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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

(Mark one)

    X         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the fiscal year ended December 31, 1996

                                       OR


            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission file number 1-22262

                             COMMERCIAL ASSETS, INC.
             (Exact name of registrant as specified in its charter)

                   Maryland                             84-1240911
       (State or other jurisdiction of                (IRS Employer
        incorporation or organization)             Identification No.)

    3600 South Yosemite Street, Suite 350                 80237
               Denver, Colorado                         (Zip Code)
   (Address of Principal Executive Offices)

                                 (303) 773-1221
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

          Common Stock,
    par value $.01 per share          American Stock Exchange, Inc.
      (Title of each class)    (Name of each exchange on which registered)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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

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

As of February 28, 1997,  10,315,809  shares of Commercial  Assets,  Inc. Common
Stock were outstanding, and the aggregate market value of the shares (based upon
the closing  price of the Common  Stock on that date as reported on the American
Stock Exchange, Inc.) held by non-affiliates was approximately $49,000,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K is incorporated by reference to the registrant's 1997
definitive  proxy  statement  to be  filed  with  the  Securities  and  Exchange
Commission no later than 120 days after the end of the registrant's fiscal year.

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<PAGE>

                             COMMERCIAL ASSETS, INC.

                                    FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1996

                                TABLE OF CONTENTS



Part I                                                                      PAGE
ITEM 1.   BUSINESS.
          (a) General Development of Business..............................   1
          (b) Narrative Description of Business............................   2
ITEM 2.   PROPERTIES.......................................................  11
ITEM 3.   LEGAL PROCEEDINGS................................................  12
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............  12

Part II
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          SHAREOWNER MATTERS...............................................  12
ITEM 6.   SELECTED FINANCIAL DATA..........................................  12
ITEM 7.   MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL
          CONDITION  AND RESULTS OF OPERATIONS.............................  13
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... F-1
ITEM 9.   CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON
          ACCOUNTING  AND FINANCIAL DISCLOSURE.............................  22

Part III
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............  22
ITEM 11.  EXECUTIVE COMPENSATION...........................................  22
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT.......................................................  22
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................  22

Part IV
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
          ON FORM 8-K......................................................  23

          SIGNATURES.......................................................  26


                                      (i)
<PAGE>

                                     PART I


Item 1. BUSINESS.

         (a)      General Development of Business.

         Commercial Assets, Inc. (the "Company") was incorporated under the laws
of Maryland on August 31, 1993, as a wholly-owned  subsidiary of Asset Investors
Corporation,  a  Maryland  corporation,  which is listed  on the New York  Stock
Exchange,  Inc.  under the symbol  "AIC"  ("Asset  Investors").  Pursuant to the
agreement  dated August 20, 1993,  between Asset  Investors and the Company (the
"Contribution  Agreement"),  Asset  Investors  contributed  $75,000,000  to  the
initial capital of the Company, including $200,000 in cash. On October 12, 1993,
Asset Investors  distributed  approximately 70% of the outstanding common stock,
par  value of $.01 per  share,  of the  Company  ("Common  Stock")  as a taxable
dividend to Asset Investors' shareowners. Prior to the distribution, the Company
had not engaged in any  activities  other than those  related to its  formation.
Asset  Investors  currently owns  approximately  27% of the  outstanding  Common
Stock. The Common Stock is listed on the American Stock Exchange,  Inc. ("AMEX")
under the symbol "CAX."

             The Company's  acquisition and other policies are determined by its
Board of Directors.  The Company's By-laws, as amended, require that a specified
number of the Board of  Directors  and each  committee  thereof be  comprised of
persons constituting  Independent Directors.  Pursuant to the Company's By-laws,
an  Independent  Director  is a  person  "who  is not  affiliated,  directly  or
indirectly,  with the person or entity  responsible  for directing or performing
the day-to-day business affairs of the corporation (the "advisor"),  including a
person or entity to which the  advisor  subcontracts  substantially  all of such
functions,  whether by ownership of, ownership  interest in,  employment by, any
material business or professional relationship with, or by serving as an officer
of the advisor or an affiliated business entity of the advisor."

         The Company's  day-to-day  operations are performed by Financial  Asset
Management  LLC,  (the  "Manager")  pursuant  to  the  Management  Agreement,  a
year-to-year  agreement  currently in effect  through  December  31,  1997.  The
Management Agreement is subject to the approval of a majority of the Independent
Directors.  Prior to April 1, 1996,  the Company was managed by Financial  Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996,  Financial Asset Management LLC assumed the obligations
of the Management  Agreement.  From April 1, 1996,  through  September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President,  Chief
Executive  Officer and a Director of the  Company.  On September  30, 1996,  MDC
acquired Mr.  Browne's 20% interest in Financial  Asset  Management LLC and then
sold 100% of the Manager to an investor group led by Terry  Considine and Thomas
L. Rhodes.  In connection with the sale,  Larry A. Mizel resigned as Chairman of
the Board of Directors and Mr. Browne  resigned as  President,  Chief  Executive
Officer and a Director of the Company. Terry Considine and Thomas L. Rhodes were
elected as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers
and Leslie B. Fox was elected as President  of the  Company.  No change has been
made to the Management  Agreement  other than an extension,  and Financial Asset
Management LLC will continue its obligations under the Management Agreement.

         The Manager is subject to the supervision of the Board of Directors. As
part of its duties,  the Manager  presents  the Company  with asset  acquisition
opportunities  and furnishes the Board of Directors with information  concerning


                                     - 1 -
<PAGE>

the  acquisition,  holding  and  disposition  of  assets.  The  Company  has  no
employees.  Certain employees of the Manager have been designated as officers of
the Company.

         Since  its  inception,  the  Company  has  operated  in a  manner  that
permitted it to qualify for the income tax  treatment  afforded to a real estate
investment  trust  ("REIT") as defined in the Internal  Revenue Code of 1986, as
amended,  (the "Code").  If it so qualifies,  the  Company's  REIT income,  with
certain limited  exceptions,  will not be subject to federal or state income tax
at the corporate level. To qualify as a REIT under the Code, the Company will be
required, among other things, to distribute annually to its shareowners at least
95% of its REIT income and to meet  certain  asset,  income and stock  ownership
tests.

         The  Company  intends to  conduct  its  operations  so as not to become
regulated as an investment  company under the Investment Company Act of 1940, as
amended, ("1940 Act"). See "Acquisition Restrictions" below.

         (b)      Narrative Description of Business.

General

         The Company owns, and the Manager  administers on the Company's behalf,
subordinate classes of Commercial Mortgage Backed Securities ("CMBS bonds").

         The  Company's  goals  are to:  (i)  generate  income  in  order to pay
dividends to its shareowners by managing its ownership  interests in securitized
mortgage loan pools comprised of multi-family  and commercial real estate loans;
and (ii) preserve  stockholders'  equity. There can be no assurances the Company
will achieve its objectives.

         Commercial  mortgage loan  securitizations  generally  are  multi-class
issuances of debt  instruments  that are secured and funded as to the payment of
principal and interest by a specific group of mortgage loans on  multi-family or
other  commercial real estate.  Monthly  principal and interest  payments of the
property owners  constitute the source of principal and interest payments on the
debt instruments issued in the commercial mortgage loan securitization. To date,
the Company has acquired  credit support  classes of commercial  securitizations
backed by mortgage loans on multi-family housing properties.

         THE COMPANY'S CMBS BONDS,  WHICH  CONSTITUTE  SUBSTANTIALLY  ALL OF ITS
ASSETS,  WERE  ACQUIRED IN PRIVATE  PLACEMENTS  AND ARE  SUBJECT TO  SIGNIFICANT
RESTRICTIONS ON RESALE.  ACCORDINGLY,  THESE BONDS MAY POSE SPECIAL RISKS TO THE
COMPANY AS WELL AS TO INVESTORS IN THE COMPANY.

         CMBS  bonds.  CMBS  bonds  generally  are backed by  mortgage  loans on
commercial  real  estate.  CMBS  bonds may be debt  obligations  or  multi-class
pass-through  certificates issued by agencies or instrumentalities of the United
States Government,  private originators or investors in mortgage loans. They are
evidenced  by a series of bonds or  certificates  issued in multiple  classes or
"tranches."  The  principal  and interest  payments on the  underlying  mortgage
assets are allocated among the several classes of a series of CMBS bonds.

         Each class (or  tranche)  of CMBS bonds has a stated  maturity or final
scheduled  distribution date and may be issued with a specific fixed or variable
coupon interest rate.  Principal  prepayments on the underlying  mortgage assets
may cause the CMBS bonds to be retired earlier (possibly  substantially earlier)


                                     - 2 -
<PAGE>

than their stated maturities or final scheduled  distribution dates. Interest is
paid or  accrues on the CMBS  bonds  generally  monthly.  The  principal  of and
interest on the  mortgage  assets may be  allocated  among the classes of a CMBS
bond issuance in many ways.

         The allocation of cash flows on mortgage  assets to the various classes
of a CMBS bond issuance creates a higher degree of  predictability of cash flows
from CMBS bonds than the underlying  mortgage assets.  As a general matter,  the
more predictable the cash flow is on a particular CMBS bond class, the lower the
yield will be on that class at the time of  issuance  relative  to the yields of
classes of CMBS bond with less predictable cash flows.

