MUNICIPAL MORTGAGE & EQUITY LLC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 1997

Commission File Number 001-11981

MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
(Exact name of Registrant as specified in its charter)

Delaware 52-1449733
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

218 North Charles Street, Suite 500
Baltimore, Maryland 21201
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (410) 962-8044

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

Name of each exchange
Title of each class on which registered
Growth Shares American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
Preferred Shares
Preferred Capital Distribution Shares

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. [ ]

The aggregate market value of the registrant's Growth Shares held
by non-affiliates of the registrant as of March 24, 1998 (computed by
reference to the closing price of such stock on the American Stock
Exchange) was $283,530,824.

DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENT WHERE INCORPORATED

Portions of the Registrant's definitive Proxy Statement
regarding the 1998 Annual Meeting of Shareholders Part III

Part I

Item 1. Description of Business.

Introduction

Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage
revenue bonds issued by state and local government authorities to finance
multi-family housing developments. The Company, a Delaware limited
liability company, is the successor to the business of SCA Tax Exempt Fund
Limited Partnership (the "Partnership"), a closed-end limited partnership that
was merged into the Company on August 1, 1996. As a limited liability
company, the Company combines the limited liability, governance and
management characteristics of a corporation with the pass-through income
features of a partnership.

The Partnership commenced operations in 1986, when it sold two
series of Beneficial Assignee Certificates ("BACs"), representing the
assignment of its limited partnership interests. The $296 million proceeds
therefrom were invested in 22 mortgage revenue bonds (the "original
bonds") and related working capital loans held in two separate pools, "Series
I" and "Series II," corresponding with the related series of BACs. In a
February 1995 financing (the "1995 Financing"), the Partnership raised
$67.7 million through the sale of multifamily revenue bond receipts (the
"Receipts") secured by newly refunded bonds issued in exchange for 11 of
the original bonds and the cash stream from one additional bond. Effective
December 31, 1997, the one additional bond has been released as additional
collateral. The refunding of the 11 original bonds (the "Refunding")
consisted of the exchange of $126.6 million aggregate principal amount of
the original bonds for $67.7 million of Series A bonds, which serve as the
collateral for the receipts, and $58.9 million of Series B bonds, which
continued to be held by the Partnership along with the $130.6 million
aggregate principal amount of the remaining 11 original bonds. The $67.7
million of 1995 Financing proceeds of which $5.0 million was invested in
demand notes and the remaining proceeds, after expenses and working
capital reserves, of $56.8 million have been principally invested in additional
mortgage revenue bonds and other bond related investments.

In connection with the August 1, 1996 merger of the Partnership into
the Company (the "Merger"), the Partnership's BAC holders were given the
opportunity to elect among three different securities of the Company for
which to exchange their BACs-Preferred Shares, Preferred Capital
Distribution Shares (collectively the "preferred shares") or Growth Shares.
The Preferred Shares were structured to give BAC holders a security
substantially the same as their BACs as if the 1995 Financing had not
occurred and thus participate in their pro rata share of income from the 22
original bonds as they existed immediately after the Refunding and before
the 1995 Financing. The Preferred Capital Distribution Shares (the
"Preferred CD Shares") were structured to give their holders the income
they would have received from their original BACs, but provided for a
distribution of their pro rata share of the proceeds of the 1995 Financing and
thus participate in their share of income from the 22 original bonds as they
existed immediately after the Refunding and 1995 Financing. The Growth
Shares, unlike either the Preferred Shares or Preferred CD Shares, were
structured to enable their holders to participate in all of the income from
investment of the proceeds of the 1995 Financing, as well as future
financings, in addition to their pro rata share of the income from the original
bonds as they existed immediately after the 1995 Financing. As a result of
the election process, the holders of 8.09% of the outstanding BACs received
Preferred Shares, the holders of 4.29% of the outstanding BACs received
Preferred CD Shares, and the holders of 86.62% of the outstanding BACs
received Growth Shares of the Company.

The Company is required to distribute to the holders of Preferred
Shares and Preferred CD Shares cash flow attributable to such shares (as
defined in the Company's Amended and Restated Certificate of Formation
and Operating Agreement). The Company is required to distribute 2.0% of
the net cash flow to the holders of Term Growth Shares. The balance of the
Company's net income is allocated to the Growth Shares and the Company's
current policy is to distribute to Growth Shareholders approximately 95%
of the cash flow associated with this income.

Until the Merger, the bonds held by the Partnership consisted solely
of the 22 original bonds purchased with the proceeds from the Partnership's
1986 BAC offerings, as refunded in connection with the 1995 Financing.
Since the Merger, the Company has been investing the proceeds from the
1995 Financing in additional bonds and other bond related investments and
had invested all of such proceeds as of December 31, 1997. The Company
intends, as market conditions warrant, to seek additional funds for bond
investment through future debt or equity financings. The Company's current
policy is to invest generally in bonds secured by properties having an
operating history, which are available both through purchase from their
existing holders and in connection with refinancings of existing properties.

The Company's business may be affected by changes in the interest
rate environment in a variety of ways. For example, the stock price of the
Company's Growth Shares may be affected by increases and decreases in
interest rates. In addition, the Company's ability to raise and invest capital
in new bond investments may be impacted by volatility in the interest rate
environment.

Raising Capital

The raw material which enables the Company to meet investment
objectives is capital. In order to facilitate growth, the Company will require
additional capital to pursue acquisition opportunities. The Company has
primarily used two sources of capital; securitizations and a Growth Share
equity offering. The most economically efficient way to fund future
acquisitions is through securitizations. Long term, however, securitizations
lead to over leveraging. Therefore, periodically the Company through equity
offerings will decrease outstanding off-balance debt to reduce leverage.
Securitizations

The Company has access to financial programs for the securitization
of tax-exempt instruments. This securitization program involves placing a
bond in a trust, and selling short term floating rate interest in the trust to
qualified third party investors. The Company typically receives the net
proceeds from the sale of the floating rate interests and retains the residual
interest ("RITES") in the trust. To the extent these transactions create
interest rate risks, the Company enters into interest rate swap contracts
designed to reduce, but not eliminate such risks.

In December 1997, the Company raised $59 million through the
securitization of five mortgage revenue bonds at an effective annual 10-year
cost of approximately 5.2%. The proceeds of the securitizations were used
to acquire additional bond related investments.

Public Offering

On January 26, 1998, the Company offered and sold to the public
3,000,000 Growth Shares at a price of $20.625 per share and granted the
underwriters an option to purchase up to an aggregate of 450,000 Growth
Shares to cover over-allotments at the same price. The net proceeds from
this offering are intended to fund bond acquisitions totaling $116 million.
Net proceeds on the 3,000,000 shares approximated $58 million. On
February 13, 1998, the underwriters exercised their option to purchase
246,000 Growth Shares generating net proceeds of approximately $4.8
million.

Preferred Share Tender Offer

On November 26, 1997, the Company offered to purchase up to
20% of the preferred shares for cash at approximately 80% of the September
30, 1997 book value for each class as a result of a tender offer made by an
unaffiliated third party, Sierra Fund 3 (the "Sierra Offer"). The Sierra Offer
was for 4.9% of the outstanding shares of each class of preferred shares at
prices ranging from between 50% to 60% of the September 30, 1997 book
value of each class. The Company recognized that there may be preferred
shareholders who desire liquidity. Accordingly, the Company determined
to offer 80% of the September 30, 1997 book value of each class so that
preferred shareholders who decide to liquidate would be able to do so at
higher prices. The offer, proration period and the withdrawal rights expired
at midnight, eastern time, on December 26, 1997. As a result, on January
1, 1998, 739 Series I and 287 Series II Preferred Shares which had been
tendered and purchased at a per share price of $593.43 and $711.77,
respectively, and 584 Series I and 274 Series II Preferred CD Shares which
had been tendered and purchased at a per share price of $448.77 and
$506.67, respectively.

The Mortgage Revenue Bonds

The proceeds of the mortgage revenue bonds held by the Company
were used to make mortgage loans for the construction, acquisition or
refinancing of multifamily housing developments throughout the United
States. The underlying developments are "qualified residential rental
properties" under section 142(d) of the Internal Revenue Code of 1986, as
amended (the "Code"), which requires that a specified percentage of their
rental units be rented to persons whose incomes do not exceed specified
percentages of local median income levels. Accordingly, the bonds are
"qualified bonds" within the meaning of section 141(e) of the Code, and the
interest paid on the bonds is exempt from federal income taxes.

The Company also holds certain working capital loans and related
demand notes, the interest on which (representing approximately 16% and
8% of interest received by the Company in 1997 and 1996, respectively) is
not tax-exempt.

Each mortgage revenue bond is secured by an assignment to the
Company of the related mortgage loan, which in turn is secured by a
mortgage on the underlying property and assignment of rents. Although the
bonds are issued by state or local governments or their agencies or
authorities, the bonds are not general obligations of any state or local
government, no government is liable under the bonds, nor is the taxing
power of any government pledged to the payment of principal or interest
under the bonds. In addition, the underlying mortgage loans are
nonrecourse, which means that the owners of the underlying properties,
which are also the borrowers under the mortgage loans, are not liable for the
payment of principal and interest under the loans. Accordingly, the sole
source of funds for payment of principal and interest under the bonds is the
revenue derived from operation of the mortgaged properties and amounts
derived from the sale, refinancing or other disposition of such properties.

The Company's investment portfolio as of December 31, 1997
consisted of: (i) 31 mortgage bonds (12 participating bonds, five non-
participating bonds, 12 participating subordinate bonds and two non-
participating subordinate bonds, which are collateralized by 28 individual
properties) and (ii) nine other bond related investments which are
collateralized by ten individual properties, discussed more fully in Note 7 to
the Company's consolidated financial statements included herein.

The Company's Preferred Shares, Preferred CD Shares, and Growth
Shares all participate in the income from the 11 original bonds and the 11
refunded Series B bonds. The Preferred Shares, because they have been
structured so that their holders are allocated the income they would have
been allocated had the 1995 Financing not occurred, are allocated an
additional amount equal to the income generated by their pro rata portion
of the 11 refunded Series A bonds that serve as the collateral for the
Receipts issued in the 1995 Financing and are no longer included in the
Company's bond portfolio. Only the Growth Shares participate in the
income from acquisitions subsequent to the 1995 Financing and will
participate in the income generated by additional bonds acquired by the
Company in the future. See Item 5 of this report for a description of each
class of the Company's shares.

The 11 original bonds not refunded in connection with the 1995
Financing, aggregating $130.6 million in principal amount, are
"participating" bonds that provide for the payment of base interest, ranging
from 7.5% to 8.125% per annum, plus annual contingent interest, dependent
upon the cash flow of the mortgaged property, equal to the difference
between the base interest rate and 16%. Such contingent interest, is payable
from 100% of "project cash flow" until the non-compounded interest
payable is between 1.5% to 2.5% greater than the base interest rate. Any
remaining project cash flow is divided equally between the property owner
and the Company until the interest paid to the Company reaches 16%.
"Project cash flow" is defined generally as the annual revenues received by
the owner of the related mortgaged property, less operating expenses paid
from such revenues excluding contingent interest payable. To the extent
that the aggregate of all interest payments, including contingent interest, for
any year does not equal 16%, the deficiency is deferred until the mortgaged
property is sold or the mortgage loan repaid. Any deferred contingent
interest is payable from 100% of sale or other proceeds remaining after
payment of the mortgage loan principal and other specified payments until
the base rate plus 1.5% to 2.5% has been paid and thereafter from 50% of
such proceeds. The 11 original bonds mature between November 1999 and
June 2012.

Of the 11 refunded Series B bonds, eight bonds, aggregating $46.5
million in principal amount, bear annual interest in an amount equal to the
greater of (i) 3% and (ii) available cash flow not exceeding 16%. To the
extent interest paid is less than 16%, the deficiency, defined as the difference
between 16% and the greater of (i) 3% and (ii) interest paid, is payable upon
the earlier of the redemption or maturity of the bond. The remaining three
refunded Series B bonds, aggregating $12.4 million in principal amount, bear
interest at the annual rate of 16%. Each of the refunded Series B bonds is
subordinate in priority and right of payment to the related refunded Series
A bond that serves as collateral for the Receipts issued in the 1995
Financing. The refunded Series A bonds bear interest at annual rates
between 7.05% and 7.40% and are secured by the same mortgaged
properties as the related refunded Series B bonds held by the Company. All
of the refunded Series B bonds mature in January 2030.

Of the eight bonds and the RITES acquired with proceeds from the
1995 Financing, aggregating $29.1 million in principal amount, one $1.5
million bond bears interest to the extent of available cash flow up to 10% per
annum, the remaining bonds are non-participating bonds bearing interest at
annual rates ranging from 7.45% to 12.50% and the RITES in conjunction
with a swap contract are intended to produce a relatively constant yield of
approximately 8.5% over the effective duration of the RITES. The eight
bonds mature between December 2015 and July 2026.

For further information concerning the terms of the investments held
by the Company, see Notes 6, 7, 8 and 9 to the Company's consolidated
financial statements included elsewhere herein.

Property Performance

The 22 original bonds held by the Partnership at the time of the 1995
Financing had been acquired by the Partnership in 1986 and 1987. Due to
a variety of factors, including the favorable investment climate for rental real
estate in the early 1980s, the ready availability of financing from thrifts and
institutional lenders, and the decision of many developers to take advantage
of favorable tax treatment for rental properties, unanticipated over building
of apartments occurred during the late 1980s in many localities throughout
the country. This oversupply affected a number of the markets in which the
mortgaged properties collateralizing the original bonds are located. Where
this condition existed, there was, until the early 1990s, an inability to
increase rents as originally anticipated because of the considerable
competition. In addition, the general economic recession that occurred in
1990 and continued into 1992 compounded the problems created by an
oversupply of apartment units in some markets. Consequently, the net cash
flow from most of the properties was insufficient to pay the base interest
due, causing the former managing general partner to draw funds from
project level sources such as reserves and guarantees or to declare monetary
defaults and initiate loan workout discussions in instances where no project
level sources existed.

Construction starts for new apartment units declined significantly
throughout the United States since the mid-1980s and fell to a record low
in 1993. This decline in new construction and the economic recovery
brought about tightening markets, stabilized and higher occupancies, and an
ability to realize greater rent increases. Apartment starts have increased
since 1993, but overbuilding is anticipated in only certain markets.
Aggregate occupancy for all of the properties collateralizing the Company's
bonds and bond related investments was 94% at December 31, 1997.

The following table provides certain information for the years ended
December 31, 1997 and 1996 with respect to the properties collateralizing
the mortgage loans underlying the investments held by the Company.

Real Estate Table

Occupancy
---------------------
Month Ended Month Ended
Month/Year Apartment December 31,December 31,
Apartment Community Location Acquired Units 1997 1996
- ------------------- ------------ --------- -------- ----------- -----------
Participating Bonds:
Alban Place Frederick, MD Sep-86 194 90.7% 92.8%
Creekside Village Sacramento, CA Nov-87 296 95.3% 95.9%
Emerald Hills Issaquah, WA Mar-88 130 96.9% 100.0%
Lakeview Miami, FL Sep-87 180 95.6% 94.4%
Newport On Seven St. Louis Park,MN Aug-86 167 97.6% 94.0%
North Pointe San Bernardino, CA Sep-86 540 91.7% 93.1%
Northridge Park II Salinas, CA Aug-87 128 95.3% 90.6%
Riverset Memphis, TN Aug-88 352 97.7% 95.5%
Southfork Village Lakeville, MN Jan-88 200 98.0% 98.5%
Villa Hialeah Hialeah, FL Nov-87 245 92.7% 92.2%
Mountain View Tacoma, WA Nov-86 241 93.8% 94.6%
The Crossings Lithonia, GA Jan-97 200 98.0% 92.0%
--------
Subtotal participating bonds 2,873
--------
Non-Participating Bonds:
Riverset II (1) Memphis, TN Jan-96 148 96.6% 95.3%
Charter House (2) Lenexa, KS Dec-96 280 93.9% 93.6%
Hidden Valley Kansas City, MO Dec-96 82 92.7% 91.5%
Oakbrook Topeka, KS Dec-96 170 88.2% 91.2%
Torries Chase Olathe, KS Dec-96 99 98.0% 90.9%
--------
Subtotal non-participating bonds 779
--------
Participating Subordinate Bonds:
Barkley Place Ft. Myers, FL May-87 156 95.5% 96.8%
Gilman Meadows Issaquah, WA Mar-87 125 96.0% 94.4%
Hamilton Chase Chattanooga, TN Feb-87 300 95.0% 96.3%
Mallard Cove I Everett, WA Feb-87 63 98.4% 96.8%
Mallard Cove II Everett, WA Feb-87 135 92.6% 97.0%
Meadows Memphis, TN Jan-88 200 98.0% 94.5%
The Montclair Springfield, MO Oct-86 159 97.5% 95.0%
Newport Village Thornton, CO Dec-86 220 97.7% 97.7%
Nicollet Ridge Burnsville, MN Dec-87 339 97.6% 99.7%
Steeplechase Knoxville, TN Oct-88 450 89.8% 90.2%
Whispering Lake Kansas City, MO Oct-87 384 97.1% 98.2%
--------
Subtotal participating subordinate bonds 2,531
--------
Non-participating Subordinate Bonds:
Independence Ridge Independence, MO Aug-96 336 99.1% 97.9%
Locarno Kansas City, MO Aug-96 110 98.2% 100.0%
--------
Subtotal non-participating subordinate bonds 446
--------
Other Bond Related Investments:
Hunters Ridge St. Louis, MO Oct-96 198 92.4% 89.7%
SouthPointe St. Louis, MO Oct-96 192 92.7% 90.4%
Indian Lakes Virginia Beach, VA Jul-97 296 92.9% 90.6%
Village at Stone Mt Stone Mountain, GA Oct-97 722 93.5% 95.0%
Southgate Crossings Columbia, MD Jun-97 215 96.3% 96.2%
Southwood Richmond, VA Nov-97 1,286 87.6% 88.5%
Poplar Glen Columbia, MD Jun-97 191 95.3% 95.8%
Cinnamon Ridge Egan, MN Dec-97 264 97.0% 97.0%
--------
Subtotal other bond related investments 3,364
--------
Total/Weighted Average Investments 9,993 94.0% 93.9%
========

Avg. Monthly Rent
Per Apartment Unit
--------------------------
Year Year
Ended Ended
December 31, December 31,
Apartment Community Location 1997 1996
- -------------------- ------------------ ----------- ----------
Participating Bonds:
Alban Place Frederick, MD $767 $754
Creekside Village Sacramento, CA 471 468
Emerald Hills Issaquah, WA 848 760
Lakeview Miami, FL 617 619
Newport On Seven St. Louis Park, MN 856 834
North Pointe San Bernardino, CA 586 585
Northridge Park II Salinas, CA 804 753
Riverset Memphis, TN 642 620
Southfork Village Lakeville, MN 817 795
Villa Hialeah Hialeah, FL 605 613
Mountain View Tacoma, WA 525 517
The Crossings Lithonia, GA 665 643

Non-Participating Bonds:
Riverset II (1) Memphis, TN 634 617
Charter House (2) Lenexa, KS 509 482
Hidden Valley Kansas City, MO 484 539
Oakbrook Topeka, KS 430 431
Torries Chase Olathe, KS 430 430

Participating Subordinate Bonds:
Barkley Place Ft. Myers, FL 1,740 1,633
Gilman Meadows Issaquah, WA 841 764
Hamilton Chase Chattanooga, TN 576 582
Mallard Cove I Everett, WA 555 493
Mallard Cove II Everett, WA 663 600
Meadows Memphis, TN 539 542
The Montclair Springfield, MO 1,587 1,483
Newport Village Thornton, CO 680 656
Nicollet Ridge Burnsville, MN 771 722
Steeplechase Knoxville, TN 587 584
Whispering Lake Kansas City, MO 569 548

Non-participating Subordinate Bonds:
Independence Ridge Independence, MO 469 454
Locarno Kansas City, MO 734 721

Other Bond Related Investments:
Hunters Ridge St. Louis, MO 645 618
SouthPointe St. Louis, MO 626 592
Indian Lakes Virginia Beach, VA 644 630
Village at Stone Mt Stone Mountain, GA 651 664
Southgate Crossings Columbia, MD 760 733
Southwood Richmond, VA 468 452
Poplar Glen Columbia, MD 753 726
Cinnamon Ridge Egan, MN 750 726

Total/Weighted Average Investments $ 645 $ 626

(1) In addition to this bond, the Company owns a participating subordinate
bond and a RITES interest also collateralized by the Riverset II property.
(2) In addition to this bond, the Company owns a RITES interest also
collateralized by the Charter House property.

