SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

   X      ANNUAL  REPORT  PURSUANT  TO  SECTION 13 OR 15(d)  OF  THE  SECURITIES
-------   EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2002

                                       OR

          TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES
-------   EXCHANGE ACT OF 1934

                         Commission File Number 0-23972

                      AMERICAN MORTGAGE ACCEPTANCE COMPANY
                  (Formerly American Mortgage Investors Trust)
                  --------------------------------------------
             (Exact name of registrant as specified in its charter)

          Massachusetts                                          13-6972380
-------------------------------                              -------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

625 Madison Avenue, New York, New York                             10022
----------------------------------------                     -------------------
(Address of principal executive offices)                         (Zip Code)

Registrant's telephone number, including area code (212) 421-5333

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

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

     Shares of Beneficial Interest, par value $.10 per share

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
                                             ---  ---

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


     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes X No

                         ---  ---
     The approximate  aggregate market value of the voting and non-voting common
equity  held by  non-affiliates  of the  Registrant  as of  June  28,  2002  was
$83,580,115,  based on a price of $13.40 per share,  the closing sales price for
the Registrant's shares of beneficial interest on the American Stock Exchange on
that date.

     As of March  14,  2003  there  were  6,363,630  outstanding  shares  of the
Registrant's shares of beneficial interest.


                       DOCUMENTS INCORPORATED BY REFERENCE


Part III:  Those  portions of the  Registrant's  Proxy  Statement for the Annual
Meeting of Shareholders to be held on June 11, 2003, which are incorporated into
Items 10, 11, 12 and 13.

Index to exhibits may be found on page 42
Page 1 of 72



                      CAUTIONARY STATEMENT FOR PURPOSES OF
                         THE "SAFE HARBOR" PROVISIONS OF
              THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

WHEN  USED  IN  THIS  ANNUAL  REPORT  ON  FORM  10-K,   THE  WORDS   "BELIEVES",
"ANTICIPATES",  "EXPECTS"  AND  SIMILAR  EXPRESSIONS  ARE  INTENDED  TO IDENTIFY
FORWARD-LOOKING  STATEMENTS.  STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K  PURSUANT TO THE "SAFE HARBOR"  PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN  RISKS AND  UNCERTAINTIES  WHICH  COULD CAUSE  ACTUAL  RESULTS TO DIFFER
MATERIALLY,  INCLUDING,  BUT NOT  LIMITED TO,  THOSE SET FORTH IN  "MANAGEMENT'S
DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS".
READERS  ARE  CAUTIONED  NOT TO PLACE UNDUE  RELIANCE  ON THESE  FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.

                                       2


                                     PART I

Item 1.  Business.

General
-------

American Mortgage Acceptance Company (the "Company") was formed on June 11, 1991
as a Massachusetts  business trust.  The Company elected to be treated as a real
estate  investment  trust ("REIT")  under the Internal  Revenue Code of 1986, as
amended (the "Code").

Effective April 26, 1999, upon authorization by the Company's board of trustees,
the  Company's  name was  changed  from  American  Mortgage  Investors  Trust to
American  Mortgage  Acceptance  Company.  The  Company's  shares  of  beneficial
interest (the "Shares") commenced trading on the American Stock Exchange on July
1, 1999 under the symbol "AMC".  As of December 31, 2002,  there were  6,363,630
Shares outstanding.

The Company's  business  plan focuses on  originating  and  acquiring  mortgages
secured  by  multi-family  properties,  which  may take  the form of  government
insured first mortgages and uninsured  mezzanine loans,  construction loans, and
bridge loans.  Additionally,  the Company has indirectly invested in subordinate
commercial  mortgage-backed  securities  and may  invest  in other  real  estate
assets, including non-multi-family  mortgages, issues guarantees of construction
and permanent financing, and makes standby and forward loan commitments.

The Company is governed by a board of trustees  comprised  of three  independent
trustees and two  trustees  who are  affiliated  with  Related  Capital  Company
("Related").   The  Company  has  engaged  Related  AMI  Associates,  Inc.  (the
"Advisor"),  an  affiliate of Related,  to manage its  day-to-day  affairs.  The
Advisor has  subcontracted  with Related to provide the  services  contemplated.
Through the  Advisor,  Related  offers the  Company a core group of  experienced
staff and  executive  management  providing  the Company with services on both a
full  and  part-time  basis.   These  services  include,   among  other  things,
acquisition,  financial,  accounting,  tax, capital markets,  asset  monitoring,
portfolio  management,  investor  relations and public relations  services.  The
Company  believes  that it benefits  significantly  from its  relationship  with
Related,  since  Related  provides  the  Company  with  resources  that  are not
generally available to smaller-capitalized, self-managed companies.

The consolidated  financial  statements  include the accounts of the Company and
three  wholly-owned  subsidiaries which it controls:  AMAC Repo Seller,  AMAC/FM
Corporation ("AMAC/FM") and AMAC Credit Facility, LLC. All intercompany accounts
and  transactions  have  been  eliminated  in  consolidation,  unless  otherwise
indicated.  The  "Company"  as  hereinafter  used,  refers to American  Mortgage
Acceptance Company and its subsidiaries.

Investment Strategy
-------------------

Since the Company's 1999 listing on the American Stock  Exchange,  the Company's
goal has been to attempt to maximize the return on the  Company's  asset base by
investing in higher yielding assets while managing risk by maintaining a portion
of its  investments  in government  agency  guaranteed or insured  assets and by
maintaining a conservative capital structure.

The Company seeks asset  diversification,  capital  appreciation  and income for
distribution  to  its  shareholders   primarily   through  the  acquisition  and
origination of mortgages  secured by multifamily  properties.  These investments
may take the form of first mortgages,  mezzanine loans,  construction  loans and
bridge loans.  The Company also  indirectly  invests in  subordinate  commercial
mortgage-backed securities and may invest in other real estate assets.

The Company invests in the following types of assets:

Government Insured and Guaranteed Investments

Generally,  the  Company  seeks to  maintain  a minimum  of 40% of its  mortgage
investments in government insured or guaranteed  investments,  primarily through
the acquisition or origination of mortgage loans on multi-family properties, the
principal of which is insured by the Federal Housing Authority ("FHA"),  and the
acquisition of Government National Mortgage Association ("GNMA") mortgage-backed
securities and pass-through  certificates.  The Company believes that government
agency insured lending offers safety,  liquidity and moderate yields, while also
providing a strong asset base for collateralized borrowing on favorable terms.

Mezzanine Loans

Mezzanine  loans  are  subordinate  to  senior   mortgages  and  may  include  a
participating  component,  such as a right to a  portion  of the  cash  flow and
proceeds generated from the refinancing and sale of the underlying properties.

The Company  seeks to  capitalize on  attractive  yields  available  through the
funding of mezzanine debt in combination with origination of government insured,
multi-family  first  mortgages.  The Company  believes that it is one of the few
lenders  in  the  country  who  offer  mezzanine   loans  in  conjunction   with
agency-insured first mortgage loans.

                                       3


The  Company's   mezzanine   loans  typically   finance  newly   constructed  or
rehabilitated market-rate multi-family properties and generally have terms of 40
years with an option to call the loan on 12 months  notice at any time after the
tenth anniversary of the completion of the construction or rehabilitation. These
loans are typically in a  subordinated  mortgage  position,  are also secured by
equity  interests in the borrower and have limited  recourse to the borrower for
the three years from the date of loan.  The Company seeks  properties in growing
real estate markets with well capitalized developers or guarantors.  The Company
leverages  the  expertise of its Advisor and its  affiliates in both the initial
underwriting  of the  property,  as well  as in the  ongoing  monitoring  of the
property through construction, lease-up and stabilization.

Bridge Loans

The Company has two bridge loan  programs.  In the first,  the Company's  bridge
loans are typically  funded in connection  with the  development of multi-family
properties  which benefit from the Low Income  Housing Tax Credit  program under
Section 42 of the Internal  Revenue Code  ("LIHTC  program").  Due to the equity
payment  schedule  typically  associated  with the LIHTC  program,  there can be
periods in a construction cycle where a developer needs short-term  capital.  To
capitalize  on this demand,  the Company  will offer bridge loans to  developers
with typical terms of  approximately 12 months and which are  collateralized  by
the equity  interests in the property owner. In the second program,  the Company
provides  bridge loans for properties  undergoing  rehabilitation  by new owners
when the  rehabilitation  process will add significant value to the property and
reduce the effective  loan-to-value  ratio and risk of loss. The Company's loans
may finance the  initial  purchase  and/or the  subsequent  rehabilitation  of a
property.

During  October  2002,  the Company  entered into a mortgage  warehouse  line of
credit (the "Fleet Warehouse  Facility") with Fleet National Bank ("Fleet"),  in
the amount of $40 million.  Advances under the Fleet Warehouse  Facility,  up to
83% of the total loan package,  will be used to fund first mortgage loans, which
the Company will make for the  acquisition/refinancing  and minor  renovation of
existing, lender-approved multi-family properties located in stable sub-markets.
As of December 31,  2002,  the Company had  approximately  $8.8 million in loans
outstanding under this program.

Commercial Mortgage-Backed Securities ("CMBS")

The Company  may invest in  subordinated  CMBS,  which  offer the  advantage  of
significantly higher yields than government insured and guaranteed  investments.
The  market  values of  subordinated  interest  in CMBS and  other  subordinated
securities  tend to be more  sensitive  to changes in economic  conditions  than
senior,  rated  classes.  As a result of these and other  factors,  subordinated
interest  generally  are not  actively  traded and may not provide  holders with
liquidity of investment.

The Company currently invests indirectly in CMBS through a convertible preferred
equity investment in ARCap Investors,  LLC ("ARCap").  ARCap specializes in, and
is a  recognized  industry  leader in  investing  in,  non-investment  grade and
unrated  subordinated  CMBS.  The CMBS  which  comprise  ARCap's  portfolio  are
collateralized   by  a  diverse   range  of  underlying   properties   including
multi-family, retail, office and hotel.

Standby Loan Commitments

The Company  issues  standby  bridge loan and  permanent  loan  commitments  for
projects  involved  with the  construction  or  rehabilitation  of  multi-family
apartment complexes in various locations.  In return, the Company receives a fee
for issuing these commitments.

Construction Guarantees

The  Company  has  entered  into  an  agreement  with  Wachovia  Bank,  National
Association ("Wachovia"), to provide stabilization guarantees for the benefit of
Wachovia  for new  construction  of  multi-family  properties  under  the  LIHTC
program.  Wachovia already provides construction and stabilization guarantees to
Fannie Mae, for loans  Wachovia  originates  under the Fannie Mae LIHTC  forward
commitment  loan  program,  but only for loans  within  regions  of the  country
Wachovia has designated to be within its territory. For loans outside Wachovia's
territory,  the Company has agreed to issue a stabilization  guarantee,  for the
benefit of  Wachovia.  The Company is  guarantying  that  properties  which have
completed  construction  will stabilize and will convert to permanent Fannie Mae
loans. The Company  receives  origination and guarantee fees from the developers
for providing the guarantees. If the properties do not stabilize with enough Net
Operating  Income for Fannie  Mae to fully  fund their  commitment,  AMAC may be
required  to  purchase  the  construction  loan  from  Wachovia  or to fund  the
difference  between the  construction  loan  amount and the  reduced  Fannie Mae
Permanent Loan Amount.

Portfolio
---------

At December  31,  2002,  the Company had total  assets of  approximately  $195.1
million  of  which   approximately   $22.4  million   represented   mortgage  or
mortgage-related   investments.   At  December  31,  2002,   the  Company  owned
approximately  $114 million in GNMA certificates and had invested  approximately
$8.3 million in a FHA insured  first  mortgage  loan (repaid  subsequent to year
end) aggregating  approximately  $122.3 million,  or approximately  62.7% of the
Company's  assets.  The Company  generally seeks to maintain at least 40% of its
mortgage investments in government insured or guaranteed investments.

At December 31, 2002, the Company owned approximately $12.4 million in mezzanine
loans and  approximately  $26 million in bridge loans funded in connection  with
the development of multi-family properties which benefit from the LIHTC program.
The Company  also owned an indirect  investment  in CMBS  through the  Company's
$20.2 million preferred equity interest in ARCap.

                                       4


GNMA Certificates

As  of  December  31,  2002,  the  Company's   portfolio  included  twelve  GNMA
certificates.

GNMA  is  a  wholly  owned  United  States  government  corporation  within  the
Department  of  Housing  and Urban  Development  ("HUD")  created  to  support a
secondary  market in  government-insured  and guaranteed  mortgage  loans.  GNMA
guarantees the timely payment of principal and interest on its securities, which
are backed by pools of FHA and other  government  agency  insured or  guaranteed
mortgages.  GNMA  certificates  are  backed by the full  faith and credit of the
United  States  government.  GNMAs are widely  held and  traded  mortgage-backed
securities and therefore provide a high degree of liquidity.

The  yield on the GNMA  certificates  will  depend,  in part,  upon the rate and
timing of principal  prepayments  on the  underlying  mortgages.  Generally,  as
market  interest  rates  decrease,  mortgage  prepayment  rates increase and the
market value of interest rate sensitive  obligations like the GNMA  certificates
increases. As market interest rates increase,  mortgage prepayment rates tend to
decrease and the market value of interest rate  sensitive  obligations  like the
GNMAs tend to  decrease.  The  effect of  prepayments  on yield is  greater  the
earlier a prepayment of principal is received.  Certain of the  Company's  GNMAs
are collateralized by mortgage loans on multi-family properties.

                                       5


Investments in GNMA Certificates - Available for Sale
--------------------------------
Information  relating to GNMA  certificates  owned by the Company as of December
31, 2002 is as follows:
(Dollars in thousands)



                                                                                                                           Interest
                                                                                                                            Income
                                                                                                                            Earned
                                                                                                 Unrealized               Applicable
                                                Date                   Principal    Amortized    Gain (Loss)   Balance   to the Year
                                    Final     Purchased/   Stated         at        Cost at          at           at        Ended
                                 Certificate   Payment    Interest     December     December      December     December    December
                                    Number       Date       Rate       31,2002      31,2002       31,2002      31,2002     31,2002
                                 -----------  --------    --------     ---------    ---------    ----------    --------   ----------

                                                                                                    
Western Manor (1)                  0355540     7/27/94      7.125%     $  2,460     $  2,470          $39      $  2,509     $    196
                                               3/15/29

Copper Commons (1)                 0382486     7/28/94      8.500%        2,088        2,158          (28)        2,130          179
                                               8/15/29

SunCoast Capital Group, Ltd. (1)   G002412     6/23/97      7.000%          546          547           32           579           50
                                               4/20/27

Hollows Apts. (2)                  511909      5/29/01          --           --           --           --            --          197


Elmhurst Village (1)               549391      6/28/01      7.745%       21,677       21,677          922        22,599        1,659
                                                1/1/42

Reserve  at Autumn  Creek (1)      448748      6/28/01      7.745%       16,023       16,023        2,574        18,597        1,200
                                                1/1/42

Casitas at Montecito (1)(3)        519289      3/11/02      7.300%        5,787        6,178          458         6,636          321
                                              10/15/42

Village at Marshfield (1)          519281      3/11/02      7.475%       19,869       21,493        1,331        22,824        1,140
                                               1/15/42

Cantera Crossing (1)               532662      3/28/02      6.500%        5,555        5,489          592         6,081          210
                                                6/1/29

Fillmore Park (1)                  536739      3/28/02      6.700%        1,189        1,203          116         1,319           48
                                              10/15/42

Northbrooke (1)                    548972      5/24/02      7.080%       10,475       10,625        1,231        11,856          244
                                                8/1/43

Ellington Plaza (1)                585494      7/26/02      6.835%       10,501       10,559        1,159        11,718          258
                                                6/1/44

Burlington (1)                     595515      11/1/02      5.900%        6,824        6,909          277         7,186           67
                                               4/15/31

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

Total                                                                  $102,994     $105,331     $  8,703      $114,034     $  5,769

                                                                       ========     ========     ========      ========     ========


(1)  These GNMA  certificates  are partially or wholly pledged as collateral for
     borrowings under the repurchase facility - See Note 7.
(2)  This GNMA  certificate  was sold  March 25,  2002,  resulting  in a gain of
     approximately $614,000.
(3)  This GNMA certificate was repaid in March 2003.

                                       6


Bridge Loans

The portfolio of bridge loans as of December 31, 2002 is summarized in the table
below:
(Dollars in thousands)





                                                                                             Remaining
                                     Number of    Outstanding    Unamortized                 Committed
                                     Apartment     Principal      Costs and      Carrying     Balance    Interest
Property             Location          Units        Balance          Fees         Amount      to Fund      Rate         Maturity
------------------------------------------------------------------------------------------------------------------------------------

                                                                                            
Alexandrine (3)     Detroit, MI           30       $   214        $      --      $   214     $    --       12.50%   November 2002(5)

Concord at
   Palm (3)(6)      Houston, TX          360         3,850               18        3,832          --       12.00%   December 2003

Parwood (3)         Long Beach, CA       528         3,022(1)            25        2,997       1,578       11.00%    January 2004

Concord at
   Little York      Houston, TX          276         3,500               25        3,475          --       12.00%   February 2004

Concord at
   Gulfgate         Houston, TX          288         3,500               47        3,453          --       12.00%        May 2004

Reserve at
   Fox River        Yorkville, IL        132         1,350               11        1,339          --       12.00%        May 2003

Del Mar                                                                                                   LIBOR +
   Villas (4)       Dallas, TX           260         5,554               42        5,512          --       4.625%      April 2004

Mountain                                                                                                  LIBOR +
   Valley (4)       Dallas, TX           312         5,242               67        5,175       1,065(2)    4.750%   November 2004
                                     ------------------------------------------------------------------

     Total                             2,186       $26,232        $     235      $25,997     $ 2,643
                                     ==================================================================


(1)  Funded on an as needed basis.
(2)  To be funded for rehabilitation.
(3)  These  loans  are  to  limited  partnerships  whose  general  partners  are
     affiliates of the Advisor.
(4)  Pledged as  collateral  in connection  with  warehouse  facility with Fleet
     National  Bank  (see  Note 8 of  the  accompanying  consolidated  financial
     statements).
(5)  Consists  of two notes  that  mature in  November  2002.  One note,  in the
     approximate amount of $207,000, has been repaid January 2003. The remaining
     note, in the amount of $6,800, remains unpaid.
(6)  The Concord of Palm bridge loan was repaid in full in March 2003.

                                       7


Investments in Mortgage Loans
-----------------------------

Information  relating  to the  Company's  investments  in  mortgage  loans as of
December 31, 2002 is as follows:
(Dollars in thousands)



                                                          Final                                                         Share of
                                                         Maturity                                        Lifetime   Excess Operating
Property                                 Description       Date      Call Date(A)   Interest Rate(B)   Interest Cap    Cash Flows

                                                                                                          

First Mortgage Loans

  Stony Brook II (E)(M)(P)
    East Haven, CT                         125 Units        6/37            12/06          7.625%            N/A            N/A

  Sunset Gardens
    Eagle Pass, TX                          60 Units        9/03              N/A          11.50%            N/A            N/A

  Northbrooke
    Harris County, TX                      240 Units        8/43              N/A           7.45%            N/A            N/A

  Alexandrine
    Detroit, MI                             30 Units       12/03              N/A          11.00%            N/A            N/A


Subtotal First Mortgage Loans

Mezzanine Loans (G):

  Stabilized Properties
  ---------------------

    Stony Brook II (J)(N)(P)
      East Haven, CT                       125 Units        6/37            12/06          15.33%            16%            40%

    Plaza at San Jacinto (K)(N)
      Houston, TX                          132 Units        1/43             6/11          11.40%            16%            50%


Subtotal Stabilized Mezzanine Loans

Properties in Lease-Up
----------------------

    The Hollows (K)(N)
      Greenville, NC                       184 Units        1/42             1/12          10.00%            16%            50%

    Elmhurst Village (J)(N)
      Oveido, FL                           313 Units        1/42             3/19          10.00%            16%            50%

    The Reserve at Autumn Creek (J)(N)
      Friendswood, TX                      212 Units        1/42             9/14          10.00%            16%            50%


Subtotal Properties in Lease-Up


  Properties in Construction
  --------------------------

    Club at Brazos (I)(N)(K)
      Rosenberg, TX                        200 Units        5/43              TBD          10.00%            14%            50%

    Northbrooke (J)(N)
      Harris County, TX                    240 Units        8/43              TBD          11.50%            14%            50%

    Del Mar Villas
      Dallas, TX                           260 Units        4/04              N/A    LIBOR+4.625%            (O)            N/A

    Mountain Valley
      Dallas, TX                           312 Units       11/04              N/A    LIBOR+4.750%            (O)            N/A


Subtotal Properties in Construction


Subtotal Mezzanine Loans


Total Mortgage Loans






                                                                                                                            Interest
                                                                                                                             Earned
                                                                                                                          Applicable
                                                                                                                             to the
                                           Share of                                                                           Year
                                         Excess Sale or                                Outstanding  Unamortized Carrying     Ended
                                          Refinancing      Periodic                 Face Amount of   Costs and  Amount of   December
Property                                   Proceeds      Payment Terms  Prior Liens   Mortgages(C)     Fees     Mortages(D) 31, 2002

                                                                                                       
First Mortgage Loans:
  Stony Brook II (E)(M)(P)
    East Haven, CT                            N/A               (F)            --      $    8,285   $     --    $   8,285   $    633

  Sunset Gardens
    Eagle Pass, TX                            N/A               (H)            --           1,323        (14)       1,309         99

  Northbrooke
    Harris County, TX                         N/A               (L)            --              --         --           --         16

  Alexandrine
    Detroit, MI                               N/A               (H)            --             342         --          342         15
                                                                                       ---------------------------------------------

Subtotal First Mortgage Loans                                                               9,950        (14)       9,936        763
                                                                                       ---------------------------------------------
Mezzanine Loans (G):

  Stabilized Properties
  ---------------------

    Stony Brook II (J)(N)(P)
      East Haven, CT                          35%               (H)      $  8,285             764       (113)         651         90

    Plaza at San Jacinto (K)(N)
      Houston, TX                             50%               (H)         6,522           1,250        (24)       1,226        149
                                                                                       ---------------------------------------------

Subtotal Stabilized Mezzanine Loans                                                         2,014       (137)      1,877         239
                                                                                       ---------------------------------------------
Properties in Lease-Up
----------------------

    The Hollows (K)(N)
      Greenville, NC                          25%               (H)         8,915           1,549       (150)       1,399        191

    Elmhurst Village (J)(N)
      Oveido, FL                              25%               (H)        21,677(L)        2,874       (419)       2,455        319

    The Reserve at Autumn Creek (J)(N)
      Friendswood, TX                         25%               (H)        16,023(L)        1,987        (60)       1,927        192
                                                                                       ---------------------------------------------

Subtotal Properties in Lease-Up                                                             6,410       (629)       5,781        702
                                                                                       ---------------------------------------------

  Properties in Construction
  --------------------------

    Club at Brazos (I)(N)(K)
      Rosenberg, TX                           25%               (H)        13,436           1,962        (77)       1,885        198

    Northbrooke (J)(N)
      Harris County, TX                       50%               (H)        10,475(L)        1,500       (136)       1,364        134

    Del Mar Villas
      Dallas, TX                              N/A               (H)         5,554             765         --          765          8

    Mountain Valley
      Dallas, TX                              N/A               (H)         5,242             776         --          776          6
                                                                                       ---------------------------------------------

Subtotal Properties in Construction                                                         5,003       (213)       4,790        346
                                                                                       ---------------------------------------------

Subtotal Mezzanine Loans                                                                   13,427       (979)      12,448      1,287
                                                                                       ---------------------------------------------

Total Mortgage Loans                                                                   $   23,377      $(993)   $  22,384   $  2,050
                                                                                       =============================================


                                       8


(A)  Loans are subject to mandatory  prepayment at the option of the Company ten
     years after construction  completion,  with one year's notice. Loans with a
     call date of "TBD" are still under construction.

(B)  Interest  on the  mezzanine  loans is based  on a fixed  percentage  of the
     unpaid principal  balance of the related first mortgage loan (prior liens).
     The amount shown is the approximate effective rate earned on the balance of
     the  mezzanine  loan.  The  mezzanine  loans also  provide for  payments of
     additional interest based on a percentage of cash flow remaining after debt
     service  and  participation  in sale or  refinancing  proceeds  and certain
     provisions  that  cap  the  Company's  total  yield,  including  additional
     interest and participations, over the term of the loan.

(C)  No principal  amounts of mortgage loans are subject to delinquent  interest
     as of December 31, 2002.

(D)  Carrying amounts of the loans are net of unamortized  origination costs and
     fees and loan discounts.

(E)  Interest and principal  payments on this first mortgage loan are insured by
     the U.S. Department of Housing and Urban Development.

(F)  Requires  monthly  payments of principal  and  interest  based on a 40-year
     amortization   period.   Loan  is  subject  to  five-year  lockout  against
     prepayments,  as well as a prepayment  penalty  structure during the second
     five-year term of the loan.

(G)  The principal  balance of the mezzanine loans is secured by the partnership
     interests  of the  entity  that owns the  underlying  property  and a third
     mortgage  deed of  trust.  Interest  payments  on the  mezzanine  loans are
     secured by a second mortgage deed of trust and are guaranteed for the first
     36 months after construction completion by an entity related to the general
     partner of the entity that owns the underlying property.

(H)  Interest only payments are due monthly, with loan balance due at maturity.

(I)  The funding of this mezzanine  loan is based on property level  operational
     achievements.

(J)  The  Company  has  an  interest  in  the  first  lien
     position relating to this mezzanine loan.

(K)  The Company does not have an interest in the first lien  position  relating
     to this mezzanine loan.

(L)  The first  mortgage loans related to those  properties  were converted from
     participations  in FHA loans to ownership of the GNMA  certificates and are
     held by the Company.

(M)  This first  mortgage  loan is pledged  to secure the  Company's  obligation
     under a first loss  protection  agreement  with Fannie Mae - see Note 14 in
     the accompanying consolidated financial statements.

(N)  Lifetime  interest cap  represents  the maximum  annual  return,  including
     interest,  fees and participations,  that can be earned by the Company over
     the life of the mezzanine loan,  computed as a percentage of the balance of
     the first mortgage loan plus the mezzanine loan.

(O)  Interest cap on these loans is the maximum rate permitted by law.

(P)  The Stony Brook II first  mortgage loan and  mezzanine  loan were repaid in
     January  2003 - See  Note  14 in the  accompanying  consolidated  financial
     statements.

                                       9


Commercial   Mortgage-Backed   Security-Related   Investment   and  Short  Sale;
--------------------------------------------------------------------------------
Investment in ARCap
-------------------

On  September  30,  1999,  the  Company  acquired  from  ARCap,  a  "BB+"  rated
subordinated  CMBS  from  a  Chase  Manhattan  Bank-First  Union  National  Bank
commercial  mortgage  trust.  The  CMBS  investment,  which  was  purchased  for
$35,622,358, had a face amount of $50,399,711 and an annual coupon rate of 6.4%.
The Company  purchased the CMBS investment  using cash and debt provided through
the Bear Stearns  repurchase  facility (see  Repurchase  Facilities  below).  In
connection  with this  acquisition,  the Company  entered into an agreement (the
"Agreement") with ARCap. Under the Agreement,  the Company had the right to sell
the CMBS investment to ARCap and purchase a preferred  equity position in ARCap,
all based on the then fair value of the CMBS investment. ARCap invests primarily
in subordinated CMBS.

On September  30,  1999,  in order to mitigate the  potential  income  statement
effect of changes in the fair value of its CMBS investment  caused by changes in
interest  rates,  the Company  entered into a short sale involving the sale of a
U.S.  Treasury Note with a face amount of $39,327,000  and an annual coupon rate
of 5.625% borrowed from Bear Stearns & Co., Inc. ("Bear Stearns").  On March 16,
2000,  the Company  replaced the borrowed  security by purchasing  such security
through  Bear  Stearns,  and  entered  into an  additional  short sale  contract
involving the sale of a U.S. Treasury Note with a face amount of $34,512,000 and
an annual coupon rate of 6.0%  borrowed from Bear Stearns.  On November 1, 2000,
the  Company  terminated  the  short  sale in  connection  with  its sale of the
associated CMBS investment.

On November 1, 2000, the Company,  in accordance  with the  Agreement,  sold the
CMBS  investment  to ARCap and  repaid  its  borrowing  under  the Bear  Stearns
repurchase  facility,  closed  out its short  sale  position  (see  below),  and
purchased  a  preferred   equity  interest  in  ARCap  in  the  face  amount  of
$20,000,000,  with a  preferred  dividend  rate of 12%.  This  preferred  equity
interest was recorded at  $19,640,637,  representing  the fair value of the CMBS
investment  at the date of the  transaction,  less the Bear  Stearns  repurchase
facility repayment plus approximately $3.5 million in cash paid to ARCap.

The Company owns 800,000  preferred equity units of ARCap, with a face amount of
$25 per unit,  representing a 7.27% ownership and voting interest. The preferred
equity units are convertible,  at the Company's option, into ARCap common units.
If converted into common units,  the  conversion  price is equivalent to $25 per
unit,  subject to certain  adjustments.  Also, if not already  converted,  for a
period of sixty days following the fifth  anniversary of the first closing date,
which will be August 4, 2005, the preferred equity units are convertible, at the
Company's  option,  into a three-year note bearing interest at 12% that would be
junior to all of ARCap's then existing indebtedness.  The preferred equity units
are also redeemable,  at the option of ARCap, up until the fifth  anniversary of
the first closing date.

Through the Company's  convertible  preferred  membership interests in ARCap, it
has a substantial  indirect  investment in CMBS owned by ARCap. ARCap was formed
in January 1999 by REMICap, an experienced CMBS investment  manager,  and Apollo
Real  Estate  Investors,  the real  estate arm of one of the  country's  largest
private equity  investors.  In  conjunction  with a preferred  equity  offering,
REMICap and ARCap merged,  making ARCap the only internally  managed  investment
vehicle  exclusively  investing in  subordinated  CMBS. As of December 31, 2002,
ARCap had $823 million in assets, including investments in $799 million of CMBS.
Multi-family properties underlie approximately one-third of ARCap's CMBS.