         As part of the  process  of  creating  more  predictable  cash flows on
certain tranches of a CMBS bond issuance, one or more tranches generally must be
created to absorb the first losses on the underlying mortgage assets.  These are
the credit support  tranches.  The yields on these tranches are generally higher
than  prevailing  market  yields  on  mortgage-backed  bonds,  instruments  that
directly or  indirectly,  evidence  interests  in, or are secured by and payable
from,  mortgage loans on real estate,  with similar  anticipated  average lives.
Because of the uncertainty of the cash flows on such tranches, the market prices
of and yields on these tranches are more volatile.

         THE CMBS BONDS THAT THE COMPANY OWNS HAVE NOT BEEN ISSUED OR GUARANTEED
BY AGENCIES OR  INSTRUMENTALITIES  OF THE UNITED  STATES  GOVERNMENT OR BY OTHER
GOVERNMENTAL  ENTITIES  AND,  ACCORDINGLY,  ARE SUBJECT TO, AMONG OTHER  THINGS,
CREDIT RISKS.

         The Company's  Subordinate CMBS Bond Classes.  The Company has acquired
subordinate  tranches  of  commercial  securitizations,  including  "first-loss"
tranches.  These first-loss  tranches bear the risk of default on the underlying
collateral and provide credit support for the more senior tranches.  Subordinate
tranches of commercial  securitizations  are debt  securities in  multiple-class
CMBS  bond  issuances  in which one or more  classes  are  subordinate  to other
classes as to the payment of principal  and interest  thereon,  with defaults on
the  underlying  assets borne first by the holders  (such as the Company) of the
most subordinate class.  Subordinate  tranches are entitled to receive repayment
of principal generally only after all required principal payments have been made
on the more senior tranches and also may have  subordinate  rights as to receipt
of interest  distributions.  Such subordinate  tranches are subject to a greater
risk of non-payment of principal and interest than are more senior  tranches and
presently have limited marketability.

         The Company's CMBS Bonds are Backed by Mortgages on  Multi-Family  Real
Estate.  The Company has  acquired  CMBS bond  classes  backed by  mortgages  on
multi-family dwellings.  Bonds backed by mortgages on multi-family dwellings are
subject to risks generally not associated with mortgages on single-family  homes
or other real estate,  including  certain types of credit risks,  vacancy rates,
increases in operating expenses, regulatory requirements,  natural disasters and
environmental liability issues.

Yield Considerations

         Defaults.  The yields on the CMBS bonds acquired by the Company will be
extremely  sensitive  to the amount and timing of defaults  and the  severity of
losses on the mortgage  loans  collateralizing  such CMBS bonds.  The  Company's
right, as a holder of subordinate  CMBS bonds, to distributions of principal and
interest is subordinate to the more senior classes of CMBS bonds.  Actual losses
on the loans take place  after  default on the loan when the  proceeds  from the
foreclosure  sale of the real  estate  are less than the  unpaid  balance of the


                                     - 3 -
<PAGE>

mortgage  loan  plus  interest   advances   through  the  foreclosure  sale  and
foreclosure  costs which  include,  among other things,  repair and  maintenance
costs during the foreclosure,  brokerage fees, legal fees and taxes. Such losses
will be allocated first to the subordinate  first-loss CMBS bonds prior to being
allocated to the more senior CMBS bond classes.  Because of this, the CMBS bonds
which the Company owns are more  speculative  than more senior CMBS bond classes
and may be subject to special risks,  including a substantially  greater risk of
loss of principal and non-payment of interest than the more senior rated bonds.

         If the CMBS bonds  acquired by the Company have an actual  default rate
and  severity  of loss on the  mortgage  collateral  that are higher  than those
anticipated  by the Company  when the bonds were  acquired,  their yield will be
lower than the Company  initially  anticipated  and, in the event of substantial
losses,  the Company may not recover its acquisition  cost. The timing of actual
losses also will affect the Company's  yield on CMBS bonds,  even if the rate of
default and severity of loss are consistent  with the Company's  projection.  In
general,  the earlier a loss  occurs,  the  greater  the  adverse  effect on the
Company's yield.

         The  Company's  yield on CMBS bonds also will be  affected  by interest
rate levels during the periods in which the mortgage loans  collateralizing  the
CMBS bonds  mature.  For example,  if at the maturity  date of a mortgage  loan,
prevailing  mortgage  interest rates are much higher than the original  interest
rate on the mortgage loan, the operating cash flows from the commercial property
may not be  sufficient  to meet the higher  debt  service  costs of  replacement
financing,  and  the  owner  of  the  commercial  property,   unable  to  obtain
replacement financing,  may default on the mortgage. If the property is not sold
for more than the amount of the mortgage plus foreclosure costs, the Company may
incur credit  losses.  Similar  losses may occur if financing of the  commercial
properties  cannot be arranged at the maturity  date of the current  outstanding
mortgage due to poor property  performance.  These potential losses are referred
to as "balloon losses."

         There  can  be no  assurance  as to the  future  rate  of  delinquency,
severity  of loss  or the  timing  of any  such  losses  on the  mortgage  loans
collateralizing  the CMBS bonds and,  thus,  no assurance as to the actual yield
received by the Company. See "FORWARD LOOKING INFORMATION" below.

         Prepayments.  The aggregate  amount of  distributions  on the Company's
CMBS bonds and their  yields  also will be  affected by the amount and timing of
principal  prepayments  on  the  mortgage  loans.  Generally,  all  payments  of
principal,  including  prepayments,  on the  mortgage  loans will be paid to the
holders of any more senior classes of CMBS bonds before  principal  payments are
paid to the subordinate bond classes held by the Company.  Because of this, when
computing  yields-to-maturity  on its CMBS bonds, the Company generally does not
consider prepayments from the underlying mortgage loans collateralizing its CMBS
bonds. However, because the Company is acquiring the CMBS bonds at a significant
discount from their outstanding  principal balance,  prepayments of principal on
the Company's CMBS bonds may increase the Company's yield on its CMBS bonds.

         Because the rate and timing of  principal  payments  on mortgage  loans
will depend on future  events and on a variety of factors over which the Company
has no  control,  no  assurances  can be given as to such rate or the  timing of
principal  payments on the CMBS bonds the Company  owns.  See  "FORWARD  LOOKING
INFORMATION" below.

         Loss  Severity.  While the rate of  default  and the rate and timing of
prepayments on the mortgage loans are important in determining  the  anticipated
yield on subordinate  CMBS bonds,  the  anticipated  severity of the loss on the


                                     - 4 -
<PAGE>

mortgage loans (i.e.,  the total loss on any foreclosure sale as a percentage of
the remaining outstanding principal balance of a mortgage loan) is significantly
more important in determining the anticipated  yield on a subordinate CMBS bond.
The severity of the losses on defaulted  mortgage  loans  through a  foreclosure
sale of the  properties  which  generally are the only security for the mortgage
loans is extremely important because such losses generally will be allocated to,
and will reduce the remaining  principal  balance of, the Company's  subordinate
CMBS bonds.  The severity of loss takes into account the property owner's equity
in the mortgaged  real estate,  the  anticipated  decline in market value of the
property,  accrued  and unpaid  interest  through  the  foreclosure  process and
foreclosure costs. In addition, the higher the coupon rate of the mortgage loan,
the higher are the costs of interest  advances from the date of default  through
the foreclosure sale.

         Illustration.  The table  below  illustrates  the  ranges of  potential
pre-tax  yields-to-maturity  on the mortgage loans underlying the Company's CMBS
bonds.  The  illustration  was  prepared  assuming,   among  other  things:  (i)
prepayment  rates of 0% and 5%; (ii) loss severity  percentages  of 20%, 30% and
40%;  (iii)  three  levels of periodic  defaults;  and (iv)  scenarios  with and
without balloon defaults of 10%.


Illustration of Potential Pre-Tax Yields to Maturity of the Company's CMBS Bonds
<TABLE>
<CAPTION>

                                                                Pre-Tax Yield-to-Maturity
                                      ------------------------------------------------------------------------------
                                                                    Assumed Periodic           Double the Assumed
                                      No Periodic Defaults          Default Rate(3)           Periodic Default Rate
                                      ---------------------      ----------------------      -----------------------
                                         No          10%            No           10%             No            10%
                   Loss Severity      Balloon      Balloon       Balloon       Balloon       Balloon        Balloon
Prepayment Rate(1) Percentage(2)      Defaults     Defaults      Defaults      Defaults      Defaults       Defaults
                    -----------       --------     --------      --------      --------      --------       --------

<S>    <C>               <C>            <C>           <C>          <C>           <C>           <C>            <C>
       0%                20%            15.6%         11.3%        13.1%          8.4%         10.7%           5.6%
       0                 30             15.6           8.5         11.9           3.9           8.3           (0.5)
       0                 40             15.6           6.1         10.7          (0.4)          6.0           (5.1)
       5                 20             15.4          11.2         13.2           8.6          11.1            6.9
       5                 30             15.4           9.1         12.1           6.1           8.8            3.0
       5                 40             15.4           7.8         11.0           3.4           6.6           (0.9)
<FN>
-----------------
1    Expressed as a constant prepayment rate ("CPR") percentage.
2    The rate of  losses  on the  outstanding  principal  balance  of  defaulted
     mortgage loans expressed as a percentage.
3    An assumption  of default rates ranging from .29% to 1.56% per annum of the
     outstanding  principal  balance of the underlying mortgage collateral.
</FN>
</TABLE>

         The pre-tax yields set forth above were  calculated by determining  the
bond  equivalent  discount rate which,  when applied to the projected  stream of
cash flows to be paid on the  Company's  CMBS bonds  beginning  January 1, 1997,
would cause the discounted  present value of such stream of future cash flows to
equal the amortized cost of the CMBS bonds at December 31, 1996 of $64,849,000.

