31, 1997 and
1996, and the related statements of operations and changes in retained earnings
and cash flows for the years then ended. These financial statements are the
responsibility of the Company'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 Essex Partners Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.



/s/ KPMG PEAT MARWICK LLP
February 26, 1998


<PAGE>









<TABLE>
<CAPTION>

                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                                 Balance Sheets

                           December 31, 1997 and 1996


               ASSETS                                              1997           1996
               ------                                              ----           ----

Current assets:
<S>                                                             <C>             <C>
    Cash and cash equivalents                                   $  418,458      84,643
    Receivables from partnerships                                  452,187     815,825
    Due from parent and affiliates, net                            318,465        --
    Other                                                            2,630       5,682
                                                                ----------   ---------

              Total current assets                               1,191,740     906,150

Noncurrent receivables from partnerships                           186,146     533,825
Investment in real estate                                          132,844        --
Investments in partnerships                                        543,745     506,224
Deferred tax asset                                                  56,300      48,000
Office furniture and equipment less accumulated
         depreciation of $104,373 in 1997 and $74,560 in 1996       73,545      87,479
                                                                ----------   ---------

                                                                $2,184,320   2,081,678
                                                                ==========   =========

         LIABILITIES AND STOCKHOLDER'S INVESTMENT

Current liabilities:
    Accounts payable and accrued expenses                          301,426      40,504
    Due to parent and affiliates, net                                 --       216,006
                                                                ----------   ---------

              Total current liabilities                            301,426     256,510

Accrued partnership contributions                                   87,359      91,770
                                                                ----------   ---------

                                                                   388,785     348,280
                                                                ----------   ---------
Contingencies (note 6)

Stockholder's investment:
    Common stock, par value $.01, authorized 2,000,000
        shares; 100 shares issued and outstanding                        1           1
    Paid-in capital                                                    999         999
    Retained earnings                                            1,794,535   1,732,398
                                                                ----------   ---------
               Total stockholder's investment                    1,795,535   1,733,398
                                                                ----------   ---------
                                                                $2,184,320   2,081,678
                                                                ==========   =========

</TABLE>


See accompanying notes to financial statements.



<PAGE>







                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

           Statements of Operations and Changes in Retained Earnings

                 For the years ended December 31, 1997 and 1996


                  1997     1996
Revenues:
   Management and administrative fees                 $ 1,361,325     1,139,551
   Organization, property acquisition, disposition
            and development fees                          960,947       652,156
                                                      -----------     ---------
          Total revenues                                2,322,272     1,791,707
                                                      -----------     ---------

Operating expenses:
    Personnel                                           1,432,460     1,136,218
    Office operations                                     166,720       170,883
    Occupancy                                             145,692       143,666
    Sales and marketing                                    38,152        51,280
    Professional fees                                      40,086        57,594
    Equity in losses of partnerships, net                  85,665        11,290
    Provision for losses on partnership investments
             and receivables                              217,246       210,653
                                                      -----------     ---------
           Total operating expenses                     2,126,021     1,781,584
                                                      -----------     ---------
           Income from operations                         196,251        10,123
                                                      -----------     ---------
Other income (expense):
    Expenses from terminated REIT transaction            (200,000)         --
    Interest income                                        76,948        75,920
    Interest expense                                       (7,062)      (80,743)
                                                       -----------     ---------
                      Total other expense, net           (130,114)       (4,823)
                                                      -----------     ---------
                      Income before income taxes           66,137         5,300

Income taxes                                               35,000         2,000
                                                      -----------     ---------
                      Net income                           31,137         3,300

Retained earnings, beginning of year                    1,732,398     1,729,098
Adjustment pursuant to tax sharing arrangement             31,000          --
                                                      -----------     ---------
Retained earnings, end of year                        $ 1,794,535     1,732,398
                                                      ===========     =========


See accompanying notes to financial statements.