The  Company's  equity in the  earnings of ARCap will  generally be equal to the
preferred  equity  rate of 12% , unless  ARCap does not have  earnings  and cash
flows  adequate  to  meet  this  distribution  requirement.  ARCap  has  met its
distribution  requirements to the Company to date. Yields on CMBS depend,  among
other things,  on the rate and timing of principal  payments,  the  pass-through
rate, interest rate fluctuations and defaults on the underlying  mortgages.  The
Company's interest in ARCap is illiquid and the Company would need to obtain the
consent of the board of managers of ARCap before it could  transfer its interest
in ARCap to any party other than a current  member.  The carrying  amount of the
investment in ARCap is not necessarily  representative of the amount the Company
would receive upon a sale of the interest.

ARCap has  informed  its members that it intends to shift its focus to CMBS fund
management,  whereby  ARCap  will  manage  CMBS  investment  funds  raised  from
third-party  investors.  ARCap will  generally  be a minority  investor in these
funds.  ARCap thereby  intends to diversify  its revenue base by increasing  its
proportion of revenue derived from fees as opposed to interest income.

Loan Origination Program with Fannie Mae
----------------------------------------

The Company  entered into a loan program with Fannie Mae,  which agreed to fully
fund the origination of $250 million of Delegated Underwriter and Servicer loans
for apartment  properties  that qualify for tax credits under the LIHTC program.
Under the loan  program,  the Company  intended to  originate  and  contract for
individual  loans of up to $6 million each over a two-year period in conjunction
with American  Property  Financing,  an  unaffiliated  third party,  which would
underwrite and service the loans for Fannie Mae. The Company  guarantees a first
loss  position of up to $21.25  million,  depending on the  aggregate  principal
amount of the loans the Company  originates under this program and would receive
guaranty,   loan  origination  and  other  fees.  The  Company  also  guarantees
construction  loans for which it has issued a forward  commitment to originate a
loan under the Fannie Mae program, with respect to which it guarantees repayment
of 100% of such  construction  loans.  As of December 31, 2002,  the Company has
originated  loans  totaling  approximately  $3.3  million  under the  Fannie Mae
program and has made forward  commitments  for an  additional  approximate  $4.0
million. The Company's maximum guaranty at December 31, 2002 was $7.3 million.

In order to conduct the program, the Company formed AMAC/FM Corporation,  which,
as of January 1, 2001,  was a wholly owned  Delaware  corporation.  From time to
time, the Company expects to make capital  contributions  or loans to AMAC/FM in
order to ensure  that it has  sufficient  net worth to satisfy  its  obligations
under the Fannie Mae  program.  On April 4, 2000,  the Company  transferred  the
Stony Brook  Village II Apartments  FHA first  mortgage  loan,  with a principal
balance at December 31, 2001 of $8.3 million, to AMAC/FM. As of January 1, 2001,
AMAC/FM  is  treated,  for  federal  income  tax  purposes,  as a  taxable  REIT
subsidiary.

                                       10


During August 2002, the Company  purchased one first mortgage loan in the amount
of $342,000 due to a default on a construction  loan that was 100% guaranteed by
the Company  under the Fannie Mae program.  The loan  defaulted  due to problems
relating to  construction  issues of  Alexandrine  Square,  a 30-unit  apartment
complex in Detroit, Michigan.

Subsequent to creating this program,  the level of loan origination  competition
has   increased,   reducing  the  program's   projected   financing   value  and
profitability.  As a result, the Company decided in the first quarter of 2002 to
discontinue  this program.  The Company has reached an agreement in principle to
terminate this program and transfer its rights and obligations to a third party.
There can be no assurance,  however,  that this agreement  will be  consummated.
Accordingly, during the first quarter of 2002, the Company wrote off the balance
of unamortized  deferred costs relating to this program.  This write-off totaled
approximately  $358,000 and is included in Fannie Mae loan  program  expenses in
the Consolidated Statement of Income.

The  Fannie  Mae  loan  program  has  not  had,  and its  discontinuance  is not
anticipated to have, a significant impact on the Company's  financial  condition
or results of operations.

The following table provides  information  relating to the loans  originated and
forward commitments made on Fannie Mae's behalf.

                             (Dollars in thousands)



Loans Originated
----------------
                                              Number of                      Loss
                                              Apartment                   Sharing Fee
Property                  Location              Units      Loan Amount   (annual rate)
----------------------    ----------------    ---------    -----------   ------------
                                                                 
Valley View               Cedar Rapids, IA        96         $2,187          0.36%
Maple Ridge Apartments    Jackson, MI             69          1,137          0.52%
                                              ---------    -----------
            Total                                165         $3,324
                                              ---------    -----------



Forward Commitments
-------------------
                                              Number of                      Loss
                                              Apartment                   Sharing Fee
Property                  Location              Units      Loan Amount   (annual rate)
-----------------------   ----------------    ---------    -----------   ------------
Cameron Creek Apartments  Dade Country, FL       148         $3,000          0.35%
Desert View Apartments    Coolidge, AZ           372          1,011          0.52%
                                              ---------    -----------
            Total                                520         $4,011
                                              ---------    -----------


Competition
-----------

The Company competes with various financial institutions in each of its lines of
business. The Company competes with banks and  quasi-governmental  agencies such
as Fannie Mae, Freddie Mac and HUD, as well as their designated mortgagees,  for
multi-family  loan  product.  For CMBS  investments,  competitors  include major
financial  institutions  that sponsor CMBS conduits,  pension  funds,  REITs and
finance companies that specialize in CMBS investment management.

The  Company's  business  is also  affected  by  competition  to the extent that
Underlying Properties from which it derives interest and, ultimately,  principal
payments may be subject to rental rates and  relative  levels of amenities  from
comparable neighboring properties.

Employees and Management
------------------------

The Company does not directly employ anyone.  All services are performed for the
Company by the Advisor and its affiliates.  The Advisor receives compensation in
connection with such activities as set forth in Item 8, Financial Statements and
Supplementary  Data,  Item 11,  Executive  Compensation  and  Item  13,  Certain
Relationships and Related Transactions.  In addition, the Company reimburses the
Advisor and certain of its affiliates for expenses  incurred in connection  with
the  performance  by their  employees of services for the Company in  accordance
with the Declaration of Trust.

                                       11


Item 2.   Properties.

          The Company does not own or lease any properties.

Item 3.   Legal Proceedings.

          The Company is not a party to any material pending legal proceedings.

Item 4.   Submission of Matters to a Vote of Shareholders.

          None.

                                       12


                                     PART II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Shareholder
Matters.

As of March 20, 2003,  there were 243 registered  shareholders  owning 6,363,630
Shares.  The Company's  Shares have been listed on the American  Stock  Exchange
since July 1, 1999, under the symbol "AMC".  Prior to July 1, 1999, there was no
established public trading market for the Company's Shares.

The high and low common share prices for each  quarterly  period in the past two
fiscal years in which the Shares were traded is as follows:



                     2002             2002            2001            2001
Quarter Ended        Low              High            Low             High
-------------      ---------       ---------       ---------       ---------
                                                       
March 31           $  12.60        $   14.70       $    7.50       $   11.25
June 30            $  12.70        $   14.09       $    9.60       $   12.00
September 30       $  10.05        $   13.60       $   10.93       $   15.50
December 31        $  11.50        $   14.09       $   12.60       $   14.80



The last reported sale price of Shares on the American  Stock  Exchange on March
20, 2003 was $15.62.

On February 25,  2002,  the Company  completed a public  offering of 2.5 million
common  shares  at a price of  $13.50  per  share.  The net  proceeds  from this
offering, approximately $31 million, net of underwriter's discount and expenses,
were used to fund investments.

Incentive Share Option Plan
---------------------------

The Company adopted an incentive share option plan (the "Incentive  Share Option
Plan") to attract and retain  qualified  persons as trustees and officers and to
provide  incentive  to and more  closely  align the  financial  interests of the
Advisor and its  employees  and officers  with the  interests  of the  Company's
shareholders by providing the Advisor with substantial financial interest in the
Company's success.  The compensation  committee (the "Compensation  Committee"),
which is  comprised of Messrs.  Peter T. Allen and Arthur P. Fisch,  administers
the Incentive Share Option Plan. Pursuant to the Incentive Share Option Plan, if
the Company's distributions per share in the immediately preceding calendar year
exceed $1.45 per share,  the  Compensation  Committee has the authority to issue
options to purchase,  in the aggregate,  that number of shares which is equal to
three  percent of the shares  outstanding  as of December 31 of the  immediately
preceding  calendar  year (or in the initial  year,  as of December  31,  1999),
provided  that the  Compensation  Committee  may only issue,  in the  aggregate,
options to purchase a maximum  number of shares  over the life of the  Incentive
Share Option Plan equal to 383,863 shares (i.e. 10% of the shares outstanding on
December 31, 2001).  If the  Compensation  Committee  does not grant the maximum
number of  options  in any year,  then the  excess of the  number of  authorized
options  over the  number of  options  granted in such year will be added to the
number of authorized  options in the  succeeding  year and will be available for
grant by the Compensation Committee in such succeeding year. All options granted
by the  Compensation  Committee  will have an exercise  price equal to or grater
than the fair  market  value of the share on the date of the grant.  The maximum
option  term is ten years  from the date of grant.  All  share  options  granted
pursuant to the Incentive Share Option Plan may vest  immediately  upon issuance
or in  accordance  with the  determination  of the  Compensation  Committee.  No
options have been granted under this plan as of December 31, 2002.

Distribution Information
------------------------

Cash  distributions per share for the years ended December 31, 2002 and 2001 are
as set forth in the following table:

                (Dollars in thousands, except per share amounts)



Cash Distribution                                          Total Amount
for Quarter Ended       Date Paid        Per Share         Distributed
-----------------       ---------        ---------         ------------
                                                   
March 31, 2002            5/15/02        $  .3625           $   2,308
June 30, 2002             8/14/02           .3750               2,386
September 30, 2002       11/14/02           .3750               2,386
December 31, 2002         2/14/03           .4000               2,545
                                         ---------          ---------

Total for 2002                           $ 1.5125           $   9,625
                                         =========          =========

March 31, 2001            5/15/01        $  .3625           $   1,391
June 30, 2001             8/14/01           .3625               1,391
September 30, 2001       11/14/01           .3625               1,392
December 31, 2001         2/14/02           .3625               1,392
                                         ---------          ---------

Total for 2001                           $ 1.4500           $   5,566
                                         =========          =========


There are no material legal  restrictions  upon the Company's  present or future
ability  to  make  distributions  in  accordance  with  the  provisions  of  the
Declaration of Trust.  Future  distributions  paid by the Company will be at the

                                       13


discretion  of the  Trustees  and will  depend  on the  actual  cash flow of the
Company, its financial condition, capital requirements and such other factors as
the Trustees deem relevant.

In order to qualify as a REIT under the Internal  Revenue Code, as amended,  the
Company must, among other things,  distribute at least 90% of its taxable income
to  shareholders.  The  Company  believes  that  it is in  compliance  with  the
REIT-related provisions of the Code.

Of the total  distributions  of $9,624,992  and  $5,566,015  for the years ended
December 31, 2002 and 2001,  respectively,  the year ended December 31, 2002 had
no  return  of  capital  and for  2001,  $378,952  ($.10  per  share  or  6.81%)
represented a return of capital determined in accordance with generally accepted
accounting  principles.  As of December 31, 2002,  the  aggregate  amount of the
distributions  made  since  the  commencement  of the  initial  public  offering
representing  a  return  of  capital,  in  accordance  with  generally  accepted
accounting  principles,  totaled  $14,462,307.  The portion of the distributions
which  constituted  a return  of  capital  was made in order to  maintain  level
distributions to shareholders.

Item 6.  Selected Financial Data.

The information set forth below presents selected financial data of the Company.
Additional  financial   information  is  set  forth  in  the  audited  financial
statements and footnotes thereto  contained in Item 8, Financial  Statements and
Supplementary Data.

(Dollars in thousands except per share amounts)



                                                                 Year Ended December 31,
                                             --------------------------------------------------------------
OPERATIONS                                      2002          2001        2000         1999         1998
----------                                   ----------   ----------   ----------   ----------   ----------
                                                                                  
Total revenues                               $   10,458   $    5,698   $    7,910   $    5,507   $    4,032

Total expenses                                    3,812        2,660        4,766        2,301          647
                                             ----------   ----------   ----------   ----------   ----------

Income before other gain                          6,646        3,038        3,144        3,206        3,385

Total other gain
                                                  3,014        2,149          174        3,054           12
                                             ----------   ----------   ----------   ----------   ----------
Net income                                   $    9,660   $    5,187   $    3,318   $    6,260   $    3,397
                                             ==========   ==========   ==========   ==========   ==========

Net income per share (basic and diluted)     $     1.61   $     1.35   $      .86   $     1.63   $      .88
                                             ==========   ==========   ==========   ==========   ==========
Weighted average shares outstanding (basic
   and diluted)                               6,017,740    3,838,630    3,838,630    3,841,931    3,845,101
                                             ==========   ==========   ==========   ==========   ==========


                                                                      December 31,
                                             --------------------------------------------------------------
FINANCIAL POSITION                              2002          2001        2000         1999         1998
------------------                           ----------   ----------   ----------   ----------   ----------

Total assets                                 $  195,063   $  101,982   $   70,438   $  115,565   $   59,993
                                             ==========   ==========   ==========   ==========   ==========

Repurchase facility payable                  $   87,880   $   43,610   $   12,656   $   19,127   $       --
                                             ==========   ==========   ==========   ==========   ==========

Warehouse facility payable                   $    8,788           --           --           --           --
                                             ==========   ==========   ==========   ==========   ==========

Total liabilities                            $  100,725   $   46,703   $   15,362   $   58,474   $    1,788
                                             ==========   ==========   ==========   ==========   ==========

Total shareholders' equity                   $   94,338   $   55,279   $   55,076   $   57,091   $   58,205
                                             ==========   ==========   ==========   ==========   ==========

DISTRIBUTIONS
-------------

Distributions to shareholders                $    9,625   $    5,566   $    5,566   $    5,544   $    5,567
                                             ==========   ==========   ==========   ==========   ==========

Distribution per share                       $    1.513   $    1.450   $    1.450   $    1.444   $    1.450
                                             ==========   ==========   ==========   ==========   ==========


                                       14


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

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

Comparison of Years Ended December 31, 2002 and 2001

Interest  income from mortgage loans  decreased  approximately  $723,000 for the
year  ended  December  31,  2002  as  compared  to 2001  due to the  sale of the
Columbiana  mortgage  during  2001  offset  by  additional  construction  period
interest received from the Club at Brazos and Northbrooke. The decrease can also
be attributed  to the  conversion  of the Hollows,  Elmhurst  Village and Autumn
Creek  mortgages to GNMA  certificates;  the interest income on these assets was
included  in interest  income from  mortgage  loans prior to  conversion  and in
interest  income  from  GNMA  certificates  after  the  conversion.  Conversely,
interest income from GNMA certificates increased  approximately $3.5 million for
the year ended  December  31,  2002 as  compared  to 2001  primarily  due to the
conversion of these three mortgage loans to GNMA  certificates  and the purchase
of an additional  six GNMA  certificates  in 2002 offset by the loss of interest
income from the Hollows GNMA  certificate  which was sold in March of 2002.  The
increase in interest income from GNMA  certificates and the decrease in interest
income from mortgage loans were, in part, a result of the interest income earned
by these loans converted to GNMA certificates  subsequent to the conversion.  No
gains or losses resulted from the conversion.

Interest income from notes receivable increased  approximately $1.8 million, for
the year ended  December  31,  2002 as compared  to 2001,  primarily  due to the
addition of nine notes receivable  during 2001 and 2002 offset by the paydown of
the Sunset Bay note.

Other income increased  approximately  $212,000, for the year ended December 31,
2002 as compared to 2001, primarily due to the collection of loan extension fees
from Autumn Creek during 2002.

Interest expense decreased  approximately  $178,000, for the year ended December
31, 2002 as compared to 2001,  primarily due to the net effect of lower interest
rates on repurchase facility borrowings and increased leverage.

General and administrative  expenses increased  approximately  $45,000,  for the
year ended  December 31, 2002 as compared to 2001,  primarily due to an increase
in the write-off of deferred loan origination  costs associated with the pursuit
of  investments  that  were not  completed,  higher  accounting  fees and  legal
expenses  offset by a decrease in unused Nomura Asset Capital  Corporation  fees
and amortization.

Fees to manager increased  approximately  $927,000,  for the year ended December
31, 2002 as compared to 2001, due to an increase in the Company's  assets and an
increase  in the  reimbursements  of  certain  administrative  and  other  costs
incurred by the Advisor on behalf of the  Company.  The Company also paid to the
Advisor an incentive management fee of approximately  $235,000 for 2002; no such
fee was paid in 2001.

During the year ended  December 31, 2002, the Company  recognized  approximately
$358,000 in Fannie Mae loan program  expenses  associated  with the write-off of
the  unamortized  deferred  costs  related  to  this  program,  which  is  being
discontinued.  The Company has not recognized  significant  fee income from this
program.  Except for the write-off of the program  costs,  this program has not,
and its  discontinuance  is not anticipated to have a significant  impact on the
Company's financial position or results of operation.

A gain  on  the  sale  or  repayment  of  GNMAs  and  mortgage  loans  increased
approximately  $865,000,  for the year ended  December  31,  2002 as compared to
2001,  primarily due to the sale of the Hollows GNMA in March of 2002 versus the
loss on repayment of the Columbiana loans in 2001.  Although the Company intends
to hold its GNMA certificates  until maturity,  it elected  "available for sale"
designation  under SFAS 115 to give it the  flexibility to liquidate those asset
if business  conditions  require.  The Company  decided to sell the Hollows GNMA
when it received an unsolicited offer at an extremely favorable price.

Comparison of Years Ended December 31, 2001 and 2000

Interest income from mortgage loans increased approximately $1,208,000,  for the
year ended December 31, 2001 as compared to 2000,  primarily due to the interest
earned by Stonybrook  while held by AMAC/FM (which was  consolidated in 2001 but
not in 2000) and the  additional  principal  advances to the  Hollows,  Elmhurst
Village and Autumn Creek prior to the conversion to GNMA certificates  offset by
the repayment of the Town and Country mortgage loan in March 2000.

Interest income from GNMA certificates increased approximately  $1,822,000,  for
the year ended  December  31,  2001 as compared  to 2000,  primarily  due to the
conversion  of three  mortgage  loans to GNMA  certificates.  The  increase  was
primarily a result of the  interest  income  earned by these loans  converted to
GNMA  certificates  subsequent to the conversion.  No gain or loss resulted from
the conversion.

Interest  income from  CMBS-related  investment  in the amount of  approximately
$3,189,000  was recorded for the year ended December 31, 2000;  such  investment
was sold October 2000.

Interest income from notes receivable decreased  approximately  $79,000, for the
year ended  December  31,  2001 as compared  to 2000,  primarily  due to AMAC/FM
becoming  consolidated  in 2001  partially  offset by  investments in additional
notes in 2000 and 2001.

Interest income from temporary investments decreased  approximately  $2,012,000,
for the year ended December 31, 2001 as compared to 2000, of which approximately
$353,000 was due to the reduced balances of temporary investments and $1,659,000
was due to termination of the deposits with brokers held as collateral for short
sales.

                                       15


Equity in earnings of ARCap  increased  approximately  $1,999,000,  for the year
ended  December  31,  2001 as  compared  to 2000,  due to the  investment  being
acquired in October 2000.

Other income increased  approximately  $38,000,  for the year ended December 31,
2001 as compared to 2000,  primarily due to the guaranty and  extension  fees on
loans in the Fannie Mae program.

Interest expense decreased approximately $1,966,000, for the year ended December
31, 2001 as compared to 2000, primarily due to the termination of the repurchase
facility  used  to  finance  the  CMBS-related  investment  and  closing  out of
government  securities sold short positions  partially offset by higher interest
expense  related  to  Nomura  Securities  repurchase  facilities  due to  higher
outstanding balance.

Fees  to the  manager  decreased  approximately  $168,000,  for the  year  ended
December  31,  2001 as compared  to 2000,  primarily  due to a decrease in asset
management  fees  payable  to  the  Advisor  due  to the  sale  of  CMBS-related
investment and a decrease in the expense reimbursement charged by the Advisor.

Amortization  increased   approximately  $28,000  due  to  acceleration  of  the
amortization of deferred costs relating to the Nomura Repurchase Facility, which
was not renewed.

A gain on the repayment of mortgage loans in the amount of approximately $14,000
was recorded for the year ended  December 31, 2000  relating to the repayment of
the Town and Country mezzanine loan and FHA insured mortgage loan on January 21,
2000. A loss in the amount of approximately  $251,000 was recognized  during the
year ended December 31, 2001 relating to the repayment of the Columbiana loans.

A net loss on the  commercial  mortgage-backed  security-related  investment and
government  securities  sold short in the amount of  approximately  $300,000 was
recorded for the year ended December 31, 2000.  These  positions were liquidated
in October 2000.

Acquisitions
------------

During  the year  ended  December  31,  2002,  the  Company  made the  following
investments:

Mezzanine Loans

On March 28, 2002,  the Company  funded an initial  advance of $1.5 million on a
total  potential  mezzanine  loan of  approximately  $2.2  million  secured by a
240-unit  apartment  complex  project known as  Northbrooke  located in Houston,
Texas.  The loan is subordinate to a first mortgage loan of  approximately  $6.1
million.  The interest on the mezzanine  loan is based on a fixed  percentage of
unpaid  principal  balance of the first mortgage loan, which for this loan is an
effective interest rate of 11.50%.

Bridge Loans

On January 28, 2002,  the Company  entered  into a commitment  to fund a maximum
bridge  loan of up to $4.6  million,  secured  by a 528-unit  apartment  complex
located in Long Beach,  California,  known as Parwood. At December 31, 2002, the
Company has funded  approximately $3 million.  The Company received a 1% fee for
the bridge  loan,  which  bears an  interest  rate of 11% and matures in January
2004.

On February 27, 2002,  the Company  fully funded a bridge loan of $3.5  million,
secured by a 276-unit  apartment  complex  located in Houston,  Texas,  known as
Concord at Little  York.  The Company  received a 1.25% fee for the bridge loan,
which bears an interest rate of 12% and matures in February 2004.

On May 8, 2002, the Company fully funded a bridge loan of $3.5 million,  secured
by a 288-unit  apartment complex located in Houston,  Texas, known as Concord at
Gulfgate.  The  Company  received a 2% fee for the bridge  loan,  which bears an
interest rate of 12% and matures in May 2004.

On October 31, 2002, the Company funded an acquisition bridge loan and mezzanine
loan  totaling  approximately  $6.3  million  for Del  Mar  Villas,  a  260-unit
multi-family  apartment complex located in Dallas, Texas. In connection with the
funding of the bridge loan, the Company borrowed approximately $4.6 million from
its warehouse  facility with Fleet Bank.  These loans,  which mature April 2004,
bear an interest rate of LIBOR + 462.5 basis points. Payments on these loans are
interest  only  for  the  full  18-month  term.  The  Company  received  a  loan
origination fee of 1.5%.

On  November  20,  2002,  the  Company  funded an  acquisition  bridge  loan and
mezzanine loan totaling approximately $6 million for Mountain Valley, a 312-unit
multi-family  apartment complex located in Dallas,  Texas. The Company will fund
an additional $1.1 million during the rehabilitation stage of this property.  In
connection  with the  funding of the  bridge  loan,  the  Company  has  borrowed
approximately  $4.2 million from its warehouse  facility with Fleet Bank.  These
loans,  which mature  November 2004,  bear an interest rate of LIBOR + 475 basis
points.  Payments on these loans are interest only for the full  24-month  term.
The Company received a loan origination fee of 1% of the amount of these loans.

On November 25, 2002, the Company fully funded a  predevelopment  bridge loan of
approximately $1.4 million secured by an apartment complex  development  project
known as Reserve at Fox River Apartments.  The Company received a 1% fee for the
bridge loan, which bears interest at a rate of 12% and matures in May 2003.

                                       16


Liquidity and Capital Resources
-------------------------------

During the year ended  December 31, 2002,  cash and cash  equivalents  increased
approximately  $9.4  million  primarily  due to  proceeds  from  repurchase  and
warehouse facilities payable, approximately $53.1 million, net proceeds from the
common share offering, approximately $31 million, and cash provided by operating
activities,   approximately   $8.3  million,   offset  by  investments  in  GNMA
Certificates,   approximately  $55.6  million,   funding  of  notes  receivable,
approximately  $22.3 million,  and distributions to shareholders,  approximately
$8.5 million.

The net unrealized  gains on GNMA investments  included in shareholders'  equity
aggregated  $8,702,929 at December 31, 2002 consisted of gross  unrealized gains
and losses of $8,730,076 and $27,147  respectively.  This represents an increase
of $8,142,542 from the unrealized gain of $560,387 at December 31, 2001.

The Company finances the acquisition of its assets primarily  through  borrowing
at  short-term  rates  using  demand  repurchase  agreements  and  the  mortgage
warehouse line of credit (see below). Under the Company's  declaration of trust,
the Company may incur permanent  indebtedness of up to 50% of total market value
calculated at the time the debt is incurred.  Permanent indebtedness and working
capital indebtedness may not exceed 100% of the Company's total market value. On
February 25, 2002, the Company completed a public offering of 2.5 million common
shares at a price of $13.50 per share.  The net  proceeds of  approximately  $31
million,  net  of  underwriter's  discount  and  expenses,  were  used  to  fund
investments.  In October 2002, the Company filed a  registration  statement with
the Securities and Exchange  Commission with respect to its common and preferred
shares. If market conditions  warrant,  the Company may seek to raise additional
funds for investment  through further common and/or  preferred  offerings in the
future, although the timing and amount of such offerings cannot be determined at
this time.

Effective February 15, 2000, the Company entered into a repurchase facility with
Nomura Securities International Inc. This facility enables the Company to borrow
up to 95% of the fair  market  value of GNMA  certificates  and other  qualified
mortgage  securities  owned by the Company,  which are pledged as collateral for
the  borrowings.  Up until May 2002,  interest on borrowings  were at LIBOR plus
0.50%.  Subsequent to May 2002,  interest on borrowings  decreased to LIBOR plus
0.05%.  As of December  31,  2002 and 2001,  the amount  outstanding  under this
facility was approximately $87.9 and $43.6 million,  respectively,  and interest
rates were 1.47% and 2.58%,  respectively.  All  borrowings  under this facility
typically have 30-day settlement terms.  However,  the Company has the option to
shorten or extend  the length of the  settlement  terms at its  discretion.  The
Company has not  experienced  any  problems  when  renewing  its  borrowing  and
management  believes it will be able to continue  to renew its  borrowings  when
due. If the Company were unable to renew such borrowings  with Nomura,  it would
have to either find replacement  financing or sell assets at prices which may be
below market value.

In October  2002,  the Company  entered into the Fleet  Warehouse  Facility with
Fleet National Bank  ("Fleet") in the amount of $40 million.  Advances under the
Fleet Warehouse Facility,  up to 83% of the total loan package,  will be used to
fund first mortgage loans,  which the Company will make to its customers for the
acquisition/refinancing  and  minor  renovation  of  existing,   lender-approved
multi-family  properties  located  in stable  sub-markets.  The Fleet  Warehouse
Facility,  which matures April 2006, bears an interest rate of LIBOR + 200 basis
points  (3.46%  and  3.42%  for  Del  Mar  Villas  and  Mountain  Valley  loans,
respectively,  at December 31, 2002), payable monthly on advances.  Principal is
due upon the  earlier of  refinance  or sale of the  underlying  project or upon
maturity.  The Company will pay a fee of 12.5 basis points,  paid quarterly,  on
any unused portion of the Fleet Warehouse Facility. As of December 31, 2002, the
Company had approximately $8.8 million in loans outstanding under this program.

In order to qualify as a REIT under the Internal  Revenue Code, as amended,  the
Company must, among other things, distribute at least 90% of its taxable income.
The Company believes that it is in compliance with the  REIT-related  provisions
of the Code.

The Company expects that cash generated from the Company's investments will meet
its needs for  short-term  liquidity,  and will be  sufficient to pay all of the
Company's  expenses and to make  distributions  to its  shareholders  in amounts
sufficient to retain the Company's REIT status in the foreseeable future.

Critical Accounting Policies
----------------------------

In  preparing  the  consolidated  financial  statements,   management  has  made
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting periods.  Actual results could differ
from those  estimates.  Set forth below is a summary of the accounting  policies
that  management  believes are critical to the  preparation of the  consolidated
financial  statements.  The summary should be read in conjunction  with the more
complete  discussion of the Company's  accounting policies included in Note 2 to
the consolidated financial statements in this annual report on Form 10-K.

The Company's  portfolio of mortgage loans and notes is  periodically  evaluated
for  possible  impairment  to  establish  appropriate  loan  loss  reserves,  if
necessary.  The Company's Advisor has a credit review committee which meets each
month.  This  committee  reviews the status of each of the  Company's  loans and
notes,  and  maintains a "watch  list" of loans  (including  loans for which the
Company  has  issued  guarantees)  for  which  the  underlying  property  may be
experiencing  construction  cost overruns,  delays in  construction  completion,
occupancy shortfalls, lower than expected debt service coverage ratios, or other
matters  which might cause the  borrower to be unable to make the  interest  and
principal payments as scheduled in the loan agreement. If a loan is experiencing
difficulties,  members of this credit committee work with the borrower to try to
resolve  the  issues,  which  could  include  extending  the loan  term,  making
additional  advances,  or reducing  required  payments.  If, in the  judgment of
Company management,  it is determined that is probable that the Company will not
receive all contractually  required payments when they are due, the loan or note
would be deemed impaired,  and a loan loss reserve  established.  As of December
31, 2002, all mortgage loans and notes are current and management has determined
that  none of these  assets  are  impaired  and  that no loan  loss  reserve  is
necessary.

                                       17


The Company's GNMA certificates are carried at estimated fair values. Changes in
these  valuations do not impact the Company's  income or cash flows,  but affect
shareholders'  equity. GNMA certificates are relatively liquid investments.  The
Company  uses  quoted  market   prices  as  its  primary   source  of  valuation
information.