         THE  ASSUMED  DEFAULT   PERCENTAGES,   LOSS  SEVERITY  PERCENTAGES  AND
PREPAYMENT  RATES  REFLECTED  IN THE  PRECEDING  TABLE ARE FOR THE  PURPOSES  OF
ILLUSTRATION  ONLY.  IT IS  HIGHLY  UNLIKELY  THAT THE  MORTGAGE  LOANS  WILL BE
PREPAID,  OR THAT CREDIT  LOSSES WILL BE INCURRED,  ACCORDING TO ANY  PARTICULAR
PATTERN OR AMOUNT SET FORTH ABOVE. IN ADDITION,  THE VARIOUS  REMAINING TERMS TO
MATURITY  OF THE  MORTGAGE  LOANS  COULD  PRODUCE  SLOWER  OR  FASTER  PRINCIPAL
DISTRIBUTIONS  THAN INDICATED IN THE PRECEDING TABLES AT THE VARIOUS  PREPAYMENT
RATES.  FOR THIS  REASON,  AND  BECAUSE  THE TIMING OF CASH FLOWS IS CRITICAL TO


                                     - 5 -
<PAGE>

DETERMINING  YIELDS, THE PRE-TAX YIELDS ABOVE WILL DIFFER FROM THE ACTUAL YIELDS
ON THE COMPANY'S CMBS BONDS AND SUCH DIFFERENCES MAY BE MATERIAL, OR EVEN RESULT
IN NEGATIVE YIELDS.

         Through February 28, 1997, one mortgage loan with a balance of $788,000
collateralizing  the  Company's  CMBS  bonds  was  foreclosed  and  subsequently
refinanced   with  a  new  property  owner.   Otherwise,   there  have  been  no
delinquencies. As of December 31, 1996, no credit losses have been realized. The
Company  expects that the loss from the foreclosed  mortgage loan will be either
$0 or  approximately  $425,000,  dependent upon the recovery of  indemnification
claims made against the bond  underwriter.  If a loss occurs, it will be charged
against the Company's allowance for credit losses.

Competition

         The Company competes with others,  including other REITs, mutual funds,
savings  and loan  associations,  banks,  pension  funds,  insurance  companies,
investment  banks  and  others,  for the  securities  and  other  assets  it may
determine to acquire.  Many such entities have greater financial  resources than
the Company.  Furthermore,  many of these  entities may be  conducting  business
activities through  corporations,  master limited partnerships or other business
forms  which  may,  among  other  things,   not  be  subject  to  the  operating
restrictions placed on REITs and thus may have more flexibility than the Company
in conducting  their business  operations,  including  more  flexibility to sell
assets.

         There are other REITs,  mutual funds and  financial  institutions  with
operations  similar to those of the Company  which may  increase  the demand for
mortgage-related  assets  suitable for  acquisition  by the Company.  Additional
competition may increase the price the Company must pay for its assets.

Capital Resources

         Asset Investors  contributed  $75,000,000  ($74,800,000 pursuant to the
Contribution  Agreement  plus  $200,000  cash)  to the  initial  capital  of the
Company.  The Company used this initial  contribution to acquire CMBS bonds. The
Company  plans to use its cash  flow  from the CMBS  bonds it has  acquired  and
leverage  to  provide  working  capital to support  its  operations  and for the
payment of dividends to its  shareowners.  See "Federal  Income  Taxation of the
Company"  below.  The Company may finance its operations by entering into credit
agreements or long-term borrowing  arrangements and by issuing additional Common
Stock or Preferred Stock. In addition, the Company may issue notes or other debt
instruments, including CMBS bonds. See "FORWARD LOOKING INFORMATION" below.

         Without further  shareowner  action, the Company is authorized to issue
up to 75,000,000  shares of Common Stock, of which 10,315,809 shares were issued
and  outstanding as of February 28, 1997.  Future  offerings of Common Stock may
result in the reduction of the net tangible book value per outstanding share and
a reduction  in the market price of the Common  Stock.  The Company is unable to
estimate  the  amount,  timing or nature of such  future  offerings  as any such
offerings will depend on general market conditions and other factors.

         In addition,  the Board of Directors is authorized to issue  25,000,000
shares of Preferred Stock,  par value $.01 per share,  without further action by
the Company's shareowners. Depending on the terms set by the Board of Directors,
the  authorization  and  issuance  of  Preferred  Stock could  adversely  affect
existing shareowners. The effects could include, among other things, dilution of
ownership  interests,  restrictions on dividends and preferences to holders of a
new class of stock in distributions, including preferences upon liquidation.


                                     - 6 -
<PAGE>

Dividend Reinvestment Plan

         The Company has an Automatic Dividend Reinvestment Plan administered by
Key Corp  Shareholder  Services,  Inc.  through January 31, 1997, and by Norwest
Shareowner  Services beginning February 1, 1997. The plan provides the Company's
shareowners  a  method  of  investing  cash  dividends  paid by the  Company  in
additional  Common Stock  purchased  in the open  market.  The plan also permits
participants  to make  additional  purchases of Common Stock with voluntary cash
payments.

Acquisition Restrictions

         The  Company  intends to  conduct  its  operations  so as not to become
regulated  as an  investment  company  under the 1940 Act.  The 1940 Act exempts
entities that are "primarily  engaged in the business of purchasing or otherwise
acquiring   mortgages   and  other  liens  on  and  interests  in  real  estate"
("Qualifying  Interests").  Under  current  interpretations  by the staff of the
Securities and Exchange Commission (the  "Commission"),  in order to qualify for
this exemption,  the Company,  among other things, must maintain at least 55% of
its assets in  Qualifying  Interests  and may also be  required  to  maintain an
additional 25% in Qualifying Interests or other real estate-related  securities.
Therefore,  the assets the Company may acquire may be limited by the  provisions
of the 1940 Act. The  Company's  policy  since its  inception is to acquire CMBS
bonds  collateralized by whole pools of mortgage loans or to obtain  substantial
foreclosure rights with respect to the mortgage loans underlying its CMBS bonds.
As a result,  the Company  believes that such CMBS bonds  constitute  Qualifying
Interests  for the  purpose of the 1940 Act and that the  Company  should not be
required to register as an investment  company.  If the  Commission or its staff
were to take a different  position  with respect to whether the  Company's  CMBS
bonds constitute  Qualifying  Interests,  the Company could be required:  (i) to
change the manner in which it conducts its operations to avoid being required to
register as an investment company; or (ii) to register as an investment company,
either of which could have an adverse effect on the Company and the market price
of its Common Stock.

         Pursuant to restrictions set forth in its By-laws,  the Company may not
"invest  in  unimproved  real  property  (i.e.,  acquire an equity  interest  in
property for purposes other than producing  income,  which has no development or
construction in progress thereon nor is any development or construction  planned
to commence thereon within the year;  invest in mortgage loans but not including
mortgage-related   securities,  such  as  collateralized  mortgage  obligations,
pass-through  securities,  stripped  mortgage-backed  bonds and other securities
that,  directly or indirectly,  represent a participation  in, or are secured by
and payable from,  mortgage loans on real property)  without an appraisal of the
underlying property; invest in real estate contracts of sale unless the same are
in recordable  form;  invest in or make a mortgage loan on property in excess of
100% of its appraised  value (unless other mortgage loan  underwriting  criteria
would justify such investment); or invest in or make a mortgage loan subordinate
to a mortgage  or equity  interest  in the  property  held by the  advisor,  the
sponsor, a director or an affiliate of any of the foregoing." These restrictions
may not be changed without the approval of the Board of Directors, which has the
power to modify or alter such  policies  without  the  consent  of  shareowners.
Although the Company has no present  intention of modifying such  policies,  the
Board of Directors  may, in the future,  conclude that it would be  advantageous
for the Company to modify such policies if it believes  that such  modifications
are in the best interests of the shareowners.  See "FORWARD LOOKING INFORMATION"
below.

         The Contribution  Agreement  entered into between the Company and Asset
Investors  provides,  among  other  things,  that the  Company  will not acquire
interests in single-family  (one- to four-unit)  securitizations  and that Asset
Investors will not acquire  interests in commercial  securitizations,  including
commercial   securitizations    collateralized   by   multi-family   residential
properties.


                                     - 7 -
<PAGE>

Management Agreement

         The Management  Agreement has been extended  through December 31, 1997.
Pursuant  to the  Management  Agreement  and subject to the  supervision  of the
Company's  Board  of  Directors,  the  Manager  performs  certain  services  and
activities relating to the assets and operations of the Company including, among
other things, those described below.