<PAGE>




<TABLE>
<CAPTION>


                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                            Statements of Cash Flows

                 For the years ended December 31, 1997 and 1996


                                                                          1997           1996
                                                                          ----           ----
Cash flows from operating activities:
<S>                                                                    <C>               <C>
         Net income                                                    $  31,137         3,300
         Adjustments to reconcile net income to net cash
           provided by operating activities:
              Equity in losses of partnerships                            85,665        11,290
              Depreciation                                                29,813        25,397
              Provision for losses on partnership investments
                       and receivables                                   217,246       210,653
              Deferred income taxes                                       (8,300)         --
              Adjustment pursuant to tax sharing arrangement              31,000          --
              Cash provided (used) by changes in:
                       Other current assets                                3,052        27,709
                       Accounts payable and accrued expenses             260,922      (144,876)
                       Accrued partnership contributions                  (4,411)      (71,772)
                                                                         -------        ------

                           Net cash provided by operating activities     646,124        61,701
                                                                         -------        ------

Cash flows from investing activities:
         Repayments from (advances to) partnerships, net                 594,614    (1,002,829)
         Purchase of real estate                                        (132,844)         --
         Investments in partnerships                                    (321,830)     (242,500)
         Distributions from partnerships                                  98,101       149,242
         Purchase of office furniture and equipment                      (15,879)      (12,410)
                                                                         -------        ------
                           Net cash provided by (used in)
                                    investing activities                 222,162    (1,108,497)
                                                                         -------        ------
Cash flows from financing activities -
         advances (to) from and parent and affiliates, net              (534,471)      216,006
                                                                         -------        ------
              Net increase (decrease) in cash and
                       cash equivalents                                  333,815      (830,790)

Cash and cash equivalents, beginning of year                              84,643       915,433
                                                                         -------        ------
Cash and cash equivalents, end of year                                 $ 418,458        84,643
                                                                       =========        ======
Supplemental disclosure of cash flow information:
         Cash paid during the year for interest                        $   8,651        86,859
                                                                       =========        ======

</TABLE>




See accompanying notes to financial statements.



<PAGE>






                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                         Notes to Financial Statements

                           December 31, 1997 and 1996


(1)  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Essex Partners Inc. (the Company) is the managing general partner of
     partnerships which primarily own and operate hotels, apartment buildings
     and manufactured home communities (MHCs). In addition to revenues earned as
     an investor, the Company receives management, administrative, development
     and other fees for services rendered to the partnerships.

     The Company's parent, Essex Investment Group, Inc. (Essex), is an
     integrated financial services and real estate company.

     CASH EQUIVALENTS

     Cash equivalents consist of money market accounts.

     INVESTMENTS IN PARTNERSHIPS

     Investments in partnerships are accounted for by the equity method. Any
     initial partnership capital contribution required by the Company which is
     payable out of future distributions to the Company is accrued.

     RECOGNITION OF REVENUE

     Organization, property acquisition, disposition, development, management
     and administrative fees are recognized as earned in accordance with
     contractual arrangements for each transaction.

     INCOME TAXES

     Income taxes are accounted for under the asset and liability method whereby
     deferred tax assets and liabilities are recognized for the estimated future
     tax consequences attributable to differences between the financial
     statement carrying amounts of existing assets and liabilities and their
     respective tax bases. Deferred tax assets and liabilities are measured
     using enacted tax rates expected to apply to taxable income in the year in
     which those temporary differences are expected to be recovered or settled.
     The effect of deferred tax assets and liabilities of a change in tax rates
     is recognized in income in the period which includes the enactment date.


     The Company is included in the consolidated federal and combined New York
     State income tax returns of Essex. Essex allocates current federal and
     state income taxes on a pro rata basis to only its subsidiaries which have
     taxable income. Any difference between current income taxes determined on a
     separate company basis in accordance with the asset and liability method
     and the amount allocated to the Company by Essex is reflected as an
     adjustment of retained earnings.

<PAGE>



                                       2


                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                    Notes to Financial Statements, Continued


(1)  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
     CONTINUED

     USE OF ESTIMATES

     Management of the Company has made a number of estimates and assumptions
     relating to the reporting of assets and liabilities and the disclosure of
     contingent liabilities to prepare these financial statements in conformity
     with generally accepted accounting principles. Actual results could differ
     from those estimates.