During  2001,  the  Company  converted  three of its first  mortgage  loans into
investments in GNMA certificates.  The conversion was made solely to improve the
leveragability  of the debt  instruments from 80% as an FHA mortgage to 95% as a
GNMA certificate,  and to reduce the interest rate on the associated  borrowings
from LIBOR + 125 bps to LIBOR + 5 bps. It is the Company's intention to hold its
GNMA certificates to maturity,  but the Company elected the "available for sale"
designation  under SFAS 115 to give it the flexibility to liquidate these assets
if business  conditions  require.  The first  mortgage  loans  remaining  in the
portfolio  will not be converted  to GNMA  certificates  and,  along with future
originations of first mortgage loans, are intended to be held to maturity.

The Company's  mezzanine  investments of approximately $12.4 million at December
31, 2002 bear interest at fixed rates,  but also include  provisions  that allow
the Company to participate in a percentage of the underlying  property's  excess
cash flows from operations and excess  proceeds from a sale or  refinancing.  At
the inception of each such investment, Company management must determine whether
such  investment  should be accounted  for as a loan,  joint  venture or as real
estate, using the guidance contained in the Third Notice to Practitioners issued
by the AICPA. Although the accounting  methodology does not affect the Company's
cash flows from these investments,  this determination affects the balance sheet
classification  of the  investments  as well as the  classification,  timing and
amounts of reported earnings.

Accounting for the investment as real estate is required if the Company  expects
that the amount of profit,  whether called  interest or another name, such as an
equity kicker,  that it expects to receive above a reasonable amount of interest
and fees, is over 50 percent of the property's  total expected  residual profit.
If a mezzanine  investment  were to be accounted  for as an  investment  in real
estate,  the Company's balance sheet would show the underlying  property and its
related  senior debt (if such debt were not also held by the  Company),  and the
income  statement  would  include  the  property's  rental  revenues,  operating
expenses and depreciation.

If the  Company  expects  that it will  receive  less  than  50  percent  of the
property's  residual profit,  then loan or joint venture  accounting is applied.
Loan  accounting  is  appropriate  if  the  borrower  has a  substantial  equity
investment in the property, if the Company has recourse to substantial assets of
the  borrower,  if the property is  generating  sufficient  cash flow to service
normal loan  amortization,  or if certain other  conditions  are met. Under loan
accounting,  the Company  recognizes  interest  income as earned and  additional
interest from participations as received. Joint venture accounting would require
that the Company  only  record its share of the net income  from the  underlying
property.

Company  management  must  exercise  judgment in making the required  accounting
determinations.  For each mezzanine arrangement, the Company projects total cash
flows over the loan's  term and the  Company's  share in those cash  flows,  and
considers the borrower's  equity, the contractual cap, if any, on total yield to
the  Company  over the term of the  loan,  market  yields on  comparable  loans,
borrower  guarantees,  and other factors in making its  assessment of the proper
accounting.  To date, the Company has determined that all mezzanine  investments
are properly accounted for as loans.

Based on the Company's  experience  with similar  arrangements,  management  has
taken the position that the  likelihood  that any of the  commitments,  with the
exception of a standby bridge loan commitment  granted to fund the  construction
of Clark's Crossing  Apartments in the approximate amount of $1.7 million,  will
be  exercised  is remote.  Therefore,  the fees  received  for a  commitment  to
originate a loan are recognized  over the commitment  period on a  straight-line
basis in other income. If however,  management believes that the likelihood that
the commitments  will be exercised is possible or probable,  the commitment fees
will be deferred and, if the commitment is exercised,  recognized  over the life
of  the  loan  as  an  adjustment  of  yield,  or,  if  the  commitment  expires
unexercised, recognized in other income upon expiration of the commitment.

Management is not aware of any trends or events,  commitments or  uncertainties,
which  have not  otherwise  been  disclosed  that  will or are  likely to impact
liquidity in a material way.

Commitments and Contingencies
-----------------------------

The Company  entered into a loan program with Fannie Mae,  which agreed to fully
fund the origination of $250 million of Delegated Underwriter and Servicer loans
for apartment  properties  that qualify for low income housing tax credits under
Section 42 of the Internal  Revenue Code.  Under the loan  program,  the Company
intended to originate and contract for individual loans of up to $6 million each
over a two-year  period in  conjunction  with American  Property  Financing,  an
unaffiliated  third  party,  which  would  underwrite  and service the loans for
Fannie  Mae.  The  Company  guarantees  a first  loss  position  of up to $21.25
million,  depending on the aggregate  principal  amount of the loans the Company
originates under this program and would receive  guaranty,  loan origination and
other fees.  The Company  also  guarantees  construction  loans for which it has
issued a forward  commitment  to  originate a loan under the Fannie Mae program,
with  respect  to which it  guarantees  repayment  of 100% of such  construction
loans.  As of December  31,  2002,  the Company has  originated  loans  totaling
approximately  $3.3  million  under the Fannie Mae program and has made  forward
commitments for an additional  approximate $4.0 million.  The Company's  maximum
guaranty at December 31, 2002 was $7.3 million.

During August 2002, the Company  purchased one first mortgage loan in the amount
of $342,000 due to a default on a construction  loan that was 100% guaranteed by
the Company  under the Fannie Mae program.  The loan  defaulted  due to problems
relating to  construction  issues of  Alexandrine  Square,  a 30-unit  apartment
complex in Detroit, Michigan.

                                       18


Subsequent to creating this program,  the level of loan origination  competition
has   increased,   reducing  the  program's   projected   financing   value  and
profitability.  As a result, the Company decided in the first quarter of 2002 to
discontinue  this program.  The Company has reached an agreement in principle to
terminate this program and transfer its rights and obligations to a third party.
There can be no assurance,  however,  that this agreement  will be  consummated.
Accordingly, during the first quarter of 2002, the Company wrote off the balance
of unamortized  deferred costs relating to this program.  This write-off totaled
approximately  $358,000 and is included in Fannie Mae loan  program  expenses in
the Consolidated Statement of Income.

Except for the write-off of the program costs  described  above,  the Fannie Mae
loan program has not had, and its  discontinuance  is not anticipated to have, a
significant  impact  on  the  Company's   financial   condition  or  results  of
operations.

The following table provides  information  relating to the loans  originated and
forward commitments made on Fannie Mae's behalf.

                             (Dollars in thousands)



Loans Originated
----------------
                                              Number of                      Loss
                                              Apartment                   Sharing Fee
Property                  Location              Units      Loan Amount   (annual rate)
----------------------    ----------------    ---------    -----------   -----------
                                                                 
Valley View               Cedar Rapids, IA        96         $2,187          0.36%
Maple Ridge Apartments    Jackson, MI             69          1,137          0.52%
                                              ---------    -----------
            Total                                165         $3,324
                                              ---------    -----------



Forward Commitments
-------------------
                                              Number of                      Loss
                                              Apartment                   Sharing Fee
Property                  Location              Units      Loan Amount   (annual rate)
-----------------------   ----------------    ---------    -----------   -----------
Cameron Creek Apartments  Dade Country, FL       148         $3,000          0.35%
Desert View Apartments    Coolidge, AZ           372          1,011          0.52%
                                              ---------    -----------
            Total                                520         $4,011
                                              ---------    -----------


                                       19


Standby and Forward Loan and GNMA Commitments
---------------------------------------------

During 2002,  the Company  issued the following  standby and forward  bridge and
permanent  loan  commitments  for  the  purpose  of  constructing/rehabilitating
certain multi-family apartment complexes in various locations.

                             (Dollars in thousands)



Standby and
Forward Bridge Loan Commitments
-------------------------------
                                                                                                 Maximum Amount of Commitments

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

Issue Date      Project                       Location          No. of Apt. Units         Less than 1 Year              1-3 Years
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                        
  Jan-02        Parwood                       Long Beach, CA           528                   $    --                   $ 1,578(3)
  Jan-02        Valley View/Summertree (7)    Little Rock, AK          240                       400(1)(4)                  --
  May-02        McMullen Square               San Antonio, TX          100                       400(8)(4)                  --
  Jul-02        Clark's Crossing Apartments   Laredo, TX               160                        --                     1,649(2)(5)
  Nov-02        Mountain Valley               Dallas, TX               312                        --                     1,065(3)
                                                                --------------------------------------------------------------------

Total Standby Bridge Loan Commitments                                1,340                   $   800                   $ 4,292
                                                                ====================================================================

Standby and Forward Permanent Loan
Commitments
----------------------------------
                                                                                                 Maximum Amount of Commitments

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

Issue Date      Project                       Location          No. of Apt. Units         Less than 1 Year              1-3 Years
------------------------------------------------------------------------------------------------------------------------------------

  Mar-02        Sunset Gardens                Eagle Pass, TX            60                   $   177(3)                     --
  May-02        Highland Park                 Topeka, TX               200                     4,250(1)(5)(6)               --
                                                                --------------------------------------------------------------------

Total Standby and Forward Permanent Loan Commitments                   260                   $ 4,427                        --
                                                                ====================================================================



                                       20





Forward GNMA Commitments
------------------------

                                                                                        Maximum Amount of Commitments

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

Date Purchased      Project                                                Less than 1 Year                   1-3 Years
---------------------------------------------                   --------------------------------------------------------------------

                                                                                                    
   Mar-02           Cantera Crossing                                         $   973 (3)                     $    --
   Mar-02           Fillmore Park                                                235 (3)                          --
   Mar-02           Casitas at Montecito                                         708 (3)                          --
   May-02           Ellington Plaza                                           27,114 (3)                          --
    N/A             Northbrooke                                                3,415 (3)                          --
                                                                --------------------------------------------------------------------

Total Forward GNMA Commitments                                               $32,445                              --
                                                                --------------------------------------------------------------------

Total Standby and Forward Loan and GNMA Commitments                          $37,672                         $ 4,292
                                                                ====================================================================


(1)  Funding not anticipated to occur.
(2)  Initial  funding in the amount of $550,000 has occurred  during March 2003.
     Remaining fundings are on an as needed basis.
(3)  Funding has already begun.  Amount  represents  remaining  commitment to be
     funded.
(4)  The  Company  received  a loan  commitment  fee of 2.50%  for  issuing  the
     commitment.
(5)  The  Company  received  a loan  commitment  fee of 2.00%  for  issuing  the
     commitment.
(6)  The Company will receive a 1% loan origination fee if funding occurs.
(7)  The first  mortgage  bond  relating to these  apartments is held by Charter
     Municipal  Mortgage  Acceptance Company  ("CharterMac"),  a publicly traded
     company which is managed by an affiliate of the Advisor.
(8)  Expired in February 2003.


                                       21


Construction Loan Guarantees
----------------------------

During 2002, the Company has  guaranteed the following  loans in relation to the
construction  of  affordable   multi-family   apartment   complexes  in  various
locations.  The construction loan guarantees will provide credit support for the
following  projects after  construction  completion,  up until the date in which
permanent financing takes place.

During October 2002,  the Company  entered into an agreement with Wachovia Bank,
National Association  ("Wachovia") to provide  stabilization  guarantees for new
construction  of  multi-family  properties  under  the LIHTC  program.  Wachovia
already provides  construction and  stabilization  guarantees to Fannie Mae, for
loans Wachovia  originates  under the Fannie Mae LIHTC forward  commitment  loan
program,  but  only  for  loans  within  regions  of the  country  Wachovia  has
designated to be within its territory.  For loans outside Wachovia's  territory,
the Company has agreed to issue a  stabilization  guarantee,  for the benefit of
Wachovia.  The  Company is  guarantying  that  properties  which have  completed
construction will stabilize and the associated  construction  loans will convert
to permanent Fannie Mae loans.  The Company  receives  origination and guarantee
fees from the developers for providing the guarantees.  If the properties do not
stabilize  with enough Net  Operating  Income for Fannie Mae to fully fund their
commitment, AMAC may be required to purchase the construction loan from Wachovia
or to fund the difference  between the construction  loan amount and the reduced
Fannie Mae Permanent Loan Amount.

                                                          (Dollars in thousands)




                                                                                           Maximum Amount of
                                                                                               Guarantee

                                                                                                     Loan Administra-   Construction
                                                                             Less than 1                tion Fee(1)      Guarantee
Date Closed  Project                   Location              No. of Units       Year      1-3 Years (annual percentage)    Fee (2)
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                         
Jul-02       Clark's Crossing          Laredo, TX                 160        $  4,790     $     --         0.500%             0.625%
Sept-02      Creekside Apts.           Colorado Springs, CO       144           7,500           --         0.375%                 --
Oct-02       Village at Meadowbend     Temple, TX                 138              --        3,675         0.500%             0.750%
Nov-02       Mapleview Apartments (3)  Saginaw, MI                104              --        3,240         0.625%             0.247%
                                                                --------------------------------------------------------------------

                                                                  546        $ 12,290     $  6,915
                                                                ====================================================================


(1)  Loan  Administration  Fee is paid on a monthly  basis during the  guarantee
     period.
(2)  Construction  Guarantee  Fee is an  up-front  fee -  paid  at  closing  and
     amortized over the guarantee period.
(3)  Guarantee was made under  Wachovia  Bank,  National  Association  Guarantee
     Agreement.

For each of these  guarantees,  and for the  guarantees  issued  under  the FNMA
program  discussed  in the  first  paragraph  of  Note  13 in  the  accompanying
consolidated  financial  statements,  the  Company  monitors  the  status of the
underlying properties and evaluates its exposure under the guarantees.  To date,
the Company has concluded that no accrual for probable  losses is required under
SFAS 5.

                                       22


Distributions
-------------

Of the total  distributions  of $9,624,992  and  $5,561,015  for the years ended
December 31, 2002 and 2001,  respectively,  the year ended December 31, 2002 had
no  return  of  capital  and for  2001,  $378,952  ($.10  per  share  or  6.81%)
represented a return of capital determined in accordance with generally accepted
accounting  principles.  As of December 31, 2002,  the  aggregate  amount of the
distributions  made  since  the  commencement  of the  initial  public  offering
representing  a  return  of  capital,  in  accordance  with  generally  accepted
accounting  principles,  totaled  $14,462,307.  The portion of the distributions
which  constituted  a return  of  capital  was made in order to  maintain  level
distributions to shareholders.

Recently Issued Accounting Standards
------------------------------------

SFAS No. 133,  "Accounting for Derivative  Instruments  and Hedging  Activities"
establishes  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging  activities.  It was  implemented  by the  Company  on  January 1, 2001.
Because the Company does not currently  utilize  derivatives,  implementation of
this  statement  did not  have a  material  effect  on the  Company's  financial
statements.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and
Other Intangible  Assets" (SFAS 142).  These statements  establish new standards
for  accounting  and  reporting for business  combinations  and for goodwill and
intangible assets resulting from business combinations.  SFAS 141 applies to all
business  combinations  initiated  after June 30, 2001; the Company  implemented
SFAS 142 on January 1, 2002.  Implementation  of these statements did not have a
material impact on the Company's consolidated financial statements.

In June 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations".  SFAS No. 143  requires  the fair value of a liability or an asset
retirement obligation to be recorded in the period in which it is incurred. SFAS
No. 143 is not effective  until January 1, 2003.  Management does not anticipate
that the  implementation  of this statement  will have a material  impact on the
Company's consolidated financial statements.

In  August  2001,  the  FASB  issued  Statement  No.  144,  "Accounting  for the
Impairment or Disposal of Long Lived Assets".  SFAS No. 144 supercedes  existing
accounting literature dealing with impairment and disposal of long-lived assets,
including  discontinued  operations.   It  addresses  financial  accounting  and
reporting for the impairment of long-lived  assets and for long-lived  assets to
be disposed of, and expands  current  reporting for  discontinued  operations to
include  disposals of a "component" of an entity that has been disposed of or is
classified as held for sale. The Company  implemented SFAS No. 144 on January 1,
2002.  Implementation  of SFAS No.  144 did not have a  material  impact  on the
Company's consolidated financial statements.

In April 2002, the FASB issued  Statement No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 among  other  things,  rescinds  SFAS No. 4,  "Reporting  Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains and
losses from the early  extinguishments of debt as extraordinary  items will only
be required if they meet the specific criteria for extraordinary  items included
in  Accounting  Principles  Board  Opinion  No. 30,  "Reporting  the  Results of
Operations".  The  rescission  of SFAS  No.  4 is  effective  January  1,  2003.
Management  does not anticipate that the  implementation  of this statement will
have a material impact on the Company's consolidated financial statements.

In July  2002,  the  FASB  issued  Statement  No.  146,  "Accounting  for  Costs
Associated  with Exit or Disposal  Activities".  SFAS No. 146  replaces  current
accounting literature and requires the recognition of costs associated with exit
or  disposal  activities  when they are  incurred  rather  than at the date of a
commitment  to an exit or disposal  plan.  SFAS No. 146 is not  effective  until
January 1, 2003.  Management does not anticipate that the implementation of this
statement will have a material  effect on the Company's  consolidated  financial
statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors'  Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others. The  Interpretation  elaborates on the disclosures to be
made by a guarantor in its  financial  statements  about its  obligations  under
certain  guarantees  that it has issued.  It also  clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does  not  prescribe  a  specific   approach  for  subsequently   measuring  the
guarantor's  recognized  liability over the term of the related  guarantee.  The
disclosure  provisions  of this  interpretation  are  included  in Note 13.  The
initial  recognition and initial  measurement  provisions of this Interpretation
are  applicable on a prospective  basis to guarantees  issued or modified  after
December 31, 2002. The Company currently receives a fee, in advance,  for acting
as guarantor of certain  construction  loans. This fee is deferred and amortized
over  the  guarantee  period.   The  Company  believes  that  the  fee  received
approximates  the  fair  value  of the  obligation  undertaken  in  issuing  the
guarantee; therefore, the Company's current accounting for these guarantees will
not be  affected  by this  Interpretation.  The  Company  has ceased  making new
guarantees  under  its  Fannie  Mae  DUS  program  and  is  in  the  process  of
transferring  its rights and  obligations  under this  program to a third party;
therefore,  this  Interpretation  will not have an impact on the  accounting for
these guarantees.

In  January  2003,  the FASB  issued  Interpretation  No. 46,  Consolidation  of
Variable Interest  Entities.  This  Interpretation  clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the  characteristics  of a controlling  financial interest or do not
have sufficient equity at risk for the entity to finance its activities  without
additional  subordinated financial support from other parties. The provisions of
the Interpretation  will be immediately  effective for all variable interests in
variable  interest entities created after January 31, 2003, and the Company will
need to apply its  provisions  to any  existing  variable  interest  in variable
interest  entities by no later than July 1, 2003.  The Company is in the process
of evaluating all of its mezzanine loans, which may be deemed variable interests
in variable  interest  entities  under the  provision of FIN 46. The real estate
entities  whose  ownership  interests  collateralize  these  loans  have  assets
totaling approximately  $110,000,000 at December 31, 2002. The Company's maximum
exposure to loss  represents  its recorded  investment in these loans,  totaling

                                       23


$12,448,000 at December 31, 2002.  The Company  believes that some, and possibly
all, of these investments may not ultimately fall under the provisions of FIN 46
and, accordingly,  continue to be accounted for as loans and not consolidated as
investments in real estate.  The Company  cannot make any definitive  conclusion
until it completes its evaluation.

Forward-Looking Statements
--------------------------

Certain   statements  made  in  this  report  may  constitute   "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking  statements include statements  regarding the intent,  belief or
current  expectations  of the Company and its  management  and involve known and
unknown  risks,  uncertainties  and other  factors  which  may cause the  actual
results,  performance or achievements of the Company to be materially  different
from any future  results,  performance or  achievements  expressed or implied by
such forward-looking  statements.  Such factors include, among other things, the
following:  general  economic and business  conditions,  which will, among other
things,  affect the availability and  creditworthiness  of prospective  tenants,
lease rents and the terms and availability of financing;  adverse changes in the
real estate  markets  including,  among  other  things,  competition  with other
companies;  risks  of real  estate  development  and  acquisition;  governmental
actions  and  initiatives;  and  environment/safety  requirements.  Readers  are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.

Inflation
---------

Inflation  did not have a  material  effect  on the  Company's  results  for the
periods presented.

Item 7 Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss  resulting  from changes in interest  rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which the investments of the Company are exposed is interest rate
risk, which is highly sensitive to many factors, including governmental monetary
and  tax   policies,   domestic  and   international   economic  and   political
considerations and other factors beyond the control of the Company.

Interest Rate risk

Interest rate  fluctuations  can adversely affect the Company's income and value
of its common shares in many ways and present a variety of risks,  including the
risk of mismatch  between  asset yields and  borrowing  rates,  variances in the
yield curve and changing prepayment rates.

The Company's operating results will depend in large part on differences between
the income from its assets (net of credit losses) and its borrowing costs.  Most
of  the  Company's  assets,   consisting   primarily  of  mortgage  loans,  GNMA
certificates,  and notes receivable,  generate fixed returns and will have terms
in excess of five years.  The Company funds the origination and acquisition of a
significant  portion of these assets with  borrowings  which have interest rates
that reset relatively rapidly, such as monthly or quarterly.  In most cases, the
income from assets will respond more slowly to interest rate  fluctuations  than
the cost of borrowings,  creating a mismatch  between asset yields and borrowing
rates. Consequently, changes in interest rates, particularly short-term interest
rates,  may influence the Company's net income.  The Company's  borrowings under
repurchase and warehouse  agreements  bear interest at rates that fluctuate with
LIBOR.  Based on the approximate  $96.7 million of borrowings  outstanding under
these  facilities  at December  31,  2002, a 1% change in LIBOR would impact the
Company's annual net income and cash flows by approximately $967,000.  Increases
in these rates will  decrease the net income and market  value of the  Company's
net assets. Interest rate fluctuations that result in interest expense exceeding
interest income would result in operating losses.

The  value of the  Company's  assets  may be  affected  by  prepayment  rates on
investments.  Prepayment  rates are  influenced  by changes in current  interest
rates  and a variety  of  economic,  geographic  and other  factors  beyond  the
Company's control,  and consequently,  such prepayment rates cannot be predicted
with certainty. When the Company originates mortgage loans, it expects that such
mortgage loans will have a measure of protection  from prepayment in the form of
prepayment lock-out periods or prepayment  penalties.  However,  such protection
may not be available with respect to investments which the Company acquires, but
does not originate. In periods of declining mortgage interest rates, prepayments
on mortgages generally increase.  If general interest rates decline as well, the
proceeds  of such  prepayments  received  during  such  periods are likely to be
reinvested  by the  Company  in  assets  yielding  less  than the  yields on the
investments  that were  prepaid.  In  addition,  the  market  value of  mortgage
investments may, because of the risk of prepayment,  benefit less from declining
interest rates than from other fixed-income securities.  Conversely,  in periods
of rising interest rates,  prepayments on mortgages generally decrease, in which
case the Company would not have the prepayment  proceeds  available to invest in
assets with higher yields.  Under certain interest rate and prepayment scenarios
the  Company  may fail to  recoup  fully  its  cost of  acquisition  of  certain
investments.

Real Estate Risk

Multi-family  and commercial  property  values and net operating  income derived
from such properties are subject to volatility and may be affected  adversely by
a number of factors, including, but not limited to, national, regional and local
economic  conditions (which may be adversely  affected by industry slowdowns and
other factors);  local real estate conditions (such as an oversupply of housing,
retail,  industrial,  office or other  commercial  space);  changes or continued
weakness in specific industry segments;  construction  quality,  age and design;
demographic  factors;  retroactive  changes to  building or similar  codes;  and
increases  in  operating  expenses  (such as  energy  costs).  In the  event net
operating income decreases,  a borrower may have difficulty paying the Company's
mortgage  loan,  which  could  result  in losses to the  Company.  In  addition,
decreases  in  property  values  reduce  the  value  of the  collateral  and the

                                       24


potential  proceeds  available  to a borrower  to repay the  Company's  mortgage
loans, which could also cause the Company to suffer losses.

Risk in Owning Subordinated Interests

The Company has invested  indirectly in subordinated  CMBS through its ownership
of a $20.2 million preferred membership interest in ARCap.  Subordinated CMBS of
the type in which ARCap invests  include "first loss" and  non-investment  grade
subordinated interests. A first loss security is the most subordinate class in a
structure  and  accordingly  is the  first to bear the loss  upon a  default  on
restructuring  or  liquidation  of the  underlying  collateral  and the  last to
receive  payment of interest and principal.  Such classes are subject to special
risks, including a greater risk of loss of principal and non-payment of interest
than more senior, rated classes. The market values of subordinated  interests in
CMBS and other  subordinated  securities tend to be more sensitive to changes in
economic  conditions than more senior,  rated classes.  As a result of these and
other factors,  subordinated interests generally are not actively traded and may
not provide holders with liquidity of investment.  With respect to the Company's
investment in ARCap, the ability to transfer the membership interest in ARCap is
further limited by the terms of ARCap's operating agreement.

Participating Interest

In connection with the  acquisition  and  origination of mortgages,  the Company
has, on occasion,  obtained and may continue to obtain  participating  interests
that may entitle it to payments based upon a development's cash flow, profits or
any  increase  in the value of the  development  that would be  realized  upon a
refinancing or sale of the development.  Competition for participating interests
is dependent to a large degree upon market conditions.  Participating  interests
are more difficult to obtain when mortgage  financing is available at relatively
low interest rates. In the current  interest rate  environment,  the Company may
have  greater  difficulty  obtaining   participating   interest.   Participating
interests are not government  insured or guaranteed and are therefore subject to
the general risks inherent in real estate  investments.  Therefore,  even if the
Company is  successful  in investing in mortgage  investments  which provide for
participating  interests,  there can be no assurance  that such  interests  will
result in additional payments.

Repurchase Facility Collateral Risk

Repurchase  agreements  involve the risk that the market value of the securities
sold by the Company  may  decline and that the Company  will be required to post
additional collateral,  reduce the amount borrowed or suffer forced sales of the
collateral. If forced sales were made at prices lower than the carrying value of
the collateral,  the Company would experience  additional losses. If the Company
is  forced  to  liquidate  these  assets  to repay  borrowings,  there can be no
assurance  that the Company  will be able to maintain  compliance  with the REIT
asset and source of income requirements.

                                       25


Item 8.  Financial Statements and Supplementary Data.

                                                                          Page
(a) 1.   Financial Statements                                          ---------
         --------------------
         Independent Auditors' Report                                      27

         Consolidated  Balance  Sheets  as  of
         December 31, 2002 and 2001                                        28

         Consolidated   Statements  of  Income
         for  the  years  ended  December  31,
         2002, 2001 and 2000                                               29

         Consolidated  Statements  of  Changes
         in   Shareholders'   Equity  for  the
         years ended  December 31, 2002,  2001
         and 2000                                                          30

         Consolidated   Statements   of   Cash
         Flows  for the years  ended  December
         31, 2002, 2001 and 2000                                           31

         Notes to Consolidated Financial Statements                        33

(a) 2.   Financial Statement Schedules
         -----------------------------

         All   schedules   have  been  omitted
         because  they  are  not  required  or
         because the required  information  is
         contained     in    the     financial
         statements or notes thereto.

                                       26


                          INDEPENDENT AUDITORS' REPORT

To the Board of Trustees
And Shareholders of
American Mortgage Acceptance Company
New York, New York

We have  audited  the  accompanying  consolidated  balance  sheets  of  American
Mortgage  Acceptance Company and subsidiaries (the "Company") as of December 31,
2002 and 2001,  and the related  consolidated  statements of income,  changes in
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 2002. 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 auditing standards generally accepted
in the  United  States of  America.  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,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of American  Mortgage  Acceptance
Company and  subsidiaries  as of December 31, 2002 and 2001,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2002, in conformity  with  accounting  principles  generally
accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
New York, New York

March 21, 2003

                                       27



                    AMERICAN MORTGAGE ACCEPTANCE COMPANY AND
                    SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

                             (Dollars in thousands)

                                     ASSETS



                                                                 December 31,
                                                            --------------------
                                                             2002         2001
                                                            --------------------
                                                                 
Investments in mortgage loans, net                          $ 22,384   $ 17,799
Investments in GNMA certificates-available for sale          114,034     50,060
Investment in ARCap                                           20,240     20,246
Cash and cash equivalents                                     10,404      1,018
Notes receivable, net                                         25,997     11,373
Accrued interest receivable                                    1,170        570
Other assets                                                     834        916
                                                            --------    -------

Total assets                                                $195,063   $101,982
                                                            ========   ========

           LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Repurchase facilities payable                               $ 87,880   $ 43,610
Warehouse facility payable                                     8,788         --
Accounts payable and accrued expenses                            822      1,370
Due to Advisor and affiliates                                    690        331
Distributions payable                                          2,545      1,392
                                                            --------   --------

Total liabilities                                            100,725     46,703
                                                            --------   --------

Commitments and contingencies

Shareholders' equity:

  Shares of beneficial interest; $.10 par value; 25,000,000
   shares authorized; 6,738,826 issued and 6,363,630
   outstanding and 4,213,826 issued and 3,838,630
   outstanding in 2002 and 2001, respectively                    674        421
  Treasury shares of beneficial interest;
   375,196 shares                                                (38)       (38)
  Additional paid-in capital                                  99,470     68,841
  Distributions in excess of net income                      (14,471)   (14,505)
  Accumulated other comprehensive income                       8,703        560
                                                            --------   --------

Total shareholders' equity                                    94,338     55,279
                                                            --------   --------

Total liabilities and shareholders' equity                  $195,063   $101,982
                                                            ========   ========



See accompanying notes to consolidated financial statements.