         The  Manager  obtains  and  manages  for  the  Company,  to the  extent
available,   ownership   interests  in  issuances  of  commercial   real  estate
securitizations  including,  among others, classes of commercial securitizations
and  participation  in pools of, or mortgages on,  commercial real estate.  To a
lesser  extent,  the Manager may  acquire for the Company fee  interests  in, or
acquire or originate  mortgages on,  commercial  real estate which,  among other
things, may be used as collateral for future securitizations.

         The Manager  advises  the  Company on its  business  and  oversees  its
day-to-day  operations,  subject to the supervision of the Board of Directors of
the  Company.  The Manager  also is  obligated  to present to the Company  asset
acquisition  opportunities  consistent  with the policies and  objectives of the
Company and to furnish the Board of Directors  of the Company  with  information
concerning the acquisition, holding and disposition of assets.

         The Management Agreement is approved by the Independent  Directors.  It
may be  terminated  by either  party with or  without  cause at any time upon 60
days' written  notice.  In addition,  the Company has the right to terminate the
Management  Agreement upon the happening of certain  specified events including,
among other  things,  a breach by the Manager of any  material  provision  which
breach  remains  uncured  for 30  days or the  bankruptcy  of the  Manager.  The
Management  Agreement  also may be  terminated at any time by a majority vote of
the  Independent  Directors  or holders of Common  Stock.  The Manager  would be
entitled to certain  termination  payments in the event of an acquisition of the
Company which results in the termination of the Management Agreement.

         The Manager  receives  various  fees for  advisory  and other  services
performed in connection with the Management Agreement.  The Manager provides (at
its expense) all personnel and certain  overhead items  necessary to conduct the
regular business of the Company.

         Pursuant to the Management Agreement,  the Manager receives a Base Fee,
an Incentive Fee, an Acquisition Fee and an Administrative  Fee. The Base Fee is
payable  quarterly in an amount  equal to 1% per annum of the "average  invested
assets"  of  the  Company.   The   Incentive  Fee  is  based  on  the  Company's
profitability and is intended to align compensation paid to the Manager with the
interests of the Company's shareowners. The Manager is entitled to the Incentive
Fee only after the Company's  shareowners first have received a threshold return
on the  Company's  "average  net worth"  equal to the  "Ten-Year  United  States
Treasury rate" plus 1%. Twenty percent of the Company's REIT income in excess of
this  threshold  return is paid to the Manager as the Incentive Fee. The Manager
receives an Acquisition Fee of 1/2 of 1% of the initial cost of each asset which
the Manager  assists the Company in acquiring.  The  Acquisition Fee compensates
the Manager for performing due diligence procedures on portfolio assets acquired
by the Company.  The Manager also performs certain bond administration and other
related  services  for the Company  pursuant  to the  Management  Agreement  and
receives an Administrative  Fee for such services of up to $10,000 per annum for
each of the Company's  CMBS bonds.  If the Company owns more than one class of a
commercial securitization,  the Manager is entitled to receive an additional fee
of up to $2,500 per annum for each additional class.


                                     - 8 -
<PAGE>

         The Company has agreed to indemnify the Manager and its affiliates with
respect to all  expenses,  losses,  damages,  liabilities,  demands,  charges or
claims of any nature in respect of acts or omissions of the Manager made in good
faith  and in  accordance  with  the  standards  set  forth  in  the  Management
Agreement.

Federal Income Taxation of the Company

         General.  The Company  has  operated  and,  in the  future,  intends to
operate in a manner  that  permits it to  qualify  for the income tax  treatment
afforded  to a REIT under the Code.  To so  qualify,  among  other  things,  the
Company  must  distribute  annually  (as  determined  under  the  Code),  to its
shareowners,  at least 95% of its REIT income. As a result,  the Company expects
that, with limited  exceptions,  its REIT income distributed to shareowners will
not be subject to federal income tax at the corporate level. The Company will be
liable for  corporate  income tax to the extent of its REIT income  which is not
distributed.  If the Company  fails to qualify as a REIT, it would be subject to
federal  and state  income  tax on its REIT  income at regular  corporate  rates
without any deduction for dividend distributions to shareowners.

         In order  to  qualify  as a REIT,  the  Company  must  satisfy  various
requirements   with   respect   to:  (i)  the  nature  of  its  assets   ("Asset
Requirements")   and  income  ("Income   Requirements");   (ii)  the  amount  of
distributions to shareowners  ("Distribution  Requirements");  and (iii) certain
organizational matters ("Organizational Requirements").

         Asset  Requirements.  At least 75% of the  assets of the  Company  must
consist of specified  real estate  assets,  cash or government  securities.  For
purposes of this requirement,  interests in a pass-through tax entity known as a
"real estate mortgage  investment  conduit"  ("REMIC") created by the Tax Reform
Act of 1986 to facilitate the  structuring of mortgage asset  transactions,  are
treated as real estate assets. Also, the Company cannot own equity securities of
any one  issuer  which  represent:  (i) more than 5% of the  total  value of the
Company's assets; or (ii) more than 10% of the outstanding  voting securities of
any  one  issuer  (in  each  case  other  than  another  REIT).   Under  certain
circumstances,  if the Company fails to satisfy the Asset Requirement at the end
of any quarter of its  taxable  year such  failure  can be cured  within 30 days
after the close of that quarter.

         Income Requirements.  The Income Requirements provide that at least 75%
of the  Company's  gross  income  must be derived  from  specified  real  estate
sources,   including   rents  from  real   property  and  interest  on  mortgage
obligations.  For purposes of this  requirement,  any amount  included in income
with  respect to an  interest  in a REMIC is treated as  interest  on a mortgage
obligation.  Additionally,  at least  95% of the  Company's  gross  income  must
consist of income derived from items that qualify for the 75% income test,  plus
other specified types of passive income,  such as interest,  dividends and gains
from the sale or other disposition of stock and securities.

         If the Company  fails to satisfy the foregoing 75% and 95% tests of the
Income  Requirements but: (i) the Company  otherwise  satisfies the requirements
for qualification as a REIT; (ii) such failure is held to be due to a reasonable
cause and not willful  neglect;  and (iii) certain other  requirements  are met,
then the  Company  will  continue  to qualify as a REIT but will be subject to a
100% tax on certain non-qualifying income.

         The  Income  Requirements  also  require  that  less  than  30%  of the
Company's  gross  income be derived from the sale or other  disposition  of: (i)
stock or securities  held for less than one year; (ii) property in a transaction
which is a "Prohibited Transaction;"  and (iii) most real property held for less
than four years. In addition,  the Code also generally imposes a 100% tax on net


                                     - 9 -
<PAGE>

gain derived from Prohibited  Transactions.  No provision for  maintaining  REIT
status applies in the case of any failure to satisfy the 30% test.

         Distribution  Requirements.  In  general,  the  Company is  required to
distribute  annually at least 95% of its REIT  income plus 95% of certain  other
income. At least 85% of the annual REIT income must be distributed by January of
the following year (as long as the dividend is declared during the year) and the
remainder of the annual REIT income distribution requirement must be distributed
to shareowners before the Company's tax return is filed. Dividend  distributions
may be made in cash, securities or property. Shareowners will be subject to tax,
in the year of declaration, on dividends declared by the Company during October,
November  and  December  of a taxable  year and paid  before  January  31 of the
subsequent  taxable  year.  Due to the nature of the  Company's  income from its
assets and its  deductions  in  respect of its  obligations,  the  Company  will
generate REIT income in excess of its cash flow.

         BECAUSE OF THE ABOVE  DISTRIBUTION  REQUIREMENTS AND CERTAIN TAX RULES,
THE COMPANY MAY BE  REQUIRED,  AMONG OTHER  THINGS,  TO: (i)  DISTRIBUTE  TO ITS
SHAREOWNERS A PORTION OF ITS WORKING CAPITAL OR SECURITIES; OR (ii) BORROW FUNDS
OR SELL ASSETS TO MAKE REQUIRED  DISTRIBUTIONS IN YEARS IN WHICH ITS REIT INCOME
EXCEEDS ITS CASH FLOW. BECAUSE OF THE DISTRIBUTION REQUIREMENTS RELATING TO REIT
INCOME,   THESE   DISTRIBUTIONS   COULD  REDUCE  AMOUNTS  AVAILABLE  FOR  FUTURE
ACQUISITIONS AND COULD REDUCE THE COMPANY'S  INCOME IN THE FUTURE.  IN THE EVENT
THAT THE  COMPANY IS UNABLE TO  DISTRIBUTE  95% OF ITS REIT  INCOME ON AN ANNUAL
BASIS TO ITS SHAREOWNERS, IT WILL LOSE ITS STATUS AS A REIT.

         Organizational  Requirements.  The Common  Stock of the Company must be
held by a minimum of 100 persons for at least 335 days in each calendar year. No
more  than  50%  in  value  of  the  Common  Stock  can be  owned,  actually  or
constructively,  by five or fewer individuals at any time during the second half
of each  taxable  year.  For  this  purpose  an  "individual"  includes  certain
tax-exempt  entities,  but excludes  pension funds. To evidence  compliance with
these requirements,  the Company is required to maintain records and the Company
must demand written  statements each year from the  recordholders  of designated
percentages  of its Common Stock which would,  among other things,  disclose the
actual owners of such Common Stock.