(2)  PARTNERSHIP INVESTMENTS AND RECEIVABLES

     INVESTMENTS

     The Company's investments in partnerships as of and for the years ended
     December 31, 1997 and 1996 by property type are summarized as follows:

                                                       APARTMENTS
                                HOTELS       MHCS      AND OTHER        TOTAL
                                ------       ----      ---------        -----
         1997

Investments at December 31    $ 180,722     304,029      58,994(1)     543,745

Equity in losses                (44,289)    (41,306)        (70)       (85,665)

Investments during the year     105,000     190,000      26,830        321,830

Distributions received           14,015      49,868      34,218         98,101

           1996

Investments at December 31    $ 134,026     205,203     166,995        506,224

Equity in losses                (14,211)     11,162      (8,241)       (11,290)

Investments during the year        --       217,500      25,000        242,500

Distributions received           89,378      23,764      36,100        149,242

(1) In 1997, the Company wrote off $100,543 of an investment in a residential
    real estate partnership.

Losses of the partnerships include amortization and depreciation of the
underlying properties.


<PAGE>





<PAGE>



                                       3


                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                    Notes to Financial Statements, Continued


(2)  PARTNERSHIP INVESTMENTS AND RECEIVABLES, CONTINUED

     RECEIVABLES

     The Company makes advances to investee partnerships to fund operations as
     well as in connection with the acquisition and construction of real estate.
     Such receivables, which are generally due on demand and unsecured, are
     summarized as follows at December 31, 1997 and 1996:

         Partnership                                       1997           1996
         -----------                                       ----           ----

Essex Geneseo Associates L.P.                         $  276,232         173,293
Essex Microtel LeRay L.P.                                212,995         313,084
Essex Hospitality Associates III L.P.                    149,903          62,784
Essex - Ashford River Oaks L.P.:
         Mortgage note                                      --           270,000
         Advances                                         10,267         472,372
Others                                                   211,936         298,117
                                                         -------         -------

                                                         861,333       1,589,650

Less allowance for losses                                223,000         240,000
                                                         -------         -------

                                                         638,333       1,349,650

Less current portion                                     452,187         815,825
                                                         -------         -------

                                                      $  186,146         533,825
                                                      ==========         =======

     Essex Microtel LeRay L.P. (LeRay) owns and operates a 100-room Microtel
     hotel located in LeRay, New York. During 1996, the Company advanced
     $313,084 to LeRay, primarily to reduce outstanding mortgage debt. Cash flow
     from hotel operations is not anticipated to be sufficient to repay the
     advances, and therefore, during 1997, the Company wrote off $100,089 of the
     amount due. Summarized financial information for LeRay as of and for the
     years ended December 31, 1997 and 1996 follows:

                                                         1997             1996
                                                         ----             ----

Assets                                               $2,064,000       2,170,000
Liabilities                                           1,581,000       1,780,000
Partners capital                                        483,000         390,000
Revenue                                                 605,000         577,000
Net income (loss)                                        93,000        (221,000)
                                                     ==========       =========



<PAGE>



                                       4


                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                    Notes to Financial Statements, Continued

(2)  PARTNERSHIP INVESTMENTS AND RECEIVABLES, CONTINUED

     The following table summarizes activity in the allowance for losses:

                                                        1997              1996
                                                        ----              ----

             Balance beginning of year               $ 240,000          240,000
             Provisions for losses                     116,703          210,653
             Charges offs, net of recoveries          (133,703)        (210,653)
                                                      --------         --------

                      Balance at end of year         $ 223,000          240,000
                                                     =========          =======

     OPERATIONS

     Fees earned in connection with providing organization, financing,
     acquisition, development, management, administration and due diligence
     services to the investee partnerships totaled $2,228,216 in 1997 and
     $1,726,426 in 1996.

     In 1997, the Company initiated development of a real estate investment
     trust (REIT) for hotel properties held by certain of the investee
     partnerships. The Company incurred legal, accounting and other advisory
     costs in connection with that project. However, as of December 31, 1997,
     the REIT offering is not expected to be completed and the Company has,
     therefore, charged $200,000 of those costs to operating expense in 1997.