                                       28


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                 (Dollars in thousands except per share amounts)




                                                   Years Ended December 31,
                                            -----------------------------------
                                                2002         2001        2000
                                            -----------------------------------
                                                             
Revenues:

  Interest income:
   Mortgage loans                           $     2,050   $   2,773   $   1,565
   GNMA certificates                              5,769       2,294         473
   Commercial mortgage-backed
    security-related investment                      --          --       3,190
   Notes receivable                               2,270         451         529
   Temporary investments                             50          73       2,084
  Other income                                      319         107          69
                                            -----------   ---------   ---------

   Total revenues                                10,458       5,698       7,910
                                            -----------   ---------   ---------

Expenses:

  Interest                                        1,228       1,406       3,372
  General and administrative                        706         661         633
  Fees to Advisor                                 1,520         593         761
  FNMA loan program                                 358          --          --
                                            -----------   ---------   ---------

   Total expenses                                 3,812       2,660       4,766
                                            -----------   ---------   ---------

Other gain (loss):

  Equity in earnings of ARCap                     2,400       2,400         401

  Net loss on commercial
   mortgage-backed security-
   related investment and
   government security sold short                    --          --        (299)

  Net gain (loss) on sale or repayment of
   mortgage loans and GNMA
   certificates                                     614        (251)         72
                                            -----------   ---------   ---------

  Total other gain                                3,014       2,149         174
                                            -----------   ---------   ---------

  Net income                                $     9,660   $   5,187   $   3,318
                                            ===========   =========   =========

  Net income per share
   (basic and diluted)                      $      1.61 $      1.35   $     .86
                                            ===========   =========   =========

  Weighted average
   shares outstanding
   (basic and diluted)                        6,017,740   3,838,630   3,838,630
                                            ===========   =========   =========




See accompanying notes to consolidated financial statements.

                                       29


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
                             (Dollars in thousands)



                                                                                                                  Accum-
                                                       Treasury Shares of                                       lated Other
                                 Shares of Beneficial      Beneficial      Additional  Distributions Comprehen-  Comprehen-
                                       Interest             Interest        Paid-in      in Excess      sive        sive
                                   Shares     Amount    Shares     Amount   Capital    of Net Income   Income      Income    Total
                                 ---------- ---------  --------   -------  ---------- -------------- ---------- ----------  --------

                                                                                                
Balance at January 2000           4,213,826  $   421    (375,196)  $ (38)  $  68,841   $  (11,878)              $    (255) $ 57,091


Comprehensive income:
Net income                                                                                  3,318    $   3,318                3,318
Other comprehensive income:
  Net unrealized holding gain
   arising during the period                                                                               291
Less: reclassification adjustment
   for gains included in net income                                                                        (58)
                                                                                                     ----------
Other comprehensive income                                                                                 233        233       233
                                                                                                     ----------
Comprehensive income                                                                                 $   3,551
                                                                                                     ==========
Distributions                                                                              (5,566)                           (5,566)
                                 -------------------------------------------------------------------            --------------------

Balance at December 31, 2000      4,213,826     421     (375,196)     (38)   68,841       (14,126)                    (22)   55,076


Comprehensive income:
Net income                                                                                  5,187    $   5,187                 5,187
Other comprehensive income:
Net unrealized holding gain arising
   during the period                                                                                       582        582       582
                                                                                                     ---------
Comprehensive income                                                                                 $   5,769
                                                                                                     =========

Distributions                                                                              (5,566)                           (5,566)
                                 --------------------------------------------------------------------           --------------------

Balance at December 31, 2001      4,213,826     421     (375,196)     (38)   68,841    $  (14,505)                    560    55,279


Comprehensive income:
Net income                                                                                  9,660    $   9,660                9,660
Other comprehensive income:
  Unrealized  holding  gain  arising
   during the period
Less:reclassification adjustment                                                                         8,757
   for gain included in net income                                                                        (614)
                                                                                                     ---------
Total other comprehensive gain                                                                           8,143      8,143     8,143
                                                                                                     ---------
Comprehensive income                                                                                 $  17,803
                                                                                                     =========
Issuance of common shares         2,525,000     253                          30,629                                          30,882
Distributions
                                                                                           (9,626)                           (9,626)
                                 ----------------------------------------------------------------               --------------------


Balance at December 31, 2002      6,738,826  $  674    $(375,196)  $  (38) $ 99,470    $  (14,471)              $   8,703  $ 94,338

                                 ================================================================               ========== =========


See accompanying notes to consolidated financial statements.


                                       30



              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)



                                                    Years Ended December 31,
                                               ---------------------------------
                                                 2002         2001        2000
                                               ---------------------------------
                                                              
Cash flows from operating activities:
  Net income                                   $    9,660   $   5,187   $  3,318

  Adjustments to reconcile net income to net
   cash provided by operating activities:
   Net loss on commercial mortgage-backed
    security-related investment and government
    security sold short                                --          --        299
   Net loss (gain) on repayment of GNMA
    certificates and mortgage loans                  (614)        251        (72)
   FNMA loan program                                  358          --         --
   Equity in earnings of ARCap                     (2,400)     (2,400)      (401)
   Equity in income of unconsolidated
    subsidiary                                         --          --         (9)
   Amortization - deferred financing costs              6         113         92
   Amortization (income) expense-loan premium
    and origination costs and fees                    (89)         79        163
   Accretion of GNMA discount (premium)                23         (22)       (22)
   Accretion of discount on commercial
    mortgage-backed security-related
    investment                                         --          --       (653)
   Government security sold short                      --          --     33,541
   Purchase of government securities sold
    short                                              --          --    (72,329)
   Changes in operating assets and liabilities:
    Investment in commercial mortgage-
     backed security-related investment                --          --     36,764
    Deposit with broker as collateral for
     security sold short                               --          --     37,733
    Accrued interest receivable                      (599)        111        499
    Other assets                                      385        (410)      (355)
    Due to Advisor and affiliates                     359        (638)       575
    Accounts payable and
     accrued expenses                                (586)      1,069        240
    Accrued interest payable                           39          (6)      (380)
                                               ----------   ---------   --------
  Net cash provided by operating activities         6,542       3,334     39,003
                                               ----------   ---------   --------

Cash flows from investing activities:

  Increase in investment in mortgage loans         (4,542)    (24,661)   (21,487)
  Proceeds from repayments of mortgage loans           --       9,245      9,995
  Periodic principal payments of mortgage loans        46          85         62
  Funding of notes receivable                     (22,307)     (9,959)    (7,414)
  Repayment of notes receivable                     7,683          --      6,000
  Investment in ARCap preferred stock                  --          --    (20,000)
  Distribution from ARCap                           2,406       2,196         --
  Principal repayments of GNMA certificates           526         346      3,927
  Investment in GNMA certificates                 (55,768)     (6,506)        --
  Costs relating to repayment of mortgage loans        --         (39)       (59)
                                               ----------   ---------   --------
  Net cash used in investing activities           (71,956)    (29,293)   (28,976)
                                               ----------   ---------   --------


                                                                     (continued)


                                       31




              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
                                   (continued)




                                                    Years Ended December 31,
                                               ---------------------------------
                                                 2002         2001        2000
                                               ---------------------------------
                                                              
Cash flows from financing activities:
  Proceeds from repurchase facilities payable     100,750      62,030     13,699
  Proceeds from warehouse facility payable          8,788          --         --
  Repayments of repurchase facilities payable     (56,480)    (31,076)   (20,170)
  Increase in deferred loan costs                    (669)        (43)      (160)
  Distributions paid to shareholders               (8,471)     (5,566)    (5,566)
  Issuance of common shares                        30,882          --         --
                                               ----------   ---------   --------

  Net cash provided by (used in)
   financing activities                            74,800      25,345    (12,197)
                                               ----------   ---------   --------

Net increase (decrease) in cash and cash
  equivalents                                       9,386        (614)    (2,170)

Cash and cash equivalents at the beginning
  of the year                                       1,018       1,632      3,802
                                               ----------   ---------   --------

Cash and cash equivalents at the end of
  the year                                     $   10,404   $   1,018   $  1,632
                                               ==========   =========   ========

Supplemental information:
Interest paid                                  $    1,163   $   1,412   $  3,752
                                               ==========   =========   ========

Conversion of mortgage loans to GNMA
  Certificates

Increases in GNMA certificates                              $  37,444
Decrease in mortgage loans                                    (37,444)
                                                            ---------
                                                            $       0
                                                            ---------


See accompanying notes to consolidated financial statements.

                                       32


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - General

American Mortgage Acceptance Company (the "Company") was formed on June 11, 1991
as a Massachusetts  business trust.  The Company elected to be treated as a real
estate  investment  trust ("REIT")  under the Internal  Revenue Code of 1986, as
amended (the "Code").

Effective April 26, 1999, upon authorization by the Company's board of trustees,
the  Company's  name was  changed  from  American  Mortgage  Investors  Trust to
American  Mortgage  Acceptance  Company.  The  Company's  shares  of  beneficial
interest (the "Shares") commenced trading on the American Stock Exchange on July
1, 1999, under the symbol "AMC".

The Company's  business  plan focuses on  originating  and acquiring  government
insured and uninsured  mortgages secured by multi-family  properties,  which may
take the form of  government  insured first  mortgages  and uninsured  mezzanine
loans,  construction  loans and bridge  loans.  Additionally,  the  Company  has
indirectly invested in subordinate commercial mortgage-backed securities and may
invest in other real estate assets, including non-multi-family mortgages, issues
guarantees  of  construction  and  permanent  financing,  and makes  standby and
forward loan commitments.

The Company is governed by a board of trustees  comprised  of three  independent
trustees and two  trustees  who are  affiliated  with  Related  Capital  Company
("Related").   The  Company  has  engaged  Related  AMI  Associates,  Inc.  (the
"Advisor"),  an  affiliate of Related,  to manage its  day-to-day  affairs.  The
Advisor has  sub-contracted  with Related to provide the services  contemplated.
Through the  Advisor,  Related  offers the  Company a core group of  experienced
staff and  executive  management  providing  the Company with services on both a
full  and  part-time  basis.   These  services  include,   among  other  things,
acquisition, financial, accounting, capital markets, asset monitoring, portfolio
management,  investor  relations  and public  relations  services.  The  Company
believes  that it benefits  significantly  from its  relationship  with Related,
since  Related  provides  the  Company  with  resources  that are not  generally
available to smaller-capitalized, self-managed companies.

NOTE 2 - Significant Accounting Policies

a) Basis of Presentation

The consolidated financial statements of the Company are prepared on the accrual
basis of accounting in accordance with accounting  principles generally accepted
in  the  United  States  of  America  ("GAAP").  The  preparation  of  financial
statements  in conformity  with GAAP requires the Advisor to make  estimates and
assumptions  that affect the reported  amounts of assets and liabilities and the
disclosure  of amortized  assets and  liabilities  at the date of the  financial
statements as well as the reported  amounts of revenues and expenses  during the
reporting  period.  Actual  results  could  differ  from  those  estimates.  The
consolidated  financial statements include the accounts of the company and three
wholly-owned   subsidiaries  which  it  controls:   AMAC  Repo  Seller,  AMAC/FM
Corporation ("AMAC/FM") and AMAC Credit Facility, LLC. All intercompany accounts
and  transactions  have  been  eliminated  in  consolidation.  Unless  otherwise
indicated,  the  "Company"  as  hereinafter  used,  refers to American  Mortgage
Acceptance Company and its subsidiaries.

b) Investments in Mortgage Loans and Notes Receivable

Mortgage  loans and notes  receivable  are intended to be held to maturity  and,
accordingly,  are carried at cost, net of unamortized loan origination costs and
fees.

The  Company's  mezzanine  investments  bear  interest at fixed rates,  but also
include  provisions that allow the Company to participate in a percentage of the
underlying property's excess cash flows from operations and excess proceeds from
a sale or  refinancing.  At the  inception  of  each  such  investment,  Company
management must determine  whether such investment  should be accounted for as a
loan, joint venture or as real estate, using the guidance contained in the Third
Notice to Practitioners issued by the AICPA. Although the accounting methodology
does  not  affect  the  Company's  cash  flows  from  these  investments,   this
determination  affects the balance sheet  classification  of the  investments as
well as the classification, timing and amounts of reported earnings.

Accounting for the investment as real estate is required if the Company  expects
that the amount of profit,  whether called  interest or another name, such as an
equity kicker,  that it expects to receive above a reasonable amount of interest
and fees, is over 50 percent of the property's  total expected  residual profit.
If a mezzanine  investment  were to be accounted  for as an  investment  in real
estate,  the Company's balance sheet would show the underlying  property and its
related  senior  debt (if such debt was not also held by the  Company),  and the
income  statement  would  include  the  property's  rental  revenues,  operating
expenses and depreciation.

If the  Company  expects  that it will  receive  less  than  50  percent  of the
property's  residual profit,  then loan or joint venture  accounting is applied.
Loan  accounting  is  appropriate  if  the  borrower  has a  substantial  equity
investment in the property, if the Company has recourse to substantial assets of
the  borrower,  if the property is  generating  sufficient  cash flow to service
normal loan  amortization,  or if certain other  conditions  are met. Under loan
accounting,  the Company  recognizes  interest  income as earned and  additional
interest from participations as received. Joint venture accounting would require
that the Company  only  record its share of the net income  from the  underlying
property.

                                       33


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Company  management  must  exercise  judgment in making the required  accounting
determinations.  For each mezzanine arrangement, the Company projects total cash
flows over the loan's  term and the  Company's  share in those cash  flows,  and
considers the borrower's  equity, the contractual cap, if any, on total yield to
the  Company  over the term of the  loan,  market  yields on  comparable  loans,
borrower  guarantees,  and other factors in making its  assessment of the proper
accounting.  To date, the Company has determined that all mezzanine  investments
are properly accounted for as loans.

The Company  accounts for its investments in mortgage loans and notes receivable
under the  provisions  of Statement of Financial  Accounting  Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Under SFAS 114,
a loan is impaired when, based on current information and events, it is probable
that a creditor  will be unable to collect  all  amounts  due  according  to the
contractual  terms of the loan  agreement.  SFAS No.  114  requires  lenders  to
measure  impaired loans based on: (i) the present value of expected  future cash
flows  discounted  at the  loans'  effective  interest  rate;  (ii)  the  loan's
observable  market price;  or (iii) the fair value of the collateral if the loan
is collateral-dependent.  The Company's portfolio of mortgage loans and notes is
periodically  evaluated for possible  impairment to establish  appropriate  loan
loss reserves,  if necessary.  If, in the judgment of Company management,  it is
determined that is probable that the Company will not receive all  contractually
required  payments when they are due, the loan or note would be deemed impaired,
and a loan loss reserve established.

c) Investments in GNMA Certificates

The  Company  accounts  for its  investments  in  GNMA  certificates  under  the
provisions  of SFAS No. 115  "Accounting  for  Certain  Investments  in Debt and
Equity Securities".

At  the  date  of  acquisition,  the  Company  elected  to  designate  its  GNMA
certificates as available-for-sale securities. Available-for-sale securities are
carried at fair value with net  unrealized  gain  (loss)  reported as a separate
component of other comprehensive income until realized.  The Company uses quoted
market  prices as its  primary  source of  valuation  information  or, if quoted
market  prices are not  available,  uses values  provided by third party pricing
services. A decline in the market value of any available-for-sale security below
cost that is deemed other than temporary is charged to earnings resulting in the
establishment  of a new cost basis for the security.  Premiums and discounts are
amortized or accreted over the life of the related  security as an adjustment to
interest income using the effective  yield method.  Realized gains and losses on
securities  are  included  in  earnings  and are  recorded on the trade date and
calculated  as the  difference  between  the  amount  of cash  received  and the
amortized cost of the specific GNMA certificate, including unamortized discounts
or premiums.

During 2001, the Company  converted three of its  FHA-guaranteed  first mortgage
loans into investments in GNMA  certificates.  Each loan's amortized cost became
the cost basis of the applicable GNMA  certificate,  which also approximated the
market value of the GNMA certificate at the conversion date. No gain or loss was
recognized upon conversion.  The three  FHA-guaranteed  first mortgage loans and
the related  GNMA  certificates  are  serviced  by  third-party  servicers.  The
conversion was made to improve the leveragability of the debt instruments and to
reduce the  interest  rate on the  associated  borrowings.  It is the  Company's
intention to hold its GNMA certificates to maturity,  but elected the "available
for sale"  designation  under SFAS 115 to give it the  flexibility  to liquidate
these assets if business conditions require.  The first mortgage loans remaining
in the  portfolio  will not be converted to GNMA  certificates  and,  along with
future originations, are intended to be held to maturity.

d) Investment in ARCap

The Company's  preferred equity investment in ARCap Investors,  LLC ("ARCap") is
accounted  for using the equity  method  because  the Company has the ability to
exercise  significant  influence,  but not control,  over ARCap's  operating and
financial policies.

e) Cash and Cash Equivalents

Cash and cash  equivalents  include cash in banks and temporary  investments  in
short-term  instruments with original maturity dates equal to or less than three
months.

f) Loan Origination Costs and Fees

Acquisition fees and other direct expenses incurred for activities  performed to
originate or acquire  mortgage loans have been  capitalized  and are included in
Investment  in Mortgage  Loans in the balance  sheets,  net of any fees received
from borrowers for loan originations.  Loan origination costs and fees are being
amortized to interest  income using the effective yield method over the lives of
the respective mortgages.

g) Revenue Recognition

The Company  derives its revenues from a variety of investments  and guarantees,
summarized as follows:

     o    Interest Income from Mortgage Loans and Notes Receivable - Interest on
          mortgage loans and notes receivable is recognized on the accrual basis
          as it  becomes  due.  Deferred  loan  origination  costs  and fees are
          amortized  over the life of the  applicable  loan as an  adjustment to
          interest income, using the interest method. Interest which was accrued
          is  reversed  out of income if  deemed  to be  uncollectible.  Certain
          mortgage loans (mezzanine  investments)  contain provisions that allow
          the  Company  to   participate  in  a  percentage  of  the  underlying

                                       34


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


          property's  excess cash flows from operations and excess proceeds from
          a sale or refinancing. This income is recognized when received.

     o    Interest Income on GNMA  Certificates - Interest on GNMA  certificates
          is recognized on the accrual basis as it becomes due.  Interest income
          also includes the  amortization or accretion of premiums and discounts
          recognized at the purchase date, using the effective yield method.

     o    Interest  Income on  Temporary  Investments  -  Interest  income  from
          temporary   investments,   such  as  cash  in  banks  and   short-term
          instruments, is recognized on the accrual basis as it becomes due.

     o    Equity in Earnings of ARCap - The Company's  equity in the earnings of
          ARCap Investors,  LLC ("ARCap") is accrued at the Company's  preferred
          dividend  rate of 12%,  unless  ARCap does not have  earnings and cash
          flows adequate to meet this dividend requirement.

     o    Standby Loan Commitment  Fees - The Company  receives fees for issuing
          standby loan  commitments.  If the Company does not expect to fund the
          commitment,   the  commitment  fee  is  recognized  ratably  over  the
          commitment period. If it is determined that it is possible or probable
          that a commitment  will be  exercised,  such fees are deferred and, if
          the commitment is exercised, amortized over the life of the loan as an
          adjustment  to  interest   income  or,  if  the   commitment   expires
          unexercised, recognized as income upon expiration of the commitment.

     o    Construction  Guarantee  and Loan  Administration  Fees - The  Company
          receives fees from borrowers for guaranteeing  construction loans made
          by  third-party  lenders.  The Company  guarantees the loan during the
          period  between  construction  completion and funding of the permanent
          loan.  These  fees  are  received  in  advance  and are  deferred  and
          amortized  into other income over the  guarantee  period.  The Company
          also receives loan administration fees on these guaranteed loans, on a
          monthly basis during the guarantee  period.  These fees are recognized
          in other income as they become due.

     o    Loss    Sharing/Guarantee   Fees   -   The   Company   receives   loss
          sharing/guarantee fees related to the FNMA DUS program. These fees are
          received monthly and recognized in other income as they become due.

h) Repurchase Facilities Payable

The Company  finances its  investments in GNMA  certificates  under a repurchase
facility with an investment bank. Under such facility, the GNMA certificates are
sold to the  investment  bank  under  an  agreement  requiring  the  Company  to
repurchase  such  certificates  for a fixed price on a fixed date,  generally 30
days from sale date.  These  transactions  are accounted  for as  collateralized
borrowings.   Accordingly,   the  GNMA  certificates  remain  on  the  Company's
consolidated  balance  sheet,  with the proceeds from the sales  included on the
consolidated balance sheet as "Repurchase  Facilities  Payable".  The difference
between  the  sales  proceeds  and the fixed  repurchase  price is  recorded  as
interest expense ratably over the period between the sale and repurchase.

i) Fair Value of Financial Instruments

As described  above,  the Company's GNMA  certificates  are carried at estimated
fair values.  The Company has  determined  that the fair value of its  remaining
financial   instruments,   including  its  mortgage  loans  and  cash  and  cash
equivalents,  notes  receivable,  investment  in ARCap,  and secured  borrowings
approximate  their carrying values at December 31, 2002 and 2001. The fair value
of  investments  in mortgage  loans,  ARCap and GNMA  certificates  are based on
actual market price quotes or by determining  the present value of the projected
future cash flows using appropriate discount rates, credit losses and prepayment
assumptions.  Other financial  instruments carry interest rates which are deemed
to approximate market rates.

j) Income Taxes

The Company has  qualified  as a REIT under the Code.  A REIT is  generally  not
subject  to  federal  income  tax on that  portion  of its REIT  taxable  income
("Taxable  Income") which is distributed  to its  shareholders  provided that at
least 90% of Taxable Income is  distributed  and provided that such income meets
certain other conditions.  Accordingly, no provision for federal income taxes is
required. The Company may be subject to state taxes in certain jurisdictions.

During 2002, the Company declared  distributions of $1.51 per share. For federal
income tax purposes,  the Company's  distribution  totaled $1.47, of which $1.42
and $.05 were  reported as ordinary  income and capital gain,  respectively,  to
shareholders for 2002.

k) Comprehensive Income

SFAS No. 130, "Reporting Comprehensive Income," requires the Company to classify
items of "other  comprehensive  income",  such as unrealized gains and losses on
its investment in GNMA certificates, by their nature in the financial statements
and  display  the  accumulated  balance  of other  comprehensive  income  (loss)
separately from shareholders'  equity in the shareholders' equity section of the
balance sheets. In accordance with SFAS No. 130, cumulative unrealized gains and
losses on securities  available-for-sale  are  classified as  accumulated  other

                                       35


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


comprehensive income in shareholders' equity and current period unrealized gains
and losses are included as a component of comprehensive income.

l) Segment Information

SFAS  No.  131,  "Disclosures  About  Segments  of  an  Enterprise  and  Related
Information",  requires  enterprises to report certain financial and descriptive
information   about   their   reportable   operating   segments,   and   certain
enterprise-wide  disclosures  regarding products and services,  geographic areas
and major  customers.  The  Company is an  investor  in  mortgage  products  and
operates in only one reportable segment.  The Company's chief operating decision
maker,  its  president  and  chief  executive  officer  makes  asset  allocation
decisions  between various real estate lending  activities as opportunities  are
brought to the Company through its relationship with the Advisor. Each potential
investment is evaluated for its potential  return on investment  and risks.  The
Company  does not have or rely upon any major  customers.  All of the  Company's
investments are secured by real estate properties  located in the United States;
accordingly, all of its revenues were derived from U.S. operations.

m) New Pronouncements

SFAS No. 133,  "Accounting for Derivative  Instruments  and Hedging  Activities"
establishes  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging  activities.  It was  implemented  by the  Company  on  January 1, 2001.
Because the Company does not currently  utilize  derivatives,  implementation of
this  statement  did not have a material  effect on the  Company's  consolidated
financial statements.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and
Other Intangible  Assets" (SFAS 142).  These statements  establish new standards
for  accounting  and  reporting for business  combinations  and for goodwill and
intangible assets resulting from business combinations.  SFAS 141 applies to all
business  combinations  initiated  after June 30, 2001; the Company  implemented
SFAS 142 on January 1, 2002.  Implementation  of these statements did not have a
material impact on the Company's consolidated financial statements.

In June 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations".  SFAS No. 143  requires  the fair value of a liability or an asset
retirement obligation to be recorded in the period in which it is incurred. SFAS
No. 143 is not effective  until January 1, 2003.  Management does not anticipate
that the  implementation  of this statement  will have a material  impact on the
Company's consolidated financial statements.

In  August  2001,  the  FASB  issued  Statement  No.  144,  "Accounting  for the
Impairment or Disposal of Long Lived Assets".  SFAS No. 144 supercedes  existing
accounting literature dealing with impairment and disposal of long-lived assets,
including  discontinued  operations.   It  addresses  financial  accounting  and
reporting for the impairment of long-lived  assets and for long-lived  assets to
be disposed of, and expands  current  reporting for  discontinued  operations to
include  disposals of a "component" of an entity that has been disposed of or is
classified as held for sale. The Company  implemented SFAS No. 144 on January 1,
2002.  Implementation  of SFAS No.  144 did not have a  material  impact  on the
Company's consolidated financial statements.

In April 2002, the FASB issued  Statement No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145 among  other  things,  rescinds  SFAS No. 4,  "Reporting  Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains and
losses from the early  extinguishments of debt as extraordinary  items will only
be required if they meet the specific criteria for extraordinary  items included
in  Accounting  Principles  Board  Opinion  No. 30,  "Reporting  the  Results of
Operations".  The  rescission  of SFAS  No.  4 is  effective  January  1,  2003.
Management  does not anticipate that the  implementation  of this statement will
have a material impact on the Company's consolidated financial statements.

In July  2002,  the  FASB  issued  Statement  No.  146,  "Accounting  for  Costs
Associated  with Exit or Disposal  Activities".  SFAS No. 146  replaces  current
accounting literature and requires the recognition of costs associated with exit
or  disposal  activities  when they are  incurred  rather  than at the date of a
commitment  to an exit or disposal  plan.  SFAS No. 146 is not  effective  until
January 1, 2003.  Management does not anticipate that the implementation of this
statement will have a material  effect on the Company's  consolidated  financial
statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors'  Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness of Others. The  Interpretation  elaborates on the disclosures to be
made by a guarantor in its  financial  statements  about its  obligations  under
certain  guarantees  that it has issued.  It also  clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does  not  prescribe  a  specific   approach  for  subsequently   measuring  the
guarantor's  recognized  liability over the term of the related  guarantee.  The
disclosure  provisions  of this  Interpretation  are  included  in Note 13.  The
initial  recognition and initial  measurement  provisions of this Interpretation
are  applicable on a prospective  basis to guarantees  issued or modified  after
December 31, 2002. The Company currently receives a fee, in advance,  for acting
as a guarantor of certain construction loans. This fee is deferred and amortized
over  the  guarantee  period.   The  Company  believes  that  the  fee  received
approximates  the  fair  value  of the  obligation  undertaken  in  issuing  the
guarantee; therefore, the Company's current accounting for these guarantees will
not be  affected  by this  Interpretation.  The  Company  has ceased  making new
guarantees  under its Fannie Mae DUS program (see Note 12) and is in the process
of transferring its rights and obligations  under this program to a third party;
therefore,  this  Interpretation  will not have an impact on the  accounting for
these guarantees.

                                       36


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In  January  2003,  the FASB  issued  Interpretation  No. 46,  Consolidation  of
Variable Interest  Entities.  This  Interpretation  clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the  characteristics  of a controlling  financial interest or do not
have sufficient equity at risk for the entity to finance its activities  without
additional  subordinated financial support from other parties. The provisions of
the Interpretation  will be immediately  effective for all variable interests in
variable  interest entities created after January 31, 2003, and the Company will
need to apply its  provisions  to any  existing  variable  interest  in variable
interest  entities by no later than July 1, 2003.  The Company is in the process
of evaluating all of its mezzanine loans, which may be deemed variable interests
in variable  interest  entities  under the  provision of FIN 46. The real estate
entities  whose  ownership  interests  collateralize  these  loans  have  assets
totaling approximately  $110,000,000 at December 31, 2002. The Company's maximum
exposure to loss  represents  its recorded  investment in these loans,  totaling
$12,448,000 at December 31, 2002.  The Company  believes that some, and possibly
all, of these investments may not ultimately fall under the provisions of FIN 46
and, accordingly,  continue to be accounted for as loans and not consolidated as
investments in real estate.  The Company  cannot make any definitive  conclusion
until it completes its evaluation.

n) Reclassifications

Certain amounts in the 2001 and 2000 financial statements have been reclassified
to conform to the 2002 presentation.