         Failure  to  Qualify  as a REIT.  The  Company  will be  subject to tax
(including any applicable alternative minimum tax) on its REIT income at regular
corporate  rates without any deduction for  distributions  to  shareowners if it
fails to qualify as a REIT in any taxable year.  Unless entitled to relief under
specific  statutory  provisions,  the  Company  also will be  disqualified  from
treatment as a REIT for the following four taxable years. The failure to qualify
as a REIT for even one year could  result in the Company  incurring  substantial
indebtedness  in order to pay any resulting  taxes,  thus reducing the amount of
cash  available  for  distribution  to  shareowners.  Even if the Company is not
disqualified  as a REIT as a result of a  failure  to  satisfy  any of the tests
described above, it may be subject to certain excise taxes.

         THE  PROVISIONS OF THE CODE ARE HIGHLY  TECHNICAL.  THIS SUMMARY IS NOT
INTENDED TO BE A DETAILED  DISCUSSION OF ALL APPLICABLE  PROVISIONS OF THE CODE,
RELATED RULES OR ADMINISTRATIVE  AND JUDICIAL  INTERPRETATIONS OF THE CODE. THIS
SUMMARY DOES NOT DISCUSS THE TREATMENT BY THE COMPANY'S  SHAREOWNERS  OF AMOUNTS
DISTRIBUTED  TO  THEM BY THE  COMPANY.  THIS  SUMMARY  IS NOT  INTENDED  TO BE A
SUBSTITUTE FOR PRUDENT TAX PLANNING, AND EACH SHAREOWNER OF THE COMPANY IS URGED
TO CONSULT  SUCH  SHAREOWNER'S  OWN TAX ADVISER  WITH RESPECT TO THESE AND OTHER


                                     - 10 -
<PAGE>

FEDERAL,  STATE AND LOCAL TAX  CONSEQUENCES  OF THE  ACQUISITION,  OWNERSHIP AND
DISPOSITION OF SHARES AND ANY POTENTIAL CHANGES IN APPLICABLE LAW.

Restrictions on and Redemptions of Common Stock

         The  Company  must meet  certain  ownership  tests with  respect to the
Common Stock to qualify as a REIT.  In addition,  the  corporate  charter of the
Company, as amended, (the "Charter") provides that Common Stock may not be owned
by a person if the  ownership of Common Stock by such person would result in the
imposition of a tax on the Company or on any other holder (nominee or otherwise)
of Common Stock.  Provisions of the Code would impose such a tax if Common Stock
were owned, directly or indirectly,  by the United States Government,  any state
or political  subdivision  thereof,  any foreign  government,  any international
organization,  any agency or  instrumentality  of any of the foregoing,  a rural
electric or  telephone  cooperative  described in Section  1381(a)(2)(C)  of the
Code, or any organization  exempt from tax under the Code that is not subject to
tax on its unrelated business taxable income.

         The Charter empowers the Board of Directors,  at its option,  to redeem
Common  Stock or to  restrict  transfers  of Common  Stock to bring or  maintain
ownership of the Common Stock in conformity with the  above-noted  requirements.
The  redemption  price to be paid is the fair market  value as  reflected in the
latest quotations on any exchange on which the Common Stock is listed or, if the
Common Stock is not listed on any exchange,  on the over-the-counter  market or,
if no  quotations  are  available,  the net asset  value of the Common  Stock as
determined  by the  Board of  Directors.  The  Charter  also  provides  that any
acquisition  of Common  Stock that would result in the  disqualification  of the
Company as a REIT shall be void to the fullest extent permitted under applicable
law and the intended transferee of such shares shall be deemed never to have had
an interest therein.  Furthermore, if such provision is determined to be void or
invalid, then the transferee of such Common Stock shall be deemed, at the option
of the  Company,  to have acted as agent on behalf of the  Company in  acquiring
such Common Stock and to hold such Common Stock on behalf of the Company.

         The Charter  provides that no person or group may beneficially own more
than 9.8% of the outstanding Common Stock, unless the Board of Directors exempts
such ownership from such limit after finding that the Company's qualification as
a REIT would not be jeopardized by such ownership.

         Each shareowner is required,  upon demand,  to disclose to the Board of
Directors  in writing  such  information  with  respect  to direct and  indirect
ownership of Common Stock as the Board of Directors  deems prudent in protecting
the REIT status of the Company.

Employees

         Pursuant  to  the  Management  Agreement,   the  Manager  provides  all
personnel   necessary   to  conduct  the  regular   business  of  the   Company.
Consequently,  the Company has no  employees.  Certain  employees of the Manager
have been elected as officers of the Company.

Item 2. PROPERTIES.

         The Company does not own or lease any real estate or physical property.


                                     - 11 -
<PAGE>

Item 3. LEGAL PROCEEDINGS.

         At  February  28,  1997,  there were no legal  proceedings,  pending or
threatened, to which the Company was a party or to which any of its property was
subject.

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

          No  matters  were  submitted  to a vote of the  Company's  shareowners
during the fourth quarter of 1996.


                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS.

         The Common  Stock of the Company is listed on the AMEX under the symbol
"CAX." The high and low closing  sales prices of the Common Stock as reported in
published  financial  sources and certain  dividend  information for the periods
indicated were as follows:
<TABLE>
<CAPTION>

                                                                 Regular          Special
                                                                Dividends        Dividends
1996                            High              Low           Declared         Declared
                                ----              ---           --------         --------

<S>                             <C>               <C>             <C>              <C>
   First Quarter                $6-1/8            $5-3/4          $.17             $ --
   Second Quarter                6-1/4             5-3/4           .17               --
   Third Quarter                 6-1/2             5-7/8           .17              .04
   Fourth Quarter                6-3/4             6-3/16          .17               --

1995

   First Quarter                $6-3/8            $5-1/2          $.17              $--
   Second Quarter                6-1/2             5-3/4           .17               --
   Third Quarter                 6-5/16            5-3/4           .17               --
   Fourth Quarter                6                 5-5/8           .17               --

</TABLE>

         In  general,  the  Company  currently  intends  to pay  quarterly  cash
dividends on the Common Stock which in the  aggregate (as  determined  under the
Code),  will equal 100% of its REIT income.  See "FORWARD  LOOKING  INFORMATION"
below.

         As of February 28, 1997,  10,315,809 shares of Common Stock were issued
and  outstanding  and were held by 1,823  shareowners  of  record.  The  Company
estimates there were  approximately  8,500 additional  beneficial owners on that
date whose shares were held by banks, brokers or other nominees.

Item 6. SELECTED FINANCIAL DATA.

         The  Company's  selected  financial  data,  set forth  below,  has been
derived  from and  should  be read in  conjunction  with the  Company's  audited
Financial Statements and the notes thereto. The data as of December 31, 1996 and


                                     - 12 -
<PAGE>

1995 and for each of the three  years  ended  December  31,  1996,  is  included
elsewhere in this Annual Report on Form 10-K.

(In thousands, except per share data)

Statement of Operations Data:
<TABLE>
<CAPTION>

                                                                                                    Period from
                                                                                                    October 12,
                                                            Year Ended December 31,                  1993(1) to
                                               -----------------------------------------------      December 31,
                                                  1996               1995              1994             1993
                                               ---------           ---------         ---------        --------

<S>                                            <C>                 <C>               <C>              <C>
Revenues                                       $  10,157           $   9,169         $   7,064        $    994
Net income                                         6,959               6,376             4,927             679
Net income per share                                 .68                 .63               .49             .07
Regular dividends per share                          .68                 .68               .50             .07
Special dividends per share                          .04                  --               .03              --
Weighted-average shares outstanding               10,247              10,104            10,047          10,039
<FN>
---------------------
1   Date operations commenced.
</FN>
</TABLE>


<TABLE>
<CAPTION>

Balance Sheet Data:                                                       December 31,
                                               ---------------------------------------------------------------
                                                 1996                 1995             1994             1993
                                               ---------            --------        ---------         --------

<S>                                            <C>                  <C>             <C>               <C>
CMBS bonds                                     $  61,460            $ 69,503        $  74,046         $  8,723
Total assets                                      72,406              71,590           87,604           75,216
Total stockholders' equity                        71,919              70,465           74,672           74,976
Book value per share                                6.97                6.95             7.43             7.47

</TABLE>

Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

Overview

         The Company was incorporated  under Maryland law on August 31, 1993, as
a  wholly-owned  subsidiary  of Asset  Investors.  Asset  Investors  contributed
$75,000,000 pursuant to the Contribution  Agreement (including $200,000 cash) to
the  initial  capital of the  Company.  On October  12,  1993,  Asset  Investors
distributed   approximately  70%  of  the  outstanding  Common  Stock  to  Asset
Investors'  shareowners as taxable  dividends.  Prior to the  distribution,  the
Company  had not  engaged in any  activities  other  than  those  related to its
formation.  Asset Investors  currently owns approximately 27% of the outstanding
Common Stock.

         The Company's  day-to-day  operations are performed by Financial  Asset
Management  LLC,  (the  "Manager")  pursuant  to  the  Management  Agreement,  a
year-to-year  agreement  currently in effect  through  December  31,  1997.  The
Management Agreement is subject to the approval of a majority of the Independent
Directors.  Prior to April 1, 1996,  the Company was managed by Financial  Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996,  Financial Asset Management LLC assumed the obligations
of the Management  Agreement.  From April 1, 1996,  through  September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of


                                     - 13 -
<PAGE>

MDC and 20% owned by Spencer I. Browne who was at the time the President,  Chief
Executive  Officer and a Director of the  Company.  On September  30, 1996,  MDC
acquired Mr.  Browne's 20% interest in Financial  Asset  Management LLC and then
sold 100% of the Manager to an investor group led by Terry  Considine and Thomas
L. Rhodes. MDC received sales proceeds of $11,450,000,  including  $6,000,000 of
cash and $5,450,000 of subordinated  convertible notes. The notes are payable at
specified  dates during the next ten years and are  convertible,  under  certain
circumstances,  into as much as a 47.6%  ownership  interest in Financial  Asset
Management LLC.