Asset Management

The Company is responsible for a full range of loan servicing and
asset management functions for each mortgaged property underlying the
mortgage revenue bonds held by the Company. The Company monitors the
timely receipt of all debt service payments and promptly notifies a borrower
of any delinquency, deficiency, or default. Reporting systems are in place
which allow the Company to review and analyze the revenue, expenses, and
leasing activity of each property on a monthly basis. In addition, the
Company inspects each property and market area at least annually.

The loan servicing and asset management oversight is designed to
enable the Company to track the performance of each property and to alert
management to potential problems. While actions will vary depending upon
the nature of an individual problem, the Company generally notifies
borrowers of any problems or concerns and recommends corrective action.

The Company responds to defaults on mortgage revenue bonds on
a case-by-case basis. After sending requisite default notices, Company
management typically holds discussions with the property owner/developer.
In the event that management determines that the owner/developer remains
committed to the project and capable of successful operations, a workout or
other forbearance arrangement may be negotiated. Where management
determines that successful operation by the current owner/developer is not
feasible, negotiations for the transfer of a deed, in lieu of foreclosure,
to an affiliated entity may be undertaken. In the absence of operating deficit
guarantees, the Company may face additional risk from operations with
respect to properties so transferred, which may require subsidies from
Company reserves to cover potential operating deficits before debt service.
The Company does not currently anticipate that any such operating deficits
before debt service will occur.

Employees

As of December 31, 1997, the Company had 18 employees.

Item 2. Properties.

The registrant has no physical properties, as its assets consist
primarily of the mortgage revenue bonds and other bond related investments
described under Item 1 and certain related loans described in Note 9 to the
Company's consolidated financial statements included elsewhere herein.

Item 3. Legal Proceedings.

None.

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

No matter was submitted to a vote of the Company's shareholders
during the three months ended December 31, 1997.

Part II

Item 5. Market for Registrant's Equity Securities and Related
Stockholder Matters.

Since August 30, 1996, the Growth Shares have been traded on the
American Stock Exchange under the symbol "MMA." The following table
sets forth the high and low sale prices per share of the Growth Shares as
reported by the American Stock Exchange for each calendar quarter since
the commencement of trading, together with the distributions declared with
respect to such shares allocable to such period.

Municipal Mortgage and Equity
Item 5. table
Distributions
High Low Declared
-------- -------- ------------
1996
Third Quarter (beginning August 30) $16 $14 1/8 $ -
Fourth Quarter 16 3/4 13 7/8 0.6325*
1997
First Quarter 17 7/8 15 1/2 0.3450
Second Quarter 17 3/8 16 1/4 0.3500
Third Quarter 19 7/8 17 0.3650
Fourth Quarter 20 7/8 19 0.3700
1998
First Quarter (through March 24) 21 7/16 19 5/8 -

* This amount represents a $0.07 distribution for the one month ended July 31,
1996 from the former Partnership and a $0.5625 distribution for the five
months ended December 31, 1996 from the Company. Also, the affiliates of
the former Managing General Partner of the Partnership who received
Growth Shares in the Merger did not receive the July 1996 distribution
paid to Growth Shareholders since they were not holders in July 1996.

As of March 19, 1998, there were 13,405 holders of record of
Growth Shares.

The Preferred Shares and the Preferred CD Shares are not listed for
trading on any national securities exchange, and there is no established
public trading market for those shares. As of March 23, 1998, there were
1,238 and 619 holders of record of Preferred Shares and Preferred CD
Shares, respectively.

Description of Shares

As of December 31, 1997 there were outstanding 23,966 Preferred
Shares (16,329 Series I and 7,637 Series II), 12,718 Preferred CD Shares
(8,909 Series I and 3,809 Series II), 2,000 Term Growth Shares, and
11,106,150 Growth Shares. Shareholder approval may not be required for
the Company to issue additional shares in the future. Although the
Company will not issue additional Preferred Shares or Preferred CD Shares,
it may from time to time issue additional Growth Shares depending upon
market conditions. In addition, the Company is authorized to issue new
classes of shares, which may be senior to the Growth Shares but cannot be
senior to the Preferred Shares or Preferred CD Shares. No shareholders
have pre-emptive rights.

The rights of the holders of each class of shares of the Company,
including the distributions to which each class is entitled, are set forth in
full in the Company's Amended and Restated Certificate of Formation and
Operating Agreement (the "Operating Agreement"), a copy of which is filed
as an exhibit to this report. The following is a summary of the rights,
privileges and preferences of the holders of each class.

Preferred Shares. The performance of, and distributions with
respect to, each series of Preferred Shares is based solely upon the
performance of that portion of the original bonds attributable to such series
as they existed immediately following the Refunding and prior to the 1995
Financing. Accordingly, the holders of the Preferred Shares are entitled to
their proportionate share of distributions with respect to the 11 original
bonds and 11 refunded Series B bonds held by the Company, as well as the
distributions they would have received with respect to the 11 refunded
Series A bonds had the 1995 Financing not occurred. Distributions to the
holders of the Preferred Shares are satisfied, however, on a basis having
priority over all payments with respect to the Growth Shares, Term Growth
Shares and any other equity class (other than Preferred CD Shares), out of
all of the resources of the Company, including revenue from investment of
the proceeds from the 1995 Financing. None of the expenses incurred in
connection with the 1995 Financing or any future financings are borne by the
holders of the Preferred Shares.

The Preferred Shares must be partially redeemed upon (i) the sale or
repayment of a bond attributable to such shares, (ii) the sale of a related
mortgaged property, or (iii) beginning in the year 2000, an appraisal of a
related mortgaged property indicating that its fair market value exceeds the
sum of (a) the face value of the bond secured by the property and (b) unpaid
accrued interest on such bond. Upon liquidation, the holders of the
Preferred Shares are entitled to receive, after payment of creditors, the
appraised value of the Company's assets attributable to such shares, together
with all unpaid accrued distributions, before any distribution is made to the
holders of Growth Shares or other shares ranking junior to the Preferred
Shares.

The holders of the Preferred Shares do not have voting rights with
respect to the election of the Company's directors, but do have voting rights
with respect to any merger or consolidation of the Company in which it is
not the surviving entity or the sale of substantially all of its assets, the
removal of a director, and any alteration of the rights, privileges or
preferences of the Preferred Shares under the Operating Agreement. The
voting power of the Preferred Shares, relative to all of the Company's
outstanding shares, is equivalent to the relative voting power, immediately
prior to the Merger, of the BACs exchanged therefor. Such protection from
loss of relative voting power, however, does not extend to issuances of
additional shares of the Company subsequent to the Merger.

Preferred CD Shares. The performance of, and distributions with
respect to, each series of Preferred CD Shares is based solely upon the
performance of that portion of the original bonds attributable to such series
as they existed immediately following the 1995 Financing. Accordingly, the
holders of the Preferred CD Shares are entitled to their proportionate share
of distributions with respect to the 11 original bonds and 11 refunded Series
B bonds held by the Company. Because the holders of the Preferred CD
Shares received a distribution of their pro rata share of the proceeds of the
1995 Financing, however, they, unlike the holders of the Preferred Shares,
(i) receive no distribution relating to the performance of the 11 refunded
Series A bonds the Receipts for which were sold in the 1995 Financing and
(ii) bear their pro rata share of the expenses of the 1995 Financing and any
future financings utilizing any of the original bonds.

The rights, privileges and preferences of the Preferred CD Shares are
otherwise substantially the same as those of the Preferred Shares.

Term Growth Shares. The holders of the Term Growth Shares are
entitled to distribution of the cash flow attributable to 2% of the Company's
net income. Except with respect to distributions and various redemption
features as defined in the Operating Agreement, the rights and privileges of
the Term Growth Shares are substantially the same as those of the Growth
Shares.

Growth Shares. The holders of the Growth Shares, also referred to
as common shares, are entitled to such distributions as declared by the
Board of Directors out of funds legally available therefor. As of December
31, 1997, the Company's policy is to distribute to the holders of the Growth
Shares approximately 95% of its cash flow from operations (exclusive of
capital-related items and reserves) after payment of distributions to the
holders of the Preferred Shares, Preferred CD Shares and Term Growth
Shares. No distributions may be declared or paid with respect to the
Growth Shares, however, so long there remains unpaid any required
distribution or redemption payment with respect to the Preferred Shares and
Preferred CD Shares.

The Growth Shares are not redeemable (except pursuant to certain
anti-takeover provisions) and upon liquidation share ratably in any assets
remaining after payment of creditors and the liquidation preferences of the
Preferred Shares and Preferred CD Shares. The holders of the Growth
Shares voting as a single class have the right to elect the directors of the
Company and, voting together with the holders of the Preferred Shares and
Preferred CD Shares, have voting rights with respect to a merger or
consolidation of the Company in which it is not the surviving entity or the
sale of substantially all of its assets, the removal of a director, the
dissolution of the Company, and certain anti-takeover provisions. Each
Growth Share entitles its holder to cast one vote on each matter presented
for shareholder vote. Because of provisions providing limited protection
against dilution of the voting rights of the holders of the Preferred Shares
and Preferred CD Shares, each Preferred Share and Preferred CD Share
currently entitles its holder to cast 44 votes on each matter presented for a
vote of the holders of those shares.

Item 6. Selected Financial Data.

ITEM 6. SELECTED FINANCIAL DATA

1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- -------------

As of and for the year ended December 31,
INCOME STATEMENT DATA (000s):
Interest on mortgage revenue bonds and
other bond related investments $17,219 $13,859 $13,363 $16,894 $7,459
Interest on working capital loans and demand notes 3,500 1,343 211 486 155
Net gain on sale 2,824 - 623 - -
Equity investment in MLP II Acquisition LP - 2,141 3,150 - -
Equity investment in real estate partnerships - - - - 5,185
Total revenues 25,339 18,670 17,713 17,590 12,996
Other-than-temporary impairments and valuation
adjustments related to investment in mortgage revenue
bonds and real estate partnerships (2,580) (3,990) - (2,014) (6,050)
Income before cumulative effect of accounting change 18,797 10,868 13,204 13,211 5,698
Cumulative effect of accounting change for mortgage
revenue bonds - - - (11,881) -
Net income $18,797 $10,868 $13,204 $1,330 $5,698

PER SHARE/BAC DATA:
Net income (loss) per BAC prior to August 1, 1996:
Series I:
Income before cumulative effect of accounting change - $5.33 $43.74 $41.79 $14.18
Cumulative effect of accounting change for mortgage
revenue bonds - - - ($47.40) -
Net income (loss) - $5.33 $43.74 ($5.61) $14.18
Series II:
Income before cumulative effect of accounting change - $26.05 $44.91 $49.04 $29.15
Cumulative effect of accounting change for mortgage
revenue bonds - - - ($23.71) -
Net income - $26.05 $44.91 $25.33 $29.15

Net income per share subsequent to July 31, 1996:
Preferred shares
Series I $43.07 $22.84 - - -
Series II $64.84 $27.24 - - -
Preferred capital distribution shares
Series I $32.59 $18.86 - - -
Series II $49.70 $21.53 - - -
Growth shares (diluted earnings per share) $1.50 $ 0.56 - - -
Weighted average Growth Shares outstanding - diluted 12,537,517 11,123,048 - - -

BALANCE SHEET DATA (000s):
Investments in mortgage revenue bonds and other
bond related investments $220,961 $183,632 $146,142 $213,842 $74,233
Investment in MLP II Acquisition LP - - 65,299 - -
Investments in real estate partnerships - - - - 157,389
Total assets $243,101 $230,277 $224,815 $230,282 $242,210

ITEM 6. SELECTED FINANCIAL DATA (continued)

1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- -------------

CASH DISTRIBUTIONS PER BAC DISTRIBUTED
EACH YEAR AS FOLLOWS:
Distributions per BAC prior to August 1, 1996:
Series I BACS:
For the six months ended June 30, paid in July/August - $26.25 $26.25 $25.00 $25.00
For the six months ended December 31, paid in February - - $26.25 $25.00 $25.00
Series II BACS:
For the six months ended June 30, paid in July/August - $27.50 $27.50 $27.50 $30.00
For the six months ended December 31, paid in February - - $27.50 $27.50 $30.00

Distributions per share subsequent to July 31, 1996:
Preferred shares:
Series I:
For the year ended December 31, paid quarterly* $53.57 - - - -
For the six months ended December 31, paid in February - $26.25 - - -
Series II:
For the year ended December 31, paid quarterly* $62.87 - - - -
For the six months ended December 31, paid in February - $30.64 - - -
Special distribution - August - $ 6.84 - - -

Preferred capital distribution shares:
Series I:
For the year ended December 31, paid quarterly* $43.79 - - - -
For the six months ended December 31, paid in February - $21.57 - - -
Special distribution/return of capital - August - $177.59 - - -
Series II:
For the year ended December 31, paid quarterly* $50.64 - - - -
For the six months ended December 31, paid in February - $25.00 - - -
Special distribution/return of capital - August - $252.03 - - -
Growth shares
For the year ended December 31, paid quarterly* $1.43 - - - -
For the six months ended December 31, paid in February** - $0.6325 - - -

* This amount represents total dividends declared/paid for 1997. Quarterly distributions
were paid to all preferred shareholders beginning with the third quarter of 1997;
the first semiannual distribution for 1997 was paid in August 1997.
**This amount represents a $0.07 distribution for the one month ended July 31, 1996 from
the former Partnership and a $0.5625 distribution for the five months ended December 31, 1996 from
the Company. Also, the affiliates of the former Managing General Partner of the Partnership who
received Growth Shares in the Merger did not receive the July 1996 distribution paid to Growth
Shareholders since they were not holders in July 1996.

ITEM 6. SELECTED FINANCIAL DATA (continued)

1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- -------------

SHARES/BACs OUTSTANDING AND NUMBER OF HOLDERS
AS FOLLOWS:
BACS as of December 31,
Series I:
BACs outstanding - - 200,000 200,000 200,000
Number of BAC holders - - 9,607 9,739 10,491
Series II:
BACs outstanding - - 96,256 96,256 96,256
Number of BAC holders - - 4,172 4,226 4,569
Shares as of December 31,
Preferred shares:
Series I
Shares outstanding 16,329 16,329 - - -
Number of shareholders 873 952 - - -
Series II
Shares outstanding 7,637 7,637 - - -
Number of shareholders 365 403 - - -
Preferred capital distribution shares:
Series I
Shares outstanding 8,909 8,909 - - -
Number of shareholders 425 481 - - -
Series II
Shares outstanding 3,809 3,809 - - -
Number of shareholders 194 222 - - -
Growth shares
Shares outstanding 11,106,150 11,092,370 - - -
Number of shareholders 13,405 11,052 - - -

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

General Business

Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage
revenue bonds issued by state and local government authorities to finance
multifamily housing developments. The Company is a limited liability
company that, as a result of a merger effective August 1, 1996 (the
"Merger"), is the successor to the business of SCA Tax Exempt Fund
Limited Partnership (the "Partnership"). Accordingly, the accompanying
consolidated financial statements present the financial position of the
Company at December 31, 1997 and 1996; results of operations include
those of the Partnership through July 31, 1996 and those of the Company
from August 1, 1996 through December 31, 1997.

The Partnership was a closed-end limited partnership whose assets,
until 1995, consisted principally of 22 mortgage revenue bonds and related
working capital loans acquired with the $296 million proceeds from two
1986 offerings of Beneficial Assignee Certificates ("BACs") representing the
assignment of its limited partnership interests. In 1995, the Partnership, in
a financing transaction described more fully in Note 5 to the Company's
consolidated financial statements included herein (the "1995 Financing"),
raised $67.7 million, the net proceeds of which have been principally
invested in additional mortgage revenue bonds.

As a result of elections made by the Partnership's BAC holders in
connection with the Merger, the outstanding BACs were exchanged for
either Preferred Shares, Preferred Capital Distribution Shares ("Preferred
CD Shares"), or Growth Shares (or "Common Shares") (including a limited
number of Term Growth Shares) of the Company. As more fully explained
in Note 13 to the Company's consolidated financial statements included
herein, all of these shares participate, to varying degrees, in the investment
results of the bonds and related loans held by the Partnership at the time of
the Merger, and the Common Shares alone participate in the investment
results of the bonds purchased with the proceeds from the 1995 Financing
and any future financings, including any equity offerings.

The Company is required to distribute to the holders of Preferred
Shares and Preferred CD Shares cash flow attributable to such shares (as
defined in the Company's Amended and Restated Certificate of Formation
and Operating Agreement). The Company is required to distribute 2.0% of
the net cash flow to the holders of Term Growth Shares. The balance of the
Company's net income is allocated to the Common Shares and the
Company's current policy is to distribute to Common Shareholders
approximately 95% of the cash flow associated with this income.

Certain of the bonds held by the Company are participating bonds
that provide for payment of contingent interest, based upon the performance
of the underlying properties, in addition to base interest at a fixed rate.
Because the mortgage loans underlying all of the bonds held by the
Company are nonrecourse, all debt service on the bonds, and therefore cash
flow available for distribution to all shareholders, is dependent upon the
performance of the underlying properties.

Liquidity and Capital Resources

The Company's primary objective is to maximize shareholder value
through increases in distributable cash flow per Common Share and
appreciation in the value of its Common Shares. The Company seeks to
achieve its growth objectives by acquiring, servicing and managing
diversified portfolios of mortgage bonds and other bond related investments.
In order to facilitate this growth strategy, the Company will require
additional capital in order to pursue acquisition opportunities. The
Company expects to finance its acquisitions through a financing strategy that
(i) takes advantage of attractive financing available in the tax-exempt
securities markets; (ii) minimizes exposure to fluctuations of interest rates;
and (iii) maintains maximum flexibility to manage the Company's short-term
cash needs. To date, the Company has primarily used two sources:
securitizations and Common Share equity offering.