                                       37


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Investments in Mortgage Loans
-----------------------------
Information  relating  to the  Company's  investments  in  mortgage  loans as of
December 31, 2002 is as follows:
(Dollars in thousands)




                                                      Final                                                             Share of
                                                     Maturity                                          Lifetime     Excess Operating
Property                             Description       Date      Call Date (A)   Interest Rate (b)   Interest Cap      Cash Flows

First Mortgage Loans:
                                                                                                        
  Stony Brook II(E)(M)(P)
      East Haven, CT                  125 Units        6/37          12/06                  7.625%        N/A              N/A

  Sunset Gardens
      Eagle Pass, TX                   60 Units        9/03            N/A                  11.50%        N/A              N/A

  Northbrooke
      Harris County, TX               240 Units        8/43            N/A                   7.45%        N/A              N/A

  Alexandrine
      Detroit, MI                      30 Units       12/03            N/A                  11.00%        N/A              N/A

Subtotal  First  Mortgage
Loans

Mezzanine Loans(G):

 Stabilized Properties
 ---------------------
  Stony Brook II (J)(N)(P)
      East Haven, CT                  125 Units        6/37          12/06                  15.33%        16%              40%

  Plaza at San Jacinto (K)(N)
      Houston, TX                     132 Units        1/43           6/11                  11.40%        16%              50%


Subtotal Stabilized Mezzanine Loans


 Properties in Lease-Up
 ----------------------

  The Hollows (K)(N)
      Greenville, NC                  184 Units        1/42           1/12                  10.00%        16%              50%

  Elmhurst Village (J)(N)
      Oveido, FL                      313 Units        1/42           3/19                  10.00%        16%              50%

  The Reserve at Autumn Creek (J)(N)
      Friendswood, TX                 212 Units        1/42           9/14                  10.00%        16%              50%


Subtotal Properties in Lease-Up



 Properties in Construction
 --------------------------

  Club at Brazos (I)(N)(K)
      Rosenberg, TX                   200 Units        5/43            TBD                  10.00%        14%              50%

  Northbrooke (J)(N)
      Harris County, TX               200 Units        8/43            TBD                  11.50%        14%              50%

  Del Mar Villas
      Dallas, TX                      260 Units        4/04            N/A            LIBOR+4.625%        (O)              N/A

  Mountain Valley
      Dallas, TX                      312 Units       11/04            N/A            LIBOR+4.750%        (O)              N/A


Subtotal Properties in Construction


Subtotal Mezzanine Loans



Total Mortgage Loans




                                                                                                                          Interest
                                                                                                                           Earned
                                                                                                                         Applicable
                                         Share of                                                                          to the
                                      Excess Sale or  Periodic               Outstanding    Unamortized    Carrying      Year Ended
                                       Refinancing    Payment                Face Amount of  Costs and     Amount of      December
Property                                 Proceeds      Terms    Prior Liens  Mortgages (C)     Fees      Mortgages (D)    31,2002

First Mortgage Loans:
                                                                                                      
  Stony Brook II(E)(M)(P)
      East Haven, CT                       N/A          (F)              --     $ 8,285         $   --      $  8,285       $   633

  Sunset Gardens
      Eagle Pass, TX                       N/A          (H)              --       1,323            (14)        1,309            99

  Northbrooke
      Harris County, TX                    N/A          (L)              --          --             --            --            16

  Alexandrine
      Detroit, MI                          N/A          (H)              --         342             --           342            15
                                                                                --------------------------------------------------

Subtotal First Mortgage Loans                                                     9,950            (14)        9,936           763
                                                                                --------------------------------------------------
Mezzanine Loans(G):

 Stabilized Properties
 ---------------------
  Stony Brook II (J)(N)(P)
      East Haven, CT                       35%          (H)          $8,285         764           (113)          651            90

  Plaza at San Jacinto (K)(N)
      Houston, TX                          50%          (H)           6,522       1,250            (24)        1,226,          149
                                                                                --------------------------------------------------

Subtotal Stabilized Mezzanine Loans                                               2,014           (137)        1,877           239
                                                                                --------------------------------------------------

 Properties in Lease-Up
 ----------------------

  The Hollows (K)(N)
      Greenville, NC                       25%          (H)           8,915       1,549           (150)        1,399           191

  Elmhurst Village (J)(N)
      Oveido, FL                           25%          (H)        21,677(L)      2,874           (419)        2,455           319

  The Reserve at Autumn Creek (J)(N)
      Friendswood, TX                      25%          (H)        16,023(L)      1,987            (60)        1,927           192
                                                                                --------------------------------------------------

Subtotal Properties in Lease-Up                                                   6,410           (629)        5,781           702
                                                                                --------------------------------------------------


 Properties in Construction
 --------------------------

  Club at Brazos (I)(N)(K)
      Rosenberg, TX                        25%          (H)          13,436       1,962            (77)        1,885           198

  Northbrooke (J)(N)
      Harris County, TX                    50%          (H)        10,475(L)      1,500           (136)        1,364           134

  Del Mar Villas
      Dallas, TX                           N/A          (H)           5,554         765             --           765             8

  Mountain Valley
      Dallas, TX                           N/A          (H)           5,242         776             --           776             6
                                                                                --------------------------------------------------

Subtotal Properties in Construction                                               5,003           (213)        4,790           346
                                                                                --------------------------------------------------

Subtotal Mezzanine Loans                                                         13,427           (979)       12,448         1,287
                                                                                --------------------------------------------------

Total Mortgage Loans                                                            $23,377         $ (993)     $ 22,384       $ 2,050
                                                                                ==================================================



                                       38


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(A)  Loans are subject to mandatory  prepayment at the option of the Company ten
     years after construction  completion,  with one year's notice. Loans with a
     call date of "TBD" are still under construction.

(B)  Interest  on the  mezzanine  loans is based  on a fixed  percentage  of the
     unpaid principal  balance of the related first mortgage loan (prior liens).
     The amount shown is the approximate effective rate earned on the balance of
     the  mezzanine  loan.  The  mezzanine  loans also  provide for  payments of
     additional interest based on a percentage of cash flow remaining after debt
     service  and  participation  in sale or  refinancing  proceeds  and certain
     provisions  that  cap  the  Company's  total  yield,  including  additional
     interest and participations, over the term of the loan.

(C)  No principal  amounts of mortgage loans are subject to delinquent  interest
     as of December 31, 2002.

(D)  Carrying amounts of the loans are net of unamortized  origination costs and
     fees and loan discounts.

(E)  Interest and principal  payments on this first mortgage loan are insured by
     the U.S. Department of Housing and Urban Development.

(F)  Requires  monthly  payments of principal  and  interest  based on a 40-year
     amortization   period.   Loan  is  subject  to  five-year  lockout  against
     prepayments,  as well as a prepayment  penalty  structure during the second
     five-year term of the loan.

(G)  The principal  balance of the mezzanine loans is secured by the partnership
     interests  of the  entity  that owns the  underlying  property  and a third
     mortgage  deed of  trust.  Interest  payments  on the  mezzanine  loans are
     secured by a second mortgage deed of trust and are guaranteed for the first
     36 months after construction completion by an entity related to the general
     partner of the entity that owns the underlying property.

(H)  Interest only payments are due monthly, with loan balance due at maturity.

(I)  The funding of this mezzanine  loan is based on property level  operational
     achievements.

(J)  The Company has an  interest  in the first lien  position  relating to this
     mezzanine loan.

(K)  The Company does not have an interest in the first lien  position  relating
     to this mezzanine loan.

(L)  The first  mortgage loans related to those  properties  were converted from
     participations  in FHA loans to ownership of the GNMA  certificates and are
     held by the Company.

(M)  This first  mortgage  loan is pledged  to secure the  Company's  obligation
     under a first loss  protection  agreement  with Fannie Mae - see Note 14 in
     the accompanying consolidated financial statements.

(N)  Lifetime  interest cap  represents  the maximum  annual  return,  including
     interest,  fees and participations,  that can be earned by the Company over
     the life of the mezzanine loan,  computed as a percentage of the balance of
     the first mortgage loan plus the mezzanine loan.

(O)  Interest cap on these loans is the maximum rate permitted by law.

(P)  The Stony Brook II first  mortgage loan and  mezzanine  loan were repaid in
     January  2003 - See  Note  14 in the  accompanying  consolidated  financial
     statements.

                                       39


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Further  information  relating to  investments  in mortgage  loans for the years
ended December 31, 2002, 2001 and 2000 is as follows:
(Dollars in thousands)



                                                          2002        2001        2000
                                                        --------    --------    --------
                                                                       
Reconciliation of mortgage loans:
Balance at beginning of period                          $ 17,799    $ 31,829    $ 28,893
Advances made during the period                            4,711      24,813      22,253
Conversion of mortgage loans to GNMA certificates           --       (37,444)       --
Loan origination fees (net of acquisition
  expenses)                                                 (169)       (152)       (766)
Proceeds from repayment of mortgage loans                   --        (9,245)     (9,995)
Periodic principal payments of mortgage loans                (46)        (85)        (62)
Loan contributed to unconsolidated subsidiary               --          --        (8,404)
Consolidation of previously unconsolidated subsidiary       --         8,374        --
Excess(deficiency) of proceeds over carrying value of
  mortgage loans                                            --          (251)         14
Amortization and accretion -- net                             89         (40)       (104)
                                                        --------    --------    --------

Investments in mortgage loans - December 31,            $ 22,384    $ 17,799    $ 31,829
                                                        ========    ========    ========


                                       40


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - Investments in GNMA Certificates - Available for Sale

Information  relating to GNMA  certificates  owned by the Company as of December
31, 2002, is as follows:
(Dollars in thousands)


                                                                                                                           Interest
                                                                                                                            Income
                                                                                                                            Earned
                                                                                                                          Applicable
                                           Date                 Principal  Amortized     Unrealized                      to the Year
                                         Purchased/    Stated      at       Cost at    Gain (Loss) at   Fair Value at       Ended
                           Certificate     Final      Interest  December    December     December          December        December
Name                         Number     Payment Date    Rate    31, 2002    31, 2002     31, 2002          31,2002         31 ,2002
----                       -----------  ------------  --------  ---------  ---------   --------------   -------------    -----------

                                                                                                    
Western Manor (1)            0355540      7/27/94      7.125%   $  2,460   $   2,470      $    39         $  2,509          $  196
                                          3/15/29

Copper Commons (1)           0382486      7/28/94      8.500%      2,088       2,158          (28)           2,130             179
                                          8/15/29

SunCoast Capital Group,      G002412      6/23/97      7.000%        546         547           32              579              50
Ltd. (1)                                  4/20/27

Hollows Apts.(2)              511909      5/29/01          --         --          --           --               --             197


Elmhurst Village(1)           549391      6/28/01      7.745%     21,677      21,677          922           22,599           1,659
                                           1/1/42

Reserve at Autumn Creek(1)    448748      6/28/01      7.745%     16,023      16,023        2,574           18,597           1,200
                                           1/1/42

Casitas at Montecito(1)(3)    519289      3/11/02      7.300%      5,787       6,178          458            6,636             321
                                         10/15/42

Village at Marshfield(1)      519281      3/11/02      7.475%     19,869      21,493        1,331           22,824           1,140
                                          1/15/42

Cantera Crossing(1)           532662      3/28/02      6.500%      5,555       5,489          592            6,081             210
                                           6/1/29

Fillmore Park(1)              536739      3/28/02      6.700%      1,189       1,203          116            1,319              48
                                         10/15/42

Northbrooke(1)                548972      5/24/02      7.080%     10,475      10,625        1,231           11,856             244
                                           8/1/43

Ellington Plaza(1)            585494      7/26/02      6.835%     10,501      10,559        1,159           11,718             258
                                           6/1/44

Burlington(1)                 595515      11/1/02      5.900%      6,824       6,909          277            7,186              67
                                          4/15/31
                                                                ------------------------------------------------------------------

Total                                                           $102,994     $105,331     $    8,703      $114,034          $5,769
                                                                ==================================================================


     (1) These GNMA  certificates  are partially or wholly pledged as collateral
     for borrowings under the repurchase facility - See Note 7.
     (2) This GNMA  certificate was sold March 25, 2002,  resulting in a gain of
     approximately $614,000.
     (3) This GNMA certificate was repaid in March 2003.

                                       41


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The amortized  cost,  unrealized  gain and fair value for the investment in GNMA
certificates at December 31, 2002 and 2001 were as follows:

                             (Dollars in thousands)



                                                             December 31,
                                                     ---------------------------
                                                       2002              2001
                                                     ---------------------------
                                                                  
Amortized cost                                       $105,331           $ 49,499
Net unrealized gain                                     8,703                561
                                                     --------           --------
Fair value                                           $114,034           $ 50,060
                                                     ========           ========


For the year ended  December 31,  2002,  there were gross  unrealized  gains and
losses of $8,730,076 and $27,147  respectively,  on GNMA  certificates.  For the
year ended December 31, 2001,  there were gross  unrealized  gains and losses of
$579,252 and $18,865, respectively, on GNMA certificates.

Due to the  complexity  of the GNMA  structure  and the  uncertainty  of  future
economic  events and other  factors  that  affect  interest  rates and  mortgage
prepayments,  it is not possible to predict the effect of future events upon the
yield to maturity or the market value of the GNMA  certificates upon any sale or
other  disposition  or whether  the  Company,  if it chose to,  would be able to
reinvest  proceeds from  prepayments  at favorable  rates relative to the coupon
rate.

NOTE 5 - CMBS-Related Investment and Short Sale; Investment in ARCap

On  September  30,  1999,  the  Company   acquired  from  ARCap  a  "BB+"  rated
subordinated CMBS from a Chase Manhattan Bank-First Union Nation Bank Commercial
Mortgage Trust. The CMBS investment,  which was purchased for $35,622,358, had a
face  amount of  $50,399,711  and an annual  coupon  rate of 6.4%.  The  Company
purchased  the CMBS  investment  using  cash and debt  provided  through  a Bear
Stearns Repurchase  Facility.  In connection with this acquisition,  the Company
entered into an agreement with ARCap.  Under the agreement,  the Company had the
right to sell the CMBS  investment  to ARCap and  purchase  a  preferred  equity
position in ARCap, all based on the then fair value of the CMBS investment.

This  investment  was  accounted for as a trading asset and carried at estimated
fair value, with changes in fair value included in earnings. Interest income was
accrued as it became receivable,  and included accretion of discounts,  computed
using the effective yield method,  after considering  estimated  prepayments and
credit  losses.  The  Company  recognized  gains  on  this  investment  totaling
$1,496,017 in 2000 due to mark-to-market adjustments.

On September  30,  1999,  in order to mitigate the  potential  income  statement
effect of changes in the fair value of its CMBS investment  caused by changes in
interest  rates,  the Company  entered into a short sale involving the sale of a
U.S.  Treasury Note with a face amount of $39,327,000  and an annual coupon rate
of 5.625% borrowed from Bear Stearns & Co., Inc. ("Bear Stearns").  On March 16,
2000,  the Company  replaced the borrowed  security by purchasing  such security
through  Bear  Stearns,  and  entered  into an  additional  short sale  contract
involving the sale of a U.S. Treasury Note with a face amount of $34,512,000 and
an annual coupon rate of 6.0% borrowed from Bear Stearns.  Short sale  positions
were carried at  estimated  fair value,  with changes in fair value  included in
earnings.  The Company recognized losses on these positions totaling  $1,795,572
in 2000 due to market-to-market adjustments.

On November 1, 2000, the Company,  in accordance  with the agreement with ARCap,
sold the CMBS  investment to ARCap and repaid its borrowing under the repurchase
facility,  closed out its short sale position and  purchased a preferred  equity
interest in ARCap in the face amount of $20,000,000,  with a preferred  dividend
rate of 12%.  This  preferred  equity  interest  was  recorded  at  $19,640,637,
representing  the  fair  value  of  the  CMBS  investment  at  the  date  of the
transaction,   less  the  Bear  Stearns   Repurchase   Facility  repayment  plus
approximately $3.5 million in cash paid to ARCap.

The Company owns 800,000  preferred equity units of ARCap, with a face amount of
$25 per unit,  representing a 7.27% ownership and voting interest. The preferred
equity units are convertible,  at the Company's option, into ARCap common units.
If converted into common units,  the  conversion  price is equivalent to $25 per
unit,  subject to certain  adjustments.  Also, if not already  converted,  for a
period of sixty days following the fifth  anniversary of the first closing date,
which will be August 4, 2005, the preferred equity units are convertible, at the
Company's  option,  into a three-year note bearing interest at 12% that would be
junior to all of ARCap's then existing indebtedness.  The preferred equity units
are also redeemable,  at the option of ARCap, up until the fifth  anniversary of
the first closing date.

                                       42


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized information for ARCap as of December 31, 2002 and 2001, and the years
then ended is as follows:



                                                   2002              2001
                                             ---------------    ---------------
                                            ($'s in millions)  ($'s in millions)

                                                          
Investment securities - trading              $           799    $           565
Other assets                                              24                 31
                                             ---------------    ---------------
Total assets                                 $           823    $           596
                                             ===============    ===============

Repurchase agreements and long-term debt     $           392    $           322
Other liabilities                                        206                 50
Members' equity                                          225                224
                                             ---------------    ---------------
Total liabilities and equity                 $           823    $           596
                                             ===============    ===============

Total revenues                               $            96    $            63
Total expenses                                            65                 50
                                             ---------------    ---------------
Net income                                   $            31    $            13
                                             ===============    ===============



                                       43


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - Notes Receivable

The Company's  notes  receivable are  collateralized  by equity  interest in the
owner of the related  property  and consist of the  following as of December 31,
2002:

                                                          (Dollars in thousands)




                                                                                   Remaining
                                 Number of   Outstanding   Unamortized             Committed
                                 Apartment    Principal     Costs and    Carrying  Balance to    Interest
Property         Location          Units       Balance         Fees       Amount      Fund         Rate          Maturity
------------------------------------------------------------------------------------------------------------------------------------

                                                                                      
Alexandrine(3)   Detroit, MI          30       $   214       $    --      $   214    $   --       12.50%      November 2002(5)

Concord at
   Palm(3)(6)    Houston, TX         360         3,850            18        3,832        --       12.00%      December 2003

Parwood(3)       Long Beach, CA      528         3,022(1)         25        2,997     1,578       11.00%       January 2004


Concord at
   Little York   Houston, TX         276         3,500            25        3,475        --       12.00%      February 2004

Concord at
   Gulfgate      Houston, TX         288         3,500            47        3,453        --       12.00%           May 2004

Reserve at
   Fox River     Yorkville, IL       132         1,350            11        1,339        --       12.00%           May 2003

Del Mar                                                                                          LIBOR +
    Villas(4)    Dallas, TX          260         5,554            42        5,512        --       4.625%         April 2004

Mountain                                                                                         LIBOR +
   Valley(4)     Dallas, TX          312         5,242            67        5,175    1,065(2)     4.750%      November 2004
                                  -----------------------------------------------------------

    Total                          2,186       $26,232       $   235      $25,997   $2,643
                                  ===========================================================



(1)  Funded on an as needed basis.
(2)  To be funded for rehabilitation.
(3)  These  loans  are  to  limited  partnerships  whose  general  partners  are
     affiliates of the Advisor (see Note 9).
(4)  Pledged as  collateral  in connection  with  warehouse  facility with Fleet
     National Bank (see Note 8).
(5)  Consists  of two notes  that  mature in  November  2002.  One note,  in the
     approximate  amount of $207,000,  was repaid  January  2003.  The remaining
     note, in the amount of $6,800, remains unpaid.
(6)  The Concord at Palm bridge loan was repaid in full in March 2003.

                                       44


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7- Repurchase Facilities

Effective  February  15,  2000,  the  Company  entered  into a $60  million  FHA
repurchase   facility  with  Nomura  Asset  Capital   Corporation  (the  "Nomura
Repurchase Facility") with a term of one year. This facility enabled the Company
to borrow up to 90% with a qualified  hedge or 80% without a qualified  hedge of
the fair market value of FHA loans owned by the Company.  The Nomura  Repurchase
Facility was renewed  February 15, 2001 for $40 million,  with a one time option
to  increase  to $60  million,  for a one year term and  interest  at LIBOR plus
1.25%. At December 31, 2001,  there was no outstanding  balance.  Deferred costs
relating  to the Nomura  Repurchase  Facility  have been fully  amortized.  This
Repurchase Facility was not renewed in 2002.

Effective February 15, 2000, the Company also entered into a repurchase facility
with Nomura Securities  International  Inc. (the "Nomura  Securities  Repurchase
Facility").  This  facility  enables the Company to borrow up to 95% of the fair
market value of GNMA certificates and other qualified mortgage  securities owned
by the Company. Up until May 2002,  borrowings would bear interest at LIBOR plus
0.50%.  Subsequent to May 2002,  interest on borrowings  decreased to LIBOR plus
0.05%.  As of December  31,  2002 and 2001,  the amount  outstanding  under this
facility was $87.9 million and $43.6 million,  respectively,  and interest rates
were  1.47% and  2.58%,  respectively.  Deferred  costs  relating  to the Nomura
Securities   Repurchase   Facility  have  been  fully  amortized.   All  amounts
outstanding at December 31, 2002 had 30 day settlement terms. As of December 31,
2002 and  2001,  all GNMA  certificates  owned by the  Company  were  wholly  or
partially pledged as collateral.

NOTE 8- Warehouse Facilities

In October 2002,  the Company  entered into a mortgage  warehouse line of credit
(the "Fleet  Warehouse") with Fleet National Bank ("Fleet") in the amount of $40
million.  Advances under the Fleet  Warehouse  Facility,  up to 83% of the total
loan package,  will be used to fund first mortgage loans, which the Company will
make to its customers for the  acquisition/refinancing  and minor  renovation of
existing, lender-approved multi-family properties located in stable sub-markets.
The Facility,  which  matures April 2006,  bears an interest rate of LIBOR + 200
basis  points  (3.46% and 3.42% for Del Mar Villas and  Mountain  Valley  loans,
respectively,  at December 31, 2002), payable monthly on advances.  Principal is
due upon the  earlier of  refinance  or sale of the  underlying  project or upon
maturity.  The Company will pay a fee of 12.5 basis points,  paid quarterly,  on
any unused  portion of the  Facility.  As of December 31, 2002,  the Company had
approximately $8.8 million in loans outstanding under this program.

NOTE 9- Related Party Transactions

Pursuant to the amended Advisory  Agreement between the Company and the Advisor,
the Advisor  receives  certain  fees, in addition to  reimbursements  of certain
administrative and other costs incurred by the Advisor on behalf of the Company,
for its ongoing management and operations of the Company:

    Fees/Compensation     Annual Amount
    -----------------     -------------

   I.  Asset              .355%  for investments in mortgage loans
       management fees    .355%  for certain investment grade investments
                          .750%  for certain non-investment grade investments
                         1.000%  for unrated investments
                          .625%  for  investments  held prior to the adoption
                                 of the amended Advisory Agreement between the
                                 Company and the Advisor dated April 6, 1999.

   II. Annual            A)      25% of the dollar amount by which
       incentive fees

                                 (1) (a) funds from operations (before the
                                          annual incentive fee) per share
                                          (based on the weighted average
                                          number of shares outstanding), plus

                                     (b) gains (or minus  losses)  from  debt
                                          restructuring and sales of property
                                          per share (based on the weighted
                                          average number of shares outstanding),
                                          exceed

                                  (2) an amount equal to the greater of:

                                     (a) (i) the weighted  average of (x) $20
                                              (the price per share in the
                                              Company's initial public offering)
                                              and (y) the prices per share of
                                              any secondary offerings by the
                                              Company multiplied by

                                         (ii)the ten year U.S. Treasury Rate
                                              plus 2% per annum; and;

                                      (b) $1.45 multiplied by

                          B)      the weighted average number of shares
                                  outstanding during such year.

                                       45


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Advisor will not receive an annual  incentive  fee in any fiscal year unless
shareholders have received a minimum annual  distribution of $1.45 per share for
that fiscal year.

In addition,  with respect to new mortgage  loans  acquired by the Company,  the
Advisor will receive  origination  points paid by borrowers equal to up to 1% of
the  principal  amount  of each  mortgage  loan  and the  Company  will  receive
origination points paid by borrowers in excess of 1%.

During 2002, the Company made an agreement with the Advisor, whereby the Advisor
waived approximately $71,000 in net fees and expense reimbursements, in light of
higher than usual expenses  related to the origination of investments  that were
never completed.

The costs  incurred to related  parties for the years ended  December  31, 2002,
2001 and 2000 were as follows:
(Dollars in thousands)


                                                  Years Ended December 31,
                                            ------------------------------------
                                             2002           2001           2000
                                            ------         ------         ------
                                                                 
Expense reimbursement                       $  447         $  345         $  375
Asset management fees                          838            248            386
Incentive fee                                  235           --             --
                                            ------         ------         ------

                                            $1,520         $  593         $  761
                                            ======         ======         ======


Asset management fees, the incentive  management fee and expense  reimbursements
owed to the Advisor and its affiliates  amounting to approximately  $553,000 and
$318,000 were accrued and unpaid at December 31, 2002 and 2001, respectively.

Some of the Company's notes  receivable (see Note 6), the guarantee on Creekside
Apartments  and standby  bridge  loan  commitments  described  in Note 12 are to
limited partnerships where the general partner is an affiliate of the Advisor.

In  December  2002,  Charter  Municipal  Mortgage  Company  announced a proposed
acquisition  of Related  Capital  Company,  an affiliate  of the  Advisor.  This
acquisition will not affect The Company or its day-to-day operations.

NOTE 10 - Earnings Per Share

Basic net income per share in the amount of $1.61,  $1.35 and $.86 for the years
ended December 31, 2002, 2001 and 2000, respectively,  equals net income for the
periods ($9,659,362,  $5,187,064 and $3,317,757,  respectively),  divided by the
weighted  average  number  of shares  outstanding  for the  periods  (6,017,740,
3,838,630 and 3,838,630, respectively).

Because the Company had no dilutive securities outstanding during 2002, 2001 and
2000, diluted net income per share is the same as basic net income per share for
all periods presented.

NOTE 11 - Capital Shares

On February 25,  2002,  the Company  completed a public  offering of 2.5 million
common  shares  at a price of  $13.50  per  share.  The net  proceeds  from this
offering, approximately $31 million, net of underwriter's discount and expenses,
were used to fund investments.

The Company has an incentive  share option  plan,  under which the  Compensation
Committee  of the board of trustees has the  authority  to issue  options to the
Company's  trustees and  employees of the Advisor to purchase,  in the aggregate
that number of shares which is equal to three percent of the shares  outstanding
as of December 31 of the immediately  preceding calendar year, provided that the
Compensation  Committee may only issue, in the aggregate,  options to purchase a
maximum number of shares over the life of the Incentive  Share Option Plan equal
to 383,363  shares.  No options have been granted under this plan as of December
31, 2002.

                                       46


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 - Selected Quarterly Financial Data




                                                             2002 Quarter Ended
                                            -------------------------------------------------
                                             (Dollars in thousands except per share amounts)
                                                                 (Unaudited)

                                             March 31     June 30     September 30   December 31
                                            ----------   ----------   ------------   -----------
                                                                         
Revenues:

Interest income:
  Mortgage loans                            $      401   $      609   $        536   $       504
  GNMA certificates                              1,084        1,370          1,548         1,767
  Notes receivable                                 487          627            548           608
  Temporary investments                             11           13             16            10
Other income                                        60           76             67           116
                                            ----------   ----------   ------------   -----------

   Total revenues                                2,043        2,695          2,715         3,005
                                            ----------   ----------   ------------   -----------

Expenses:

  Interest                                         272          307            290           359
  General and administrative                       126          164            119           297
  Fees to Advisor                                  357          371            318           474
  FNMA loan program                                355            3             --            --
                                            ----------   ----------   ------------   -----------

   Total expenses                                1,110          845            727         1,130
                                            ----------   ----------   ------------   -----------

Other gain:

  Equity in earnings of ARCap                      592          608            600           600

  Net gain on repayment of mortgage loans
   and GNMA certificates                           614         --               --            --
                                            ----------   ----------   ------------   -----------

  Total other gain                               1,206          608            600           600
                                            ----------   ----------   ------------   -----------

  Net income                                $    2,139   $    2,458   $      2,588   $     2,475
                                            ==========   ==========   ============   ===========

  Net income per weighted average share
   (basic and diluted)                      $     0.43   $     0.39   $       0.41   $      0.39
                                            ==========   ==========   ============   ===========

  Weighted average shares outstanding
   (basic and diluted)                       4,960,852    6,363,630      6,363,630     6,363,630
                                            ==========   ==========   ============   ===========


                                       47


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




                                                             2001 Quarter Ended
                                            ----------------------------------------------------

                                             March 31     June 30     September 30   December 31
                                            ----------   ----------   ------------   -----------
                                                                         
Revenues:

Interest income:
  Mortgage loans                            $      888   $    1,018   $      350(1)  $     517(1)
  GNMA certificates                                116          379          860           939
  Notes receivable                                  45           61          127           218
  Temporary investments                             17           10           20            26
Other income                                         6           25           39            37
                                            ----------   ----------   ----------     ---------

   Total revenues                                1,072        1,493        1,396         1,737
                                            ----------   ----------   ----------     ---------

Expenses:

  Interest                                         275          361          463           307
  General and administrative                       140          122          115           284
  Fees to Advisor                                  118          178          121           176
                                            ----------   ----------   ----------     ---------

   Total expenses                                  533          661          699           767
                                            ----------   ----------   ----------     ---------

Other gain (loss):

  Equity in earnings of ARCap                      592          592          604           612

  Net loss on repayment of mortgage loans
   and GNMA certificates                            --           --         (212)          (39)
                                            ----------   ----------   ----------     ---------

  Total other gain (loss)                          592          592          392           573
                                            ----------   ----------   ----------     ---------

  Net income                                $    1,131   $    1,424   $    1,089     $   1,543
                                            ==========   ==========   ==========     =========

  Net income per weighted average share
   (basic and diluted)                      $     0.29   $     0.37   $     0.28     $    0.40
                                            ==========   ==========   ==========     =========

  Weighted average shares outstanding
    (basic and diluted)                      3,838,630    3,838,630    3,838,630     3,838,630
                                            ==========   ==========   ==========     =========


(1)  Interest  income from  mortgage  loans and GNMA  certificates  in the third
     quarter of 2001  reflects the impact of the  conversion  of three  mortgage
     loans into GNMA  certificates  during the second quarter 2001. The increase
     or  decrease  in interest  income was  primarily  a result of the  interest
     income earned by these loans converted to GNMA  certificates  subsequent to
     the conversion. No gains or losses resulted from the conversion.

NOTE 13 - Commitments and Contingencies

The Company completed a loan program with Fannie Mae, which agreed to fully fund
the origination of $250 million of Delegated  Underwriter and Servicer loans for
apartment  properties  that  qualify for low income  housing  tax credits  under
Section 42 of the Internal  Revenue Code.  Under the loan  program,  the Company
intended to originate and contract for individual loans of up to $6 million each
over a two-year  period in  conjunction  with American  Property  Financing,  an
unaffiliated  third  party,  which  would  underwrite  and service the loans for
Fannie  Mae.  The  Company  guarantees  a first  loss  position  of up to $21.25
million,  depending on the aggregate  principal  amount of the loans the Company
originates under this program and would receive  guaranty,  loan origination and
other fees.  The Company  also  guarantees  construction  loans for which it has
issued a forward  commitment  to  originate a loan under the Fannie Mae program,
with  respect  to which it  guarantees  repayment  of 100% of such  construction
loans.  As of December  31,  2002,  the Company has  originated  loans  totaling
approximately  $3.3  million  under the Fannie Mae program and has made  forward
commitments for an additional  approximate $4.0 million.  The Company's  maximum
guaranty at December 31, 2002 was approximately $7.3 million.

During August 2002, the Company purchased one construction loan in the amount of
$342,000 due to a default on a construction loan that was 100% guaranteed by the
Company  under the  Fannie  Mae  program.  The loan  defaulted  due to  problems
relating to  construction  issues of  Alexandrine  Square,  a 30-unit  apartment
complex in Detroit,  Michigan.  The  construction  loan is classified as a first
mortgage loan on the balance sheet at December 31, 2002.

Subsequent to creating this program,  the level of loan origination  competition
has   increased,   reducing  the  program's   projected   financing   value  and
profitability.  As a result, the Company decided in the first quarter of 2002 to
discontinue  this program.  The Company has reached an agreement in principle to
terminate this program and transfer its rights and obligations to a third party.
There can be no assurance,  however,  that this agreement  will be  consummated.