         In connection with the sale, Larry A. Mizel resigned as Chairman of the
Board of Directors and Mr. Browne resigned as President, Chief Executive Officer
and a Director of the Company. Terry Considine and Thomas L. Rhodes were elected
as  Co-Chairmen  of the Board of Directors and Co-Chief  Executive  Officers and
Leslie B. Fox was elected as President  of the Company.  No change has been made
to the  Management  Agreement  other  than an  extension,  and  Financial  Asset
Management LLC will continue its obligations under the Management Agreement.

         The Manager is subject to the supervision of the Board of Directors. As
part of its duties,  the Manager  presents  the Company  with asset  acquisition
opportunities  and furnishes the Board of Directors with information  concerning
the  acquisition,  holding  and  disposition  of  assets.  The  Company  has  no
employees.  Certain employees of the Manager have been designated as officers of
the Company.

         The Company owns, and the Manager  administers on the Company's behalf,
subordinate ownership interests in CMBS bonds issued in commercial mortgage loan
securitizations  acquired  with the  proceeds  from its initial  capitalization.
Commercial mortgage loan securitizations  generally are multi-class issuances of
debt securities  which are secured and funded as to the payment of principal and
interest  by a  specific  group  of  mortgage  loans  on  multi-family  or other
commercial real estate.

Results of Operations for the Years Ended December 31, 1996, 1995 and 1994

REIT Income

         REIT income is taxable income computed as prescribed for REITs prior to
the  dividends  paid  deduction  (including  the  dividends  paid  deduction for
dividends  related to capital  gains).  The Company's  REIT income for the years
ended  December  31,  1996,  1995 and  1994 was  $8,491,000  ($.83  per  share),
$7,039,000 ($.70 per share) and $5,274,000 ($.52 per share), respectively.

         REIT income from CMBS bonds during 1996,  1995 and 1994 was $11,438,000
($1.12 per share),  $9,657,000 ($.96 per share) and $6,208,000 ($.62 per share),
respectively. The increase in earnings from CMBS bonds from 1995 to 1996 was the
result of a $2,441,000  increase in  amortization  primarily due to: (i) the May
1996 redemption of two CMBS bonds (Aspen MHC,  Series 1994-1,  Class C and Class
D-1);  and (ii)  prepayments  on two other CMBS bonds during 1996.  The proceeds
from the redemption have been invested in short-term cash instruments  resulting
in lower bond  interest  income  subsequent to the  redemption.  The increase in
earnings from CMBS bonds from 1994 to 1995 was the result of the  acquisition of
ten subordinate  CMBS bonds for $65,724,000  ($91,971,000 par value) during 1994
with coupon  interest  rates  ranging  from 6.5% to 9.0% and a  weighted-average
yield before credit losses for REIT purposes of 13.6%.

         The yield exceeds the coupon interest rate because the subordinate CMBS
bonds were sold to the Company with original issue  discount or market  discount
(i.e.,  the  acquisition  price of the CMBS bond was lower than its par  value).
Accordingly,  the Company amortizes a portion of the discount (the excess of the


                                     - 14 -
<PAGE>

outstanding  par amount over the net cost),  as interest  income,  on a constant
effective  yield  under  the  interest  method  over the life of the CMBS  bond.
Amortization of the discount into REIT income from certain of the Company's CMBS
bonds is limited to principal received.

         As of February 28, 1997, one mortgage loan with an outstanding  balance
of $788,000,  which  collateralizes two of the Company's CMBS bonds, has been in
foreclosure.  Otherwise,  there have been no  delinquencies.  As of December 31,
1996,  there have been no credit losses  charged to  operations  or  write-downs
charged against the allowance for credit losses.  The Company estimates that the
loss  from the  mortgage  loan in  foreclosure  may range  from $0 to  $425,000,
dependent  upon the  recovery of  indemnification  claims made  against the bond
underwriter.  For REIT purposes, credit losses are reflected in income only when
they are  realized.  In future  periods,  the Company  likely will be  allocated
credit losses on its CMBS bonds,  and as a result,  REIT income may be adversely
impacted. See "FORWARD LOOKING INFORMATION" below.

         Interest  income in 1996,  1995 and 1994 was $319,000 ($.03 per share),
$189,000 ($.02 per share) and  $1,126,000  ($.11 per share),  respectively.  The
increase in interest  income in 1996 as compared to 1995 is due to investing the
proceeds  from the May 1996  redemption  of two CMBS bonds into  highly  liquid,
short-term investments.  In 1994, prior to the acquisition of the Company's CMBS
bonds, the unused proceeds of the initial capitalization were invested in highly
liquid short-term  investments.  As the Company acquired CMBS bonds using liquid
short-term  investments,  interest income  decreased.  The average interest rate
earned  on these  funds  was  5.14%,  5.08%  and  4.28% in 1996,  1995 and 1994,
respectively.

         General and administrative  expenses of the Company were $873,000 ($.09
per  share),  $1,407,000  ($.14 per  share)  and  $1,143,000  ($.11 per  share),
respectively,  for the years ended December 31, 1996, 1995 and 1994. General and
administrative  expenses decreased in 1996 compared to prior years primarily due
to, among other things,  elimination of the expense from the accrual of dividend
equivalent  rights  ("DERs")  in  May  1996  and  lower  costs  for  shareholder
relations.  General  and  administrative  expenses  in 1995  included a one-time
expense of $313,000  ($.03 per share)  incurred to have a third party assess the
fair value of the Company's net assets.

         On May 30, 1996, the Company's shareowners approved an amendment to the
Stock Option Plan at its annual  meeting  permitting the Company to issue shares
of Common  Stock in the second  quarter of 1996 to the holders of stock  options
who  voluntarily  gave up their DERs, as defined in the  Company's  Stock Option
Plan which was established in 1993. The amendment also eliminated  provisions in
the  Stock  Option  Plan that  would  have  permitted  the  issuance  of DERs in
connection  with stock  options  granted in the future.  The  issuance of Common
Stock in exchange for the right to receive DERs resulted in a one-time charge to
income of $966,000  ($941,000 non-cash charge for the issuance of 157,413 shares
of Common Stock plus $25,000 of transaction  costs) during the second quarter of
1996.

         Management  fees of the  Company  were  $1,425,000  ($.14  per  share),
$1,151,000 ($.11 per share),  and $598,000 ($.06 per share),  respectively,  for
the years ended  December 31, 1996,  1995 and 1994.  The increase in  management
fees  during  1996  compared  with 1995 was due to an  increase  of  $378,000 in
Incentive  Fees,  offset by  decreases  of  $97,000  in Base Fees and  $7,000 in
Administrative  Fees.  The  increase in  Incentive  Fees was due to a $1,830,000
increase in REIT income before  incentive  fees and a 14 basis point decrease in
the average  Ten-Year U.S.  Treasury Rate between 1995 and 1996. The decrease in
Base Fees was due  primarily  to a  reduction  of invested  assets  because of a
$4,245,000  unrealized  holding loss on the CMBS bonds  recorded at December 31,
1995,  and because of the early  redemption  of the two CMBS bonds in the second
quarter of 1996. The decrease in Administrative  Fees was also due to the May 1,
1996,  redemption of the two CMBS bonds.  The increase in management fees during


                                     - 15 -
<PAGE>

1995  compared  with 1994 was due to: (i)  $335,000 of Incentive  Fees  incurred
during 1995, while no Incentive Fees were incurred in 1994; and (ii) higher Base
and Administrative Fees from acquisitions of CMBS bonds throughout 1994.

         During the years  ended  December  31,  1996,  1995 and 1994,  interest
expense,  including non-usage fees on the Company's secured loan agreement,  was
$2,000  ($.00 per  share),  $249,000  ($.02 per  share) and  $319,000  ($.03 per
share),  respectively.  Due to the cash  available  from the early  redemptions,
there were only limited  borrowings in 1996. The decrease in interest expense in
1995  compared  with  1994  was  due  to a  decrease  in  the  weighted  average
outstanding  balance of debt of $3,939,000  in 1995 compared with  $6,795,000 in
1994,  partially  offset by the increase in the  effective  interest rate of the
Company's secured loans during 1995 of 9.18% compared with 6.40% in 1994.

Dividend Distributions

         During 1996, 1995 and 1994, the Company declared  regular  dividends of
$.68 per share, $.68 per share and $.50 per share,  respectively.  Additionally,
in 1996  and  1994  special  dividends  of $.04 per  share  and $.03 per  share,
respectively, were distributed.

Book Income

         For the years  ended  December  31,  1996,  1995 and 1994,  the Company
earned book income  computed in accordance  with generally  accepted  accounting
principles, ("GAAP") of $6,959,000 ($.68 per share), $6,376,000 ($.63 per share)
and $4,927,000 ($.49 per share), respectively, essentially from the same sources
as its REIT income.