Securitizations

Through securitizations, the Company seeks to enhance its overall
return on its investments and to generate proceeds which, along with equity
offering proceeds, facilitate the acquisition of additional investments. In
December 1997, the Company securitized five bond investments in the
portfolio (the "1997 Securitization") through a financial program with
Merrill Lynch (discussed in Note 3 to the Company's consolidated financial
statements included herein). The program involves the sale of bonds to
Merrill Lynch who, in turn, deposits the bonds into a trust. Short-term
floating rate interests in the trust, which have first priority on the cash flow
from the bonds, are sold to qualified third party investors. The Company
retains the residual interests in the trust and receives the proceeds from the
sale of the floating rate interests less certain transaction costs. The
residual interests are the subordinate security and receive the residual
income after the payment of all fees and the floating rate obligation. The
Company recognizes taxable capital gains (or losses) upon the sale of the
bonds.

In the event the trust cannot meet its obligations, all or a portion of
the bonds may be distributed to the floating rate interest holders or sold to
satisfy such obligations. As a result, cash flow from the bonds may not be
available to pay any amounts on the residual interests and in the event of the
liquidation of the bonds, no payment will be made to the Company except
to the extent that the market value of the bonds exceeds the amounts due on
the other obligations of the trust. In certain circumstances, additional bonds
may be pledged to secure repayment of the floating rate securities. Upon
any default in repayment of such securities, the pledged bonds may be
subject to foreclosure and sale and the Company may lose the cash flow
associated with and its ownership in those bonds. The Company may have
a limited ability to remedy defaults inside the trust and prevent the loss of
its investment in the residual interest. As a result of these securitizations,
the Company generally owns higher yielding but riskier portions of bond related
investments.

Since the bonds generally bear fixed rates of interest, the residual
interest in the trust created by the securitizations may create interest rate
risks. To reduce the Company's exposure to interest rate risks, the
Company enters into interest rate swaps, which are contracts exchanging an
obligation to receive a floating rate approximating the rate on the senior
floating rate security for an obligation to pay a fixed rate. Net swap
payments received, if any, will be taxable income, even though the
investment being hedged pays tax-exempt interest. The interest rate swaps
are for limited time periods which generally match the anticipated
prepayment date of the underlying bond. However, there is no certainty that
prepayment will occur at the end of the swap period. There can be no
assurance that the Company will be able to acquire interest rate swaps at
favorable prices, or at all, when the existing arrangements expire, in which
case the Company would be fully exposed to interest rate risk to the extent
the anticipated prepayment does not occur.

In the fourth quarter of 1997, the Company completed the 1997
Securitization with respect to five investments with a total bond amount of
$85.8 million and with a weighted average base interest rate of 7.8%, for an
aggregate of approximately $59 million at a weighted average annual 10-year
cost of approximately 5.2%. The Company intends to enter into a
number of securitization transactions, the proceeds of which, along with the
equity offering proceeds, will be utilized to fund future investments.

Through the use of securitizations, the Company expects to employ
leverage and maintain leverage ratios in the 50% range. The Company
calculates leverage by dividing the total amount of senior interests in its
securitized facilities, which it considers the equivalent of off-balance sheet
debt, by the sum of total assets owned by the Company plus senior
securitized interests. Under this method, the Company's leverage ratio at
December 31, 1997 was 40%.

Public Offering

On January 26, 1998, the Company sold to the public 3,000,000
Common Shares at a price of $20.625 per share and granted the
underwriters an option to purchase up to an aggregate of 450,000 Common
Shares to cover over-allotments at the same price (the "1998 Offering"). On
February 13, 1998, the underwriters exercised their option to purchase
246,000 Common Shares. Net proceeds generated from the offering of the
3,246,000 Common Shares approximated $62.6 million. The net proceeds
from this offering are intended to fund future bond acquisitions. Through
March 15, 1998, the Company originated $94.0 million of the intended bond
acquisitions and retained $13.8 million of those investments.

Cash Flow

At December 31, 1997, the Company had cash and cash equivalents
of approximately $7.4 million available for investment.

Cash flow from operating activities was $18.8 million, $12.8 million
and $7.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in cash flow for 1997 vs 1996 is due to the
permanent investment of the 1995 Financing proceeds and investment
activity related to the 1997 Securitization. For the period February 1995
through July 1996, the income from the temporary investment of the 1995
Financing proceeds, as well as the debt service on certain notes both of
which were held by MLP II, were classified as cash flow from investing
activities. Had the cash flows from MLP II been classified as cash flow from
operating activities during this period, cash flows from operating activities
during the years ended December 31, 1996 and 1995 would have been $15.6
million and $10.9 million, respectively.

The Company uses Cash Available for Distribution ("CAD") as the
primary measure of its dividend paying ability. CAD differs from net income
because of slight variations between generally accepted accounting principles
("GAAP") income and actual cash received. There are two primary
differences between CAD and GAAP income. The first is the treatment of
loan origination fees, which for CAD purposes are recognized when
received but for GAAP purposes are amortized into income over the life of
the associated loan. The second difference is the noncash gain and loss
recognized for GAAP associated with valuations and sales of investments,
which are not included in the calculation of CAD. For the year ended
December 31, 1997, cash available for distribution to Common Shares was
$16.7 million. The Company's Common Share dividend for 1997 of $1.43
represents a payout ratio of 95.3% of CAD.

Regular cash distributions to shareholders attributable to the years
ended December 31, 1997, 1996 and 1995 were $18.3 million, $16.1 million
and $15.9 million, respectively. In addition, during the year ended
December 31, 1996, the Company, in accordance with the terms of the
Merger, made a one-time distribution of an aggregate of $2.5 million to the
holders of the Preferred CD Shares, consisting of their allocable share of the
proceeds from the 1995 Financing and related expenses.

The Company expects to meet its cash needs in the short-term,
which consist primarily of funding new investments, operating expenses and
dividends on the Common Shares and other equity, from operating cash flow
and the net proceeds from the 1998 Offering. In addition, the Company's
business plan includes making additional investments of approximately $175
million to $200 million of additional mortgage revenue bonds during 1998.
In order to achieve its plan, the Company will be required to obtain
additional financing of approximately $115 million to $140 million during
1998. The Company currently has no commitments or understandings with
respect to such financings, and there can be no assurance that any such
financings will be available when needed.

Results of Operations

Year Ended December 31, 1997 Compared with Year Ended December 31,
1996

Total income for the year ended December 31, 1997 increased by
approximately $6.7 million as compared to the same period last year. The
increase in total income is due primarily to (i) a $2.8 million gain on the sale
of bonds associated with the 1997 Securitization which includes a portion
of the unrealized gain associated with the bonds of approximately $3.1
million, net of selling expenses of approximately $0.3 million; (ii) an increase
in interest revenue and fees of $1.6 million earned on new acquisitions; and
(iii) an increase in interest revenue of $1.1 million resulting from the
contribution of mortgage servicing fees by the former general partners of the
Partnership.

Operating expenses for 1997 increased slightly over 1996 due
primarily to an increase in costs associated with the expansion and growth
of the Company.

For the year ended December 31, 1997, the net adjustment to
unrealized gains and losses on mortgage revenue bonds and other bond
related investments available for sale increased shareholders' equity by
approximately $15.5 million. Although the Company recorded other-than-
temporary impairments aggregating $2.6 million on two bonds in the fourth
quarter of 1997, these impairments do not affect the cash flow generated
from the operation of the underlying properties, distributions to
shareholders, the tax-exempt status of the income stream, or the financial
obligations under the bonds.

Year Ended December 31, 1996 Compared with Year Ended December 31,
1995

Total income for the year ended December 31, 1996 increased by
approximately $1.0 million as compared to the same period last year. The
increase in total income is due primarily to an increase in interest revenue of
$0.6 million resulting from the contribution of mortgage servicing fees by
the former general partners of the Partnership and an increase in interest
revenue of $0.5 million earned on new acquisitions.

Operating expenses for the year ended December 31, 1996 decreased
by approximately $0.7 million from the prior year due primarily to a
decrease in merger-related expenses.

For the year ended December 31, 1996, the net adjustment to
unrealized gains and losses on mortgage revenue bonds and other bond
related investments available for sale increased shareholders' equity by
approximately $9.4 million. Although the Company recorded other-than-
temporary impairments aggregating $4.0 million on five bonds in the second
quarter of 1996, these impairments do not affect the cash flow generated
from the operation of the underlying properties, distributions to
shareholders, the tax-exempt status of the income stream, or the financial
obligations under the bonds.

Income Tax Considerations

The Company has elected under Section 754 of the Internal Revenue
Code to adjust the basis of the Company's property on the transfer of shares
to reflect the price each shareholder paid for their shares. While the bulk of
the Company's recurring income is tax-exempt, from time to time, the
Company may sell or securitize various assets which may result in capital
gains and losses for tax purposes. Since the Company is taxed as a
partnership, these capital gains and losses are passed through to shareholders
and are reported on each shareholder's Schedule K-1. The capital gain and
loss allocated from the Company may be different to each shareholder due
to the Company's 754 election and is a function of, among other things, the
timing of the shareholder's purchase of shares and the timing of transactions
which generate gains or losses for the Company. This means that for assets
purchased by the Company prior to a shareholder's purchase of shares, the
shareholder's basis in the assets may be significantly different than the
Company's basis in those same assets. While the procedure for allocating
the basis adjustment is complex, the impact of the election is that each
shareholder's basis in the assets of the Company may be different.
Consequently, the capital gains and losses allocated to shareholders may be
significantly different than the capital gains and losses recorded by the
Company.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Because the Company's market capitalization on January 28, 1997 was less
than $2.5 billion, this item is not applicable until the filing of the 1998 Form
10-K Annual Report.

Item 8. Consolidated Financial Statements.

The consolidated financial statements of the Company, together with
the report thereon of Price Waterhouse LLP dated February 4, 1998, are
listed in Item 14(a)(1) and included at the end of this report.

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

None.

Part III

Item 10. Directors and Executive Officers of the Registrant.

The information required by Item 10 is contained in the Company's
proxy statement for its 1998 annual shareholders meeting under the captions
"Election of Directors" and "Identification of Executive Officers" and is
incorporated herein by reference.

Item 11. Executive Compensation.

The information required by Item 11 is contained in the Company's
proxy statement for its 1998 annual shareholders meeting under the same
caption and is incorporated herein by reference.

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

The information required by Item 12 is contained in the Company's
proxy statement for its 1998 annual shareholders meeting under the same
caption and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

The information required by Item 13 is contained in the Company's
proxy statement for its 1998 annual shareholders meeting under the caption
"Certain Transactions" and is incorporated herein by reference.

Part IV

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

(a) (1) List of Financial Statements. The following is a list of
the consolidated financial statements included at the end of
this report:

Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements

(2) List of Financial Statement Schedules.

All schedules prescribed by Regulation S-X have been
omitted as the required information is inapplicable or the
information is presented elsewhere in the consolidated
financial statements or related notes.

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the three months
ended December 31, 1997.

(c) List of Exhibits. The following is a list of exhibits furnished:

3.1 Amended and Restated Certificate of Formation and
Operating Agreement of the Company (filed as
Exhibit 3.4 to the Company's Registration Statement
on Form S-4, File No. 33-99088, and incorporated
by reference herein).

3.2 By-laws of the Company (filed as Exhibit 3.5 to the
Company's Registration Statement on Form S-4, File
No. 33-99088, and incorporated by reference
herein).

23 Consent of Price Waterhouse LLP

27 Financial Data Schedule

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.

Municipal Mortgage and
Equity, L.L.C.

By: /s/ Mark K. Joseph

Mark K. Joseph
Chief Executive Officer

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

Signature Title Date

/s/ Mark K. Joseph Chairman of the Board, Chief Executive March 25, 1998
Mark K. Joseph Officer (Principal Executive Officer),
and Director

/s/ Charles Baum Director March 25, 1998
Charles Baum

/s/ Richard O. Berndt Director March 25, 1998
Richard O. Berndt

/s/ Robert S. Hillman Director March 25, 1998
Robert S. Hillman

/s/ William L. Jews Director March 25, 1998
William L. Jews

/s/ Carl W. Stearn Director March 25, 1998
Carl W. Stearn

To the Shareholders and Board of Directors
of Municipal Mortgage and Equity, LLC

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of shareholders'
equity present fairly, in all material respects, the consolidated financial
position of Municipal Mortgage and Equity, LLC (successor to the business
of SCA Tax Exempt Fund Limited Partnership) and consolidated entities as
described in Note 1 at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting
principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As explained in Note 2, the financial statements include mortgage revenue
bonds and other bond related investments valued at $220,961,000 (91% of
total assets) and $183,632,000 (80% of total assets) at December 31, 1997
and 1996, respectively, whose values have been estimated by the Company's
management in the absence of readily ascertainable market values. Those
estimated values may differ significantly from the values that would have
been used had a ready market for the investments existed, and the
differences could be material.

Price Waterhouse LLP
Linthicum, Maryland
February 4, 1998

MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

December 31, December 31,
1997 1996
------------ ------------

ASSETS

Cash and cash equivalents $7,370 $34,817
Interest receivable 1,472 1,352
Investment in mortgage revenue bonds,
net (Note 6) 182,035 179,239
Investment in other bond related investments,
net (Notes 7 and 8) 38,926 4,393
Investment in parity working capital loans,
demand notes and other loans, net (Note 9) 11,491 10,158
Other assets 477 318
Restricted assets (Note 10) 1,330 -
------------ ------------
TOTAL ASSETS $243,101 $230,277
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable and accrued expenses $1,000 $870
Distributions payable - 8,095
Unearned revenue (Note 11) 702 329
------------ ------------
TOTAL LIABILITIES 1,702 9,294
------------ ------------

Commitments and contingencies
(Notes 2, 6, 7, 8, 9, 10, 12 and 19) - -

Shareholders' equity:
Unrealized gain on mortgage revenue bonds
and other bond related investments
available for sale, net (Notes 6, 7 and 8) 27,362 12,423
Preferred shares:
Series I (16,329 shares issued and
outstanding) 11,308 11,254
Series II (7,637 shares issued and
outstanding) 6,230 6,086
Preferred capital distribution shares:
Series I (8,909 shares issued and
outstanding) 4,559 4,559
Series II (3,809 shares issued and
outstanding) 2,126 2,080
Term growth shares (2,000 shares issued and
outstanding) 97 -
Growth shares (11,166,227 shares, including
11,153,168 issued, 3,685 deferred, and
9,374 restricted shares at December 31, 1997
and 11,153,168 shares issued
at December 31, 1996) 192,504 185,514
Less growth shares held in treasury
at cost (60,077 shares at December 31, 1997
and 60,798 at December 31, 1996) (922) (933)
Less unearned compensation -
restricted shares (Note 16) (1,865) -
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 241,399 220,983
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $243,101 $230,277
============ ============
The accompanying notes are an integral part of these financial statements.

MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share, per share and per BAC data)

For the year ended December 31,
------------------------------------
1997 1996 1995
------------ ----------- ---------

INCOME

Interest on mortgage revenue bonds and other bond
related investments $17,219 $13,859 $13,363
Interest on parity working capital loans,
demand notes and other loans 3,500 1,343 211
Interest on short-term investments 627 1,096 366
Net gain on sale (Notes 3 and 5) 2,824 - 623
Equity in MLP II (Note 5) - 2,141 3,150
Other income (Note 14) 1,169 231 -
------------ ----------- ---------
TOTAL INCOME 25,339 18,670 17,713
------------ ----------- ---------
EXPENSES
Operating expenses 3,962 3,799 4,491
Minority interest - 13 18
Other-than-temporary impairments related
to investments in mortgage revenue
bonds (Note 6) 2,580 3,990 -
------------ ----------- ---------
TOTAL EXPENSES 6,542 7,802 4,509
------------ ----------- ---------
NET INCOME $18,797 $10,868 $13,204
============ =========== =========

Net income prior to August 1, 1996 allocated to:

General Partners $- $36 $132
============ =========== =========
Limited Partners:
Series I $- $1,065 $8,749
============ =========== =========
Series II $- $2,508 $4,323
============ =========== =========
Net income per BAC prior to August 1, 1996:
Series I $0.00 $5.33 $43.74
============ =========== =========
Series II $0.00 $26.05 $44.91
============ =========== =========

Net income subsequent to July 31, 1996 allocated to:

Preferred shares:
Series I $703 $373 $-
============ =========== =========
Series II $495 $208 $-
============ =========== =========
Preferred capital distribution shares:
Series I $290 $168 $-
============ =========== =========
Series II $189 $82 $-
============ =========== =========
Term growth shares $381 $153 $-
============ =========== =========
Growth shares $16,739 $6,275 $-
============ =========== =========
Basic net income per share subsequent to July 31, 1996:

Preferred shares:
Series I $43.07 $22.84 $-
=========== ============ =========
Series II $64.84 $27.24 $-
============ ============ =========
Preferred capital distribution shares:
Series I $32.59 $18.86 $-
============ =========== =========
Series II $49.70 $21.53 $-
============ =========== =========

Growth shares $1.51 $0.56 $-
============ =========== =========
Weighted average shares outstanding 11,094,881 11,122,705 -

Diluted net income per share subsequent to July 31, 1996:
Growth shares $1.50 $0.56 $-
============ =========== =========
Weighted average shares outstanding 12,537,517 11,123,048 -

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

MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For the year ended December 31,
--------------------------
1997 1996 1995
------------ ----------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $18,797 $10,868 $13,204
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in MLP II net income - (2,141) (3,150)
Income allocated to minority interest - 13 18
Other-than-temporary impairments related to
investments in mortgage revenue bonds 2,580 3,990 -
Increase (decrease) in valuation allowance on
parity working capital loans (92) 113 -
Net realized gain on sale of bonds (2,824) - (2,347)
Depreciation and amortization 58 10 -
Restricted share compensation expense 177 - -
Deferred shares issued under the Non-Employee
Directors' Share Plan 62 - -
Director fees paid by reissuance of treasury shares14 - -
(Increase) decrease in interest receivable (120) (468) 336
(Increase) decrease in other assets (87) (78) 38
Increase (decrease) in accounts payable
and accrued expenses 130 525 (566)
(Decrease) in due to affiliates - (9) (86)
Increase in unearned fees collected, net 60 - -
------------ ----------- ---------
Net cash provided by operating activities 18,755 12,823 7,447
------------ ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage revenue bonds and
other bond related investments (109,603) (20,867) -
Origination of other loans (1,244) - -
Purchases of furniture and equipment (80) - -
Investment in restricted assets (Note 10) (1,000) - -
Principal payments received 162 107 -
Proceeds from sale of bonds 87,231 - 67,700
Investment in MLP II - - (61,000)
Distributions from MLP II (including
$49,628 upon dissolution) - 52,466 3,499
------------ ----------- ---------
Net cash provided by (used in) investing act (24,534) 31,706 10,199
------------ ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares - (933) -
Distributions (21,668) (18,589) (15,691)
------------ ----------- ---------
Net cash provided by (used in) financing
activities (21,668) (19,522) (15,691)

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (27,447) 25,007 1,955

CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 34,817 9,810 7,855
------------ ----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,370 $34,817 $9,810
============ =========== =========
Disclosure of Non-Cash Activities:
Net assets received upon dissolution of
the MLP II structure $- $14,974 $-
============ =========== =========
Contribution of parity working capital loans
and other assets to MLP II $- $- $4,647
============ =========== =========
The accompanying notes are an integral part of these financial statements.

MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)

Limited Partners Beneficial
Assignee Certificates
------------------------------ General
Series I Series II Partners
------------------------------------------

Balance, January 1, 1995 $142,862 $77,600 ($464)
Net income 8,749 4,323 132
Distributions (10,500) (5,294) (145)
Net realized gain on sale of
A bond receipts - - -
------------------------------------------
Balance, December 31, 1995 141,111 76,629 (477)
Net income 1,065 2,508 36
Distributions (5,250) (2,647) (83)
Merger of SCA Tax Exempt Fund
into Municipal Mortgage
and Equity, LLC (Note 4) (136,926) (76,490) 524
Purchase of treasury shares - - -
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - - -
Realization of other-than-temporary
impairments on mortgage revenue
bonds available for sale - - -
------------------------------------------
Balance, December 31, 1996 $- $- $-
==========================================

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

Preferred Capital
Preferred Shares Distribution Shares
-------------------------------------------------
Series I Series II Series I Series II
-------------------------------------------------

Balance, January 1, 1995 $- $ - $- $-
Net income - - - -
Distributions - - - -
Net realized gain on sale of
A bond receipts - - - -
-------------------------------------------------
Balance, December 31, 1995 - - - -
Net income 373 208 168 82
Distributions (429) (286) (1,774) (1,054)
Merger of SCA Tax Exempt Fund
into Municipal Mortgage
and Equity, LLC (Note 4) 11,310 6,164 6,165 3,052
Purchase of treasury shares - - - -
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - - - -
Realization of other-than-temporary
impairments on mortgage revenue
bonds available for sale - - - -
-------------------------------------------------
Balance, December 31, 1996 11,254 6,086 4,559 2,080

Net income 703 495 290 189
Distributions (649) (351) (290) (143)
Reissuance of treasury shares - - - -
Deferred shares issued under the
Non-Employee Directors' Share
Plan (Note 16) - - - -
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - - - -
Realization of other-than-temporary
impairments on mortgage revenue
bonds available for sale - - - -
Net realized gain on sale of bonds - - - -
Restricted share grants (Note 16) - - - -
Amortization of deferred
compensation (Note 16) - - - -
-------------------------------------------------
Balance, December 31, 1997 $11,308 $6,230 $4,559 $2,126
=================================================

SHARE ACTIVITY:
Issuance of shares in Merger,
August 1, 1996 16,329 7,637 8,909 3,809
Purchase of treasury shares - - - -
-------------------------------------------------
Balance, December 31, 1996 16,329 7,637 8,909 3,809
Reissuance of treasury shares - - - -
Deferred shares issued under the
Non-Employee Directors'
Share Plan (Note 16) - - - -
Vesting of restricted
shares (Note 16) - - - -
-------------------------------------------------
Balance, December 31, 1997 16,329 7,637 8,909 3,809
=================================================

Term Growth Growth Treasury
Shares Shares Shares
------------------------------------------

Balance, January 1, 1995 $- $- $-
Net income - - -
Distributions - - -
Net realized gain on sale of
A bond receipts - - -
------------------------------------------
Balance, December 31, 1996 - - -
Net income 153 6,275 -
Distributions (153) (6,962) -
Merger of SCA Tax Exempt Fund
into Municipal Mortgage
and Equity, LLC (Note 4) - 186,201 -
Purchase of treasury shares - - (933)
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - - -
Realization of other-than-temporary
impairments on mortgage revenue
bonds available for sale - - -
------------------------------------------
Balance, December 31, 1996 - 185,514 (933)

Net income 381 16,739 -
Distributions (284) (11,856) -
Reissuance of treasury shares - 3 11
Deferred shares issued under the
Non-Employee Directors' Share
Plan (Note 16) - 62 -
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - - -
Realization of other-than-temporary
impairments on mortgage revenue
bonds available for sale - - -
Net realized gain on sale of bonds - - -
Restricted share grants (Note 16) - 2,042 -
Amortization of deferred
compensation (Note 16) - - -
------------------------------------------
Balance, December 31, 1997 $97 $192,504 ($922)
==========================================

SHARE ACTIVITY:
Issuance of shares in
Merger, August 1, 1996 2,000 11,153,168 -
Purchase of treasury shares - (60,798) 60,798
------------------------------------------
Balance, December 31, 1996 2,000 11,092,370 60,798
Reissuance of treasury shares - 721 (721)
Deferred shares issued under the
Non-Employee Directors'
Share Plan (Note 16) - 3,685 -
Vesting of restricted
shares (Note 16) - 9,374 -
------------------------------------------
Balance, December 31, 1997 2,000 11,106,150 60,077
==========================================

Unrealized gain
(loss) on mortgage
revenue bonds
and other bond
related investments
Unearned available
Compensation for sale, net Total
------------------------------------------

Balance, January 1, 1995 $- $1,366 $221,364
Net income - - 13,204
Distributions - - (15,939)
Net realized gain on sale of
A bond receipts - (2,347) (2,347)
------------------------------------------
Balance, December 31, 1995 - (981) 216,282
Net income - - 10,868
Distributions - - (18,638)
Merger of SCA Tax Exempt Fund
into Municipal Mortgage
and Equity, LLC (Note 4) - - -
Purchase of treasury shares - - (933)
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - 9,414 9,414
Realization of other-than-temporary
impairments on mortgage revenue
bonds available for sale - 3,990 3,990
------------------------------------------
Balance, December 31, 1996 - 12,423 220,983

Net income - - 18,797
Distributions - - (13,573)
Reissuance of treasury shares - - 14
Deferred shares issued under the
Non-Employee Directors' Share
Plan (Note 16) - - 62
Change in value of mortgage revenue bonds
and other bond related investments
available for sale, net - 15,474 15,474
Realization of other-than-temporary
impairments on mortgage revenue
bonds available for sale - 2,580 2,580
Net realized gain on sale of bonds - (3,115) (3,115)
Restricted share grants (Note 16) (2,042) - -
Amortization of deferred
compensation (Note 16) 177 - 177
------------------------------------------
Balance, December 31, 1997 ($1,865) $27,362 $241,399
==========================================

MUNICIPAL MORTGAGE AND EQUITY, L.L.C.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

The Company

Municipal Mortgage and Equity, L.L.C. (the "Company") is in the
business of originating, investing in and servicing tax-exempt mortgage
revenue bonds issued by state and local government authorities to finance
multifamily housing developments and secured by nonrecourse mortgage
loans on the underlying properties. The Company, organized in July 1995
as a limited liability company under Delaware law, is the successor to the
business of the SCA Tax Exempt Fund Limited Partnership (the
"Partnership"), which was merged into the Company effective August 1,
1996 (the "Merger"). Accordingly, the accompanying consolidated financial
statements present the financial position of the Company at December 31,
1997 and 1996; results of operations include those of the Partnership
through July 31, 1996 and those of the Company from August 1, 1996
through December 31, 1997.
The Partnership, organized in 1986, consummated public offerings
of two series of Beneficial Assignee Certificates ("BACs") representing the
assignment of its limited partnership interests. The $296,256,000 of
aggregate BAC proceeds, which were used to acquire 22 mortgage revenue
bonds, and to advance certain related parity working capital loans, were held
in two distinct pools, "Series I" and "Series II." The general partners of the
Partnership were SCA Realty I, Inc. (the "Managing General Partner") and
SCA Associates 86 Limited Partnership (the "Associate General Partner,"
and together with the Managing General Partner, the "General Partners").

Basis of Presentation

The consolidated financial statements of the Company are prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Prior to the Merger on August 1, 1996, the
consolidated financial statements of the Partnership included the Partnership,
The SCA Tax Exempt Trust (the "Trust"), which holds the Series B Bonds
resulting from the Refunding (defined in Note 5) and received the proceeds
from the 1995 Financing (defined in Note 5), and MLP III Investment
Limited Partnership ("MLP III"), a limited partnership owned by the
Partnership into which such proceeds were invested. MLP III reinvested
such proceeds in MLP II Acquisition Limited Partnership ("MLP II"), a
limited partnership, which was accounted for under the equity method and
financial information with respect to which is set forth in Note 5.
Immediately prior to the Merger, MLP III and MLP II were dissolved, and
the Partnership became the owner of all of their net assets.

Subsequent to the Merger on August 1, 1996 through December 31,
1996, the consolidated financial statements of the Company included the
Company, the Trust, and the former Associate General Partner of the
Partnership, which is 99% owned by the Company. On September 9, 1997,
the Company acquired the remaining 1% interest in the former Associate
General Partner of the Partnership and dissolved this entity.

On June 30, 1997, the Company acquired a 99.9% member interest
in MMACap, LLC ("MMACap") for $1.0 million (see further discussion in
Note 10). The other member interest in MMACap was purchased by MME
I Corporation, an affiliate of the Company.

In October 1997, Municipal Mortgage Servicing, LLC ("MMA
Servicing"), a limited liability company, was organized as a wholly owned
subsidiary of the Company for the purpose of servicing real estate mortgage
loans and other debt financing. Municipal Mortgage Investments, LLC
("MMA Investments"), a limited liability company wholly owned by the
Company, was organized in December 1997 to invest in and otherwise deal
in tax-exempt bonds and other bond related investments. Assets of MMA
Investments are solely those of MMA Investments and are not available to
creditors of the Company. The equity interest in MMA Investments is held
by the Company and is subject to the claims of creditors of the Company and
in certain circumstances could be foreclosed.

At December 31, 1997, the consolidated financial statements of the
Company include the Company, the Trust, MMACap, MMA Servicing and
MMA Investments. All significant intercompany transactions are eliminated.

Certain 1996 and 1995 amounts have been reclassified to conform
to the 1997 presentation.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Set forth below are the more significant accounting policies followed
by the Company in its consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents consist principally of investments in
money market mutual funds and short-term marketable securities with
original maturities of 90 days or less, both of which are readily convertible
to known amounts of cash in seven days or less. Cash equivalents are
carried at cost which approximates fair value.

Investment in Mortgage Revenue Bonds

Mortgage revenue bonds are accounted for under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," ("FAS 115"). All
investments in mortgage revenue bonds, regardless of their status, are
classified and accounted for as available-for-sale debt securities and carried
at fair value; unrealized holding gains or losses are included as a separate
component of shareholders' equity and other-than-temporary impairments
are recorded through operations.

The fair value of participating bonds (i.e., bonds that participate in
the net cash flow and net capital appreciation of the underlying properties)
that are wholly collateral dependent and for which only a limited market
exists is determined by discounting the underlying collateral's expected
future cash flows using current estimates of discount rates and capitalization
rates. Annually, the Company engages an independent real estate valuation
firm, Robert A. Stanger & Co., Inc. ("Stanger") to assist the Company in
reviewing the reasonableness of the estimates of discount rates and
capitalization rates used to estimate the fair value of these bonds.

The fair value of non-participating bonds, which also have a limited
market, is based on quotes from external sources, such as brokers, for these
or similar bonds.

When the estimated fair value of a bond has declined to an amount
below amortized cost, the Company considers the following in determining
whether the indicated decline is other-than-temporary. With respect to
bonds that are not performing in accordance with their contractual terms, the
Company considers declines in fair value, if any, to be other-than-temporary.
In the absence of evidence to the contrary, indicated impairments of
performing bonds are generally considered to be temporary. The Company
evaluates the need for other-than-temporary impairments on an on-going
basis.

Base interest on the bonds is recognized as revenue as it accrues;
contingent interest is recognized when received. Delinquent bonds are
placed on non-accrual status for financial reporting purposes when collection
of interest is in doubt. Interest payments on non-accrual bonds are applied
first to previously recorded accrued interest and, once previously accrued
interest is satisfied, is then recognized as income when received. The
accrual of interest income is reinstated once a bond's ability to perform is
adequately demonstrated. For tax purposes, the Company recognizes
interest income on the bonds at rates negotiated at the time such investments
were made and, with respect to contingent interest, when received. Interest
recognized on the bonds is exempt for federal income tax purposes to the
shareholders.

Investment in Other Bond Related Investments

The Company owns Residual Interest Tax-Exempt Securities
Receipts ("RITES"), a security offered by Merrill Lynch Pierce Fenner &
Smith Incorporated ("Merrill Lynch") through its RITES/Puttable Floating
Option Tax-Exempt Receipts (the "P-floats") program discussed more fully
in Notes 3 and 7. The RITES are classified as available-for-sale debt
securities under FAS 115 and are carried at fair value with unrealized gains
or losses included as a separate component of shareholders' equity. The fair
value of the RITES, which also have a limited market, is determined based
on quotes from external sources, such as brokers, for these or similar
investments. Interest income is recognized as revenue as it accrues. Interest
recognized on the RITES is exempt for federal income tax purposes to the
shareholders.

Purchase Commitments

Purchase commitments on bonds and bond related investments are
not recorded on the financial statements of the Company. However,
purchase commitments are marked to market with unrealized gains or losses
included as a separate component of shareholders' equity. The fair value of
the purchase commitment is based on the fair value of the underlying
investment, the mortgage revenue bond. The fair value of the investment is
estimated in accordance with the Company's valuation policy discussed
above.

Interest Rate Swaps

The Company enters into interest rate swap contracts to hedge
against interest rate exposure on the Company's RITES investments as
discussed more fully in Notes 3, 7 and 8. Interest rate swap contracts are
carried at fair value with unrealized gains or losses included as a separate
component of shareholders' equity. The fair value of the interest rate swap
agreements is determined based on quotes from external sources, such as
brokers, for these or similar investments. The differential to be paid or
received under this agreement is recognized as an adjustment to interest
income related to the RITES. Net swap payments received by the
Company, if any, will be taxable income, even though the investment being
hedged pays tax-exempt interest.

Investment in Parity Working Capital Loans, Demand Notes and Other
Loans

Parity working capital loans, demand notes and other loans are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114"). FAS 114 requires a creditor to base its measure of loan
impairment on the present value of expected future cash flows discounted
at the loan's effective interest rate, or the fair value of the collateral if
the loan is collateral dependent. A valuation allowance is provided to
record the loan impairment with a corresponding charge to net income.

Base interest on the parity working capital loans is recognized as
revenue as it accrues; contingent interest is recognized when received.
Delinquent parity working capital loans are placed on non-accrual status for
financial reporting purposes when collection of interest is in doubt. Interest
payments on non-accrual parity working capital loans are applied first to
previously recorded accrued interest and, once previously accrued interest
has been satisfied, is recognized as income when received. The accrual of
interest income is reinstated once a loan's ability to perform is adequately
demonstrated. For tax purposes, the Company recognizes interest income
on the loans at rates negotiated at the time such investments were made and,
with respect to contingent interest, when received. Interest recognized on
the parity working capital loans is taxable to the shareholders.

Interest on demand notes and other loans is recognized as revenue
as it accrues. Interest income is also recognized for the portion of the
principal payments received that represents payment for previously
unaccrued interest. Interest recognized on the demand notes and other loans
is taxable to the shareholders.

Furniture and Equipment

Furniture and equipment is stated at cost. Depreciation is computed
over the estimated useful lives, ranging from six to ten years, on the 150%
declining balance method. The cost and accumulated depreciation is
included in other assets.

Loan Origination and Guarantee Fee Revenue

Loan origination fees are deferred and are amortized into income to
approximate a level yield over the estimated lives of the related investments.
The unamortized balance of loan origination fees is reported as part of the
amortized cost of the related investments. Loan guarantee fees are
recognized over the term of the guarantee period.

Premiums and Discounts on Purchased Investments

Premiums and discounts on purchased investments are amortized
into income over the term of the related investment to approximate a level
yield over the life of the investment.

Earnings per Share/BAC

For the year ended December 31, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("FAS 128"). FAS 128 requires the dual presentation
of basic and diluted earnings per share on the face of the income statement
for all entities with complex capital structures. This statement is
effective for financial statements issued for both interim and annual periods
ending after December 15, 1997 and requires restatement of all prior periods
presented.

Income Taxes

No recognition has been given to income taxes in the accompanying
financial statements as the distributive share of the Company's income,
deductions and credits is included in each shareholder's income tax returns.
Management believes that the Company is not subject to income taxes. The
tax basis of the Company's net assets exceeds the carrying value for book
purposes by approximately $69 million.

The Company has elected under Section 754 of the Internal Revenue
Code to adjust the basis of the Company's property on the transfer of shares
to reflect the price each shareholder paid for their shares. While the bulk of
the Company's recurring income is tax-exempt, from time to time, the
Company may sell or securitize (See Note 3) various assets which may result
in capital gains and losses for tax purposes. Since the Company is taxed as
a partnership, these capital gains and losses are passed through to
shareholders and are reported on each shareholder's Schedule K-1. The
capital gain and loss allocated from the Company may be different to each
shareholder due to the Company's 754 election and is a function of, among
other things, the timing of the shareholder's purchase of shares and the
timing of transactions which generate gains or losses for the Company. This
means that for assets purchased by the Company prior to a shareholder's
purchase of shares, the shareholder's basis in the assets may be significantly
different than the Company's basis in those same assets. While the
procedure for allocating the basis adjustment is complex, the impact of the
election is that each shareholder's basis in the assets of the Company may be
different. Consequently, the capital gains and losses allocated to
shareholders may be significantly different than the capital gains and losses
recorded by the Company.

Significant Risks and Uncertainties

Because the Company's assets consist primarily of bonds and other
bond related investments secured by nonrecourse mortgage loans on real
estate projects, the value of the Company's assets is subject to all of the
factors affecting bond and real estate values, including interest rate changes,
demographics, local real estate markets, and individual property
performance. Further, many of the Company's investments are subordinated
to the claims of other senior interests and uncertainties may exist as to a
borrower's ability to meet principal and interest payments.

The use of estimates is inherent in the preparation of all financial
statements, but is especially important in the case of the Company, which is
required under FAS 115 to carry a substantial portion of its assets at fair
value, even though only a limited market exists for them. Because only a
limited market exists for most of the Company's investments, fair value is
estimated by management in accordance with the Company's valuation
procedures discussed above. These estimates involve uncertainties and
matters of judgment and therefore cannot be determined with precision. The
assumptions and methodologies selected by management were intended to
estimate the amounts at which the investments could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. Changes in assumptions could significantly affect estimates.
These estimated values may differ significantly from the values that would
have been used had a ready market for the investments existed, and the
differences could be material.

NOTE 3 - SECURITIZATION TRANSACTION

In December 1997, the Company securitized four mortgage bonds
and a series A custody receipt (representing the bond principal and tax-exempt
interest up to 7.875% on the Stone Mountain bond) in the portfolio
(the "1997 Securitization") through the Merrill Lynch RITES/ P-floats
program. The 1997 Securitization involved the sale of the four bonds and
the series A receipt (collectively, the "Five Investments") to Merrill Lynch.
Merrill Lynch in turn, deposited the Five Investments into a trust, which was
created to hold these assets. Two types of securities, P-floats and RITES,
were created for each asset deposited into the trust. The P-floats are short-
term floating rate interests in the trust which have priority on the cash flows
of the mortgage bonds and bear interest at rates that reset weekly by the
remarketing agent, Merrill Lynch. The P-floats are credit enhanced by
Merrill Lynch and sold to qualified third party investors. The Company
receives the proceeds from the sale of the P-floats less certain transaction
costs. Through MMA Investments, the Company retained the residual
interests in the trust, the RITES. The RITES are the subordinate security
and receive the residual interest after the payment of all fees and the P-floats
interest.