                                       48


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accordingly, during the first quarter of 2002, the Company wrote off the balance
of unamortized  deferred costs relating to this program.  This write-off totaled
approximately  $358,000 and is included in Fannie Mae loan  program  expenses in
the Consolidated Statement of Income.

Except for the write-off of the program costs  described  above,  the Fannie Mae
loan program has not had, and its  discontinuance  is not anticipated to have, a
significant  impact  on  the  Company's   financial   condition  or  results  of
operations.

The following table provides  information  relating to the loans  originated and
forward commitments made on Fannie Mae's behalf.

                             (Dollars in thousands)



Loans Originated
----------------
                                              Number of                      Loss
                                              Apartment                   Sharing Fee
Property                  Location              Units      Loan Amount   (annual rate)
----------------------    ----------------    ---------    -----------   ------------
                                                                 
Valley View               Cedar Rapids, IA        96         $2,187          0.36%
Maple Ridge Apartments    Jackson, MI             69          1,137          0.52%
                                              ---------    -----------
            Total                                165         $3,324
                                              ---------    -----------



Forward Commitments
-------------------
                                              Number of                      Loss
                                              Apartment                   Sharing Fee
Property                  Location              Units      Loan Amount   (annual rate)
-----------------------   ----------------    ---------    -----------   ------------
Cameron Creek Apartments  Dade Country, FL       148         $3,000          0.35%
Desert View Apartments    Coolidge, AZ           372          1,011          0.52%
                                              ---------    -----------
            Total                                520         $4,011
                                              ---------    -----------


                                       49


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Standby and Forward Loan and GNMA Commitments
---------------------------------------------

During 2002,  the Company  issued the following  standby and forward  bridge and
permanent  loan  commitments  for  the  purpose  of  constructing/rehabilitating
certain multi-family apartment complexes in various locations.

                             (Dollars in thousands)



Standby and
Forward Bridge Loan Commitments
-------------------------------
                                                                                                 Maximum Amount of Commitments

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

Issue Date      Project                       Location          No. of Apt. Units         Less than 1 Year              1-3 Years
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                        
  Jan-02        Parwood                       Long Beach, CA           528                   $    --                   $ 1,578(3)
  Jan-02        Valley View/Summertree (7)    Little Rock, AK          240                       400(1)(4)                  --
  May-02        McMullen Square               San Antonio, TX          100                       400(8)(4)                  --
  Jul-02        Clark's Crossing Apartments   Laredo, TX               160                        --                     1,649(2)(5)
  Nov-02        Mountain Valley               Dallas, TX               312                        --                     1,065(3)
                                                                --------------------------------------------------------------------

Total Standby Bridge Loan Commitments                                1,340                   $   800                   $ 4,292
                                                                ====================================================================






Standby and Forward Permanent Loan
Commitments
----------------------------------
                                                                                                 Maximum Amount of Commitments

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

Issue Date      Project                       Location          No. of Apt. Units         Less than 1 Year              1-3 Years
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                             
  Mar-02        Sunset Gardens                Eagle Pass, TX            60                   $   177(3)                     --
  May-02        Highland Park                 Topeka, TX               200                     4,250(1)(5)(6)               --
                                                                --------------------------------------------------------------------

Total Standby and Forward Permanent Loan Commitments                   260                   $ 4,427                        --
                                                                ====================================================================



                                       50


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Forward GNMA Commitments
------------------------

                                                                                        Maximum Amount of Commitments

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

Date Purchased      Project                                                Less than 1 Year                   1-3 Years
---------------------------------------------                   --------------------------------------------------------------------

                                                                                                    
   Mar-02           Cantera Crossing                                         $   973 (3)                     $    --
   Mar-02           Fillmore Park                                                235 (3)                          --
   Mar-02           Casitas at Montecito                                         708 (3)                          --
   May-02           Ellington Plaza                                           27,114 (3)                          --
    N/A             Northbrooke                                                3,415 (3)                          --
                                                                --------------------------------------------------------------------

Total Forward GNMA Commitments                                               $32,445                              --
                                                                --------------------------------------------------------------------

Total Standby and Forward Loan and GNMA Commitments                          $37,672                         $ 4,292
                                                                ====================================================================



(1)  Funding not anticipated to occur.
(2)  Initial  funding in the amount of $550,000 has occurred  during March 2003.
     Remaining fundings are on an as needed basis.
(3)  Funding has already begun.  Amount  represents  remaining  commitment to be
     funded.
(4)  The  Company  received  a loan  commitment  fee of 2.50%  for  issuing  the
     commitment.
(5)  The  Company  received  a loan  commitment  fee of 2.00%  for  issuing  the
     commitment.
(6)  The Company will receive a 1% loan origination fee if funding occurs.
(7)  The first  mortgage  bond  relating to these  apartments is held by Charter
     Municipal  Mortgage  Acceptance Company  ("CharterMac"),  a publicly traded
     company which is managed by an affiliate of the Advisor.
(8)  Expired in February 2003.


                                       51


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Construction Loan Guarantees
----------------------------

During 2002, the Company has  guaranteed the following  loans in relation to the
construction  of  affordable   multi-family   apartment   complexes  in  various
locations.  The construction loan guarantees will provide credit support for the
following  projects after  construction  completion,  up until the date in which
permanent financing takes place.

During October 2002,  the Company  entered into an agreement with Wachovia Bank,
National Association  ("Wachovia") to provide  stabilization  guarantees for new
construction  of  multi-family  properties  under  the LIHTC  program.  Wachovia
already provides  construction and  stabilization  guarantees to Fannie Mae, for
loans Wachovia  originates  under the Fannie Mae LIHTC forward  commitment  loan
program,  but  only  for  loans  within  regions  of the  country  Wachovia  has
designated to be within its territory.  For loans outside Wachovia's  territory,
the Company has agreed to issue a  stabilization  guarantee,  for the benefit of
Wachovia.  The  Company is  guarantying  that  properties  which have  completed
construction will stabilize and the associated  construction  loans will convert
to permanent Fannie Mae loans.  The Company  receives  origination and guarantee
fees from the developers for providing the guarantees.  If the properties do not
stabilize  with enough Net  Operating  Income for Fannie Mae to fully fund their
commitment, AMAC may be required to purchase the construction loan from Wachovia
or to fund the difference  between the construction  loan amount and the reduced
Fannie Mae Permanent Loan Amount.

                                                          (Dollars in thousands)




                                                                                           Maximum Amount of
                                                                                               Guarantee

                                                                                                     Loan Administra-   Construction
                                                                             Less than 1                tion Fee(1)      Guarantee
Date Closed  Project                   Location              No. of Units       Year      1-3 Years (annual percentage)    Fee (2)
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                         
Jul-02       Clark's Crossing          Laredo, TX                 160        $  4,790     $     --         0.500%             0.625%
Sept-02      Creekside Apts.           Colorado Springs, CO       144           7,500           --         0.375%                 --
Oct-02       Village at Meadowbend     Temple, TX                 138              --        3,675         0.500%             0.750%
Nov-02       Mapleview Apartments (3)  Saginaw, MI                104              --        3,240         0.625%             0.247%
                                                                --------------------------------------------------------------------

                                                                  546        $ 12,290     $  6,915
                                                                ====================================================================


(1)  Loan  Administration  Fee is paid on a monthly  basis during the  guarantee
     period.
(2)  Construction  Guarantee  Fee is an  up-front  fee -  paid  at  closing  and
     amortized over the guarantee period.
(3)  Guarantee was made under  Wachovia  Bank,  National  Association  Guarantee
     Agreement.

For each of these  guarantees,  and for the  guarantees  issued  under  the FNMA
program  discussed  in the  first  paragraph  of  Note  13 in  the  accompanying
consolidated  financial  statements,  the  Company  monitors  the  status of the
underlying properties and evaluates its exposure under the guarantees.  To date,
the Company has concluded that no accrual for probable  losses is required under
SFAS 5.

                                       52


              AMERICAN MORTGAGE ACCEPTANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - Subsequent Events

In February  2003, a  distribution  of  $2,545,452  ($.40 per share),  which was
declared in  December  2002,  was paid to  shareholders  for the  quarter  ended
December 31, 2002.

In February 2003,  the Company  received  approximately  $10 million in proceeds
relating to the  repayment of the Stony Brook II first  mortgage  and  mezzanine
loans.  At December  31, 2002,  the  carrying  value of the Stony Brook II first
mortgage and mezzanine loans were  approximately  $8.3 million and approximately
$651,000,  respectively.  The cash proceeds from the principal  repayment of the
first  mortgage loan are being held as collateral  for the Company's  contingent
liabilities under guarantees issued in the Fannie Mae DUS program (see Note 13).

During March 2003, AMAC exercised its rights under the  subordinated  promissory
note and other  documents to take  possession  of the real estate  collateral of
Plaza at San Jacinto.  The Company has paid  approximately  $6.7 million and now
owns the first mortgage. As such, AMAC is now "mortgagee in possession". This is
a  preliminary  step toward  foreclosure  which is expected to take place in the
near future and allow the Company to secure and protect the real estate and cash
collateral,  securing  both the senior and  subordinate  mortgages.  The Company
believes  that the value of the  collateral  exceeds  the  amounts  of the first
mortgage loan (approximately $6.5 million) and the mezzanine loan (approximately
$1.3 million).

In  February  2003,  the  Company  funded  a   predevelopment   bridge  loan  of
approximately $6.9 million and agreed to fund a $7.3 million rehabilitation loan
secured by Noble  Tower  Apartments,  a 195-unit  apartment  complex  located in
Oakland,  CA. The Company has received a 1% fee for the bridge loan, which bears
interest at 12% and matures in July 2005. The Company will receive an additional
1% fee for the rehabilitation  loan, which will bear interest at a rate of 9.75%
and is expected to have a term of fifteen months.

In March 2003, the Company partially funded an acquisition  bridge loan totaling
approximately  $11  million  for  Baywoods  Apartment,  a 128-unit  multi-family
apartment  complex  located in Antioch,  CA. The Company's  initial  funding was
approximately   $10.5  million  with  future  fundings  totaling   approximately
$500,000.  In connection  with the funding of this bridge loan,  the Company has
borrowed $8 million  from its  warehouse  facility  with Fleet Bank.  This loan,
which  matures  March 2005,  bears an interest rate of LIBOR + 400 basis points.
Payments on this loan are interest only for the full 24 month term.  The Company
received a loan origination fee of .625%.

In March 2003,  the  Company  partially  funded a bridge  loan of $1.7  million,
secured by a 288-unit  apartment  complex  located in Houston,  TX, known as The
Concord at Gessner. The Company's initial funding was approximately $1.5 million
with future fundings totaling approximately $200,000. The Company has received a
2.0% fee for the  bridge  loan,  which  bears  interest  at a rate of 12.0%  and
matures in March 2005.

In March 2003,  the  Concord at Palm  bridge  loan was  repaid.  The Company has
received proceeds in the amount of approximately $39 million, which approximates
the carrying amount of the bridge loan at December 31, 2002.

In March 2003, the Casitas at Montecito GNMA certificate was repaid. The Company
has received  proceeds in the approximate  amount of $5.8 million.  The carrying
amount of the certificate at December 31, 2002 was approximately $6.2 million.


                                       53



Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

None.

                                    PART III

Item 10. Directors and Executive Officers of the Company.

Incorporated  by reference to the  Company's  definitive  proxy  statement to be
filed pursuant to Regulation  14A under the Securities  Exchange Act of 1934, as
amended (the "Exchange Act").

Item 11. Executive Compensation.

Incorporated  by reference to the  Company's  definitive  proxy  statement to be
filed pursuant to Regulation 14A under the Exchange Act.

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

Incorporated  by reference to the  Company's  definitive  proxy  statement to be
filed pursuant to Regulation 14A under the Exchange Act.

Item 13. Certain Relationships and Related Transactions.

Incorporated  by reference to the  Company's  definitive  proxy  statement to be
filed pursuant to Regulation 14A under the Exchange Act.

Item 14. Controls and Procedures

(a)  Evaluation  of Disclosure  Controls and  Procedures.  The  Company's  Chief
     Executive   Officer  and  Chief   Financial   Officer  have  evaluated  the
     effectiveness of the Company's  disclosure controls and procedures (as such
     term is defined  in Rules  13a-14(c)  and  15d-14(c)  under the  Securities
     Exchange Act of 1934, as amended (the "Exchange  Act")) as of a date within
     90 days prior to the filing date of this quarterly  report (the "Evaluation
     Date"). Based on such evaluation,  such officers have concluded that, as of
     the Evaluation Date, the Company's  disclosure  controls and procedures are
     effective  in  alerting  them on a  timely  basis to  material  information
     relating to the Company (including its consolidated  subsidiaries) required
     to be  included  in the  Company's  reports  filed or  submitted  under the
     Exchange Act.

(b)  Changes in Internal  Controls.  Since the Evaluation  Date,  there have not
     been any significant changes in the Company's internal controls or in other
     factors that could significantly affect such controls.

Item 15.  Exhibits,  Financial  Statement  Schedules,  and  Reports  on Form 8-K

                                                                      Sequential
(a) 1.    Financial Statements                                           Page
          --------------------                                        ----------

          American Mortgage Acceptance Company

               Independent Auditors' Report                                27

               Consolidated Balance Sheets as of
               December 31, 2002 and 2001                                  28

               Consolidated  Statements  of Income
               for the years ended  December 31,
               2002, 2001 and 2000                                         29

               Consolidated  Statements of Changes
               in  Shareholders' Equity for the years
               ended December 31, 2002, 2001 and 2000                      30

               Consolidated  Statements  of  Cash  Flows
               for  the  years  ended December 31,
               2002, 2001 and 2000                                         31

               Notes to Consolidated Financial Statements                  33

          ARCap Investors, LLC
          --------------------

          Consolidated 2002 financial statements for ARCap
          Investors, LLC (see Exhibit 99)                                  99(a)

          Consolidated 2001 financial statements for ARCap
          Investors, LLC (see Exhibit 99)                                  99(b)



                                       54


Item 15.  Exhibits,  Financial  Statement  Schedules,  and  Reports  on Form 8-K
(continued)
                                                                      Sequential
                                                                         Page
                                                                      ----------
(a) 2.    Financial Statement Schedules

          All  schedules  have been  omitted  because  they are not
          required or because  the  required  information  is
          contained  in  the  financial statements or notes thereto.

(a) 3.    Exhibits

1(a)      Dealer Manager Agreement,  dated March 29, 1993 as
          previously filed as an Exhibit to  Amendment  No. 3
          dated March 23,  1993 to  Registrant's Registration
          Statement No. 33-42481.

1(b)      Form of Soliciting  Dealer Agreement as previously filed
          as an Exhibit to Amendment No. 3 dated March 23, 1993 to
          Registrant's  Registration Statement No. 33-42481.

3.4       Amended and Restated Declaration of Trust, dated as of
          March 29, 1993, as  amended  as of July 1, 1993 as
          previously  filed as an Exhibit to Post-Effective
          Amendment No. 1 dated November 9, 1993.

          Amendment No. 2 to Amended and Restated Declaration of
          Trust, dated as of April 5, 1994 as previously filed as
          an Exhibit to Annual Report on Form 10-K for the year
          ended December 31, 1993.

3.4(c)    Second Amended and Restated  Declaration of Trust, dated
          as of April 6, 1999  (incorporated by reference to
          Exhibit 3.4(c) in the Company's March 31, 1999 Quarterly
          Report on Form 10-Q).

10(a)     Rockport  Mortgage  Corporation  Mortgage Note in the
          principal amount of  $8,500,000  dated  December  15,
          1995  (incorporated   herein  by reference to Exhibit
          10(a) to Form 8-K dated  December 15, 1995 filed with the
          Securities and Exchange Commission pursuant to the
          Securities Exchange Act of 1934 (Commission File No. 0-23972)).

10(b)     Equity Loan Note in the principal  amount of $1,039,000
          dated December 15, 1995  (incorporated  herein by reference
          to Exhibit  10(b) to Form 8-K dated  December  15, 1995
          filed with the  Securities  and Exchange Commission pursuant
          to the Securities Exchange Act of 1934 (Commission
          File No. 0-23972)).

10(c)     Subordinated  Promissory  Note by  SCI-ROEV  East Haven
          Land  Limited Partnership, dated December 15, 1995
          (incorporated herein by reference to Exhibit  10(c) to
          Form 8-K dated  December  15,1995  filed with the
          Securities and Exchange Commission pursuant to the
          Securities Exchange Act of 1934 (Commission File No. 0-23972)).

10(d)     Limited Operating Guaranty between SCI Real Estate
          Development,  Ltd., and Euro General East Haven,  Inc.,
          and the Company dated December 15, 1995 (incorporated
          herein Exhibit 10(d) to Form 8-K dated December 15, 1995
          filed with the Securities and Exchange Commission pursuant
          to the securities Exchange Act of 1934 (Commission File No.
          0-23972)).

10(e)     Amended and  Restated  Advisory  Services  Agreement,
          effective as of April 6, 1999  (incorporated  herein by
          reference to Exhibit  10(z) to Form 10-Q dated  September
          30, 1999 filed  with the  Securities  and  Exchange
          Commission  pursuant to the Securities  Exchange Act of 1934
          (Commission File No. 0-23972)).

10(f)     First Amendment to Amended and Restated  Advisory
          Services  Agreement between  Related AMI  Associates,  Inc.
          and the Company dated November 29, 2001  (incorporated
          by reference to Exhibit 10-6 to the Company's Registration
          Statement on Form S-2, file number 333-74288 as filed on
          November 30, 2001).

10(g)     Settlement and Escrow Agreement between Related Mortgage
          Corporation, Columbiana Lakes Limited  Partnership,  the
          Company, et al. dated June 7, 2001  (incorporated  by
          reference to Exhibit 10-7 to the  Company's Registration
          Statement on Form S-2, file number 333-74288 as filed on
          November 30, 2001).

                                       55


Item 15.  Exhibits,  Financial  Statement  Schedules,  and  Reports  on Form 8-K
(continued)
                                                                      Sequential
                                                                         Page
                                                                      ----------
23(a)     Consent  of  Deloitte & Touche LLP with  respect to
          incorporation  by reference  of its report in the
          Company's  Registration  Statement on Form S-3
          (filed herewith).                                                63

23(b)     Consent  of  Deloitte & Touche LLP with  respect to
          incorporation  by reference of its report relating to the
          financial  statements of ARCap Investors, LLC in the
          Company's Registration Statement on Form S-3
          (filed herewith).                                                64

23(c)     Consent  of  Ernst  & Young  LLP  with  respect  to
          incorporation  by reference of its report relating to the
          financial  statements of ARCap Investors, LLC in the
          Company's Registration Statement on form S-3
          (filed herewith).                                                65

24.1      Power of Attorney (Included on signature page hereto)

99.       Additional Exhibits
          -------------------

99(a)     The 2002 Financial  Statements of ARCap  Investors,  LLC
          which invests primarily in subordinated commercial
          mortgage-backed  securities,  as required by Regulation S-X,
          Rule 3-09 (filed herewith).                                      66

99(b)     The 2001 Financial  Statements of ARCap  Investors,  LLC
          which invests primarily in subordinated commercial
          mortgage-backed  securities,  as required by Regulation S-X,
          Rule 3-09 (filed herewith).                                      78

   (b)    Reports on Form 8-K
          -------------------

          Current report  on Form 8-K  relating  to press  release
          issued  regarding proposed  acquisition by Charter
          Municipal Mortgage Acceptance Company of Related Capital
          Company, dated and filed December 18, 2002.

                                       56


                                   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.

                      AMERICAN MORTGAGE ACCEPTANCE COMPANY
                                  (Registrant)

Date: March 21, 2003                 By: /s/ Stuart J. Boesky
                                         ---------------------
                                         Stuart J. Boesky
                                         Trustee, Chairman of the Board,
                                         President and Chief Executive Officer

Date: March 21, 2003                 By: /s/ Stuart A. Rothstein
                                         -----------------------
                                         Stuart A. Rothstein
                                         Chief Financial Officer



                                       57


                                POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints Stuart
J. Boesky,  Alan P. Hirmes and Stuart A. Rothstein,  and each or either of them,
his true and  lawful  attorney-in-fact  with  full  power  of  substitution  and
resubstitution,  for  him  and in his  name,  place  and  stead,  in any and all
capacities,  to sign any and all amendments to this Annual Report,  and to cause
the  same to be  filed,  with  all  exhibits  thereto  and  other  documents  in
connection therewith,  with the Securities Exchange Commission,  hereby granting
to said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing whatsoever requisite or desirable
to be done in and about the  premises,  as fully to all intents and  purposes as
the undersigned might or could do in person, hereby ratifying and confirming all
acts and things that said  attorneys-in-fact  and agents,  or either of them, or
their  substitutes or substitute,  may lawfully do or cause to be done by virtue
hereof.

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

     Signature                            Title                        Date
--------------------     --------------------------------------   --------------

/s/ Stuart J. Boesky
--------------------
Stuart J. Boesky         Trustee, Chairman of the Board,          March 21, 2003
                         President and  Chief Executive Officer


/s/ Peter T. Allen
------------------
Peter T. Allen           Trustee                                  March 21, 2003


/s/ Arthur P. Fisch
-------------------
Arthur P. Fisch          Trustee                                  March 21, 2003


/s/ Alan P. Hirmes
------------------
Alan P. Hirmes           Trustee                                  March 21, 2003


/s/ Scott M. Mannes
-------------------
Scott M. Mannes          Trustee                                  March 21, 2003


/s/ Stuart A. Rothstein
-----------------------
Stuart A. Rothstein      Chief Financial Officer                  March 21, 2003


                                       58


                                  CERTIFICATION


I, Stuart J. Boesky, hereby certify that:

     1.   I have reviewed  this annual report on Form 10-K of American  Mortgage
          Acceptance Company;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary  in  order  to make  the  statements  made,  in light of the
          circumstances  under which such  statements  were made, not misleading
          with respect to the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a) designed  such  disclosure  controls and  procedures  to ensure the
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

          c)  presented  in  this  annual  report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's   board  of  directors  or  persons
          performing the equivalent functions:

          a) all significant deficiencies in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

          b) any fraud,  whether or not material,  that  involves  management or
          other  employees  who  have a  significant  role  in the  registrant's
          internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this annual report  whether or not there were  significant  changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.



Date:  March 21, 2003                                By: /s/ Stuart J. Boesky
       --------------                                    --------------------
                                                         Stuart J. Boesky
                                                         Chief Executive Officer


                                       59



                                  CERTIFICATION


I, Stuart A. Rothstein, hereby certify that:

     1.   I have reviewed  this annual report on Form 10-K of American  Mortgage
          Acceptance Company;

     2.   Based on my knowledge,  this annual report does not contain any untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary  in  order  to make  the  statements  made,  in light of the
          circumstances  under which such  statements  were made, not misleading
          with respect to the period covered by this annual report;

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this  annual  report,  fairly  present in all
          material respects the financial  condition,  results of operations and
          cash flows of the registrant as of, and for, the periods  presented in
          this annual report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a) designed  such  disclosure  controls and  procedures  to ensure the
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

          c)  presented  in  this  annual  report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent  evaluation,  to the registrant's  auditors and the
          audit  committee  of  registrant's   board  of  directors  or  persons
          performing the equivalent functions:

          a) all significant deficiencies in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

          b) any fraud,  whether or not material,  that  involves  management or
          other  employees  who  have a  significant  role  in the  registrant's
          internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this annual report  whether or not there were  significant  changes in
          internal controls or in other factors that could significantly  affect
          internal   controls   subsequent  to  the  date  of  our  most  recent
          evaluation,   including   any   corrective   actions  with  regard  to
          significant deficiencies and material weaknesses.


Date:  March 21, 2003                                By: /s/ Stuart A. Rothstein
       --------------                                    -----------------------
                                                         Stuart A. Rothstein
                                                         Chief Financial Officer

                                       60


                                                                    Exhibit 99.1


                            CERTIFICATION PURSUANT TO
                             18.U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection  with the Annual Report of American  Mortgage  Acceptance  Company
(the  "Company")  on Form 10-K for the year ending  December 31, 2002,  as filed
with the Securities and Exchange  Commission on the date hereof (the  "Report"),
I, Stuart J. Boesky, Chief Executive Officer of the Company,  certify,  pursuant
to  18  U.S.C.  Section  1350,  as  adopted  pursuant  to  Section  906  of  the
Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully  complies  with the  requirements  of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.

By:  /s/ Stuart J. Boesky
     --------------------
     Stuart J. Boesky
     Chief Executive Officer
     March 21, 2003



                                       61


                                                                    Exhibit 99.2


                            CERTIFICATION PURSUANT TO
                             18.U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection  with the Annual Report of American  Mortgage  Acceptance  Company
(the  "Company")  on Form 10-K for the year ending  December 31, 2002,  as filed
with the Securities and Exchange  Commission on the date hereof (the  "Report"),
I, Stuart J. Boesky, Chief Executive Officer of the Company,  certify,  pursuant
to  18  U.S.C.  Section  1350,  as  adopted  pursuant  to  Section  906  of  the
Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully  complies  with the  requirements  of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.

By:  /s/ Stuart A. Rothstein
     -----------------------
     Stuart A. Rothstein
     Chief Financial Officer
     March 21, 2003

                                       62


                                                                   EXHIBIT 23(a)

                          INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation  by reference  in  Registration  Statement  No.
33-42481  of  American  Mortgage  Acceptance  Company  on Form S-3 of our report
relating to the financial  statements of American Mortgage Acceptance Company as
of  December  31,  2002 and 2001,  and for each of the three years in the period
ended December 31, 2002,  dated March 21, 2003,  appearing in this Annual Report
on Form 10-K of American Mortgage Acceptance Company for the year ended December
31, 2002.

/s/ DELOITTE & TOUCHE LLP

New York, New York
March 21, 2003


                                       63


                                                                   EXHIBIT 23(b)

                          INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation  by reference  in  Registration  Statement  No.
33-42481  of  American  Mortgage  Acceptance  Company  on Form S-3 of our report
relating to the consolidated financial statements of ARCap Investors,  L.L.C. as
of December 31, 2002 and for each of the two years in the period ended  December
31, 2001,  dated January 31, 2002,  appearing in this Annual Report on Form 10-K
of American Mortgage Acceptance Company for the year ended December 31, 2002.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
March 21, 2003


                                       64



                                                                   EXHIBIT 23(c)

                          INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement (Form S-3
No.  33-42481)  of  American  Mortgage  Acceptance  Company  and in the  related
Prospectus of our report dated  February 4, 2003 on the  consolidated  financial
statements of ARCap Investors, L.L.C. included in this Annual Report (Form 10-K)
for the year ended December 31, 2002.

/s/ Ernst & Young LLP

Dallas, Texas
March 21, 2003


                                       65



                                                                  EXHIBIT 99 (a)



                          INDEPENDENT AUDITORS' REPORT

The Board of Managers
ARCap Investors, L.L.C.

We have audited the accompanying  consolidated balance sheet of ARCap Investors,
L.L.C. and  subsidiaries  (the Company) as of December 31, 2002, and the related
consolidated  statements of operations,  members' equity, and cash flows for the
year 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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. 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 consolidated  financial position of ARCap Investors,
L.L.C. and  subsidiaries at December 31, 2002, and the  consolidated  results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.


/s/ Ernst & Young LLP

Dallas, Texas
February 4, 2003

                                       66


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

                                     ASSETS




                                                           December 31, 2002
                                                           -----------------

                                                         
Investment securities - trading,
 net (Note 3)                                               $798,856,791
Accrued interest receivable                                    9,243,042
Cash and cash equivalents                                      4,953,388
Deferred borrowing costs, net (Note 5)                         4,453,750
Restricted cash - CBO swap (Note 5)                            4,325,848
Other assets                                                     722,261
                                                            ------------
Total assets                                                $822,555,080
                                                            ============


             LIABILITIES AND MEMBERS' EQUITY

Liabilities:

Long-term debt (Note 5)                                     $236,000,000
Repurchase agreements (Note 6)                               155,423,000
Accrued interest payable                                       4,853,757
Borrowed investment securities and
 interest rate swap, net (Note 4)                              4,487,562
CBO swap liability (Note 5)                                    4,125,000
Accrued expenses                                                 208,455
                                                            ------------

Total liabilities                                            405,097,774
                                                            ------------

Commitments and contingencies

Minority interest in consolidated entities                   192,337,631

Members' equity:

   Series A preferred members                                147,340,254
   Common members                                             77,779,421

 Total members' equity                                       225,119,675
                                                            ------------

Total liabilities and members' equity                       $822,555,080
                                                            ============

                 See notes to consolidated financial statements

                                       67



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS




                                                          December 31, 2002
                                                          -----------------
                                                       
Revenues:

   Interest income - CMBS                                   $ 76,306,706
   Other investment income                                     2,175,975
                                                            ------------

Total revenues                                                78,482,681
                                                            ------------

Expenses:

   Interest - long-term debt and repurchase agreements        20,527,438
   Interest - borrowed investment securities and
    interest rate swap, net                                    7,287,485
   Financing fee                                               1,180,000
   Salaries and employee benefits                              5,508,718
   General and administrative                                  4,442,601
                                                            ------------

Total expenses                                                38,946,242
                                                            ------------

Net margin on CMBS and other investments                      39,536,439

Other revenue (expense):

   Accretion of purchase discount                             17,137,362
   Loss on trading securities, net (Note 7)                  (11,068,375)
                                                            ------------

                                                               6,068,987

Income before minority interest                               45,605,426

Minority interest                                            (14,456,330)
                                                            ------------

Net income                                                  $ 31,149,096
                                                            ============


                 See notes to consolidated financial statements

                                       68


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
                          YEAR EMDED DECEMBER 31, 2002




                                                       Series A
                                   Common              Preferred
                                  Members               Members         Total
                                 ------------------------------------------------

                                                            
Balance at January 1, 2002       $ 78,156,400       $145,827,125     $223,983,525
 Costs to raise capital of
  consolidated subsidiaries          (386,470)          (863,826)      (1,250,296)
 Distributions                    (10,890,994)       (17,871,656)     (28,762,650)
 Net income                        10,900,485         20,248,611       31,149,096
                                 ------------       ------------     ------------
Balance at December 31, 2002     $ 77,779,421       $147,340,254     $225,119,675
                                 ============       ============     ============


                 See notes to consolidated financial statements

                                       69




                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS




                                                              December 31, 2002
                                                              -----------------
                                                           
OPERATING ACTIVITIES
Net income                                                     $  31,149,096
Adjustments to reconcile net income to net cash
  used in operating activities:
    Loss on trading securities, net                               11,068,375
    Accretion of purchase discount                               (17,137,362)
    Amortization of deferred borrowing costs                         680,930
    Minority interest                                             14,456,330
    Changes in operating assets and liabilities:
       Investment securities - trading, net                     (205,485,635)
       Accrued interest receivable                                (3,410,351)
       Restricted cash - CBO swap                                    (73,117)
          Other assets                                               (93,381)
          Accrued interest payable                                 1,616,725
          Borrowed investment securities and
           interest rate swap, net                               (14,765,069)
          Accrued expenses                                          (190,995)
                                                               -------------

Net cash used in operating activities                           (182,184,454)
                                                               -------------

FINANCING ACTIVITIES
   Distributions to members                                      (28,762,650)
   Contributions from minority interest members                  148,576,742
   Distributions to minority interest members                    (14,093,989)
   Costs to raise capital                                         (1,350,296)
   Proceeds from repurchase agreements                            69,321,000
                                                              --------------

Net cash provided by financing activities                        173,690,807
                                                              --------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                           (8,493,647)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      13,447,035
                                                              --------------

CASH AND CASH EQUIVALENTS, END OF YEAR                        $    4,953,388
                                                              ==============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash payments for interest on repurchase agreements
     and long-term debt                                       $   20,489,835
                                                              ==============


                 See notes to consolidated financial statements

                                       70



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

A)  Organization - ARCap  Investors,  L.L.C.  (the Company) was  incorporated in
January 1999 and  commenced its  operations  on March 17, 1999.  The Company was
organized  to  invest  primarily  in  subordinated  commercial   mortgage-backed
securities (CMBS).