(3)  INVESTMENT IN REAL ESTATE

     In 1997, the Company purchased an 8% mortgage loan receivable with an
     outstanding balance of $192,844. The Company purchased the loan at a
     $60,000 discount, paying $132,844. On February 26, 1998, the Company
     acquired title to the property through foreclosure sale.

(4)   RELATED PARTY TRANSACTIONS

     The Company provides management and administrative services under contracts
     with several other entities owned by officers of Essex, earning fees of
     $94,056 in 1997 and $65,281 in 1996.

(5)   INCOME TAXES

     The components of income tax expense are as follows:

                                      Current           Deferred         Total
                                      -------           --------         -----
               1997:
                  Federal            $ 34,000           (7,000)         27,000
                  State                 9,300           (1,300)          8,000
                                     --------           ------          ------
                                     $ 43,300           (8,300)         35,000
                                     ========           ======          ======
               1996:
                  Federal               1,500             --             1,500
                  State                   500             --               500
                                     --------           ------          ------
                                     $  2,000             --             2,000
                                     ========           ======          ======



<PAGE>



                                       5


                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                    Notes to Financial Statements, Continued


(5)  INCOME TAXES, CONTINUED

     Income taxes differ from the amounts computed by applying the U.S. Federal
     income tax rate of 34% to income before income taxes as follows:

                                                         1997           1996
                                                         ----           ----

          Computed "expected" tax expense               $22,500        1,800
          Increase (decrease) resulting from:
              State taxes, net of Federal income
                  tax benefit                             5,300          330
              Meals and entertainment                     2,400         --
              Officers' life insurance                    4,300         --
              Other                                         500         (130)
                                                        -------        -----
                                                        $35,000        2,000
                                                        =======        =====

     In 1997 and 1996, Essex allocated $12,300 and $2,000 of consolidated
     current income tax expense to the Company pursuant to the inter-company tax
     sharing arrangement. The differences between current income taxes allocated
     to the Company under the tax sharing arrangement and the amounts reflected
     above in accordance with the asset and liability method are reflected in
     the accompanying statement of changes in retained earnings as adjustments
     to retained earnings.

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     December 31, 1997 and 1996 are presented below:

                                                               1997       1996
                                                               ----       ----

        Deferred tax assets - allowance for uncollectible
            receivables                                       $89,200     96,000
                                                              -------     ------

        Deferred tax liabilities:
            Investment in partnerships                         26,800     42,700
            Depreciation of office furniture and
                 equipment                                      6,100      5,300
                                                              -------     ------
                       Gross deferred tax liabilities          32,900     48,000
                                                              -------     ------
                       Net deferred tax asset                 $56,300     48,000
                                                              =======     ======




<PAGE>



                                       6


                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                    Notes to Financial Statements, Continued


(5)  INCOME TAXES, CONTINUED

     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized. The ultimate realization of deferred tax
     assets is dependent upon the generation of future taxable income during the
     periods in which those temporary differences become deductible. Management
     considers the projected future taxable income and tax planning strategies
     in making this assessment. Based on the level of historical taxable income
     and estimates of future taxable income over the periods which the deferred
     tax assets are deductible, management believes it is more likely than not
     that the Company will realize the benefits of these deductible differences
     at December 31, 1997.

(6)  CONTINGENCIES

     As the general partner in several partnerships, the Company may, subject to
     partnership agreement restrictions, be held liable for all recourse debt
     and obligations of such partnerships to the extent that the obligations are
     not otherwise funded. The amounts of such contingent liabilities include
     guarantees of the following partnership obligations at December 31, 1997:

     Essex Microtel Lehigh L.P.

     Mortgage payable to bank, secured by a first mortgage on
         the property                                                $2,543,000

     Essex Hospitality Associates IV L.P.

     Mortgage payable, secured by a first mortgage on the property    1,350,000

     Essex Geneseo Associates L.P.

     Mortgage payable to bank, secured by mortgages on
         the property                                                 4,275,000

     Essex Real Estate Partnership Notes

     Mortgage notes payable to private investors, primarily
         secured by first and second mortgages on certain
         properties                                                     651,000

     Essex Glenmaura L.P.