The Five Investments sold to the trust totaled $85.8 million in face
value and included the Riverset Phase II A bond ($7.5 million), the
Southgate mortgage revenue bond ($11 million), the Charter House
mortgage revenue bond ($7.6 million), the Stone Mountain series A receipt
($33.9 million) and the Southwood mortgage revenue bond ($25.8 million).
After the assets were deposited into the trust, $58.8 million in P-floats were
sold and MMA Investments retained $27.0 million in RITES as follows:

(in millions)
Face Amount Fair Value
----------- ----------
Riverset Phase II RITES $ 1.9 $ 2.6
Southgate RITES 2.8 3.4
Charter House RITES 1.9 2.3
Stone Mountain RITES 10.1 11.0
Southwood RITES 10.3 10.5
----------- ----------
TOTAL $27.0 $29.8
=========== ==========

As a result of the sale of these bonds, the Company recognized a
gain of approximately $2.8 million. Included in this amount is a portion of
the net unrealized gain associated with the Five Investments of
approximately $3.1 million, net of selling expenses of approximately $0.3
million. The portion of the unrealized gain recognized for each investment
was determined by allocating the net amortized cost at the time of sale
between the corresponding P-floats and RITES based upon their relative fair
values, using the concepts outlined in the Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("FAS 125").

NOTE 4 - THE MERGER

Effective August 1, 1996, the Partnership merged into the Company
following the approval of the Merger by the holders of a majority of the
outstanding Series I BACs and Series II BACs. The Merger preserved the
pass-through tax status of the primarily tax-exempt income generated by the
Company's bonds and resulted in self-management through a Board of
Directors elected by the shareholders and the alignment of the financial
interests of the former General Partners with those of the shareholders. In
connection with their approval of the Merger, the Partnership's BAC holders
were provided with the opportunity to elect to exchange their BACs for
Preferred Shares, Preferred CD Shares, or Growth Shares, depending upon
their individual investment objectives.

In connection with the Merger, the 296,256 outstanding BACs
(200,000 Series I and 96,256 Series II) outstanding immediately prior to the
Merger were exchanged for 23,966 Preferred Shares (16,329 Series I and
7,637 Series II), 12,718 Preferred CD Shares (8,909 Series I and 3,809
Series II) and 10,270,127 Growth Shares. The Company also authorized the
issuance of 1,000 shares of a special class of Growth Shares ("Term Growth
Shares") to the former General Partners, in exchange for the relinquishment
of their general partnership interests in the Partnership, and 1,000 Term
Growth Shares to a Merrill Lynch affiliate in exchange for their subordinated
BACs. Term Growth Shares are entitled to an aggregate 2% interest in cash
distributions from the Company (subordinated to the rights of the Preferred
and Preferred CD Shares, and before distributions to Growth Shareholders).

Upon the consummation of the Merger, the General Partners and
their affiliates contributed their mortgage acquisition and servicing
activities in exchange for 883,033 Growth Shares. The Partnership retained
Stanger, an independent third party, to render an opinion regarding the
fairness, from a financial point of view, that the allocation of Growth
Shares and Term Growth Shares to the former General Partners in exchange for the
contribution of their mortgage acquisition and servicing activities was fair
to the Series I and Series II BAC holders. As a result of the contribution of
the acquisition and servicing activities by the General Partners and their
affiliates, the Company, and more specifically, the Growth Shareholders, will
receive additional income which is primarily tax-exempt.

The capitalization of the Company in accordance with the terms of
the Merger is reflected in the accompanying financial statements. Because
the interests of a significant majority of the former Series I and Series II
BAC holders have now been merged as a result of their election to receive
Growth Shares, separate financial statements for Series I and Series II are
no longer presented as supplementary information. Results of operations
continue to be maintained by Series, however, as required for those former
Series I and Series II BAC holders electing either Preferred Shares or
Preferred CD Shares, and appropriate allocations of net income are reflected
in the accompanying financial statements.

NOTE 5 - THE 1995 FINANCING

On February 14, 1995, the 1995 Financing was consummated,
resulting in the receipt of gross proceeds of $67.7 million from the sale of
the same aggregate principal amount of Multifamily Mortgage Revenue
Bond Receipts (the "Receipts"). The Receipts are collateralized by a pool
of newly refunded bonds issued in exchange for 11 of the Partnership's
original bonds, all of which had defaulted on their original debt obligations.
The cash stream from one additional bond, Creekside Village, which also
had defaulted on its original debt obligation, was pledged as further security
for the Receipts. Effective December 31, 1997, the Creekside bond has
been released as additional collateral.

Prior to the 1995 Financing, the 11 original bonds, in the aggregate
principal amount of $126.6 million, were refunded (the "Refunding") into a
Series A Bond and a Series B Bond (the aggregate principal amount of
which equals that of the original bond), each with an extended maturity date
of January 2030. The aggregate principal amount of the Series A Bonds and
Series B Bonds is $67.7 million and $58.9 million, respectively. Each Series
B Bond is subordinate to the related Series A Bond. The Series A Bonds
bear interest at various fixed annual rates, ranging from 7.05% to 7.40%,
payable monthly, and are subject to mandatory sinking fund redemptions
beginning January 1, 2001. The Series B Bonds and their general terms are
discussed in Note 6.

The Partnership deposited the Series A Bonds and Series B Bonds
with the Trust, which was created to hold these assets, and the Trust issued
a certificate of participation in the corpus and the income of the Trust to the
Partnership. The Trust then deposited the Series A Bonds with a custodian,
and the Receipts, collateralized by the Series A Bonds, were sold. As a
result of the sale of the Receipts, the Company no longer has any interest in
the Series A Bonds and recognized a gain of approximately $623,000.
Included in this amount is a portion of the net unrealized gain associated
with the refunded bonds of approximately $2.3 million, net of selling
expenses of approximately $1.7 million. The portion of the unrealized gain
(loss) recognized for each bond was determined by allocating the net
carrying amount at the time of sale to its corresponding Series A Bond and
Series B Bond based upon their relative fair values, using the concepts
outlined in the Financial Accounting Standard Board's Emerging Issues Task
Force Issue No. 88-11.

Through the Series A Bonds held by the custodian, the Receipts have
a fixed interest rate and preferred return position, resulting in a guaranteed,
preferred, fixed-rate tax-exempt return paid by the operating partnerships.
The operating partnerships entered into an interest rate swap agreement
whereby a portion of the fixed interest rate under the Series A Bonds was
swapped for a floating tax-exempt interest rate through 2004 equivalent to
the PSA Municipal Swap Index. This mechanism is intended to allow the
Company to realize the potential benefit of traditionally lower floating tax-
exempt interest rates by lowering the effective cost of the Series A Bonds
to the operating partnerships which, for 1997 and 1996, enabled the
operating Partnerships to pay an additional $1.7 million and $1.8 million,
respectively, in Series B Bond interest payments to the Company. Also, an
interest rate cap was purchased for approximately $4.2 million by the
operating partnerships to limit their exposure (and ultimately the Company's)
resulting from the swap transaction. The purchase price of the interest rate
cap and approximately $800,000 of transaction expenses incurred on behalf
of the operating partnerships were financed by a loan of approximately $5
million from the 1995 Financing proceeds to the operating partnerships,
evidenced by demand notes (the "Load Loan Demand Notes").

The sale of the Receipts resulted in gross proceeds of $67.7 million
and net proceeds of $56.8 million available for further investment after
deduction of the $4.2 million cost of the interest rate cap and payment of
$6.7 million of transaction costs and provision for additional working capital
reserves. Management believes that the transaction costs, all of which were
paid to third parties, were appropriate and consistent with transactions of
similar size and characteristics.

The Trust and, prior to its dissolution, MLP III are included in the
consolidated financial statements of the Company. Financial information for
MLP II for the period February 15, 1995 through dissolution on July 31,
1996, which was accounted for under the equity method, is set forth below.
MLP II followed the same accounting policies followed by the Company.

MLP II ACQUISITION LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(In thousands)
For the period
-----------------------------
January 1 to February 15 to
July 31, 1996 December 31, 1995
-----------------------------
Interest income and other $3,825 $5,850
Operating expenses 182 18
-----------------------------
Net income $3,643 $5,832
=============================
Net income allocated to general partner $1,502 $2,681
=============================
Net income allocated to limited partners $2,141 $3,151
=============================

STATEMENTS OF CASH FLOWS
(In thousands)
For the period
-----------------------------
January 1 to February 15 to
July 31, 1996 December 31, 1995
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,643 $5,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 2 17
(Increase) decrease in interest receivable 111 (343)
(Increase) decrease in other assets 206 (140)
Increase (decrease) in due to affiliates (15) 120
-----------------------------
Net cash provided by operating activities 3,947 5,486
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in short-term investments 56,893 (56,893)
Issuance of load loans to operating partnerships - (4,233)
Purchases of mortgage revenue bonds (7,455) -
Principal payments on notes receivable from
operating partnerships 547 782
-----------------------------
Net cash provided by (used in) investing activities 49,985 (60,344)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from partners - 61,001
Distribution to partners (including $49,698
upon dissolution (54,280) (5,795)
-----------------------------
Net cash provided by (used in) financing
activities (54,280) 55,206
-----------------------------
Net increase (decrease) in cash and cash
equivalents (348) 348
Cash and cash equivalents at beginning of
period 348 -
-----------------------------
Cash and cash equivalents at end of period - 348
=============================
DISCLOSURE OF NON-CASH ACTIVITIES:
Contribution of working capital loans and other assets
(to) from MLP III Investment Limited
Partnerships ($14,974) $4,647
=============================
Transfer of other assets to operating
partnership $- $755
=============================

NOTE 6 - INVESTMENT IN MORTGAGE REVENUE BONDS

The original offering proceeds of the Partnership were invested in 22
mortgage bonds secured by nonrecourse participating first mortgage loans
on multifamily housing developments. Additional collateral was provided
in the form of property level operating reserves funded from construction
period cash flow and by operating deficit guarantees. Of the additional
collateral originally provided, the property level operating reserves have
been exhausted on all but three of the loans, and all but one of the operating
deficit guarantees have expired. Of the 22 original bonds acquired by the
Partnership, 16 were unable to support their entire debt service obligation,
after other sources of debt service other than property operations. In lieu
of foreclosure, the deeds to the properties collateralizing these bonds were
transferred to partnerships affiliated with the former Managing General
Partner of the Partnership ("New Borrowers") or an affiliate of the former
Managing General Partner was designated as the general partner of the
original borrowing entity. Although the Company has not waived the
defaults under these bonds, it does not intend to accelerate their maturity.
In addition, the Company is responsible for the post-transfer operating
deficits of New Borrowers. No operating deficits were funded for the three
years ended December 31, 1997.

A review of the audited financial statements for the year ended
December 31, 1996 for the Riverset Phase I and Phase II borrowing
partnership indicated that contingent interest was due and payable. As a
result, during 1997, the Company placed Riverset in default in accordance
with the terms and conditions of the mortgage bonds. On December 31,
1997, a settlement was executed between the general partners of the
Riverset borrowing partnership and the Company. The terms of the
settlement included the payment of over $400,000 in contingent interest,
received in the first quarter of 1998, and the assignment of the general
partner interest to an affiliate of the Company.

As of December 31, 1997, the Company held 31 bonds (12
participating bonds, five non-participating bonds, 12 participating
subordinate bonds and two non-participating subordinate bonds) which are
collateralized by 28 individual properties. The following table provides
certain information with respect to each of the bonds.

December 31, 1997 December 31, 1996
-------- -------- ---------- -------- ------- ---------- -------- ---------
Base Face Amortized Unrealized Fair Face Amortized Unrealized Fair
Investment in Mortgage Interest Maturity Amount Cost Gain (Loss) Value Amount Cost Gain (Loss) Value
Revenue Bonds Rate Date (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s)
- ---------------------------- ------- ------- -------- -------- ---------- -------- ------- ---------- -------- ---------

Participating Bonds (1):
Alban Place (2) 7.875 Oct. 2008 $10,065 $10,065 ($1,170) $8,895 $10,065 $10,065 ($773) $9,292
Creekside Village (2) 7.500 Nov. 2009 11,760 7,396 190 7,586 11,760 7,396 120 7,516
Emerald Hills (2) 7.750 Apr. 2008 6,725 6,725 579 7,304 6,725 6,725 455 7,180
Lakeview Garden (2) 7.750 Aug. 2007 9,003 5,340 - 5,340 9,003 5,674 98 5,772
Newport-on-Seven (2) 8.125 Aug. 2008 10,125 7,898 1,265 9,163 10,125 7,898 618 8,516
North Pointe (2) 7.875 Aug. 2006 25,185 12,738 3,717 16,455 25,185 12,738 1,536 14,274
Northridge Park (2) 7.500 June 2012 8,815 8,815 (1,547) 7,268 8,815 8,815 (2,959) 5,856
Riverset (2) 7.875 Nov. 1999 19,000 19,000 1,116 20,116 19,000 19,000 560 19,560
Southfork Village (2) 7.875 Jan. 2009 10,375 10,375 2,084 12,459 10,375 10,375 1,337 11,712
Villa Hialeah (2) 7.875 Oct. 2009 10,250 8,004 (117) 7,887 10,250 10,250 (2,609) 7,641
Willowgreen (2) 8.000 Dec. 2010 9,275 6,770 2 6,772 9,275 6,770 (13) 6,757
The Crossings (5) 8.000 July 2007 6,940 6,940 245 7,185 - - - -
--------- -------- --------- ---------- -------- ---------
Subtotal participating bonds 110,066 6,364 116,430 105,706 (1,630) 104,076
--------- -------- --------- ---------- -------- ---------
Non-Participating Bonds:
Riverset II (4) 9.500 Oct. 2019 110 105 15 120 7,610 7,222 826 8,048
Charter House (4) 7.450 July 2026 35 35 1 36 7,675 7,752 (38) 7,714
Hidden Valley (4) 8.250 Jan. 2026 1,700 1,700 77 1,777 1,705 1,705 (46) 1,659
Oakbrook (4) 8.200 July 2026 3,195 3,226 161 3,387 3,210 3,242 14 3,256
Torries Chase (4) 8.150 Jan. 2026 2,070 2,070 155 2,225 2,080 2,080 20 2,100
-------- -------- ---------- ---------- -------- ---------
Subtotal non-participating bonds 7,136 409 7,545 22,001 776 22,777
-------- -------- ---------- ---------- -------- ---------
Participating Subordinate Bonds (1):
Barkley Place (3) 16.000 Jan. 2030 3,480 2,445 1,430 3,875 3,480 2,445 483 2,928
Gilman Meadows (3) 3.000 Jan. 2030 2,875 2,530 1,409 3,939 2,875 2,530 964 3,494
Hamilton Chase (3) 3.000 Jan. 2030 6,250 4,140 98 4,238 6,250 4,140 778 4,918
Mallard Cove I (3) 3.000 Jan. 2030 1,670 798 645 1,443 1,670 798 146 944
Mallard Cove II (3) 3.000 Jan. 2030 3,750 2,429 1,599 4,028 3,750 2,429 420 2,849
Meadows (3) 16.000 Jan. 2030 3,635 3,716 451 4,167 3,635 3,716 719 4,435
Montclair (3) 3.000 Jan. 2030 6,840 1,691 3,914 5,605 6,840 1,691 2,798 4,489
Newport Village (3) 3.000 Jan. 2030 4,175 2,973 1,803 4,776 4,175 2,973 1,901 4,874
Nicollet Ridge (3) 3.000 Jan. 2030 12,415 6,075 2,325 8,400 12,415 6,075 573 6,648
Steeplechase Falls (3) 16.000 Jan. 2030 5,300 5,852 744 6,596 5,300 5,852 2,361 8,213
Whispering Lake (3) 3.000 Jan. 2030 8,500 4,779 3,234 8,013 8,500 4,779 1,182 5,961
Riverset II (4) 10.000 Oct. 2019 1,489 - 1,229 1,229 1,489 - 913 913
-------- -------- ---------- ---------- -------- ---------
Subtotal participating subordinate bonds 37,428 18,881 56,309 37,428 13,238 50,666
-------- -------- ---------- ---------- -------- ---------
Non-Participating Subordinate Bonds:
Independence Ridge (4) 12.500 Dec. 2015 1,045 1,045 21 1,066 1,045 1,045 - 1,045
Locarno (4) 12.500 Dec. 2015 675 675 10 685 675 675 - 675
-------- -------- ---------- ---------- -------- ---------
Subtotal non-participating subordinate bonds 1,720 31 1,751 1,720 - 1,720
-------- -------- ---------- ---------- -------- ---------

Total investment in mortgage
revenue bonds and other bond related investments $156,350 $25,685 $182,035 $166,855 $12,384 $179,239
======== ========= ========= ========== ======== ========
(1) These bonds also contain additional interest features contingent on available cash flow, except for
Barkley Place, Meadows, and Steeplechase Falls.
(2) One of the original 22 bonds.
(3) Series B Bonds derived from original 22 bonds.
(4) 1996 Acquisitions.
(5) 1997 Acquisition. The Crossing's bond paid base interest of 5.5% and an additional yield maintenance
fee of 3.31% until the bond refunding in July 1997 at which time the base interest rate was changed to 8.00%.

General Mortgage Loan Terms

The Company's rights under all of the bonds held by it are defined by
the terms of the related mortgage loans, which are assigned to the Company
to secure the payment of principal and interest under the bonds. These
assignments include assignments of mortgages on the underlying properties
and of rents.

Participating Mortgage Bonds

The participating mortgage bonds are collateralized by nonrecourse
participating first mortgage loans on multifamily housing developments. At
December 31, 1997, the company's investment in participating mortgage
bonds includes the 11 bonds not refunded in the 1995 Financing and the
Crossings bond purchased in 1997. The following paragraphs describe the
general loan terms of the participating mortgage bonds.

Of the 22 original bonds, the 11 bonds not refunded in the 1995
Financing transaction (and the 11 refunded bonds for the period prior to the
1995 Financing) provide for the payment of base interest and additional
contingent interest. Principal on the mortgage loans will not be amortized
while held by the Company, but will be required to be repaid or refinanced
in a lump sum payment at the end of the holding period or at such earlier
time as the Company may require. The mortgage loans are non-assumable
except with the consent of the Company. Prepayment is prohibited during
the first seven years of the mortgage loan. Between years eight and eleven,
the mortgage loan may be prepaid at the option of the borrower subject to
a declining penalty. Prepayments after the twelfth year, subject to par value
appraisals, are allowed without regard to whether the mortgaged property
is sold or refinanced. The Company may also require prepayment of the
mortgage loan upon the occurrence of an event which would cause
significant risk that the interest on the bonds would be subject to federal
income taxation.