B) Principles of Consolidation - The consolidated  financial  statements include
the accounts of:

     -    The Company.

     -    ARCap REIT,  Inc.  (ARCap REIT),  a  majority-owned  subsidiary of the
          Company.

     -    ARCAP Resecuritization Corporation (ARCap Resecuritization),  a wholly
          owned  subsidiary of ARCap REIT. ARCap  Resecuritization  owns all the
          residual interest in Commercial Resecuritization Trust 2001 ABC-2 (the
          Trust).

     -    ARCap High Yield CMBS Fund,  L.L.C.  (the High Yield  Fund),  of which
          ARCap  REIT  owned  an  approximate  23%  controlling  interest  as of
          December 31, 2002. The High Yield Fund owns approximately 60% of ARCap
          CMBS Fund REIT, Inc. (the Fund REIT).

     -    ARCap  Diversified Risk CMBS Fund, L.L.C. (the Diversified Risk Fund),
          of which ARCap REIT owned an approximate 1% controlling interest as of
          December 31, 2002. The Diversified Risk Fund owns approximately 40% of
          the Fund REIT.

     -    ARCap Special  Servicing,  Inc.  (Special  Servicing),  a taxable REIT
          subsidiary wholly owned by ARCap REIT.

Minority  interests  primarily   represent  outside  members'   approximate  77%
ownership in the High Yield Fund and outside members'  approximate 99% ownership
in the Diversified  Risk Fund. The Company has  consolidated the High Yield Fund
and Diversified  Risk Fund as it exercises  control  (through ARCap REIT,  which
acts as the Managing  Member of both Funds in  accordance  with the terms of the
respective  LLC  agreements)  over the  operations  of these Funds.  The Company
records  minority  interest  expense  (income)  that reflects the portion of the
earnings (losses) of the operations which is applicable to the minority interest
members.

Separate   books  of   accounts   are   maintained   for   ARCap   REIT,   ARCap
Resecuritization, the Trust, the High Yield Fund, the Fund REIT, the Diversified
Risk  Fund,  and  Special  Servicing  and  are  reflected  in  the  accompanying
consolidated  financial  statements  of the Company.  All material  intercompany
transactions and account balances have been eliminated in consolidation.

C) Investment  Securities - The Company's  investment security  transactions are
recorded on the trade date for existing  securities and the settlement  date for
to-be-issued securities. CMBS are designated as trading assets since the Company
is holding the securities for possible sales or other  dispositions  in the near
term. Such securities are carried at their estimated fair value, with unrealized
gains or losses included in earnings.

The fair value of the  Company's  portfolio  of CMBS is  generally  estimated by
management  based on market prices provided by certain dealers who make a market
in these  financial  instruments.  The  market for the  Company's  CMBS may lack
liquidity and have limited market volume. Accordingly,  the fair values reported
reflect  estimates and may not necessarily be indicative of the amounts that the
Company could realize in a current market exchange.

The yield to maturity on the Company's CMBS depends on, among other things,  the
rate and timing of principal  payments,  the pass-through rate and interest rate
fluctuations.  The  subordinated  CMBS  interests  owned by the Company  provide
credit  support  to  the  more  senior  interests  of  the  related   commercial
securitization.  Cash  flow from the  mortgages  underlying  the CMBS  interests
generally  is  allocated  first to the senior  interests,  with the most  senior
interest  having a priority  entitlement  to cash flow.  Remaining  cash flow is
allocated  generally  among the other CMBS  interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying  mortgages that result in reduced cash flows,  the most  subordinated
CMBS interest will bear this loss first.  To the extent that there are losses in
excess of the most subordinated  interest's stated  entitlement to principal and
interest,  then the remaining  CMBS  interests will bear such losses in order of
their relative subordination.

D)  Revenue  Recognition  -  Interest  income  and  special  servicing  fees are
recognized   as  earned.   Accretion  of   discounts   is  computed   using  the
effective-yield method over the life of the underlying assets.

E) Derivative  Financial  Instruments  - Derivative  financial  instruments  are
utilized  by the Company to reduce  interest  rate risk.  The  Company  utilizes
interest  rate  swaps and cap and floor  agreements  as a means of  hedging  the
potential  financial  statement  impact  of  changes  in the  fair  value of its
portfolio of CMBS and variable  rate  long-term  debt due to changes in interest
rates.  Risks in these  contracts arise from the movements in interest rates and
from  the  possible  inability  of  counterparties  to meet  the  terms of their
contracts.  The Company  carries its  derivative  financial  instruments at fair

                                       71


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

value with any unrealized gain or loss included in earnings,  in accordance with
the  provisions  of SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging Activities.

F) Resale and  Repurchase  Agreements  -  Transactions  involving  purchases  of
securities under agreements to resell (reverse repurchase  agreements or reverse
repos)  or  sales of  securities  under  agreements  to  repurchase  (repurchase
agreements  or repos) are  accounted for as  collateralized  financings,  except
where the Company does not have an agreement to sell (or  purchase)  the same or
substantially  the same  securities  before  maturity at a fixed or determinable
price.

G) Cash and Cash  Equivalents  - Cash and cash  equivalents  include  all highly
liquid  investments  with original  maturities when purchased of three months or
less.

H) Restricted Cash - Restricted cash represents  amounts  required to be pledged
under interest rate cap and floor agreements (see Note 5).

I) Deferred  Borrowing Costs - Deferred borrowing costs represent costs incurred
in connection  with the issuance of long-term  debt.  Such amounts are amortized
using the effective  interest method over the term of the related debt (see Note
5).

J)  Financing  Fee - The Company pays an annual rate of 0.50% of the face of its
existing  long-term  debt to a financier to provide  credit  enhancement of such
debt.

K) Income Taxes - The Company has elected to be taxed as a partnership,  whereby
all income is taxed at the member level, with the exception of Special Servicing
which is taxed at the entity level. ARCap REIT has elected to be taxed as a real
estate investment trust for federal income tax purposes.

No provision for income taxes has been made for Special Servicing for the period
April 1, 2002  (inception  of Special  Servicing)  through  December 31, 2002 as
Special Servicing did not generate any taxable income.

L) Use of Estimates - The  preparation of consolidated  financial  statements in
conformity with accounting  principles  generally  accepted in the United States
requires  management to make  estimates  and  assumptions  that affect  reported
amounts of certain assets,  liabilities,  revenues, and expenses. Actual results
could differ from those estimates.

M) Fair Value of Financial Instruments - The estimated fair value amounts herein
have been  determined  by the Company using  available  market  information  and
appropriate valuation methodologies.  However, considerable judgment is required
to interpret  market data to develop the  estimates of fair value.  Accordingly,
the estimates  presented  herein are not  necessarily  indicative of the amounts
that  the  Company  could  realize  in a  current  market  exchange.  The use of
different  market  assumptions  and/or  estimation  methodologies  could  have a
material effect on the estimated fair value amounts.

The  Company's  portfolio  of CMBS and  securities  borrowed is carried at their
estimated fair values. The Company's management believes that the fair values of
its  cash and cash  equivalents,  restricted  cash,  and  repurchase  agreements
approximate  their carrying  values due to the nature of the  instruments or the
fact that their terms approximate current market terms.

NOTE 2. MEMBERS' EQUITY

The Limited Liability Company Agreement (LLC Agreement)  establishes two classes
of membership: Series A Preferred members and Common members.

Cash Flows are distributed in the following order of priority:

     -    To the Series A  Preferred  members in an amount  equal to the accrued
          and unpaid Preferred  Distributions (12% per annum of the $25.00 price
          per Unit).

     -    To the Common  members in an amount  equal to (a) during the  18-month
          period that ended February 4, 2002, the amount determined by the Board
          of Managers,  but no more than a cumulative return on the Common Units
          at the rate of 10% per annum on an  established  value of  $21.74  per
          unit,  and  (b)  subsequent  to  such  18-month  period,   the  amount
          determined  by the  Board of  Managers,  provided  that if the  amount
          distributable  to the Common members shall exceed a cumulative  annual
          return on the  Common  Units of 12% per annum,  the Board of  Managers
          shall notify the Series A Preferred  members 30 days in advance of the
          record date for distribution of Cash Flow.

                                       72


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002


     -    To the extent that any remaining  Cash Flow  received  during such tax
          period is not includable in the income of the Company, to members that
          have  been  allocated  Net  Profits  in  excess  of  amounts  actually
          distributed to such members, in proportion to such amounts.

Net Profits of the Company are allocated as follows:

     -    To the Series A Preferred members to the extent of amounts distributed
          or distributable to them in such taxable year.

     -    To the Series A Preferred  members to the extent Net Losses previously
          allocated to such members exceed  undistributed Net Profits previously
          allocated to them.

     -    To the  Common  members  to  the  extent  of  amounts  distributed  or
          distributable to them in such taxable year.

     -    To the Common members to the extent Net Losses previously allocated to
          such members exceed  undistributed Net Profits previously allocated to
          them.

     -    To the members in proportion to their Percentage Interests.

Net Losses of the Company are allocated as follows:

     -    To the  members  in an  amount  equal  to  undistributed  Net  Profits
          allocated to such member.

     -    To the  Common  members  pro  rata  to the  extent  of  their  Capital
          Accounts.

     -    To the  Series A  Preferred  members  pro rata to the  extent of their
          Capital Accounts.

Series A Preferred Units
------------------------

Series A Preferred  Units are  convertible  into Common Units at the  Conversion
Price in effect on the Conversion Date. If the Series A Preferred Units have not
been converted within five years of the effective date of the First Amendment to
the LLC  Agreement  (August 4,  2000),  Series A  Preferred  Units  may,  at the
holder's  option,  be converted to a note equal to $25.00 per Unit, plus accrued
and unpaid Preferred Distributions.

Eighteen  months after the First Closing Date  (February 4, 2002),  but no later
than the fifth  anniversary  of the First  Closing  Date  (August 4, 2005),  the
Company  may  redeem  the Series A  Preferred  Units for  $25.00 per unit,  plus
accrued and unpaid Preferred Distributions, plus a premium that will provide the
Series A  Preferred  members  with a total  pretax  internal  rate of  return of
17.50%.

In  addition,  upon  either a change in  control or sale or  transfer  of all or
substantially all of the assets of the Company, Series A Preferred Units may, at
the  holder's  option,  be redeemed at $25.00 per unit,  plus accrued and unpaid
Preferred Distributions.

At December 31, 2002,  there were a total of 6,000,000  Series A Preferred Units
and 4,999,382 Common Units issued and outstanding.

The LLC Agreement contains certain restrictive covenants regarding the amount of
variable rate debt, total debt, and certain  financial  ratios.  Failure to meet
the covenants in successive  quarters can result in the Chief Executive  Officer
and Chief Operating  Officer being removed from the Board of Managers until such
time as the covenants are cured for  successive  quarters.  Management  believes
that the Company has not violated the covenants in successive quarters.

                                       73


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

NOTE 3. INVESTMENT SECURITIES

The Company's  trading  securities  are carried at estimated  fair value and are
comprised of the following at December 31, 2002:




                            Face             Cost         Fair Value   ercentage
                      ----------------------------------------------------------
                                                              
Subordinated CMBS:
   Security rating:
     BB+              $   115,923,711   $  91,176,800    $103,776,027     12.99%
     BB                   170,077,178     127,903,052     141,264,695     17.68%
     BB-                  134,295,076      90,149,121      99,793,698     12.49%
     B+                   215,067,722     127,005,619     137,774,880     17.25%
     B                    264,721,814     151,661,428     144,486,471     18.09%
     B-                   161,254,347      79,612,839      70,601,239      8.84%
     NR                   420,501,779     110,757,808     101,159,781     12.66%
                      ---------------   -------------    ------------    -------

                      $ 1,481,841,627   $ 778,266,667    $798,856,791    100.00%
                      ===============   =============    ============    =======


The Company  accretes  purchase  discounts using the effective yield method over
the life of the  CMBS.  The  accumulated  accretion  of  purchase  discounts  at
December 31, 2002, was approximately $30,627,000.

The gross  cumulative  unrealized  gains and  losses  on the  Company's  trading
investment  securities at December 31, 2002, were approximately  $41,709,000 and
($51,746,000), respectively.

NOTE 4. BORROWED INVESTMENT SECURITIES AND INTEREST RATE SWAP, NET

The Company's borrowed investment  securities and interest rate swap are carried
at estimated fair value and are comprised of the following at December 31, 2002:




             Security        Coupon                          Cost            Fair        Unrealized
            Description       Rate          Face             Basis           Value      Gain (Loss)
------------------------------------------------------------------------------------------------------

                                                                        
U.S. Treasury (08-15-09)      6.000%  $ (11,239,000)    $  (10,974,728)   $( 13,072,362)  $ (2,097,634)
U.S. Treasury (02-15-11)      5.000%    (17,818,000)       (17,523,195)     (19,591,448)    (2,068,253)
U.S. Treasury (08-15-11)      5.000%   (136,603,000)      (138,334,790)    (149,900,450)   (11,565,660)
U.S. Treasury (02-15-12)      4.875%    (85,300,000)       (91,513,064)     (92,697,111)    (1,184,047)
U.S. Treasury (11-15-12)      4.000%    (20,468,000)       (20,336,877)     (20,775,020)      (438,143)
                                      --------------     --------------   --------------  ------------
                                      $(271,428,000)    $( 278,682,654)    (296,036,391)  $(17,353,737)
                                      ==============    ===============                   =============
Reverse repurchase agreements                                               295,618,149
                                                                          -------------
Borrowed investment securities, net                                            (418,242)

Interest rate swap                                                           (4,069,320)
                                                                          -------------
Borrowed investment  securities and
   interest rate swap, net                                                $  (4,487,562)
                                                                          ==============


The borrowed U.S.  Treasury  securities  were sold in the open market  (i.e.,  a
"short" security sale). The Company is obligated to return the securities in the
future  and is  therefore  exposed  to  price  risk  until  it  repurchases  the
securities  for  delivery to the lender.  Short  security  sales are used by the
Company to modify its  interest  rate risk.  The Company  must pay the  security
lender the interest earned by the underlying security.  Short security sales are
recorded  at the  estimated  fair  value  of the  borrowed  securities,  and any
unrealized gains (losses) are included in earnings.

Proceeds  from short  security  sales are used to  purchase  reverse  repurchase
agreements of the same  security.  The  transactions  are governed by one master
repurchase  agreement  with rights of offset and,  therefore,  the values of the
short  security  sales and reverse  repurchase  agreements  have been offset and
shown as one line item in the accompanying consolidated financial statements. It
has been the Company's practice to settle these transactions on a net basis.

At  December  31,  2002,  the  Company  pledged  CMBS  valued  at  approximately
$10,363,000 as additional  collateral against the borrowed investment securities
outstanding as of December 31, 2002.

                                       74


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

The Company  entered  into an interest  rate swap  agreement  with Bear  Stearns
Capital  Markets (Bear Stearns) with a notional  amount at December 31, 2002, of
$27,000,000,  on which the  Company  pays a fixed rate of 6.015% and  receives a
variable  rate based upon a six-month  LIBOR for a term of 10 years ending April
27,  2011.  The swap  agreement  calls for interest to be paid  semiannually  in
arrears.  The Company  carries the swap  agreement at its estimated  fair value,
with all periodic  changes in estimated fair value  recognized in earnings.  The
Company was required under the swap agreement to pledge  collateral valued at 1%
of the notional  amount of the swap to ensure its  performance in the event that
the swap  declines in value.  At December  31,  2002,  the Company  pledged CMBS
valued  at  approximately  $14,611,000  as  additional  collateral  against  the
interest rate swap outstanding as of December 31, 2002.

NOTE 5. LONG-TERM DEBT

During  fiscal year 2001,  the Company  entered  into an  agreement  to sell its
interests in 50 CMBS pass-through  certificates (the Pooled Certificates) to its
subsidiary, the Trust.

The Trust  resecuritized the Pooled  Certificates and offered  $98,500,000 Class
A-1 Senior  Notes  with a fixed  coupon  rate of 7.17%  (Fixed  Rate  Notes) and
$137,500,000  Class A-2  Senior  Notes  with a  variable  coupon  rate  based on
one-month  LIBOR plus 115 basis  points  (Variable  Rate Notes)  (together,  the
Notes). The Notes are secured by the investment securities of the Company with a
carrying value of  approximately  $345,512,000 at December 31, 2002. The Company
capitalized  $5,667,580 of deferred  borrowing  costs related to the issuance of
the  Notes.  The  deferred  borrowing  costs  are  being  amortized,  using  the
effective-interest  method,  over the  life of the  debt,  which is seven  years
(through  February 22, 2008). The Company  amortized  $680,930 of deferred costs
for the year ended December 31, 2002. Total accumulated amortization of deferred
borrowing costs at December 31, 2002, was $1,213,830.

In conjunction with the issuance of the Variable Rate Notes, the Company entered
into an interest rate cap agreement  and an interest rate floor  agreement  with
Bear Stearns  (CBO Swap) to  effectively  fix the interest  rate on its variable
rate debt at 7.435%.  The notional amount for the CBO Swap is $137,500,000.  The
agreements  call for interest to be paid  monthly.  The Company  carries the CBO
Swap at its estimated  fair value,  with all periodic  changes in estimated fair
value recognized in earnings.  The Company  originally  deposited  $4,125,000 of
cash to ensure its performance in the event that the CBO Swap declines in value.
If the market value of the CBO Swap falls below defined thresholds,  the Company
may be required to deposit additional  restricted cash. Amounts in excess of the
minimum requirements may be withdrawn by the Company.

Interest  on the  Notes is paid  monthly.  Interest  expense  on the  Notes  was
approximately  $17,238,000 for the year ended December 31, 2002, and the related
accrued interest payable at December 31, 2002, was approximately $480,000.

NOTE 6. REPURCHASE AGREEMENTS

The Company entered into repurchase  agreements to finance a portion of its CMBS
purchases.  The  weighted-average  interest  rate as of December 31,  2002,  was
2.73%,  and the average  maturity of the  agreements was 30 days. The repurchase
agreements are  collateralized  by a portion of the Company's  portfolio of CMBS
investments  with a fair value of  approximately  $284,943,000  at December  31,
2002. Accrued interest payable at December 31, 2002, was approximately $209,000.

NOTE 7. LOSS ON TRADING SECURITIES, NET

The composition of the Company's gain (loss) on trading securities,  net for the
year ended December 31, 2002, is as follows:



                                                                
Unrealized loss - borrowed investment securities                   $(17,594,455)
Unrealized loss - interest rate swap                                 (3,395,007)
Unrealized loss - CBO Swap                                           (1,408,400)
Unrealized gain - CMBS                                               12,443,165
Realized loss - CMBS                                                 (1,086,698)
Realized loss - borrowed investment securities                          (26,980)
                                                                   -------------
Loss on trading securities, net                                    $(11,068,375)
                                                                   =============


                                       75


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

NOTE 8. OPERATING LEASES

The Company leases its office space and certain equipment under operating leases
that expire between April 2004 and January 2007.  The office lease,  as amended,
provides for an annual basic  rental of $206,244  during the initial  lease term
and contains an option to extend the term of the lease for one extension term of
five years,  with the basic rental  being reset at the then market rate.  Future
minimum lease payments under these leases are as follows:



                                                            
           2003                                                $313,851
           2004                                                 243,455
           2005                                                 207,384
           2006                                                 206,244
           2007                                                  17,187
                                                               --------
           Total                                               $988,121
                                                               ========



Lease expense for the year ended December 31, 2002 was approximately $316,000.

NOTE 9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

At times,  the  Company  purchases  investment  securities  from  members of the
Company or their affiliates.  These purchases represent transactions that are in
the normal  course of business of the Company and the  members.  During the year
ended  December 31, 2002,  the Company  purchased from such members CMBS with an
approximate   face  of  $387,327,000   at  an  approximate   purchase  price  of
$210,382,000.

The Company has loaned  approximately  $231,000 to key executives for funding of
tax liabilities  associated  with units granted under an incentive  compensation
arrangement.   As  of  December  31,  2002,  there  is  approximately   $190,000
outstanding.

These loans are  classified as other assets in the  consolidated  balance sheet.
The  loans  bear  interest  at a rate  of 7% per  annum,  and  payments  are due
quarterly on the distribution  date for the Common Units.  Payments are due only
to the extent that the quarterly  distribution  is  sufficient to pay them.  The
loans  become  due  upon  termination  of the  executives'  employment  with the
Company, and recourse is limited to the Common Units securing the loans.

Under a fee arrangement, ARCap REIT paid C.P. Eaton & Associates, Inc. a monthly
retainer  fee and an incentive  fee to assist ARCap REIT in raising  capital for
fund  operations  with respect to which ARCap REIT acts as the Managing  Member.
The  total   costs   incurred   under  this  fee   arrangement   are   allocated
proportionately  (based on total dollars  raised) to all funds for which capital
dollars are raised.

NOTE 10. EMPLOYEE BENEFITS

The Company holds a contributory  defined  contribution  401(k) plan that covers
substantially  all  full-time   employees.   The  Company  matches   participant
contributions  up to 3%  of  each  participant's  total  compensation.  Matching
contributions  totaled  approximately  $75,000 for the year ended  December  31,
2002.

The Company has a deferred  compensation  plan for key  employees.  The Board of
Managers approved the availability of approximately 690,000 phantom appreciation
units and 296,000  phantom grant units for future awards to employees.  In order
to grant these awards,  the  Compensation  Committee must recommend that they be
granted, and the Compensation Committee's recommendation must be approved by the
Board  of  Managers.   As  of  December  31,  2002,   the  Company  has  granted
approximately   551,000  and  193,000   appreciation   units  and  grant  units,
respectively.  The  Board of  Managers  approved  the  Compensation  Committee's
recommendations  to grant  additional  appreciation  units  and  grant  units of
approximately 138,000 and 95,000, respectively, effective January 1, 2003.

Grant units granted each have a vesting period,  which generally is ratable over
a period of three years. Once vested,  employees are entitled to receive a bonus
in an amount equal to the per Unit amount  distributed  on account of the Common
Units times the number of grant units  vested in the  employee.  The employee is
entitled to this  compensation  regardless  of whether the  distribution  to the
holders  of  Common  Units  is an  ordinary  distribution  or  an  extraordinary
distribution.  Thus, if the Company is sold or liquidated, the employee would be
entitled to share in the proceeds of the sale or  liquidation  on the same basis
as the holders of Common Units with respect to vested grant units.

Appreciation  units granted also have a vesting period which is generally spread
ratably over a three year period.  Once  vested,  employees  begin to "earn" the
right to receive  compensation  on account of each vested  appreciation  unit by
being  credited  with an  amount  equal  to the per Unit  distributions  made to
holders of Common Units until the amount credited equals the Initial Value (i.e.
the  price  at which a vested  employee  could  obtain  the  appreciation  unit)
established  by the  Compensation  Committee.  Vested  employees are entitled to
compensation on account of each vested  appreciation  unit in an amount equal to
the per Unit  distributions made to holders of Common Units only after they have
"earned"  credits equal to the Initial  Value.  In the event of a liquidation or

                                       76


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2002

sale,  employees with vested  appreciation units are entitled to compensation in
an amount equal to the per Unit proceeds in excess of the Initial Value plus the
credits which have been earned.

The amount  actually  received by  employees  on account of the vested grant and
appreciation  units is  compensation.  For the year ended December 31, 2002, the
Company expensed approximately $157,000 relating to compensation paid on account
of vested grant units.

                                       77



                                                                  Exhibit 99 (b)

                          INDEPENDENT AUDITORS' REPORT

To the Members of
ARCap Investors, L.L.C.:

We have audited the accompanying  consolidated balance sheet of ARCap Investors,
L.L.C. and subsidiaries (the "Company") as of December 31, 2001, and the related
consolidated  statements of income,  members'  equity and cash flows for each of
the two years in the period ended December 31, 2001. 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 audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  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,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position  of ARCap  Investors,  L.L.C.  and
subsidiaries  as of December 31, 2001,  and the results of their  operations and
their cash flows for each of the two years ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
Dallas, Texas

January 31, 2002

                                       78



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

                                     ASSETS



                                                               December 31, 2001
                                                               -----------------

                                                                
Investment securities - trading (Notes 3 and 5)                    $ 564,877,324
Borrowed investment securities and interest rate swap,
net (Note 4)                                                           1,763,811
Cash and cash equivalents                                             13,447,035
Restricted cash - CBO swap (Note 5)                                    4,252,731
Accrued interest receivable                                            5,832,691
Deferred borrowing costs, net (Note 5)                                 5,134,680
Other assets                                                             628,880
                                                                   -------------

Total                                                              $ 595,937,152
                                                                   =============


                         LIABILITIES AND MEMBERS' EQUITY

Liabilities:

   Long-term debt (Note 5)                                         $ 236,000,000
   Repurchase agreements (Note 6)                                     86,102,000
   CBO swap liability (Note 5)                                         2,716,600
   Accrued interest payable                                            3,237,032
   Accrued expenses                                                      499,447
                                                                   -------------

Total liabilities                                                    328,555,079
                                                                   -------------


Commitments and contingencies

Minority Interests in consolidated entities                           43,398,548


Members' equity                                                      223,983,525
                                                                   -------------

Total                                                              $ 595,937,152
                                                                   =============


See notes to consolidated financial statements.


                                       79


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME




                                                               December 31, 2001
                                                               -----------------

                                                                
Revenues:

   Interest income - CMBS                                           $ 51,730,450
   Accretion of purchase discount                                     10,172,033
   Other investment income                                               882,160
   Gain on sale of real estate                                           224,482
                                                                   -------------

Total revenues                                                        63,009,125
                                                                   -------------

Expenses:

   Loss on trading securities, net (Note 7)                           24,281,841
   Interest - long-term debt and repurchase agreements                17,151,723
   Interest - borrowed investment securities and interest
     rate swap, net                                                    2,079,629
   Financing fee                                                       1,015,054
   General and administrative                                          3,616,430
   Salaries and employee benefits                                      3,286,376
                                                                   -------------

Total expenses                                                        51,431,053
                                                                   -------------

Income before minority interests                                      11,578,072

Minority interests                                                     1,781,987
                                                                   -------------

Net income                                                          $ 13,360,059
                                                                   =============


See notes to consolidated financial statements.


                                       80


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME





                                                               December 31, 2000
                                                               -----------------
                                                                
Revenues:

   Interest and other investment income                            $ 26,873,191
   Loss on trading securities, net                                   (6,942,136)
                                                                   -------------

Total revenues                                                       19,931,055
                                                                   -------------

Expenses:

   General and administrative                                         2,232,077
   Interest                                                           5,044,681
   Management fee                                                       825,142
   Minority interest                                                      3,365
                                                                   -------------

Total expenses                                                        8,105,265
                                                                   -------------

Net income                                                           11,825,790

Other comprehensive income - Unrealized holding gain
   (loss) on investment securities - available-for-sale               4,400,901

Comprehensive income                                               $ 16,226,691
                                                                   =============



See notes to consolidated financial statements.


                                       81


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
                          YEAR ENDED DECEMBER 31, 2001




                                   ----------------------------------------------------------------
                                                                     Accumulated
                                                      Series A          Other
                                      Common          Preferred      Comprehensive
                                      Members          Members          Income            Total
                                   ----------------------------------------------------------------

                                                                          
Balance, January 1, 2001           $  88,219,621    $  85,703,753    $   3,103,845    $ 177,027,219

Proceeds from issuance of
  membership units                            --       61,743,525               --       61,743,525

Costs to raise capital                   (71,856)      (1,620,153)              --       (1,692,009)

Distributions                        (10,873,542)     (12,462,367)              --      (23,335,909)

Repurchase of members'
  equity (Note 9)                        (15,515)              --               --          (15,515)

Net income                               897,692       12,462,367               --       13,360,059
Transfer of available for sale
  to trading securities (Note 3)              --               --      (3,103,845)       (3,103,845)
                                   -------------    -------------    -------------    -------------


Balance, December 31, 2001         $  78,156,400    $ 145,827,125    $           0    $ 223,983,525
                                   =============    =============    =============    =============



See notes to consolidated financial statements.