     Unsecured subordinated notes payable to private investors        1,500,000

     Essex Mobile Home Properties IX L.P.

     Unsecured subordinated notes payable to private investors        1,200,000

     Greenport L.L.C

     Mortgage payable to bank, secured by a first mortgage              135,000
         on the property
     Essex Manufactured Home Communities X L.P.

     Unsecured subordinated notes payable to private investors        1,200,000

<PAGE>


                                       7


                              ESSEX PARTNERS INC.
          (A Wholly Owned Subsidiary of Essex Investment Group, Inc.)

                    Notes to Financial Statements, Continued


(6)  CONTINGENCIES, CONTINUED

     Although there is no current plan or intention to do so, the capital of the
     Company is available for withdrawal by Essex. Summarized consolidated
     financial information for Essex as of and for the years ended December 31,
     1997 and 1996 follows:

                                              1997         1996
                                              ----         ----

             Assets                       $ 7,000,000    6,400,000

             Liabilities                    5,200,000    5,200,000

             Total stockholders' equity     1,800,000    1,200,000

             Revenue                       16,700,000   13,900,000

             Net income                       420,000      400,000
                                           ==========   ==========





<PAGE>





ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Partnership's former accountants, KPMG Peat Marwick LLP, were dismissed
effective February 13, 1998. KPMG Peat Marwick LLP's reports on the
Partnership's financial statements for the past two years did not contain an
adverse opinion or disclaimer of opinion, nor was either such opinion modified
as to uncertainty, audit scope or accounting principles. The decision to change
accountants was decided by Essex Partners Inc., the Managing General Partner.
There were no disagreements with KPMG Peat Marwick LLP through February 13, 1998
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.

Coopers & Lybrand, LLP was engaged to serve as the Partnership's principal
accountants to audit its financial statements by Essex Partners Inc. on February
13, 1998. Although the Partnership has consulted with Coopers & Lybrand
regarding accounting matters in connection with accounting issues for affiliated
entities, the Partnership did not consult with the new accountants regarding the
application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on the
Partnership's financial statements.


PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16 OF THE EXCHANGE ACT

The Partnership is managed by the Managing General Partner, Essex Partners Inc.
The Managing General Partner is a wholly-owned subsidiary of Essex Investment
Group, Inc. ("Essex"). Essex was formed in January, 1987. Mr. John E. Mooney,
the President of the Managing General Partner and Essex, is also a General
Partner of the Partnership.

The directors and executive officers of the Managing General Partner, as of
March, 1998, are as follows. Brief summaries of their business experience and
certain other information are set forth following the table.

           NAME          AGE                  POSITION
           ----          ---                  --------
John E. Mooney            53    President, Chief Executive Officer and Director
Jerald P. Eichelberger    54    Executive Vice President, Secretary and Director
Richard C. Brienzi        40    Senior Vice President, Treasurer, Chief
                                Operating Officer of the Multi-Family Division
                                and Director
Barbara J. Purvis         44    Senior Vice President and Director
James A. Young            49    First Vice President Hotel Operations

Mr. Mooney has been the President, Chief Executive Officer and a Director of the
General Partner since its formation in December, 1986. Mr. Mooney is also the
President, Chief Executive Officer and a Director of Essex, and has served in
that capacity since its formation in January, 1987. His investment experience
includes serving as an individual general partner of over 45 real estate limited
partnerships, 10 oil and gas limited partnerships, and 3 venture funds. He is
the Chairman of the Board of Moscom Corporation. In addition, he is a Director
of Performance Technologies, Inc., the Greater Rochester Housing Partnership and
the Monroe County Industrial Development Agency. He is also Chairman of the
Executive Committee of Genesee Capital, Inc., a Small Business Investment
Company in the Rochester, New York area.

Mr. Eichelberger has been the Executive Vice President and Director of the
General Partner since its formation in December, 1986. Mr. Eichelberger has also
been an Officer and Director of Essex since its formation in January, 1987. Mr.
Eichelberger has been an individual general partner in several real estate
limited partnerships, one oil and gas partnership, and one venture capital fund.
He is a Director of Genesee Capital, Inc. and St. Joseph's Villa.