The mortgage loans bear interest at base rates determined by arms
length negotiations that reflected market conditions existing at the time the
original bonds were purchased by the Company. Each loan provides for
contingent interest in an amount equal to the difference between the stated
base interest rate and 16%. During the construction period, each original
bond bore interest at base rates that were separately negotiated, and
payment of any construction period contingent interest was deferred until
the project was sold or refinanced. Contingent interest (other than
contingent interest during the construction period) is payable during the year
from 100% of the project cash flow until the Company's aggregate
non-compounded interest rate equals the base interest rate plus 1.5% to
2.5% (first tier contingent interest), as the case may be, on each mortgage
loan. Any remaining cash flow is divided equally with the property owner
until the Company reaches its 16% annual limit. To the extent that the
aggregate of all interest payments, including contingent interest, for any year
does not equal 16%, the difference is deferred until the mortgaged property
is sold or the mortgage loan repaid. Sale or repayment proceeds remaining
after the repayment of principal and other specified payments are all paid to
the Company to the extent necessary for the Company to recover the base
rate plus first tier contingent interest previously deferred; thereafter, 50% of
any excess sale or repayment proceeds is paid to the Company until it
reaches its 16% per annum limit. Accordingly, the ability of the Company
to collect contingent interest on the original bonds is dependent upon the
level of project cash flow and sale or repayment proceeds.

With respect to the 22 original bonds held by the Company prior to
the Refunding, 16 had been placed on non-accrual status as of December 31,
1995. On February 14, 1995, 11 of these 16 were refunded in connection
with the 1995 Financing. No additional bonds were placed on non-accrual
status during 1996 or 1997. Thus as of December 31, 1997 and 1996, five
original bonds were on non-accrual status. Additional interest income that
would have been recognized had these original bonds not been placed on
non-accrual status was approximately $1.1 million, $1.8 million and $2.2
million for the years ended December 31, 1997, 1996 and 1995,
respectively.

On January 27, 1997, the Company acquired a $7.1 million tax-exempt mortgage
revenue bond collateralized by a 200-unit multifamily
apartment project known as The Crossings, located in DeKalb County,
Georgia with a stated annual interest rate of 5.5%. On July 11, 1997, the
bond was refunded, and as a result, the stated annual interest rate was
changed to 8.0% and the maturity date was extended to a 30-year term
(2027) with a prepayment option in the twelfth year. Also as part of the
refunding, the Company now may participate in the growth of the value of
the underlying property collateral through contingent interest payments from
the property's cash flow. These contingent interest payments are taxable
income for federal income tax purposes. Prior to the refunding, under the
terms of the transaction, the Company received an effective annual interest
rate of 8.81% on the bond as a result of a yield maintenance agreement
entered into between the borrower and the Company. The 3.31% yield
maintenance fee earned on the bonds was taxable income for federal income
tax purposes. Additionally, in conjunction with this bond purchase, the
Company made a taxable loan discussed further in Note 9.

Non-Participating Mortgage Bonds

At December 31, 1997, the Company owned five non-participating
mortgage bonds. The non-participating mortgage bonds bear interest at
various fixed annual rates, ranging from 7.45% to 9.5%. Principal
amortization on four bonds is received in accordance with amortization
tables set forth in the bond documents. The following paragraphs describe
the general loan terms of the non-participating mortgage bonds.

On January 19, 1996, a Series A bond collateralized by Riverset II,
a multifamily property located in Memphis, Tennessee was acquired for $7.2
million. The bond was purchased at a discount of $402,000, which is being
amortized into income to approximate a level yield over the life of the bond.
The bond bears interest at the stated annual rate of 9.50%. Principal
payments begin in 2013 until maturity in 2019. All but $110,000 face
amount of this bond was sold as part of the 1997 Securitization described
in Note 3.

On December 12, 1996, the Company purchased for approximately
$7.7 million a mortgage revenue bond collateralized by Charter House, a
multifamily property located in Lenexa, Kansas. The bond provides for
interest at the stated annual rate of 7.45%. Principal amortization on the
mortgage began in January 1997 and continues through the initial
remarketing date in July 2006. At the remarketing date the remarketing
agent is required to adjust the interest rate to enable the bonds to be
remarketed at par but in no event shall the interest rate be greater than 12%.
Principal amortization will also be adjusted accordingly. The bond matures
in July 2026. The bond was purchased at a premium of $76,750 which is
being amortized into income to approximate a level yield over the life of the
bond. The Company may require mandatory redemption upon the
occurrence of an event which would cause significant risk that the interest
on the bond would be subject to federal income taxation. All but $35,000
face amount of this bond was sold as part of the 1997 Securitization
described in Note 3.

Also, on December 12, 1996, the Company purchased the following
three Series A bonds with stated annual interest rates ranging from 8.15%
to 8.25%: (i) a bond collateralized by Torries Chase, a multifamily property
located in Olathe, Kansas, for approximately $2.1 million; (ii) a bond
collateralized by Oakbrook, a multifamily property located in Topeka,
Kansas, for approximately $3.2 million; and (iii) a bond collateralized by
Hidden Valley, a multifamily property located in Kansas City, Missouri, for
approximately $1.7 million. The Oakbrook bond was purchased at a
premium of $32,100 which is being amortized into income to approximate
a level yield over the life of the bond. Principal amortization for Hidden
Valley and Torries Chase began in July 1996 and continues through
maturity, January 2026. Principal amortization for Oakbrook began January
1997 and continues through maturity, July 2026. Between years ten and
twelve, the bonds are subject to optional redemption at the option of the
borrowers subject to a declining penalty. The Company may require
mandatory redemption upon the occurrence of an event which would cause
significant risk that the interest on the bonds would be subject to federal
income taxation.

On June 11, 1997, the Company acquired a $11.1 million tax-exempt
mortgage revenue bond collateralized by a 215 unit multifamily
apartment project known as Southgate, located in Howard County,
Maryland. In conjunction with the bond purchase, the Company also made
a taxable loan discussed further in Note 9. The bond bears interest at a
stated annual rate of 8.0%. Principal payments began in August 1997 until
maturity in 2027. In December 1997, the entire bond was sold as part of the
1997 Securitization.

As of December 31, 1997, there were no non-participating mortgage
bonds on non-accrual status.

Subordinate Participating Mortgage Bonds

At December 31, 1997, the Company's investment in subordinate
participating mortgage bonds includes the 11 Series B Bonds resulting from
the Refunding and the Riverset Phase II B Bond. The following paragraphs
describe the general loan terms of the subordinate participating mortgage
bonds.

The Series B Bonds resulting from the Refunding, except for
Steeplechase Falls, Barkley Place and The Meadows, bear annual interest
equal to the greater of (i) three percent (3%) per annum ("base interest") and
(ii) the amount of available cash flow not exceeding 16%. To the extent
annual interest paid on these Series B Bonds for the period is less than 16%,
the difference between 16% and the greater of (i) actual interest collected
and (ii) base interest is payable on the earlier of the maturity date or the
redemption date. The Series B Bonds relating to Steeplechase Falls, Barkley
Place and The Meadows bear interest at the annual rate of 16%. Principal
amortization on these Series B Bonds prior to their maturity in January 2030
is permitted but not required. To the extent the operating partnerships have
available cash flow, as defined, interest is payable monthly.

The Series B Bonds resulting from the Refunding are subordinate in
priority and right of payment to the related Series A Bonds and Demand
Notes (discussed in Note 9) and are payable only to the extent of available
cash flow. For the years ended December 31, 1997 and 1996, interest
payments of approximately $4.1 million and $4.8 million, respectively, were
received on these Series B Bonds. All 11 of the bonds were on non-accrual
status. As of December 31, 1997 and 1996, the three Series B Bonds that
bear interest at 16% were unable to pay full base interest. Additional
interest income that would have been recognized by the Company had these
bonds not been placed on non-accrual status was approximately $693,000
and $760,000 for the years ended December 31, 1997 and 1996,
respectively.

In connection with the purchase of the Riverset II Series A bond, the
Company also acquired the related Series B mortgage revenue bond, with
a face value of $1.5 million, which was allocated $30,000 of the total
purchase price. The bond, which matures in 2019, bears interest equal to
the extent of available cash flow not to exceed the annual rate of 10%.
Principal amortization is required to the extent cash is available in
accordance with the bond terms. For the year ended December 31, 1996,
the interest and principal payments received on the bond were approximately
$25,000 and $30,000, respectively. For the year ended December 31, 1997,
no payments for interest or principal were received.

All of the participating subordinate mortgage bonds are on non-accrual
status as of December 31, 1997.

Non-Participating Subordinate Mortgage Bonds

At December 31, 1997, the Company had two investments in non-participating
subordinate mortgage revenue bonds.

On August 30, 1996, the Company purchased the following two
non-participating Series B bonds providing for interest at the stated annual
rate of 12.5%: (i) a bond collateralized by Locarno, a multifamily property
located in Kansas City, Missouri for $675,000 and (ii) a bond collateralized
by Independence Ridge, a multifamily property located in Jackson County,
Missouri for $1,045,000. Both bonds were purchased at face value.
Principal may be repaid in a lump sum payment any time after the initial
remarketing date but is required no later than the maturity date in 2015.

As of December 31, 1997, there were no non-participating
subordinate mortgage bonds on non-accrual status.

Valuation Adjustments

For the year ended December 31, 1997 and 1996, the net adjustment
to unrealized gains and losses on mortgage revenue bonds available for sale
increased shareholders' equity by approximately $13.8 million and $9.4
million, respectively. The Company recorded other-than-temporary
impairments totaling $2,580,000 on two bonds: Lakeview ($334,000) and
Villa Hialeah ($2,246,000) in the fourth quarter of 1997. The Company
recorded other-than-temporary impairments totaling $3,990,000 on five
bonds: Creekside ($1,239,000), Lakeview ($1,315,000), Willowgreen
($1,131,000), Mallard I ($143,000) and Mallard II ($162,000) in the second
quarter of 1996. For 1995, there were no other-than-temporary
impairments.

The other-than-temporary impairments (and the unrealized gains and
losses) discussed above do not affect the cash flow generated from property
operations, distributions to shareholders, the characterization of the tax-
exempt income stream nor the financial obligations under the bonds. The
Company will continue to evaluate the need for other-than-temporary
impairments in the future as circumstances dictate.

NOTE 7 - OTHER BOND RELATED INVESTMENTS

As of December 31, 1997, the Company held nine other bond related
investments which are collateralized by ten individual properties. The other
bond related investments are primarily investments in RITES, a security
offered by Merrill Lynch through its P-floats Program. The RITES are part
of a program under which a bond is placed into a trust and two types of
securities are sold by the trust, P-floats and RITES. The P-floats are the
senior security and bear interest at a rate that is reset weekly by the
Remarketing Agent, Merrill Lynch, to result in the sale of the P-floats at par.
The RITES are the subordinate security and receive the residual interest.
The residual interest is the remaining interest on the bond after payment of
all fees and the P-floats interest. In conjunction with the purchase of the
RITES, the Company entered into interest rate swap contracts to hedge
against interest rate exposure on the Company's investment in the RITES
(see further discussion in Note 8). The following table provides certain
information with respect to each of the other bond related investments.

December 31, 1997 December 31, 1996
-------- --------- ----------- -------- ---------- --------- ----------- ----------
Face Amortized Unrealized Fair Face Amortized Unrealized Fair
Other Bond Related Amount Cost Gain (Loss) Value Amount Cost Gain (Loss) Value
Investments: (000s) (000s) (000s) (000s) (000s) (000s) (000s) (000s)
- ------------------------------- -------- --------- ----------- -------- ---------- --------- ----------- ----------

RITES -Hunters Ridge/South Pointe (1) $ 3,560 $ 4,248 $ 700 $ 4,948 $ 3,600 $ 4,354 $ 299 $ 4,653
Interest rate swap on Hunters Ridge
/South Pointe (1),(3) 7,200 - (427) (427) 7,200 - (260) (260)
RITES -Indian Lake (2) 3,360 3,530 363 3,893 - - - -
Interest rate swap on Indian Lake (2),(3) 6,500 - (202) (202) - - - -
RITES-Charterhouse (2),(6) 1,930 2,196 76 2,272 - - - -
RITES -Southgate (2),(6) 2,760 3,178 217 3,395 - - - -
RITES -Southwood (2),(6) 10,320 10,308 166 10,474 - - - -
RITES -Stone Mountain (2),(6) 10,140 10,366 661 11,027 - - - -
RITES-Riverset II (2),(6) 1,875 2,222 328 2,550 - - - -
$58M Interest Rate Swap (5) (2),(3) 58,000 - (493) (493) - - - -
Stone Mountain Interest Only Strip (2) - 1,201 76 1,277 - - - -
Cinnamon Ridge Total Return Swap (2),(3) 10,570 - 264 264 - - - -
Cinnamon Ridge Interest Rate Swap (2),(3) 7,000 - (52) (52) - - - -
Purchase commitment (4) - - - - 33,900 - - -
---------- ----------- --------- --------- --------- ----------
Subtotal other bond related investments $ 37,249 $ 1,677 $ 38,926 $ 4,354 $ 39 $ 4,393
---------- ----------- --------- --------- --------- ----------

(1) 1996 Acquisition.
(2) 1997 Acquisition.
(3) Amount represents notional amount of interest rate swap agreements. See following discussion for further explanation.
(4) On November 12, 1996 the Company agreed to purchase a bond with a face amount of $33,900,000. The bond was purchased
and sold in 1997.
(5) Relates to RITES on Charter House, Southgate, Southwood, Stone Mountain and Riverset.
(6) Investment held by MMA Investments (see Note 1).

On October 15, 1996, the Company purchased $3.6 million (par
value) in Hunters Ridge/South Pointe RITES for approximately $4.4
million. For the Hunters Ridge/South Pointe P-floats and RITES, Merrill
Lynch placed into a trust $10.8 million in multifamily revenue bonds with a
coupon of 7.875% collateralized by South Pointe Apartments and Hunters
Ridge Apartments, two properties located in St. Louis, Missouri. The trust
was securitized into $7.2 million in P-floats and $3.6 million in RITES. The
$800,000 premium paid for the RITES is being amortized into income to
approximate a level yield over the term of the RITES. The RITES are
subject to mandatory semi-annual call provisions.

On July 1, 1997, the Company purchased $3.36 million (par value)
in Indian Lakes RITES for $3.5 million. For the Indian Lakes P-floats and
RITES, Merrill Lynch placed into a trust $10.1 million in multifamily
revenue bonds with a coupon of 7.375% collateralized by Indian Lakes
Apartments, located in Virginia Beach, Virginia. The trust was securitized
into $6.72 million in P-floats and $3.36 million in RITES. The premium paid
for the Indian Lakes RITES is being amortized into income to approximate
a level yield over the term of the RITES. The Indian Lakes RITES are
subject to mandatory semi-annual call provisions.

In the fourth quarter of 1997, in conjunction with the 1997
Securitization (described in Note 3), the Company retained $27.0 million
(par value) in RITES with a fair value of $29.8 million. The RITES are
subordinate to $58.8 million in P-floats. The weighted average interest rate
on the underlying bonds in the trust is 7.8%. The RITES are subject to
mandatory call provisions.

On October 30, 1997, in conjunction with the purchase of the Stone
Mountain bond, the bond was deposited into a custodian account. In return,
the Company received two custodial receipts; a receipt representing the
bond principal and tax-exempt interest up to 7.875% (the "A receipt") and
a receipt representing the interest only portion generated on the bonds in
excess of the 7.875% (the "Interest-only strip"). As part of the 1997
Securitization, the A receipt was sold to Merrill Lynch while the Company
retained the investment in the Interest-only strip. The first .75% of interest
received on the Interest-only strip (in excess of 7.875% base rate on the A
receipt) is considered must pay contingent interest based on available cash
flow. The excess available cash flow generated after the payment of 8.625%
(7.875% plus .75%) base interest, is considered contingent interest equal to
the lesser of 3.375% or one-third of available cash flow. Interest income
received from the Interest-only strip is considered taxable income for federal
income tax purposes.

On November 26, 1997, the bond collateralized by Southwood, a multifamily
property located in Richmond, Virginia was acquired for $25.8 million. The bond
bears interest at the stated annual rate of 7.375%. Principal payments begin
in 1999 until maturity in 2029. The Southwood Bond was sold as part of the
1997 Securitization described in Note 3.

On December 11, 1997, the Company entered into a total return
swap with Merrill Lynch which replicates the total return on the Cinnamon
Ridge bond financed at a rate of 4.75%. The Cinnamon Ridge bond is a
$10.6 million bond collateralized by a 264 unit multifamily apartment
complex located in Egan, Minnesota. The bond has a stated interest rate of
5.375% and matures in 2029. During the term of the swap, the Company
will receive net taxable income of approximately .625% on the face amount
of the Cinnamon Ridge bond from the total return swap. In addition to the
net taxable income received, the total return swap includes a cash settlement
at termination, whereby the Company will pay to (receive from) Merrill
Lynch an amount equal to the decline (increase) in the market value of the
underlying bond. The total return swap terminates on December 31, 1999.
The Company also entered into a $7.0 million two-year forward swap to
commence December 10, 1999 and expire in ten years. This swap hedges
the anticipated future acquisition of the Cinnamon Ridge bond and the
anticipated securitization of such bond through Merrill Lynch's P-floats
program. However, the Company has not entered into a binding contract to
either purchase or to securitize the bond.

Valuation Adjustments

For the year ended December 31, 1997 and 1996, the net adjustment
to unrealized gains and losses on other bond related investments available
for sale increased shareholders' equity by approximately $1.6 million and
$39,000, respectively.

NOTE 8 - FINANCIAL RISK MANAGEMENT AND DERIVATIVES

Since the investments securitized to date bear fixed rates of interest,
the RITES created by the securitization have interest rate risks associated
with them. To reduce the Company's exposure to fluctuating interest rates,
the Company enters into interest rate swaps which are contracts exchanging
an obligation to receive a floating rate for an obligation to pay a fixed rate.
Net swap payments received by the Company, if any, will be taxable income,
even though the investments being hedged pay tax-exempt interest. The
interest rate swaps are for limited time periods which generally match the
anticipated prepayment date of the underlying mortgage bond. However,
there is no certainty that the prepayments will occur at the end of the swap
periods. There can be no assurance that the Company will be able to acquire
the interest rate swaps on favorable terms, or at all, when the existing
arrangements expire, in which case the Company would be fully exposed to
the interest rate risk to the extent the anticipated prepayment does not occur.

The Company entered into several interest rate swap contracts to
hedge against interest rate exposure on the Company's investments in
RITES. Under the interest rate swap agreements, the Company is obligated
to pay Merrill Lynch Capital Services, Inc. (the "Counterparty") a fixed rate.
In return, the Counterparty will pay the Company a floating rate equivalent
to the PSA Municipal Swap Index, an index of weekly tax-exempt variable
rate issues. The average PSA rate for 1997 and 1996 was approximately
3.66% and 3.43%, respectively. The swap contracts, in conjunction with the
RITES, are intended to produce a relatively constant yield over the effective
duration of the RITES. Risks arise from the possible inability of the
Counterparty to meet the terms of the contracts with the Company.
However, there is no current indication of such inability. The fair value of
the interest rate swap agreements is determined based on quotes from
external sources, such as brokers, for these or similar investments.

NOTE 9 - PARITY WORKING CAPITAL LOANS AND DEMAND NOTES

Parity Working Capital Loans

As of December 31, 1997 and 1996, the Company held 10 parity
working capital loans, all relating to the remaining original bonds and having
terms similar to those of the bonds to which they relate. The carrying value
of the Company's investment in parity working capital loans is believed by
management to approximate fair value, in the absence of a readily available
market, and reflects valuation allowances of $621,000 and $713,000 at
December 31, 1997 and 1996, respectively.