                                       82


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
                          YEAR ENDED DECEMBER 31, 2000



                               -----------------------------------------------------------------------------------
                                                                                     Accumulated
                                                   Series A                             Other
                                  Common          Preferred         Preferred       Comprehensive
                                 Members           Members           Members            Income           Total
                               -----------------------------------------------------------------------------------

                                                                                      
Balance, January 1, 2000       $  60,904,584    $  34,966,975    $            --    $  (1,297,056)   $  94,574,503

Proceeds from issuance of
  membership units                        --               --         81,750,000               --       81,750,000

Costs to raise capital                    --               --         (4,173,592)              --       (4,173,592)

Distributions                     (7,426,558)      (3,277,183)          (646,642)              --      (11,350,383)

Net income                         6,721,605        2,334,498          2,769,687               --       11,825,790

Other comprehensive
  income - unrealized gain
  on investment securities -
  available-for-sale                      --               --                 --        4,400,901        4,400,901

Contributions of REMICap
   (Note 2)

Recapitalization                  28,019,990      (34,024,290)         6,004,300               --               --
                               -------------    -------------    ---------------    -------------    -------------

Balance, December 31, 2000     $  88,219,621    $          --    $    85,703,753    $   3,103,845    $ 177,027,219
                               =============    =============    ===============    =============    =============



See notes to consolidated financial statements.

                                       83



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS




                                                               December 31, 2001
                                                               -----------------

                                                               
OPERATING ACTIVITIES:
  Net income                                                      $  13,360,059
  Adjustments to reconcile net income to net cash used in
   operating activities:
    Loss on trading securities, net                                  24,281,841
    Accretion of purchase discount                                  (10,172,033)
    Gain on sale of real estate                                        (224,482)
    Amortization of deferred borrowing costs                            532,900
    Minority interest                                                (1,781,987)
    Increase (decrease) in cash for changes in operating
     assets and liabilities:
      Restricted cash                                                (3,569,211)
      Investment securities - trading, net                         (292,096,310)
      Securities purchased under agreement to resell and
        proceeds rom borrowed security, net                          (5,028,069)
      Accrued interest receivable                                    (2,667,514)
      Other assets                                                   (5,944,087)
      Accrued expenses                                                  (47,259)
      Accrued interest payable                                           33,600
      Receivable for sold security                                   13,372,667
                                                                  -------------

  Net cash used in operating activities                            (269,949,885)
                                                                  -------------

INVESTING ACTIVITIES - Proceeds from sale of real estate
  and net cash provided by investing activities                         224,482
                                                                  -------------

FINANCING ACTIVITIES:
  Contributions from members                                         61,743,525
  Distributions to members                                          (23,335,909)
  Contributions from minority interest members                       45,355,985
  Distributions to minority interest members                             (2,721)
  Repurchase of members' equity                                         (15,515)
  Payment of issuance costs                                          (1,692,009)
  Payment of issuance costs by minority interest members               (174,950)
  Proceeds from issuance of long-term debt                          236,000,000
  Payment of repurchase agreements                                  (37,381,443)
                                                                  -------------

Net cash provided by financing activities                           280,496,963
                                                                  -------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                            10,771,560

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                          2,675,475
                                                                  -------------

CASH AND CASH EQUIVALENTS, END OF YEAR                            $  13,447,035
                                                                  =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
  Cash payments for interest                                      $  16,816,163
                                                                  =============

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
  AND FINANCING ACTIVITIES - Transfer of securities from
  available for sale to trading                                   $  76,092,175
                                                                  =============


See notes to consolidated financial statements.

                                       84


                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS





                                                               December 31, 2000
                                                               -----------------

                                                               
OPERATING ACTIVITIES:
  Net income                                                      $  11,825,790
  Adjustments to reconcile net income to net cash
   used in operating activities:
    Loss on trading securities                                        6,942,136
    Accretion of interest income                                     (3,332,291)
    Minority interest                                                     3,365
    (Increase) decrease in cash for changes in
     operating assets and liabilities:
      Restricted cash                                                   (57,100)
      Investment securities - trading                              (100,674,955)
      Securities purchased under agreement to resell and
       proceeds from borrowed security, net                          (5,664,448)
      Receivable for security sold                                  (13,372,667)
      Accrued interest receivable                                    (1,247,297)
      Other assets                                                      106,468
      Accrued expenses and interest payable                           3,264,334
                                                                  -------------

  Net cash used in operating activities                            (102,206,665)
                                                                  -------------

INVESTING ACTIVITIES  - Purchase of investment
  securities-available-for-sale                                     (11,985,869)
                                                                  -------------

FINANCING ACTIVITIES:
  Contributions from members                                         81,750,000
  Distributions to members                                          (11,350,383)
  Payment of issuance costs                                          (4,173,592)
  Distributions to minority interest members                             (1,154)
  Proceeds from other borrowings and securities
   sold under agreement to repurchase, net                           46,194,085
                                                                  -------------

Net cash provided by financing activities                           112,418,956
                                                                  -------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                            (1,773,578)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                          4,449,053
                                                                  -------------

CASH AND CASH EQUIVALENTS, END OF YEAR                            $   2,675,475
                                                                  =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
  Cash payments for interest                                      $   4,652,352
                                                                  =============


See notes to consolidated financial statements.

                                       85



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2001

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

A) Organization - ARCap  Investors,  L.L.C.  (the "Company") was incorporated in
January 1999 and  commenced its  operations  on March 17, 1999.  The Company was
organized  to  invest  primarily  in  subordinated  commercial   mortgage-backed
securities ("CMBS").

B) Principles of Consolidation - The consolidated  financial  statements include
the accounts of:

     -    The Company;
     -    ARCap REIT, Inc., its majority-owned subsidiary;
     -    ARCap  Resecuritization  Corporation  ("ARCap  Resecuritization"),   a
          wholly owned subsidiary of ARCap REIT, Inc.;
     -    Commercial  Resecuritization  Trust 2001 ABC-2 (the "Trust"), in which
          ARCap Resecuritization owns all of the residual interest; and
     -    ARCap High Yield CMBS Fund, L.L.C. (the "Fund"),  of which ARCap REIT,
          Inc. owned  approximately 48% as of December 31, 2001. The Fund is the
          majority-owner of ARCap CMBS Fund REIT, Inc. (the "Fund REIT").

Minority  interests  primarily   represent  outside  members'   approximate  52%
ownership in the Fund. The Company has consolidated  this entity as it exercises
control (through ARCap REIT, Inc.) over the operations of the Fund REIT (subject
to  provisions of the Fund Limited  Liability  Company  Agreement).  The Company
records  minority  interest  income  (expense)  that reflects the portion of the
earnings  (losses)  of the  operations  which  are  applicable  to the  minority
interest members.

Separate  books  of  accounts  are  maintained  for  ARCap  REIT,   Inc.;  ARCap
Resecuritization;  the Trust;  the Fund;  and the Fund REIT and are reflected in
the accompanying  consolidated financial statements of the Company. All material
intercompany   transactions   and  account  balances  have  been  eliminated  in
consolidation.

C) Investment  Securities - The Company's  investment security  transactions are
recorded on the trade date.  CMBS are  designated  as trading  assets  since the
Company is holding the securities for possible  sales or other  dispositions  in
the near term. Such  securities are carried at their estimated fair value,  with
unrealized gains or losses included in earnings.

Interest  income is recognized as earned and includes  amortization  of premiums
and accretion of discounts,  computed using the effective  yield method over the
expected life of the underlying assets.

D) Derivative  Financial  Instruments  - Derivative  financial  instruments  are
utilized  by the Company to reduce  interest  rate risk.  The  Company  utilizes
interest rate swap, cap and floor agreements as a means of hedging the potential
financial statement impact of changes in the fair value of its portfolio of CMBS
and variable  rate  long-term  debt due to changes in interest  rates.  Risks in
these contracts arise from the movements in interest rates and from the possible
inability of  counterparties  to meet the terms of their contracts.  The Company
carries its derivative  financial  instruments at fair value with any unrealized
gain or loss included in earnings.

E)  Resale  and  Repurchase  Agreements  and  Securities  Lending  Agreements  -
Transactions  involving  purchases  of  securities  under  agreements  to resell
(reverse  repurchase  agreements or reverse repos) or sales of securities  under
agreements to repurchase  (repurchase  agreements or repos) are accounted for as
collateralized  financings,  except where the Company does not have an agreement
to sell (or  purchase)  the same or  substantially  the same  securities  before
maturity at a fixed or determinable price.

F) Cash and Cash  Equivalents  - Cash and cash  equivalents  include  all highly
liquid investments with original maturities of three Months or less.

G) Restricted Cash - Restricted cash represents  amounts  required to be pledged
under an interest rate swap  agreement and amounts  required to be pledged under
the interest rate cap and floor agreements (see Notes 4 and 5).

H) Deferred  Borrowing Costs - Deferred borrowing costs represent costs incurred
in connection  with the issuance of long-term  debt.  Such amounts are amortized
using the effective  interest method over the term of the related debt (see Note
5).

I)  Financing  Fee - The Company pays an annual rate of 0.50% of the face of its
existing  long-term  debt to a financier to provide  credit  enhancement of such
debt.

J) Income Taxes - The Company has elected to be taxed as a partnership,  whereby
all income is taxed at the member level.

                                       86



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2001

K) Use of Estimates - The  preparation of consolidated  financial  statements in
conformity with accounting principles generally accepted in the United States of
America  requires  management  to make  estimates  and  assumptions  that affect
reported amounts of certain assets,  liabilities,  revenues and expenses. Actual
results could differ from those estimates.

L) Fair Value of Financial Instruments - The estimated fair value amounts herein
have been  determined  by the Company using  available  market  information  and
appropriate valuation methodologies.  However, considerable judgment is required
to interpret  market data to develop the  estimates of fair value.  Accordingly,
the estimates  presented  herein are not  necessarily  indicative of the amounts
that  the  Company  could  realize  in a  current  market  exchange.  The use of
different  market  assumptions  and/or  estimation  methodologies  could  have a
material effect on the estimated fair value amounts.

The  Company's  portfolio of CMBS and  securities  borrowed are carried at their
estimated fair values. The Company's management believes that the fair values of
its  cash and  cash  equivalents,  restricted  cash  and  repurchase  agreements
approximate  their carrying  values due to the nature of the  instruments or the
fact that their terms approximate current market terms.

M) Change in Accounting Standard - Statement of Financial  Accounting  Standards
("SFAS") No. 133, Accounting for Derivative  Instruments and Hedging Activities,
as  amended,  was  adopted by the  Company on  January  1, 2001.  This  standard
requires  that all  derivative  financial  instruments  be  recognized as either
assets  or  liabilities  on the  balance  sheet at their  fair  values  and that
accounting  for the changes in fair values is dependent upon the intended use of
the derivatives and their resulting designations.  The adoption of this standard
did  not  have  a  material  effect  on  the  Company's  consolidated  financial
statements.

N) New  Accounting  Standards - In  September  2000,  the  Financial  Accounting
Standards  Board  ("FASB")  issued SFAS No. 140,  ("SFAS  140")  Accounting  for
Transfers and Servicing of Financial Assets and  Extinguishments of Liabilities.
SFAS 140  replaces  SFAS No. 125  ("SFAS  125")  Accounting  for  Transfers  and
Servicing of Financial Assets and Extinguishments of Liabilities. It revises the
standards for accounting for  securitizations  and other  transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. The statement is effective for
transfers and servicing of financial assets and  extinguishments  of liabilities
occurring  after March 31, 2001.  The Company has made the required  disclosures
relating  to  securitization  transactions  and  collateral  for the year  ended
December 31, 2000. The Company adopted the remaining requirements of SFAS 140 on
April 1, 2001, as required.

During 1999,  the FASB issued  Emerging  Issues Task Force  ("EITF") No.  99-20,
Recognition  of  Interest  Income  and  Impairment  on  Purchased  and  Retained
Beneficial  Interests in  Securitized  Financial  Assets.  Effective  the second
quarter of 2001, EITF No. 99-20 provides guidance on the recognition of interest
income  from,   and   measurement   of  retained   beneficial   interests.   The
implementation of EITF No. 99-20 did not have a material effect on the Company's
consolidated financial statements.

O)  Reclassifications  -  Certain   reclassifications  have  been  made  to  the
prior-year amounts to conform to the current-year presentation.

NOTE 2. MEMBERS' EQUITY

On August 4, 2000,  the Company  amended  and  restated  its  Limited  Liability
Company Agreement (the "LLC Agreement").  Capitalized terms in this footnote are
defined in the LLC Agreement.

The LLC  Agreement  established  two classes of  membership:  Series A Preferred
members and Common members.  The LLC Agreement calls for  distributions  of Cash
Flows as follows:

-    To the Series A  Preferred  members in an amount  equal to the  accrued and
     unpaid  Preferred  Distributions  (12% per  annum of the  $25.00  price per
     Unit).

-    To the Common members in an amount equal to (a) during the 18-month  period
     that ends February 4, 2002, the amount determined by the Board of Managers,
     but no more than a cumulative return on the Common Units at the rate of 10%
     per  annum,  and  (b)  subsequent  to  such  18-month  period,  the  amount
     determined  by  the  Board  of  Managers,   provided  that  if  the  amount
     distributable to the Common members shall exceed a cumulative annual return
     on the Common  Units of 12% per annum,  the Board of Managers  shall notify
     the Series A  Preferred  members 30 days in advance of the record  date for
     distribution of Cash Flow.

-    To the extent that any remaining Cash Flow received  during such tax period
     is not  includable in the income of the Company,  to members that have been
     allocated  Net Profits in excess of amounts  actually  distributed  to such
     members, in proportion to such amounts.

                                       87



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2001

Net Profits of the Company are allocated as follows:

-    To the Series A Preferred  members to the extent of amounts  distributed or
     distributable to them in such taxable year.

-    To the Series A  Preferred  members  to the  extent  Net Losses  previously
     allocated  to such  members  exceed  undistributed  Net Profits  previously
     allocated to them.

-    To the Common members to the extent of amounts distributed or distributable
     to them in such taxable year.

-    To the Common members to the extent Net Losses previously allocated to such
     members exceed undistributed Net Profits previously allocated to them.

-    To the members in proportion to their Percentage Interests.

Net Losses of the Company are allocated as follows:

-    To the members in an amount equal to undistributed Net Profits allocated to
     such member.

-    To the Common members pro rata to the extent of their Capital Accounts.

-    To the Series A Preferred  members pro rata to the extent of their  Capital
     Accounts.

Series A Preferred Units
------------------------

Series A Preferred  Units are  convertible  into Common Units at the  Conversion
Price in effect on the Conversion Date. If the Series A Preferred Units have not
been  converted  within five years of August 4, 2000,  Series A Preferred  Units
may, at the  holder's  option,  be converted to a note equal to $25.00 per Unit,
plus accrued and unpaid Preferred Distributions.

Eighteen  months after the First Closing Date  (February 4, 2002),  but no later
than the fifth  anniversary  of the First  Closing  Date  (August 4, 2005),  the
Company  may  redeem  the Series A  Preferred  Units for  $25.00 per unit,  plus
accrued and unpaid Preferred Distributions, plus a premium that will provide the
Series A  Preferred  members  with a total  pretax  internal  rate of  return of
17.50%.

In  addition,  upon  either a change in  control or sale or  transfer  of all or
substantially all of the assets of the Company, Series A Preferred Units may, at
the  holder's  option,  be redeemed at $25.00 per unit,  plus accrued and unpaid
Preferred Distributions.

Subsequent to the Company's amendment and restatement of its LLC Agreement,  the
Company  circulated  an amended  Private  Placement  Memorandum  (the "PPM") for
5,739,741  units of Series A Preferred  Membership  Interests  representing  the
balance of such interests  available for subscription in the Company's offering.
As of  December  31,  2001,  5,739,741  units have been  issued  pursuant to the
Company's offering for total capital contributions of $143,493,525.

At December 31, 2001,  there were a total of 6,000,000  and  4,999,382  Series A
Preferred Units and Common Units, respectively, issued and outstanding.

NOTE 3. INVESTMENT SECURITIES

The  Company's  trading  securities  are  carried  at  estimated  fair value and
comprise the following at December 31, 2001:




                    Face               Cost            Fair Value        Percentage
               --------------     --------------     --------------      ----------
                                                                  
Subordinated CMBS:
Security rating:
BB+            $   70,399,711     $   54,261,102     $   55,566,874           9.84%
BB                 88,938,033         65,393,924         66,145,766          11.71
BB-                99,764,931         67,278,474         67,543,265          11.96
B+                172,749,308        102,104,976        100,908,791          17.86
B                 219,851,296        129,013,634        124,843,334          22.10
B-                141,994,347         71,886,492         66,223,972          11.72
NR                339,813,225         83,926,063         83,645,322          14.81
               --------------     --------------     --------------      ----------

               $1,133,510,851     $  573,864,665     $  564,877,324         100.00%
               ==============     ==============     ==============      ==========


                                       88



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2001

The fair value of the  Company's  portfolio  of CMBS is  generally  estimated by
management  based on market prices provided by certain dealers who make a market
in these  financial  instruments.  The  market for the  Company's  CMBS may lack
liquidity and have limited market volume. Accordingly,  the fair values reported
reflect  estimates and may not necessarily be indicative of the amounts that the
Company could realize in a current market exchange.

The Company  accretes  purchase  discounts using the effective yield method over
the life of the  CMBS.  The  accumulated  accretion  of  purchase  discounts  at
December 31, 2001, was approximately $13,491,000.

The yield to maturity on the Company's CMBS depends on, among other things,  the
rate and timing of principal  payments,  the pass-through rate and interest rate
fluctuations.  The  subordinated  CMBS  interests  owned by the Company  provide
credit  support  to  the  more  senior  interests  of  the  related   commercial
securitization.  Cash  flow from the  mortgages  underlying  the CMBS  interests
generally  is  allocated  first to the senior  interests,  with the most  senior
interest  having a priority  entitlement  to cash flow.  Remaining  cash flow is
allocated  generally  among the other CMBS  interests in order of their relative
seniority. To the extent that there are defaults and unrecoverable losses on the
underlying  mortgages that result in reduced cash flows,  the most  subordinated
CMBS interest will bear this loss first.  To the extent that there are losses in
excess of the most subordinated  interest's stated  entitlement to principal and
interest,  then the remaining  CMBS  interests will bear such losses in order of
their relative subordination.

The gross  cumulative  unrealized  gains and  losses  on the  Company's  trading
investment  securities at December 31, 2001, were  approximately  $6,900,000 and
$29,378,000, respectively.

On January 1, 2001, the Company  transferred  all of its available for sale CMBS
to the trading category.  This resulted in the  reclassification  of the related
$3,103,845  unrealized gain in accumulated other comprehensive income to loss on
trading securities, net in the accompanying statement of income.

NOTE 4. BORROWED INVESTMENT SECURITIES AND INTEREST RATE SWAP, NET

The Company's borrowed investment  securities and interest rate swap are carried
at estimated fair value and are comprised of the following at December 31, 2001:




       Security            Coupon                       Cost           Fair       Unrealized
      Description           Rate        Face           Basis           Value      Gain (Loss)
------------------------   ------  -------------   -------------   ------------   ------------
                                                                   
U.S. Treasury (08-15-09)   6.000%  $  11,239,000   $  10,974,728   $ 11,981,828   $ (1,007,100)
U.S. Treasury (02-15-11)   5.000      17,818,000      17,523,195     17,765,103       (241,908)
U.S. Treasury (08-15-11)   5.000      97,378,000      98,609,087     97,119,363      1,489,724
                                   -------------   -------------   ------------   ------------
                                   $ 126,435,000   $ 127,107,010    126,866,294   $    240,716
                                   =============   =============                  ============

Reverse repurchase agreements                                       129,304,395
                                                                   ------------

Borrowed investment securities, net                                   2,438,101

Interest rate swap                                                     (674,290)
                                                                   -------------

Borrowed investment securities and interest rate swap, net         $   1,763,811
                                                                   =============


As of December  31,  2001,  the Company had  borrowed  agency and U.S.  Treasury
securities  with face  amounts  totaling  $126,435,000.  The fair value of these
borrowed  agency  and  U.S.  Treasury  securities  at  December  31,  2001,  was
$126,866,294. The U.S. Treasury securities were sold in the open market (i.e., a
"short" security sale). The Company is obligated to return the securities in the
future  and is  therefore  exposed  to  price  risk  until  it  repurchases  the
securities  for  delivery to the lender.  Short  security  sales are used by the
Company to modify its  interest  rate risk.  The Company  must pay the  security
lender the interest earned by the underlying security.  Short security sales are
recorded  at the  estimated  fair  value  of the  borrowed  securities,  and any
unrealized  gains (losses) are included in earnings.  The cumulative  unrealized
loss on the short  securities  at December  31,  2001,  was  $240,716,  which is
included in borrowed  investment  securities and interest rate swap, net, in the
accompanying consolidated financial statements.

Proceeds  from short  security  sales are used to  purchase  reverse  repurchase
agreements of the same  security.  The  transactions  are governed by one master
repurchase  agreement with rights of offset,  and  therefore,  the values of the
short  security  sales and reverse  repurchase  agreements  have been offset and
shown as one line item in the accompanying consolidated financial statements. It
has been the Company's practice to settle these transactions on a net basis.

                                       89



                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2001

In April 2001,  the Company  entered into an interest rate swap  agreement  with
Bear  Stearns  Capital  Markets  ("Bear  Stearns")  with a  notional  amount  of
$30,956,000,  on which the  Company  pays a fixed rate of 6.015% and  receives a
variable  rate based upon a six-month  LIBOR for a term of 10 years ending April
27, 2011. In December  2001, the Company  terminated  $3,956,000 of the original
notional amount, which resulted in a realized loss of approximately $82,000. The
swap  agreement  with Bear  Stearns  has a  notional  amount of  $27,000,000  at
December 31, 2001. The swap agreement calls for interest to be paid semiannually
in arrears.  The Company carries the swap agreement at its estimated fair value,
with all periodic  changes in estimated fair value  recognized in earnings.  The
Company was required under the swap agreement to pledge  collateral valued at 1%
of the notional  amount of the swap to ensure its  performance in the event that
the swap  declines in value.  At December  31,  2001,  the Company  pledged CMBS
valued at  approximately  $1,107,000.  The fair value and cumulative  unrealized
loss on this  interest rate swap  agreement at December 31, 2001,  was $674,290,
which is included in borrowed investment securities and interest rate swap, net,
in the accompanying consolidated financial statements.

In February  2001,  the Company  terminated an interest rate swap agreement with
Bear Stearns with a notional amount of $31,321,000,  on which the Company paid a
fixed rate of 5.952% and received a variable  rate based upon a six-month  LIBOR
for a term of 10 years  ending  April 9, 2009.  The  termination  resulted  in a
realized loss of approximately $145,000.

NOTE 5. LONG-TERM DEBT

On  February  22,  2001,  the  Company  entered  into an  agreement  to sell its
interests in 50 CMBS passthrough certificates (the "Pooled Certificates") to its
subsidiary, the Trust.

The Trust  resecuritized the Pooled  Certificates and offered  $98,500,000 Class
A-1 Senior  Notes with a fixed  coupon rate of 7.17%  ("Fixed  Rate  Notes") and
$137,500,000  Class A-2  Senior  Notes  with a  variable  coupon  rate  based on
one-month  LIBOR plus 115 basis points  ("Variable Rate Notes")  (together,  the
"Notes"). The Notes are secured by the investment securities of the Company with
a carrying value of approximately $349,855,000 at December 31, 2001. The Company
capitalized  $5,667,580 of deferred  borrowing  costs related to the issuance of
the Notes. The deferred borrowing costs are being amortized, using the effective
interest  method,  over the life of the  debt,  which  is seven  years  (through
February 22, 2008).  The Company  amortized  $532,900 of deferred  costs in year
ended December 31, 2001.

In conjunction with the issuance of the Variable Rate Notes, the Company entered
into an interest rate cap agreement  and an interest rate floor  agreement  with
Bear Stearns ("CBO Swap") to  effectively  fix the interest on its variable rate
debt. The notional  amount for the CBO Swap is  $137,500,000.  With the interest
rate cap, the Company receives a variable rate based on one-month LIBOR plus 115
basis  points if it is greater than 7.435%.  With the interest  rate floor,  the
Company  pays a variable  rate based on one month LIBOR plus 115 basis points if
it is less than 7.435%. The agreements call for interest to be paid monthly. The
Company  carries the CBO Swap at its  estimated  fair value,  with all  periodic
changes in estimated fair value  recognized in earnings.  The Company  deposited
$4,125,000  of cash to ensure  its  performance  in the event  that the CBO Swap
declines  in value.  If the  market  value of the CBO Swap falls  below  defined
thresholds,  the Company may be required to deposit additional  restricted cash.
Amounts in excess of the minimum  requirements  may be withdrawn by the Company.
Interest on the Notes is to be paid monthly.  Interest  expense on the Notes was
approximately  $14,550,000 for the year ended December 31, 2001, and the related
accrued interest payable at December 31, 2001, was approximately  $528,000.  The
LLC Agreement  contains certain  restrictive  covenants  regarding the amount of
variable  rate debt,  total  debt,  and  certain  financial  ratios.  Management
believes that the Company is in compliance with such covenants.

NOTE 6. REPURCHASE AGREEMENTS

The Company has entered into  repurchase  agreements to finance a portion of its
CMBS purchases. As of December 31, 2001, the Company had entered into repurchase
obligations in the amount of $86,102,000.  The weighted  average maturity of the
agreements  as of December  31,  2001,  was 32 days,  and the  weighted  average
interest rate was 3.90%.  The  repurchase  agreements  are  collateralized  by a
portion of the  Company's  portfolio  of CMBS  investments  with a fair value of
approximately  $206,700,000  at  December  31,  2001.  Interest  expense  on the
repurchase  agreements was approximately  $2,599,000 for the year ended December
31, 2001,  and the related  accrued  interest  payable at December 31, 2001, was
approximately $124,000.

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                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2001

NOTE 7. LOSS ON TRADING SECURITIES, NET

The composition of the Company's gain (loss) on trading securities,  net for the
year ended December 31, 2001, follows:



                                                                              
     Realized gain - borrowed investment security                                $   2,965,698
     Realized loss - borrowed investment security                                     (719,668)
     Realized loss - interest rate swap                                               (227,240)
     Realized gain - CMBS sold                                                       1,683,516
     Realized loss - CMBS sold                                                      (1,238,190)
     Unrealized gain - borrowed investment security                                  1,124,884
     Unrealized loss - interest rate swap                                             (674,290)
     Unrealized loss - CBO Swap                                                     (2,716,600)
     Unrealized loss - CMBS                                                        (27,583,796)
     Unrealized gain - CMBS, transferred from other comprehensive income             3,103,845
                                                                                 $ (24,281,841)


NOTE 8. OPERATING LEASES

The Company leases its office space and certain equipment under operating leases
that expire  between  October 2002 and December  2005. The office lease provides
for an annual  basic  rental of  $180,504  during  the  initial  lease  term and
contains  an option to extend  the term of the lease for one  extension  term of
five years,  with the basic rental  being reset at the then market rate.  Future
minimum lease payments under these leases are as follows:




     Year ending December 31:

                                                                              
           2002                                                                  $     280,977
           2003                                                                        270,568
           2004                                                                        199,958
           2005                                                                        166,602


Lease expense for the year ended December 31, 2001, was approximately $273,000.

NOTE 9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES

At times,  the  Company  purchases  investment  securities  from  members of the
Company or their  affiliates.  These purchases and sales represent  transactions
that are in the normal course of business of the Company and the members. During
the year ended December 31, 2001,  the Company  purchased from such members CMBS
with face values  totaling  approximately  $457,200,000  for a purchase price of
approximately  $229,300,000  and sold  CMBS to such  members  with  face  values
totaling approximately $58,400,000 for proceeds of approximately $25,000,000.

The Company has loaned  approximately  $310,000 to key executives for funding of
tax liabilities  associated  with units granted under an incentive  compensation
arrangement.   As  of  December  31,  2001,  there  is  approximately   $214,000
outstanding,  with approximately $77,000 satisfied through the transfer of 3,567
Common Units to the Company and  approximately  $19,000 repaid by the employees.
During the year ended  December 31,  2001,  the Company  purchased  5,343 common
units from a key executive  for  approximately  $116,000.  The key executive had
members' equity of $15,515 at the date of repurchase.

These loans are  classified as other assets in the  consolidated  balance sheet.
The  loans  bear  interest  at a rate  of 7% per  annum,  and  payments  are due
quarterly on the distribution  date for the Common Units.  Payments are due only
to the extent that the quarterly  distribution  is  sufficient to pay them.  The
loans  become  due  upon  termination  of the  executives'  employment  with the
Company, and recourse is limited to the Common Units securing the loans.

NOTE 10. EMPLOYEE BENEFITS

During 2001, the Company implemented a contributory  defined contribution 401(k)
plan  that  covers  substantially  all  full-time  employees.  Under  the  plan,
participants may contribute up to 15% of their total  compensation.  The Company
matches  up  to  3%  of  each   participant's   total   compensation.   Matching
contributions totaled $71,000 for year ended December 31, 2001.

Effective January 1, 2001, the Company adopted a deferred  compensation plan for
key employees.  The Board of Managers approved the availability of approximately
690,000  phantom  appreciation  units and 296,000 phantom grant units for future
awards to employees.  In order to grant these awards, the Compensation Committee

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                    ARCap INVESTORS, L.L.C. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          YEAR ENDED DECEMBER 31, 2001

must  recommend  that  they  be  granted,   and  the  Compensation   Committee's
recommendation must be approved by the Board of Managers.

As of December 31, 2001, the Company granted  approximately  279,000 and 105,000
of appreciation units and grant units, respectively. Prior to December 31, 2001,
the Board of Managers approved the Compensation  Committee's  recommendations to
grant additional appreciation units and grant units of approximately 269,000 and
88,000, respectively, effective January 1, 2002.

For the appreciation units,  compensation is measured as the amount by which the
cumulative per common unit  distribution  exceeds the value  specified under the
plan and is expensed over the performance of the related services. For the grant
units,  compensation  is equal to the per common  unit  distributions  times the
number of vested grant units.  Compensation  is measured at the date of declared
distribution.  As of December 31, 2001,  the Company has expensed  approximately
$57,000 relating to compensation expense for the grant units.


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