Mr. Brienzi joined Essex in April of 1993, and was appointed Vice President,
Treasurer and Chief Financial Officer in September, 1993. Prior to joining
Essex, from 1988 to 1993, he was the Chief Financial Officer of DiMarco
Constructors Corporation. While at DiMarco he established Baldwin Real Estate
Corp., a subsidiary which manages the properties of the DiMarco Group. He is a
member of the American Institute of Certified Public Accountants, New York State
Society of Certified Public Accountants, and Construction Financial Management
Association.

Ms. Purvis has been a Vice President and Director of the General Partner and
Essex since their formation. She is a Director of Genesee Capital, Inc. and
serves on the boards of a number of not-for-profit agencies.

Mr. Young joined Essex in August of 1993, and is responsible for hotel
management and operations. Mr. Young was appointed Vice President in September,
1993. From 1990 to 1993 he worked for the Georgetown University, first as
General Manager of the Georgetown University Hotel and Conference Center, then
as Executive Director of Auxiliary Services of Georgetown University.

Another significant employee of the General Partner, as of March, 1998, is as
follows. Brief summaries of their business


<PAGE>



experience and certain other information are set forth following the table.

           NAME           AGE            POSITION
           ----           ---            --------
Lorrie L. LoFaso           41         Assistant Secretary and Vice President

Ms. LoFaso joined Essex in June, 1989, was elected a Vice President of Essex and
the Managing General Partner in January, 1991, and appointed to the position of
Assistant Secretary of the Managing General Partner in March, 1990. Ms. LoFaso
is responsible for the financial control of the Hotel Division's properties.

Each officer and director of the Managing General Partner is elected for a one
year term and until his or her successor is elected and has qualified. There are
no arrangements between any officer or director and any other person pursuant to
which he or she was elected as an officer or director of the Managing General
Partner.

The Partnership does not have a class of equity securities registered pursuant
to Section 12 of the Exchange Act.


ITEM 10.  EXECUTIVE COMPENSATION

The Partnership has approximately 80 employees who work at the three Partnership
hotels. The Partnership and its hotel properties are managed by its Managing
General Partner. The Partnership has not paid (or accrued) any cash or other
compensation to any executive officer of the Managing General Partner for
services rendered to the Partnership during the year ended December 31, 1997.
The Partnership has no pension, option or other benefit plans and no cash or
non-cash compensation was paid or distributed, or is proposed to be paid or
distributed in the future, by the Partnership to any executive officer of the
Managing General Partner pursuant to any benefit plan.

The Managing General Partner is the property manager for each of the
Partnership's properties. The management agreements describe the property
manager's responsibilities and fees. Under the management agreements, the
Managing General Partner receives a monthly management fee of 4.5% of gross
revenues, and a monthly accounting fee of $675 from each property. Total fees
paid under the management agreements in 1997 were $202,300.

The Managing General Partner also receives a partnership management fee of 1.25%
of gross revenues under section 4.07 of the Partnership Agreement. Total
partnership management fees in 1997 were $49,000.

The amount of fees payable by the Partnership to the Managing General Partner
and its affiliates are described in Section 4.07 of the Partnership Agreement.
The rules governing the reimbursement of expenses of the Partnership are set
forth in Section 4.10 of the Partnership Agreement.


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

There are no partners which own at least a 5% interest in the Partnership.

The following table sets forth the interests in the Partnership held by
executive officers and directors of the Managing General Partner as of March 20,
1998:

                              NAME AND ADDRESS OF
TITLE OF CLASS                   BENEFICIAL OWNER          PERCENTAGE
--------------                   ----------------          ----------

6 limited partnership units    Jerald P. Eichelberger (1)       .2%
                               22 Autumn Wood
                               Rochester, New York   14624

General Partner interests      Essex Partners and
                               John E. Mooney                    1%
                               100 Corporate Woods
                               Rochester, New York   14623

(1)  These partnership units are held by family members of Mr. Eichelberger. Mr.
     Eichelberger disclaims ownership of these units.

The Managing General Partner is a wholly-owned subsidiary of Essex. Essex
possesses the sole voting and dispositive power with respect to the common stock
of the Managing General Partner beneficially owned by it.