At December 31, 1995, there were five parity working capital loans
on non-accrual status. No additional loans were placed on non-accrual
status during 1996 and 1997. Additional interest income that would have
been recognized had these loans not been placed on non-accrual status was
approximately $35,000, $56,000 and $68,000 for the years ended December
31, 1997, 1996 and 1995, respectively.

Demand Notes

As part of the 1995 Financing, ten parity working capital loans, and
unpaid and accrued interest thereon, aggregating approximately $4.8 million,
were converted to Working Capital Demand Notes, and unpaid and
unaccrued base interest receivable of approximately $15.5 million on the
eleven refunded original bonds were converted to Accrued Interest Demand
Notes. In addition, as discussed in Note 5, the approximately $5.0 million
loan to the operating partnerships in connection with the 1995 Financing is
a demand loan represented by the Load Loan Demand Notes.

The Working Capital, Accrued Interest and Load Loan Demand
Notes (collectively the "Demand Notes"), in the aggregate original principal
face amount of approximately $25.3 million, are due on demand, but in any
case not later than January 2030. The Demand Notes bear interest at a
compound annual rate equal to the Blended Annual Rate in effect for that
calendar year as published by the Internal Revenue Service. For 1997 and
1996, the Blended Annual Rate approximated 5.85% and 5.77%,
respectively. To the extent the operating partnerships have available cash
flow, interest on the principal amount and scheduled principal payments are
payable monthly.

On September 1, 1996, the eleven operating partnerships included
in the 1995 Financing entered into an agreement with the Company whereby
the principal amortization on the Working Capital and Load Loan Demand
Notes were suspended. This action did not change the total cash payments
received from the operating partnerships, but did result in additional interest
income of $938,000 and $313,000 for the years ended December 31, 1997
and 1996, respectively.

Additionally, on July 1, 1997, nine of the eleven operating
partnerships included in the 1995 Financing entered into an agreement with
the Company whereby the principal amortization on the Accrued Interest
Demand Notes was increased. The increase in the principal payments on
these notes was equal to the amount of principal payments suspended on the
Working Capital and Load Loan Demand Notes discussed above. This
action did not change the total cash payments received from the operating
partnerships, nor did it change total income, but did result in a
reclassification of interest income on the related Series B Bonds to interest
earned on Accrued Interest Demand Notes of $469,000 for the year ended
December 31, 1997.

For financial reporting purposes, interest income is recognized for
the portion of principal payments received that represents payment for
previously unaccrued interest. For the year ended December 31, 1997,
approximately $2.0 million was received by the Company for principal
payments on the Demand Notes, all of which was recorded as income. For
the period August 1, 1996 to December 31, 1996, approximately $722,000
was received by the Company for principal payments on the Demand Notes,
of which approximately $645,000 was recorded as income. For the periods
ended July 31, 1996 and December 31, 1995, approximately $1.5 million
and $2.2 million, respectively, was received for principal payments on the
Demand Notes, of which approximately $943,000 and $1.4 million,
respectively, was recorded as income in the financial statements of MLP II.

Other Loans

As of December 31, 1997, the Company held three other taxable
loans. The following paragraphs describe the general terms of these loans.

On January 9, 1997, in conjunction with the purchase of the bond
collateralized by The Crossings property, the Company made a loan on the
property not to exceed $844,000 of which approximately $563,000 was
drawn by the borrower. The annual stated interest rate on the loan was
8.81% until the bond refunding. On July 11, 1997, in conjunction with the
bond refunding, the loan was amended resulting in a new annual stated
interest rate of 8% on the loan. An additional $181,000 was drawn on the
loan at the time of the bond refunding. Principal payments on the bond and
the loan will be made monthly through maturity in 2027.

On June 11, 1997, in conjunction with the purchase of the bond
collateralized by the Southgate property, the Company made a $380,000
loan on the property. The loan bears interest at an annual stated rate of
8.0%. Principal payments begin in August 1997 until maturity in 2027.

On December 11, 1997, in conjunction with entering a total return
swap on the bond collateralized by the Cinnamon Ridge property, the
Company made a $120,000 loan on the property. The loan bears interest at
an annual stated rate of 8.0%. Principal payments begin in 2000 until
maturity in 2009.

For disclosure purposes, the fair value of the parity working capital
loans and other loans is determined in conjunction with the valuation of the
bonds to which they relate and is believed by management to approximate
carrying value. The Demand Notes, together with the related Series B
Bonds, primarily represent the residual interest (after the Series A Bonds
that were sold) in the cash flows of the underlying property collateral. Only
a limited market exists for both Demand Notes and the related Series B
Bonds. Also, as illustrated above, as long as the Company is entitled to the
residual cash flow, to the extent permitted under the terms of the Demand
Notes and the related Series B Bonds, the specific cash flows applicable to
each of the residual interests may be altered from time-to-time.
Accordingly, it is difficult and, in the opinion of management, not meaningful
to estimate a separate fair value for the Demand Notes. However, under the
assumption that the fair value of the parity working capital loans
approximates their carrying value, and using discounted cash flow analyses
for the Demand Notes based on their terms as they existed at December 31,
1997 and 1996, an aggregate fair value for the Company's investment in
parity working capital loans and Demand Notes could be estimated to be
$20.9 million and $19.3 million at December 31, 1997 and 1996,
respectively.

NOTE 10- RESTRICTED ASSETS

On June 30, 1997, the Company acquired a 99.9% member interest
in MMACap for $1.0 million. As a result of this acquisition, the consolidated
financial statements of the Company include MMACap. The only asset of
MMACap is a $1.3 million Fannie Mae risk-sharing collateral account. The
collateral account is part of a structured finance program developed by
Fannie Mae to facilitate the credit enhancement of bonds for which there is
shared risk. The risk-sharing collateral account provides additional security
for three enhanced bonds currently within a cross collateralized pool. In the
event any of the bonds in the pool cannot fund their debt service payments,
the money in the collateral account can be used to fund debt service short
falls. The Company does not believe that any loss is likely. The collateral
account will not be released to the Company until the interest and principal
obligations on all the bonds are fulfilled. The release of the collateral
account is anticipated to be in 2006 when the bonds are expected to be
refunded. In the interim, the Company will receive the interest earned on
the balance of the collateral reserve account. The approximate $360,000
discount on the purchase has been recorded as unearned revenue and will be
amortized into income as guarantee fee revenue over the expected life of the
collateral account.

As part of the purchase of this collateral account, the Company
assumed a Master Recourse Agreement with Fannie Mae. Under this
agreement, the Company can add additional assets to the existing pool
discussed above. This will enable the Company to securitize bonds with
Fannie Mae credit enhancement. As bonds are added to the pool, the
expected life on the collateral account may be adjusted.

NOTE 11- UNEARNED REVENUE

In addition to the unearned revenue resulting from the purchase of
the risk-sharing collateral account (discussed in Note 10), the Company
received $107,000 in fees associated with the origination of the Cinnamon
Ridge transaction, which are deferred and recorded as unearned revenue.
These fees are then amortized into income to approximate a level yield over
the estimated life of the underlying bond. The Company also received a loan
guarantee fee in December 1996 that was deferred and amortized into
income over the term of the guarantee period.

On July 7, 1997, the Company entered into a joint program with the
Montford Companies to originate tax-exempt transactions. The Company
and the Montford Companies agreed to work jointly over an initial two year
period to invest in tax-exempt trust certificates backed by tax-exempt
housing bonds. The Company anticipates acquiring up to $50 million in
senior interest tax-exempt bonds through this joint program; however, the
Company is not obligated to acquire any bonds as a result of entering this
program. The Company received a $250,000 program development fee for
structuring, documenting, underwriting and generally developing the
program. This fee is being amortized into income over the term of the
program.

NOTE 12 - RELATED PARTY TRANSACTIONS

Upon consummation of the Merger (see Note 4), all employees of an
affiliate of the former Managing General Partner of the Partnership who
were necessary for the prudent operations of the Company became
employees of the Company, which now incurs their salary expenses directly.
Certain administrative services, including services performed by shared
personnel, continue to be performed by an affiliate that receives direct
reimbursement from the Company on a monthly basis. The expense
associated with the shared personnel was previously charged to salaries as
shown in the following table.

For the years ended December 31,
----------- ----------- -------------
1997 1996 1995
(000's) (000's) (000's)
----------- ----------- -------------

Charged to Series I:
Salaries of noncontrolling persons &
related expenses $0 $321 $458
Other administrative expenses - 51 95
----------- ----------- -------------
Expenses reimbursed $0 $372 $553
=========== =========== =============
Charged to Series II:
Salaries of noncontrolling persons &
related expenses $0 $154 $220
Other administrative expenses - 25 46
----------- ----------- -------------
Expenses reimbursed $0 $179 $266
=========== =========== =============
Charged to Company subsequent to July 31, 1996:
Other administrative expenses $282 $56 $0
=========== =========== =============
Total:
Salaries of noncontrolling persons &
related expenses $0 $475 $678
Other administrative expenses 282 132 141
----------- ----------- -------------
Expenses reimbursed $282 $607 $819
=========== =========== =============

Mr. Mark K. Joseph, the Company's Chairman and Chief Executive
Officer, controls and is an officer of, and Mr. Michael L. Falcone, the
Company's President, has an interest in and is a board member of, an entity
which is responsible for a full range of property management functions for
certain properties that serve as collateral for the Company's bond
investments. For these services the affiliates receive property management
fees pursuant to management fee contracts. Consistent with the Company's
Amended and Restated Certificate of Formation and Operating Agreement
(the "Operating Agreement"), each affiliate property management contract
is presented to the independent members of the Board of Directors for
approval with information documenting the comparability of the proposed
fees to those in the market area of the property. During the years ended
December 31, 1997, 1996 and 1995, these fees approximated $756,000,
$638,000, and $589,000, respectively.

Mr. Joseph owns an indirect interest in the general partners of the
Southgate Crossings operating partnership. Also, Mr. Joseph controls the
general partners of 17 of the 22 operating partnerships whose property
collateralizes the Company's original bonds and Mr. Thomas R. Hobbs, the
Company's Senior Vice President, serves as an officer of such general
partners. In order to preserve the loan obligations and the participation in
cash flow for the Company and thereby assure that the Company will
continue to recognize tax-exempt income, 13 of the 17 operating
partnerships were created as successors to the original borrowers. With
respect to the other four operating partnerships, an entity controlled by Mr.
Joseph was designated as the general partner of the original borrowing
entities. However, such entities could have interests which do not fully
coincide with, or even are adverse to, the interests of the Company. Such
entities could choose to act in accordance with their own interests, which
could adversely affect the Company. Among the actions such entities could
desire to take might be selling a property, thereby causing a redemption
event, at a time and under circumstances which would not be advantageous
to the Company.

Shelter Development Holdings, Inc. (the "Special Shareholder") is
personally liable for the obligations and liabilities of the Company. Mr.
Joseph owns 100% of the Special Shareholder. In the event that a business
combination or change in control occurs, and the Special Shareholder does
not approve of such transaction, then the Special Shareholder has the right
to terminate its status as the Special Shareholder. In the event of such
termination, the Company would be obligated to pay the Special Shareholder
$1,000,000.

Prior to the Merger, the former Associate General Partner received fees
for mortgage servicing from the operating partnerships owning the
mortgaged properties. The fees paid by all operating partnerships to the
former Associate General Partner approximated $1.2 million for the period
January 1 through July 31, 1996 and approximately $2 million for the year
ended December 31, 1995. As discussed in Note 4, on August 1, 1996, the
former General Partners and their affiliates contributed to the Company their
mortgage servicing activities in exchange for Growth Shares, and the
Company now receives the cash flow associated with these fees. Upon
receipt of the mortgage servicing activities, the Company terminated the
mortgage servicing fees paid on bonds collateralized by properties controlled
by affiliates of the Company. As a result, the Company now receives these
fees in two forms, (1) as mortgage servicing fees from the bonds
collateralized by properties controlled by non-affiliates, and (2) as
additional bond interest for bonds collateralized by properties controlled by
affiliates of the Company. For the year ended December 31, 1997, the cash flow
associated with these fees paid to the Company approximated $495,000 in
mortgage servicing fees and $1.5 million in additional bond interest. For the
five months ended December 31, 1996, the cash flow associated with these
fees paid to the Company approximated $206,000 in mortgage servicing fees
and $616,000 in additional bond interest.

An affiliate of the former Managing General Partner was engaged as
MLP II's exclusive project acquisition and servicing agent. The affiliate
received as compensation, project selection and acquisition fees (one percent
of the gross proceeds) and annual mortgage servicing fees to the extent the
net proceeds raised by the 1995 Financing are permanently invested. On
August 1, 1996, the rights to these fees were exchanged for Growth Shares
in connection with the Merger transaction. Prior to the Merger, $97,000 was
earned by the affiliate related to such fees.

In addition, 177061 Canada Ltd. (formerly Shelter Corporation of
Canada Limited), a general partner of the former Associate General Partner,
is contractually obligated to the nonaffiliated borrowers of North Pointe and
Whispering Lake to fund operating deficits. The unaccrued and unpaid
balances due under the limited operating deficit guarantees, including
interest as of December 31, 1997, totaled $27,000 and $33,000 for North
Pointe and Whispering Lake, respectively. Scheduled payments totaling
$63,000, $98,000 and $ 116,000 were received on the North Pointe
obligation and recorded as income during 1997, 1996 and 1995,
respectively. Under the Whispering Lake obligation, $33,000, $139,000 and
$165,000 were received and recorded as income during 1997, 1996 and
1995, respectively.

In October 1997, the Company purchased a $33.9 million bond
collateralized by the Village of Stone Mountain. The Company subsequently
sold this bond and as a result at December 31, 1997 owns a RITES
investment and interest-only strip which represent an interest in the cash
flows from this $33.9 million bond. The borrower of the $33.9 million
mortgage revenue bond is the Shelter Foundation, a public non-profit
foundation that provides housing and related services to families of low and
moderate income. Mark K. Joseph, the Company's Chairman and Chief
Executive Officer, is the President and one of five directors of the Shelter
Foundation. In addition, companies of which Mr. Joseph owns an indirect
minority interest and Mr. Falcone owns a direct minority interest, received
a development fee of 1.0% of the loan amount and serve as property
manager of the related apartment project for a fee of $13,750 per month.

An affiliate of Merrill Lynch owns 1,250 Term Growth Shares of the
Company and 128,367 Growth Shares. The Company may from time to time
enter into various investment banking, financial advisory and other
commercial services with Merrill Lynch for which Merrill Lynch receives
and will receive (in the future) customary compensation. The Company also
enters into various RITES and interest rate swap transactions with Merrill
Lynch on terms generally available in the marketplace.

NOTE 13 - SHAREHOLDERS' EQUITY

The Company's Preferred Shares, Preferred CD Shares, Term Growth
Shares and Growth Shares differ principally with respect to allocation of
income and cash distributions, as provided by the terms of the Operating
Agreement as summarized below. In addition, the Preferred Shares and
Preferred CD Shares, which retain their BAC series distinctions, have
priority over the Growth Shares and Term Growth Shares with respect to
distributions and redemptions.

Preferred Shares

Taking into account their respective series distinctions, the Preferred
Shares are allocated their proportionate share of the income generated by the
22 original bonds and related parity working capital loans held by the
Partnership immediately prior to the 1995 Financing (collectively the
"original bonds") including income attributable to the refunded Series A
Bonds no longer held by the Company. While the Preferred Shares bore
their proportionate share of the expenses of the Refunding and will bear their
share of the expenses of any future refunding of the original bonds, the
Preferred Shares are not allocated any income or expense related to the 1995
Financing and the investment of the proceeds therefrom or from any future
financings. The Company is required to distribute to the holders of the
Preferred Shares cash flow attributable to such shares, as defined by the
Operating Agreement. The Preferred Shares must be partially redeemed
when any bond attributable to the shares is sold or beginning in the year
2000 when any bond attributable to the shares reaches par value (which
includes accrued but unpaid base interest under the original bond terms and
accrued but unpaid interest under the then-current bond terms) based on
receipt of an appraisal of the property securing the bond. Additionally,
beginning in the year 2004, and every second year thereafter, Preferred
Shareholders may exchange their remaining Preferred Shares, at the then
current value of the remaining attributable assets for either Growth Shares
or cash, as determined by the Company's Board of Directors.

Preferred CD Shares

The Preferred CD Shares are allocated their proportionate share of
income on the same basis as the Preferred Shares, except that in addition the
Preferred CD Shares received a one-time special distribution of their
proportionate share of the net proceeds from the 1995 Financing, will
receive a similar distribution with respect to any future financings of the
original bonds, are not allocated any income attributable to the refunded
Series A Bonds and are allocated their proportionate share of the annual
costs of the 1995 Financing (and any such future financings utilizing any of
the original bonds). The Company is required to distribute to the holders of
the Preferred CD Shares cash flow attributable to such shares, as defined by
the Operating Agreement. The Preferred CD Shares must be partially
redeemed when any bond attributable to the shares is sold or beginning in
the year 2000 when any bond attributable to the shares reaches par value
(which includes accrued but unpaid base interest under the original bond
terms and accrued but unpaid interest under the then-current bond terms)
based on receipt of an appraisal of the property securing the bond.
Additionally, beginning in the year 2004, and every second year thereafter,
Preferred CD Shareholders may exchange their remaining Preferred CD
Shares, at the then current value of the remaining attributable assets, for
either Growth Shares or cash, as determined by the Company's Board of
Directors.

Term Growth Shares

The Term Growth Shares are allocated an aggregate of 2% of the
Company's net cash flow after allocation to the Preferred Shares and
Preferred CD Shares, and the holders of the Term Growth Shares are
entitled to distribution of the cash flow attributable to such allocable income
before any distributions to the holders of the Growth Shares. Term Growth
Shares will be redeemed when Preferred and Preferred CD Shares are fully
redeemed or converted (subject to certain conditions defined in the
Operating Agreement).

Growth Shares

The Growth Shares are allocated the balance of the Company's income
after allocation to the Preferred Shares, Preferred CD Shares and Term
Growth Shares. Consequently, the Growth Shares are allocated their
proportionate share of the income generated by the original bonds
(excluding the income generated by the Series A Bonds that serve as
collateral for the Receipts) and all of the income generated by bonds
acquired with the proceeds from the 1995 Financing and any future
financings. As of December 31, 1997, it is the Company's policy to distribute
to the holders of the Growth Shares approximately 95% of cash flow from
operations after distributions to the holders of the Preferred Shares,
Preferred CD Shares and Term Growth Shares.

The following table reflects distributions for the year ended December 31,
1997 and includes distributions declared and paid in 1998 for the quarter
ended December 31, 1997.

Preferred Capital
Growth Preferred Shares Distribution Shares
Shares Series I Series II Series I Series II
--------- --------- ---------- ---------- ------------

Distributions related to the year ended December 31, 1997:
Distributions paid on May 9, 1997
to holders of record on April 28, 1997:
For the three months ended March 31, 1997 $ 0.3450 $ - $ - $ - $ -

Distributions paid on August 4, 1997
to holders of record on July 21, 1997:
For the three months ended June 30, 1997 0.3500 - - - -
For the six months ended June 30, 1997 - 26.25 30.64 21.57 25.00

Distributions paid on November 3, 1997
to holders of record on October 20, 1997
For the three months ended September 30, 1997 0.3650 13.50 15.35 11.00 12.50

Distributions paid on January 22, 1998
to holders of record on January 12, 1998
For the three months ended December 31, 1997 0.3700 - - - -

Distributions paid on February 26, 1998
to holders of record on February 16, 1998
For the three months ended December 31, 1997 (unadudited) - 13.82 16.88 11.22 13.14
--------- ---------- ---------- --------- ----------
Total 1997 Distributions $ 1.4300 $ 53.57 $ 62.87 $43.79 $ 50.64
========= ========== ========== ========= ==========

NOTE 14 - OTHER INCOME

For the year ended December 31, 1997 and 1996, the Company's other
income included mortgage servicing fees received from the bonds that are
collateralized by properties controlled by non-affiliates (see Note 12) and
guarantee fees received from the Village of Stone Mountain. Also in 1997,
the Company recognized $40,000 of the program development fee received
from the Montford Group discussed further in Note 11.