Reconciliation of REIT Income and Book Income

         The  Company  computes  its  income in  accordance  with the Code (REIT
income) and in accordance with GAAP (book income). As a REIT, the Company's REIT
income  is  the  basis  upon  which  the  Code  requires  the  Company  to  make
distributions to its shareowners. However, because the Company's Common Stock is
registered with the Commission,  the Company is required to report its financial
position and income in accordance with GAAP. The differences between REIT income
and book income are discussed below.

         During the years ended  December 31, 1996,  1995 and 1994,  REIT income
exceeded book income by $1,532,000  ($.15 per share),  $663,000 ($.07 per share)
and  $347,000  ($.03  per  share),  respectively.   Substantially  all  of  this
difference is due to: (i) the method of recording credit losses,  which for REIT
income  purposes are not deducted  until they occur (as of December 31, 1996, no
credit  losses  had been  realized)  and  which  for book  income  purposes  are
estimated and reflected as a reduction of revenues in the form of lower discount
amortization  included  in interest  income from CMBS bonds;  (ii) the method of
amortizing  purchase price discounts,  which for REIT income purposes is subject
to certain  limitations  not  applicable  for book  income  purposes;  and (iii)
differences in the timing of recognition of the expense from DERs.

Fair Value of Financial Instruments

         The  fair  value  of  the  Company's  financial  instruments  generally
approximates their carrying basis, or amortized cost, except for the CMBS bonds.
Due to the complex  nature of  subordinate  CMBS bonds,  each  instrument  has a


                                     - 16 -
<PAGE>

discrete  and  unique  risk/return   profile.   Not  only  do  CMBS  bonds  vary
significantly  from  issuance  to  issuance,  but  the  characteristics  of  the
individual mortgage loans underlying the securities of one issuance are distinct
from the  mortgage  loans  underlying  certificates  of another  issuance.  As a
result,  there is no  exchange  or other  active  market  from which to obtain a
quoted market price for these financial instruments. The estimates of fair value
have been  determined  by the Company using  available  market  information  and
valuation  methodologies.  Considerable  judgment is required to  interpret  the
market information and develop the estimates of fair value.

         THE  ESTIMATES  OF FAIR  VALUE  PRESENTED  HEREIN  ARE NOT  NECESSARILY
INDICATIVE  OF THE  AMOUNTS  THE  COMPANY  COULD  REALIZE  IN A  CURRENT  MARKET
EXCHANGE.  THE USE OF DIFFERENT MARKET ASSUMPTIONS,  VALUATION  METHODOLOGIES OR
BOTH MAY HAVE A MATERIAL  EFFECT ON THE ESTIMATES OF FAIR VALUE.  THE FAIR VALUE
ESTIMATES  PRESENTED  HEREIN ARE BASED ON  PERTINENT  INFORMATION  AVAILABLE  TO
MANAGEMENT  AS OF DECEMBER 31, 1996.  FUTURE  ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM AMOUNTS PRESENTED HEREIN.

         The fair value of the Company's CMBS bonds will fluctuate over time due
to,  among  other  things,  changes in  prevailing  interest  rates,  changes in
collateral  performance,  liquidity  in the CMBS bond  market,  paydowns  on the
mortgage loans  collateralizing the CMBS bonds and changes in real estate values
of the related commercial properties.  The estimate of fair value was determined
by  discounting  the future cash flows before  estimates of credit losses of the
CMBS bonds at interest  rates equal to a spread  over U.S.  Treasury  rates with
comparable  terms to  maturity.  The  discount  rates range from 10% to 27%. The
interest rate spread over the U.S.  Treasury rate was based upon current  market
information  of CMBS bonds with similar  characteristics.  See "FORWARD  LOOKING
INFORMATION" below.

         At December 31, 1996,  the estimated  fair value of the Company's  CMBS
bonds  was  $61,460,000,  or  $3,389,000  less  than  their  amortized  cost  of
$64,849,000,  compared  to the  estimated  fair value at  December  31,  1995 of
$69,503,000,  or $4,245,000 less than their  amortized cost of $73,748,000.  The
decrease in  unrealized  holding  losses on the  Company's  two largest bonds is
partially offset by increased unrealized holding losses on the remaining bonds.

         The  improvement  in fair value of the Company's two largest CMBS bonds
is attributed to prepayments on the underlying  collateral  which  shortened the
term to maturity.  The decline in value of the remaining CMBS bonds is primarily
attributed  to the 76 basis point (0.76%)  increase in interest  rates offset by
the impact of lower spreads to treasuries from December 31, 1995 to December 31,
1996.

Liquidity and Capital Resources

         The Company  uses its cash flows from  operating  activities  and other
capital  resources to provide  working  capital to support its  operations,  for
making distributions to its shareowners, for the acquisition of portfolio assets
and for the repayment of short-term borrowings.  The Company did not acquire any
CMBS bonds in 1995 or 1996,  and does not plan to use leverage to acquire  bonds
in the future without having a source of long-term  financing in place.  For the
years ended  December 31, 1996,  1995 and 1994,  cash flow provided by operating
activities  was  $5,920,000,  $6,151,000  and  $4,432,000,  respectively.  As of
December 31, 1996, the Company had $8,277,000 in cash and cash equivalents which
the  Company  currently  intends  to use  to pay  its  expenses,  make  dividend
distributions to shareowners and acquire portfolio assets.  See "FORWARD LOOKING
INFORMATION" below.


                                     - 17 -
<PAGE>

         The  Company  was  capitalized   with   $75,000,000   pursuant  to  the
Contribution  Agreement  (including $200,000 cash) from Asset Investors.  During
1993,  the Company  acquired one CMBS bond at a cost of  $8,709,000.  During the
year ended December 31, 1994, the Company  acquired ten additional CMBS bonds at
a cost of $65,724,000.

         Two of the Company's CMBS bonds (Aspen MHC,  Series  1994-1,  Classes C
and D-1) with a total  outstanding  balance of  $9,664,000  were redeemed in May
1996.  The  redemption  of these CMBS bonds  occurred  eight years  earlier than
anticipated.  The  proceeds  from the bond  redemption  have  been  invested  in
short-term cash instruments until a long-term strategy is determined.

         The Company renewed its Loan and Security  Agreement  collateralized by
four CMBS bonds through  November 29, 1997. No borrowings  were  outstanding  on
this line at December  31, 1996 or 1995.  Advances  bear  interest  based upon a
spread over the London Interbank Offered Rate on Eurodollar  deposits ("LIBOR").
The Loan and  Security  Agreement  contains  certain  covenants  with  which the
Company was in compliance  at December 31, 1996.  The amount the Company will be
able to borrow under its secured credit  facility is subject to lender  approval
and will vary  depending on the value of the  collateral  pledged to secure such
facility.

         On July 19, 1996,  the Company  renewed a one-year,  unsecured  line of
credit with a bank for $1,000,000.  Advances bear interest at prime. At December
31, 1996, no advances were outstanding on this line of credit.

         The indentures of the commercial  securitizations  in which the Company
has  acquired  CMBS bonds  generally  provide for  substantial  penalties if the
mortgage loans  underlying the commercial  securitization  are prepaid,  and the
prepayments  generally  are  allocated  to the senior  bond  classes  before the
subordinate bond classes which the Company generally owns. Significant principal
distributions to subordinate CMBS bonds generally are not anticipated before the
scheduled principal distributions.

         The  Company's  ability to acquire  additional  assets  will depend on,
among other things,  unanticipated  principal prepayments such as the $9,664,000
of CMBS bonds  redeemed in May 1996,  obtaining new debt or equity  capital,  or
liquidating  the  existing  portfolio of CMBS bonds.  There is no assurance  the
Company will be able to identify new asset acquisition  opportunities  that meet
the  Company's  acquisition  criteria or that the Company  will be able to raise
additional funds, whether from principal prepayments,  borrowings,  issuances of
debt or  equity  securities,  liquidation  of the  current  portfolio  or  other
sources. See "FORWARD LOOKING INFORMATION" below.

         As a REIT, the Company is required,  among other things,  to distribute
annually to its  shareowners at least 95% of its REIT income.  By qualifying for
the  favorable  tax  treatment  accorded  to a REIT and by  distributing  to its
shareowners 100% of the Company's REIT income, the Company generally will not be
required to pay income tax at the corporate level.

         The Company anticipates its REIT income from CMBS bonds will exceed the
related cash flow due to the inherent  structure and pricing of the  subordinate
CMBS bonds. The subordinate  classes of CMBS bonds purchased by the Company were
issued at a  significant  discount to their par value.  In  accordance  with the
Code, this discount generally is amortized into income over the life of the CMBS
bond (a non-cash source of REIT income).

         Under  the  Code,  the  Company  has  elected  an  income   recognition
methodology for certain of its CMBS bonds that computes  income  attributable to


                                     - 18 -
<PAGE>

the  amortization  of  market  discount  as the  lesser  of:  (i) the  amount of
principal  received  from the CMBS bond  during the year;  or (ii) the  computed
discount amortization.  The effect of this election is to defer a portion of the
amount of the Company's REIT income from non-cash discount amortization from the
early years in the life of the applicable  bonds to later years when significant
repayments  of principal  are  expected to be received.  The Company was able to
make this election on four CMBS bonds which had an outstanding principal balance
of $55,394,000 at December 31, 1996.