Item 12.   Certain Relationships and Related Transactions

The Managing General Partner and Essex Capital Markets Inc., an affiliate of the
Managing General Partner, have received (or accrued) certain fees and
reimbursements from the Partnership for the years ended December 31, 1997 and
1996:


TYPE OF FEE       AMOUNT OF FEE            1997         1996
-----------       -------------            ----         ----

Property        4.5% of gross revenues   $177,953      168,192
management      of the properties
fees



<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rochester,
State of New York on March 30, 1998.

                              ESSEX HOSPITALITY ASSOCIATES III L.P.
                              By:      Essex Partners Inc.
                              Its:     Managing General Partner

                              By:      /S/JOHN E. MOONEY
                                       John E. Mooney
                                       President


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.

Dated:   March 30, 1998       Principal Executive Officer of
                              Managing General Partner:

                              /S/JOHN E. MOONEY
                              John E. Mooney
                              President and Chief
                              Executive Officer


Dated:   March 30, 1998       Principal Financial and Accounting
                              Officer of Partnership

                              /S/LORRIE L. LOFASO
                              Lorrie L. LoFaso
                              Principal Accounting Officer

<PAGE>










               The Board of Directors of Managing General Partner:



Dated:   March 30, 1998                /S/JOHN E. MOONEY
                                       John E. Mooney, Director



Dated:   March 30, 1998                /S/JERALD P. EICHELBERGER
                                       Jerald P. Eichelberger, Director



Dated:   March 30, 1998                /S/BARBARA J. PURVIS
                                       Barbara J. Purvis, Director



Dated:   March 30, 1998                /S/RICHARD C. BRIENZI
                                       Richard C. Brienzi, Director



                                       The Individual General Partner of Essex
                                       Hospitality Associates III L.P.:



Dated:   March 30, 1998                /S/JOHN E. MOONEY
                                       John E. Mooney, General Partner





<PAGE>



Part IV

Item 13.  Exhibits and Reports on Form 8-K

        (a)  Exhibits and Index of Exhibits

EXHIBIT NUMBER DESCRIPTION

     3-1*   Certificate of Incorporation of Essex Partners Inc. (Filed as
            Exhibit 3-1 to form 10KSB for fiscal year ended December 31, 1993.)

     3-2*   By-laws of Essex Partners Inc. (Filed as Exhibit 3-1 to form 10KSB
            for fiscal year ended December 31, 1993.)

     3-3*   Certificate of Limited Partnership of Essex Hospitality Associates
            III L.P. (Filed as Exhibit 3(b) to the Registration Statement on
            Form S-1 of Essex Hospitality Associates III L.P., SEC File No.
            33-67848)

     4-1*   Form of Amended and Reinstated Limited Partnership Agreement of
            Essex Hospitality Associates III L.P. (Filed as Exhibit A to the
            Prospectus included in the Registration Statement on Form S-1 of
            Essex Hospitality Associates III L.P., SEC File No. 33-67848)

     4-2*   Escrow Agreement, dated November 17, 1993, between Essex Hospitality
            Associates III L.P. and Manufacturers and Traders Trust Company.
            (Filed as Exhibit 3-1 to form 10KSB for fiscal year ended December
            31, 1993.)

     4-3*   Form of Subscription Agreement (Filed as Exhibit C to the Prospectus
            included in the Registration Statement on Form S-1 of Essex
            Hospitality Associates III L.P., SEC File No. 33-67848)

     4-4*   Indenture, dated as of November 1, 1993, between the Partnership and
            Manufacturers and Traders Trust Company, relating to the
            Partnership's 10% First Mortgage Notes. (Filed as Exhibit 3-1 to
            form 10KSB for fiscal year ended December 31, 1993.)