For the years ended December 31,
1997 1996
-------------- -----------------

Mortgage servicing fees $ 502 $ 206
Guarantee fees 609 -
Other 58 25
-------------- -----------------
Total other income $ 1,169 $ 231
============== =================

NOTE 15 - EARNINGS PER SHARE

For the year ended December 31, 1997, the Company adopted the
provisions of FAS 128, which requires dual presentations of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. This statement is effective for financial statements issued
for all periods ending after December 15, 1997 and requires restatement of
all prior periods presented.

A single presentation of basic EPS is presented for BACs, Preferred
Shares and Preferred CD Shares because there were no potentially dilutive
shares outstanding during the periods presented. Earnings per BAC (for
periods prior to August 1, 1996) are calculated on a Series basis using the
income or loss attributable to Series I and Series II and the average number
of BACs of each Series outstanding. Earnings per share for Preferred
Shares and Preferred CD Shares are calculated by dividing net income
allocable to the shares by the average number of shares outstanding.

A dual presentation of basic and diluted EPS is presented for Growth
Shares. Basic EPS is calculated by dividing net income allocable to Growth
Shares by the weighted average number of Growth Shares outstanding. In
addition to Growth Shares that are issued and outstanding, the weighted
average shares outstanding includes the Deferred Shares payable under the
Directors' Plan (see Note 16) and the vested portion of restricted shares
granted to officers (see Note 16).

The calculation of diluted EPS is similar to that of basic EPS except that
the denominator is increased to include the number of additional shares that
would have been outstanding if the restricted shares had vested, options
granted had been exercised and the Preferred Shares and Preferred CD
Shares had been converted to Growth Shares. Accordingly, the numerator
is adjusted to add back the income allocable to the Preferred and Preferred
CD Shares, as well as the Term Growth Shares, that would have been
allocated to Growth Shares as a result of the conversion of these shares. The
diluted EPS calculation does not assume conversion if the conversion would
have an anti-dilutive effect on EPS. The following tables reconcile the
numerators and denominators in the basic and diluted EPS calculations for
1997 and 1996:

For the year ended December 31, 1997 For the period ended December 31, 1996
(in thousands, except share and per share data) (in thousands, except share and per share data)
----------- --------------- ----------------- ------------- -------------- ---------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ---------------- -------------- ------------- -------------- ---------------

Basic EPS

Income allocable to growth shares $ 16,739 11,094,881 $ 1.51 $ 6,275 11,122,705 $ 0.56
============ ===========
Effect of Dilutive Securities

Options and restricted shares - 59,611 - 343

Convertible preferred shares
(including term growth shares) 2,058 1,383,025 - -
------------ ----------------- ------------ ---------------
Dilutive EPS

Income allocable to growth shares
plus assumed conversions $ 18,797 12,537,517 $ 1.50 $ 6,275 11,123,048 $ 0.56
============ ================= ============ ============ ============== ===========

For the period ended December 31, 1996, the effect of the potential dilution
from the conversion of the preferred shares is not included in the calculation
of diluted EPS because the effect of the conversion would have been
anti-dilutive.

NOTE 16 - NON-EMPLOYEE DIRECTORS' SHARE PLAN AND
EMPLOYEE INCENTIVE PLAN

1996 Non-Employee Directors' Share Plan

On July 31, 1996, the Company adopted the 1996 Non-Employee
Directors' Share Plan (the "Directors' Plan") for the purpose of providing a
means to attract and retain highly qualified persons to serve as non-employee
directors of the Company. Under the plan, an option to purchase 2,500
Growth Shares will be granted to each director when first elected or
appointed to the Board of Directors and each year thereafter on the date of
the annual meeting of shareholders. The exercise price of such options will
be equal to 100% of the fair market value of the Growth Shares on the date
of grant. Options expire at the earlier of ten years after the date of grant or
one year after the date a director ceases to serve as such. The options
become exercisable in full on the first anniversary of the date of grant. There
are 50,000 Growth Shares reserved for issuance under the plan. At
December 31, 1997, the Directors' Plan had 12,500 shares immediately
exercisable.

The Directors' Plan also entitles each director to elect to receive payment
of directors' fees in the form of Growth Shares, based on their fair market
value on the date of payment, in lieu of cash payment of such fees. Such
shares may also be paid on a deferred basis, whereby the shares payable (the
"Deferred Shares") are credited to the account of the director, and future
dividends payable with respect thereto are paid in the form of additional
share credits based upon the fair market value of the Growth Shares on the
record date of the dividend payment. As of December 31, 1997, 721
Growth Shares and 3,685 Deferred Shares had been issued to directors in
lieu of cash payments for director fees.

1996 Share Incentive Plan

On July 31, 1996, the Company adopted the 1996 Share Incentive Plan
(the "1996 Plan") to retain and reward executive officers and other key
employees of the Company. The 1996 Plan authorizes grants of a broad
variety of awards, including non-qualified stock options, share appreciation
rights, restricted shares, deferred shares and shares granted as a bonus or in
lieu of other awards. Initially, 883,033 Growth Shares are reserved for
issuance under the 1996 Plan, except that shares issued as restricted shares
and as awards, other than options (including restricted shares), may not
exceed 20% and 40% of the total reserved under the 1996 Plan,
respectively. The exercise price of options granted under the 1996 Plan will
be equal to 100% of the fair market value of the Growth Shares on the date
of grant. The following paragraphs describe the awards issued under the
1996 Plan for the year ended December 31, 1997.

Growth Share Options

The exercise price of Growth Share options granted under the 1996 Plan
is equal to 100% of the fair market value of the Growth Shares on the date
of grant. The options vest over three years. In the event of a change in
control of the Company (as defined in the 1996 Plan), the options shall
become immediately and fully exercisable. In addition, the Company may,
at any time, accelerate the exercisability of all or a specified portion of the
options. Generally, the options expire ten years from date of grant.
However, options will expire immediately upon the termination of
employment for cause and three months after termination of employment for
reasons other than death, disability or normal or early retirement. In the
event of death, disability or retirement, the options will expire one year after
such event. As of December 31, 1997, no options had vested.

Growth Share Appreciation Rights

On November 11, 1997, 3,000 Growth Share appreciation rights
("SARs") were awarded to certain employees under the 1996 Plan. The
exercise price of the SARs was equal to 100% of the fair market value of the
Growth Shares ($19 per share) on the date of grant and are exercisable for
cash only. The SARs vest over three years and generally expire ten years
from date of grant. In the event of a change in control of the Company (as
defined in the 1996 Plan), the SARs shall become immediately and fully
exercisable. In addition, the Company may, at any time, accelerate the
exercisability of all or a specified portion of the SARs. However, the SARs
will expire immediately upon the termination of employment for cause and
three months after termination of employment for reasons other than death,
disability or normal or early retirement. In the event of death, disability or
retirement, the SARs will expire one year after such event. As of December
31, 1997, no SARs had vested.

Restricted Shares

On April 24, 1997, 10,769 restricted shares were awarded under the
1996 Plan and vest ratably through July 31, 1999 so long as the officer
remains in the continuous employ of the Company. The fair market value
of the award on the date of grant was approximately $182,000. On
December 2, 1997, the Company awarded 93,030 restricted shares under the
1996 Plan to certain officers with a fair market value of approximately $1.86
million on the date of grant. These restricted share awards vest over ten
years so long as the officers remain in the continuous employ of the
Company. The restricted share awards also provide for accelerations of
vesting on a discretionary basis, upon a change in control and death or
disability. As of December 31, 1997, 9,374 restricted shares had vested.
The Company recorded unearned compensation equal to the fair market
value of the awards, which is shown as a separate component of
shareholders' equity. Unearned compensation is being amortized into
expense over the vesting period. For the year ended December 31, 1997,
the Company recognized compensation expense of $177,000 relating to the
restricted shares.

The following table summarizes the activities relating to the Directors' Plan
and the 1996 Plan for the years ended December 31, 1997 and 1996.

1996 Non-Employee Directors' Share Plan:
Option Price Number of
Per Share Shares
--------------- ----------

Options outstanding at December 31, 1995 $ - -

Granted 14.7500 12,500
Exercised - -
Expired - -
----------------- -----------
Options outstanding at December 31, 1996 14.7500 12,500

Granted 16.8125 12,500
Exercised - -
Expired - -
---------------------- ----------
Options outstanding at December 31, 1997 $14.7500 - 16.8125 25,000
====================== ==========

1996 Share Incentive Plan:

Outstanding at December 31, 1996 $ - -

Granted 16.875 - 19.000 677,470
Exercised - -
Expired - -
----------------------- --------
Outstanding at December 31, 1997 $ 16.875 - 19.000 677,470
======================= =========

Compensation Expense

The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock issued to Employees," in accounting for these plans.
Accordingly, no compensation expense has been recognized for the options
issued under either plan during 1997 or 1996. Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), requires the Company to make certain disclosures as if the
compensation expense for the Company's plans had been determined based
on the fair market value at date of grant for awards under those plans.
Accordingly, the Company estimated the grant-date fair value of each
option awarded in 1997 and 1996 using the Black-Scholes option-pricing
model with the following weighted-average assumptions: dividend yield of
7.5%, expected volatility of 10%, risk-free interest rate of 6% and expected
lives of 7.5 years in 1997 and 1996. Had 1997 compensation expense been
determined including the weighted-average estimate of the fair value of each
option granted of $0.65, the Company's net income allocable to Growth
Shares would be reduced to a pro forma amount of $16.3 million. Pro
forma basic and diluted earnings per Growth Share would be $1.47 and
$1.46, respectively, in 1997. For the period ended December 31, 1996, the
Company estimated the fair value at the date of grant of each option award.
However, on a pro forma basis, net income allocable to Growth Shares and
earnings per Growth Share would have remained unchanged for 1996.
These pro forma disclosures are not representative of the effects on reported
net income and earnings per share for future years since the options granted
were the first options granted by the Company since its shares began trading
on August 30, 1996, the options primarily vest over three years and
additional awards may be made in future years.

NOTE 17 - DIVIDEND REINVESTMENT PLAN

On September 4, 1997, the Company created a Dividend Reinvestment
and Growth Share Purchase Plan (the "DRP Plan") to allow Growth
shareholders to buy additional Growth Shares through dividend
reinvestment. The DRP Plan provides for issuance of up to 450,000 Growth
Shares. All purchases under the DRP Plan are without payment of
brokerage commissions or service charges. The price paid for Growth
Shares purchased by the plan will be 100% of the average price of all
Growth Shares purchased by the agent in the open market with respect to
a related dividend payment date. In the future, it is expected that the plan
will allow optional cash investments ranging from $100 to $5,000 per
quarter.

NOTE 18 - SHARE REPURCHASE PROGRAM

On August 28, 1996, the board of directors approved a Growth Share
repurchase program under which the Company is authorized to repurchase
up to 700,000 Growth Shares from time to time through February 28, 1997,
the expiration date, in the open market and in privately negotiated
transactions. As of December 31, 1996, the Company had purchased
60,798 shares at an average
price of $15.34 per share. No Growth shares were repurchased during 1997.

NOTE 19 - SUBSEQUENT EVENTS

Preferred Share Tender Offer

On November 26, 1997, the Company offered to purchase up to 20% of
the preferred shares for cash at approximately 80% of the September 30,
1997 book value for each class as a result of a tender offer made by an
unaffiliated third party, Sierra Fund 3 (the "Sierra Offer"). The Sierra Offer
was for 4.9% of the outstanding shares of each class of preferred shares at
prices ranging from between 50% to 60% of the September 30, 1997 book
value of each class. The Company recognized that there may be preferred
shareholders who desire liquidity. Accordingly, the Company determined
to offer 80% of the September 30, 1997 book value of each class so that
preferred shareholders who decide to liquidate would be able to do so at
higher prices. The offer, proration period and the withdrawal rights expired
at midnight, eastern time, on December 26, 1997. As a result, on January
1, 1998, 739 Series I and 287 Series II Preferred Shares which had been
tendered and purchased at the per share price of $593.43 and $711.77,
respectively, and 584 Series I and 274 Series II Preferred CD Shares which
had been tendered and purchased at the per share price of $448.77 and
$506.67, respectively.

Growth Share Offering (unaudited)

On January 26, 1998, the Company sold to the public 3,000,000 Growth
Shares at a price of $20.625 per share and granted the underwriters an
option to purchase up to an aggregate of 450,000 Growth Shares to cover
over-allotments at the same price. The net proceeds from this offering are
intended to fund bond acquisitions totaling $116 million. Net proceeds on
the 3,000,000 shares approximated $57.8 million. On February 13, 1998,
the underwriters exercised their option to purchase 246,000 Growth Shares
generating net proceeds of approximately $4.8 million.

Purchase of Bond Pool (unaudited)

On February 4, 1998, the Company completed an investment transaction
involving an $84,500,000 mortgage revenue bond pool collateralized by ten
properties located in Florida and Missouri. The bond pool contains four
bonds issued by Dade and Broward Counties, Florida and St. Louis County,
Missouri. The Company's investment consisted of $81 million of bonds with
an interest rate of 7.125% and a $3.5 million bond with an interest rate of
12%. The collateral for these bonds are multifamily apartment communities,
eight located in Dade County, one in Broward County and one in St. Louis
County. The ten properties total 1,903 units. Subsequent to the purchase of
these bonds, the Company sold the $81 million of bonds to Merrill Lynch.
Merrill Lynch then securitized the bonds into approximately $80 million in
P-floats and $1 million in RITES. The Company retained the RITES.

On January 14, 1998 the Company entered into an interest rate swap
contract for a notional amount of $73 million to hedge against interest rate
exposure on the RITES investments. The agreement is effective February
2, 1998. Under the swap agreement, the Company is obligated to pay the
Counterparty a fixed rate equal to 4.37%. In return, the Counterparty is
obligated to pay the Company a floating rate equivalent to the BMA
Municipal Swap Index (formerly known as the PSA Municipal Swap Index)
an index of weekly tax-exempt variable rate issues. The interest rate swap
agreement terminates February 1, 2008.

Purchase of Palisades Park (unaudited)

On February 11, 1998, the Company originated a $9.5 million taxable
mortgage loan collateralized by a 328 unit multifamily apartment project
known as Palisades Park located in Universal City, Texas. The six month
loan was made as short term financing pending issuance, by the Bexar
County Housing Finance Corporation, of a tax-exempt mortgage revenue
bond not to exceed $9.65 million with a base interest of 7.125%. The
Company has committed to acquire this bond when it is issued. The
mortgage loan bears interest at a stated annual rate of 8.5%. The Company
earned a 2.0% origination fee on the transaction and will act as the servicing
agent for the bond.

Interest Rate Swap Contract (unaudited)

On February 24, 1998, the Company entered into an interest rate swap
contract for a notional amount of $9.7 million in order to hedge a pending
acquisition. Under the interest rate swap agreement, the Company is
obligated to pay the Counterparty a fixed rate of 3.9%. In return, the
Counterparty will pay the Company a floating rate equivalent to the BMA
Municipal Swap Index. The swap contract is intended to produce a relatively
constant yield over the effective duration of a pending acquisition.

Sale of Bond Related Investment (unaudited)

On February 27, 1998, the Company sold for $5.0 million the RITES
associated with Hunters Ridge/South Pointe which resulted in a gain of $0.7
million. Also, the Company terminated the $7.2 million interest rate swap
contract associated with this investment at a cost of $0.4 million. As a result
of the sale of the RITES and the termination of the swap, the Company
recognized a net gain of approximately $0.3 million. Included in this amount
is a portion of the net unrealized gain associated with the RITES of $0.7
million and the net unrealized loss associated with the swap of approximately
$0.4 million.

Sale of Put Option (unaudited)

On February 26, 1998, the Company entered into a put option with
Merrill Lynch Capital Services, Inc. whereby Merrill Lynch has the right to
sell to the Company, and the Company has the obligation to buy, a pool of
participating tax-exempt mortgage revenue bonds with a combined face
amount of $120 million for a purchase price of $105 million. Under this
three year option, the Company receives an annual payment equal to 20
basis points of the average principal amount of the bonds in the pool, or
approximately $0.2 million, for assuming the purchase obligation. The
purchase price can be reduced by up to 10% in the event of a material
adverse change (as defined in the put agreement).

NOTE 20 - QUARTERLY RESULTS (Unaudited):

QUARTERLY RESULTS (unaudited)
(in thousands, except per share and per BAC data)

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------- ----------- ----------- -----------
Year ended December 31, 1997:
Total income $5,344 $5,326 $5,679 $8,990
Net income (loss) 4,532 4,587 4,789 4,889

Net income per share:
Preferred shares:
Series I 13.55 14.00 14.44 1.08
Series II 16.05 15.90 16.01 16.88

Preferred capital distribution shares:
Series I 11.18 11.18 11.63 (1.40)
Series II 12.61 11.61 12.34 13.14

Growth shares:
Basic 0.36 0.36 0.38 0.42
Diluted 0.36 0.36 0.37 0.39

Growth share Market Price Data*:
High $17 7/8 $17 3/8 $19 7/8 $20 7/8
Low 15 1/2 16 1/4 17 19

Year ended December 31, 1996:
Total income $4,069 $4,526 $5,179 $4,896
Net income (loss) 3,222 (420) 3,987 4,079

Net income (loss) per BAC prior to August 1, 1996:
Series I 10.35 (7.49) 2.47 N/A
Series II 11.63 11.24 3.18 N/A

Net income per share subsequent to July 31, 1996:
Preferred shares:
Series I N/A N/A 10.19 12.65
Series II N/A N/A 11.14 16.10

Preferred capital distribution shares:
Series I N/A N/A 8.70 10.16
Series II N/A N/A 8.92 12.61

Growth shares:
Basic N/A N/A 0.25 0.31
Diluted N/A N/A 0.25 0.31

Growth share Market Price Data*:
High N/A N/A $16 $16 3/4
Low N/A N/A 14 1/8 13 7/8

*Since August 30, 1996 the Company's Growth Shares have been traded on the
American Stock Exchange (the "AMEX") under the symbol "MMA". Set forth
above are the high and low sale prices for the Growth Shares for each
calendar quarter (since trading began) in 1996 as reported by the AMEX.
Amounts shown represent actual sales transactions as reported by the AMEX.

Exhibit 23
Consent of Price Waterhouse LLP

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-17427), Form S-3 (No. 333-20945) and Form S-3
(No. 333-34925) of Municipal Mortgage and Equity, LLC of our report dated
February 4, 1998 appearing in Item 14(a)(1) of this Form 10-K.

/s/ Price Waterhouse

Linthicum, Maryland
March 25, 1998