     4-5*   Form of 10% First Mortgage Note (Filed as Exhibit B to the
            Prospectus included in the Registration Statement on Form S-1 of
            Essex Hospitality Associates III L.P., SEC File No. 33-67848)

     4-6*   Form of Guaranty of Completion (Filed as Exhibit D to the Prospectus
            included in the Registration Statement on Form S-1 of Essex
            Hospitality Associates III L.P., SEC File No. 33-67848)

     10-1*  Form of Dealer Manager Agreement between Essex Hospitality
            Associates III L.P. and Essex Capital Markets Inc. (Filed as Exhibit
            1(a) to the Registration Statement of Essex Hospitality Associates
            III L.P., SEC File No. 33-67848)

     10-2*  Form of Franchise Agreement to be entered into between Essex
            Hospitality Associates III L.P. and Microtel Franchise and
            Development Corporation (Filed as Exhibit 28(a) to the Registration
            Statement of Essex Hospitality Associates III L.P., SEC File No.
            33-67848)

     10-3*  Form of Management Agreement to be entered into between Essex
            Hospitality Associates III L.P. and Essex Partners Inc. (Filed as
            Exhibit 28(d) to the Registration Statement of Essex Hospitality
            Associates III L.P., SEC File No. 33-67848)



<PAGE>



     10-4* Real Estate Purchase Contract for the Birmingham, Alabama sites,
           dated as of October 1, 1993, between Essex Partners Inc. and Farris,
           Harden & Associates, Inc. (Filed as Exhibit 3-1 to form 10KSB for
           fiscal year ended December 31, 1993.)

     10-5*  Fee Mortgage and Security Agreement, dated December 30, 1993,
            between the Partnership and Manufacturers and Traders Trust Company,
            as Trustee relating to the Birmingham property. (Filed as Exhibit
            3-1 to form 10KSB for fiscal year ended December 31, 1993.)

     10-6*  Real Estate Purchase Contract for one of the Chattanooga sites,
            dated as of December 15, 1993, between Essex Partners and Clifford
            E. Colbaugh and Linda C. McDaniel. (Filed as Exhibit 3-1 to form
            10KSB for fiscal year ended December 31, 1993.)

     10-7*  Real Estate Purchase Contract for one of the Chattanooga sites,
            dated as of December 15, 1993, between Essex Partners and Robert W.
            Myers, Executor of the James E. Myers Estate. (Filed as Exhibit 3-1
            to form 10KSB for fiscal year ended December 31, 1993.)

     10-8*  Option Agreement for the Rochester, New York site, dated as of
            August 25, 1993, between Essex Partners and Center Place Associates.
            (Filed as Exhibit 3-1 to form 10KSB for fiscal year ended December
            31, 1993.)

     10-9*  Form of License Agreement to be entered into between Essex
            Hospitality Associates III L.P. and the Hampton Inn Hotel Division
            of Embassy Suites, Inc. (Filed as Exhibit 28(C) to the Registration
            Statement on Form S-1 of Essex Hospitality Associates III L.P., SEC
            File No. 33-67848)

     10-10* Fee Mortgage and Security Agreement, dated June 28, 1994, as
            modified on March 30, 1995, between the Partnership and
            Manufacturers and Traders Trust Company, as Trustee relating to the
            Rochester, New York property. (Filed as Exhibit 10-10 to form 10KSB
            for fiscal year ended December 31, 1994.)

     10-11* Fee Mortgage and Security Agreement, dated December 30, 1994,
            between the Partnership and Manufacturers and Traders Trust Company,
            as Trustee relating to the Chattanooga, Tennessee property. (Filed
            as Exhibit 10-11 to form 10KSB for fiscal year ended December 31,
            1994.)

     10-12* Construction contract for the Birmingham property, dated April 1,
            1994 between the Partnership and Potter Builders, Inc. (Filed as
            Exhibit10-12 to form 10KSB for fiscal year ended December 31, 1994.)

     10-13* Construction contract for the Rochester property, dated August 15,
            1994 between the Partnership and DiMarco Constructors, Inc. (Filed
            as Exhibit 10-13 to form 10KSB for fiscal year ended December 31,
            1994.)

     10-14* Construction contract for the Chattanooga property, dated April 15,
            1995 between the Partnership and Bunkoff General Contractors. (Filed
            as Exhibit 10-14 to form 10KSB for fiscal year ended December 31,
            1995.)

     27     Financial Data Schedule


(b)  No Form 8-K was filed during the quarter ended December 31, 1997.



*    Incorporated by reference