         Subordinate   CMBS  bonds   acquired  by  the  Company  are  relatively
non-liquid  and,  as a result,  the  Company's  ability to change its  portfolio
quickly in response to changes in economic and other  conditions may be limited.
In addition,  REIT rules  applicable  to the Company may restrict the  Company's
ability to sell assets within four years of their acquisition. Under the Code, a
redemption or prepayment does not constitute a "sale."

         As the holder of subordinate  CMBS bonds (which generally are allocated
all losses on the underlying  mortgage loans until the principal  balance of the
bond is exhausted),  the Company has  significant  credit risk.  These bonds are
subject to a greater risk of loss of principal and  non-payment of interest than
the more senior bonds  secured by the same assets.  If a borrower  defaults on a
commercial mortgage loan that is pledged as collateral for a commercial mortgage
loan  securitization,  and the proceeds of the  foreclosure  of the property are
less than the unpaid balance of the mortgage plus  foreclosure  costs (principal
and interest  advances through  foreclosure  sale,  repair and maintenance costs
during the foreclosure, brokerage fees, legal fees, taxes, insurance, etc.), the
Company,  as the holder in most cases of the  subordinate  class,  will suffer a
loss.

         The  Company  believes  that  cash  generated  by  current  and  future
operations and additional capital-raising activities, including borrowings, will
enable  the  Company  to meet  its  current  and  anticipated  future  liquidity
requirements, including the payment of dividends to its shareowners in an amount
equal to at  least  95% of the  Company's  REIT  income.  See  "FORWARD  LOOKING
INFORMATION" below.

         The management and the Board of Directors of the Company are continuing
to evaluate its existing structure and strategy and consider whether changes are
warranted.  The goal of  management  and the Board of  Directors is to invest in
assets  with the  greatest  risk-adjusted  rates  of  return.  A  change  in the
Company's  existing  portfolio  may impact the future REIT income and  resulting
dividends of the Company. See "FORWARD LOOKING INFORMATION" below.


                         CMBS BOND YIELD CONSIDERATIONS

Defaults

         The yields on the CMBS bonds  acquired  by the  Company  are  extremely
sensitive to the amount and timing of defaults and the severity of losses on the
mortgage loans collateralizing such CMBS bonds. The Company's right, as a holder
of  subordinate  CMBS bonds,  to  distributions  of  principal  and  interest is
subordinate to the more senior classes of CMBS bonds. Actual losses on the loans
take place after  default on the loan,  when the proceeds  from the  foreclosure
sale of the real estate are less than the unpaid  balance of the  mortgage  loan
plus  interest  advances and  foreclosure  costs.  Such losses will be allocated
first to the  subordinate  first-loss CMBS bonds prior to being allocated to the
more senior CMBS bond  classes.  As of February 28, 1997,  one of the  mortgages
with an outstanding balance of $788,000 that collateralizes two of the Company's
CMBS bonds was foreclosed and subsequently refinanced with a new property owner.
Otherwise, there have been no delinquencies. The CMBS bonds the Company owns are


                                     - 19 -
<PAGE>

more speculative than the senior CMBS bond classes and may be subject to special
risks,  including  a  substantially  greater  risk  of  loss  of  principal  and
non-payment of interest.

         If the CMBS bonds  acquired by the Company have an actual  default rate
and  severity  of loss on the  mortgage  collateral  that are higher  than those
anticipated  by the Company  when the bonds were  acquired,  their yield will be
lower than the Company  initially  anticipated  and, in the event of substantial
losses,  the Company may not recover its acquisition  cost. The timing of actual
losses also will affect the Company's  yield on CMBS bonds,  even if the rate of
default and severity of loss are consistent  with the Company's  projection.  In
general,  the earlier a loss  occurs,  the  greater  the  adverse  effect on the
Company's yield.

         The  Company's  yield on CMBS bonds also will be  affected  by interest
rate levels during the periods in which the mortgage loans  collateralizing  the
CMBS bonds  mature.  For example,  if at the maturity  date of a mortgage  loan,
prevailing  mortgage  interest rates are much higher than the original  interest
rate on the mortgage loan, the operating cash flows from the commercial property
may not be  sufficient  to meet the higher  debt  service  costs of  replacement
financing,  and  the  owner  of  the  commercial  property,   unable  to  obtain
replacement financing,  may default on the mortgage. If the property is not sold
for more than the amount of the mortgage plus foreclosure costs, the Company may
incur credit  losses.  Similar  losses may occur if financing of the  commercial
properties  cannot be arranged at the maturity  date of the current  outstanding
mortgage due to poor property  performance.  These potential losses are referred
to as "balloon losses."

         There  can  be no  assurance  as to the  future  rate  of  delinquency,
severity  of loss  or the  timing  of any  such  losses  on the  mortgage  loans
collateralizing  the CMBS bonds and,  thus,  no assurance as to the actual yield
received by the Company. See "FORWARD LOOKING INFORMATION" below.

Prepayments

         The aggregate  amount of  distributions on the Company's CMBS bonds and
their  yields  also will be  affected  by the  amount  and  timing of  principal
prepayments  on the  mortgage  loans.  Generally,  all  payments  of  principal,
including prepayments,  on the mortgage loans will be paid to the holders of any
more senior  classes of CMBS bonds  before  principal  payments  are paid to the
subordinate  bond classes held by the Company.  Because of this,  when computing
yields-to-maturity  on its CMBS bonds,  the Company  generally does not consider
prepayments from the underlying  mortgage loans  collateralizing its CMBS bonds.
However,  because  the  Company is  acquiring  the CMBS  bonds at a  significant
discount from their outstanding  principal balance,  prepayments of principal on
the CMBS bonds the Company owns,  may increase the  Company's  yield on its CMBS
bonds.

         Because the rate and timing of  principal  payments  on mortgage  loans
will depend on future  events and on a variety of factors over which the Company
has no control, no assurances can be given as to the rate or timing of principal
payments,  if any,  on the CMBS bonds the Company  owns.  See  "FORWARD  LOOKING
INFORMATION" below.

Loss Severity

         While the rate and timing of defaults and  prepayments  on the mortgage
collateral are important in  determining  the  anticipated  yield on subordinate
CMBS bonds,  the  anticipated  severity of the loss on the mortgage loans (i.e.,
the  total  loss  on any  foreclosure  sale  as a  percentage  of the  remaining
outstanding  principal  balance  of  a  mortgage  loan)  is  significantly  more


                                     - 20 -
<PAGE>

important in  determining  the  anticipated  yield on a  subordinate  CMBS bond.
Losses on defaulted mortgage  collateral are realized after the foreclosure sale
of the property which  generally is the only security for the mortgage loan. The
severity of these losses is extremely  important  because such losses  generally
will be allocated  to, and will reduce the remaining  principal  balance of, the
Company's  subordinate  CMBS bonds.  The severity of loss takes into account the
property owner's equity in the mortgaged real estate, the anticipated decline in
market  value  of  the  property,   accrued  and  unpaid  interest  through  the
foreclosure  process and  foreclosure  costs.  The higher the coupon rate of the
mortgage  loan,  the higher are the costs of interest  advances from the date of
default through foreclosure sale.

        INFLATION, INTEREST RATES, MORTGAGE PREPAYMENTS AND OTHER FACTORS

         The Company and the Common Stock will be affected by prevailing  market
interest  rates,  including:  (i) the effects of interest rates on the values of
long-term,  fixed-rate debt securities; (ii) the possibility that, in periods of
high interest rates,  the Common Stock may be less  attractive than  alternative
investments  of equal or lower  risk;  (iii)  possible  mismatches  between  the
Company's  borrowing costs and the Company's cash flow requirements  which could
have a negative effect on the Company's income; (iv) the negative effect of high
interest rates on the properties  underlying the Company's CMBS bonds (including
a negative  impact on the  owner's  ability to  refinance  debt  secured by such
properties);  and (v) the effects of interest  rates on the Company's  borrowing
costs.  Interest  rates are  determined in large part by market  conditions  and
government  policies  which are beyond the  control of the Company and which are
difficult to predict.

                           FORWARD LOOKING INFORMATION

         Certain  statements  in  this  Form  10-K  Annual  Report,  as  well as
statements made by the Company in periodic press releases,  oral statements made
by the  Company's  officials  to  analysts  and  shareowners  in the  course  of
presentations  about  the  Company  and  conference  calls  following  quarterly
earnings releases, constitute "forward-looking statements" within the meaning of
the Private  Securities  Litigation  Reform Act of 1995 (the "Reform Act"). Such
forward-looking  statements  involve known and unknown risks,  uncertainties and
other factors that may cause the actual results,  performance or achievements of
the Company to be materially  different from any future results,  performance or
achievements  expressed  or  implied  by the  forward-looking  statements.  Such
factors  include  the  following:  general  economic  and  business  conditions;
investment opportunities;  interest rate changes;  competition; the availability
of financing  with terms and prices  acceptable  to the Company;  the  Company's
ability to maintain or reduce expense  levels and the assumption  that losses on
CMBS bonds do not exceed the Company's estimates.


                                     - 21 -
<PAGE>



Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



                             COMMERCIAL ASSETS, INC.

                          Index to Financial Statements


                                                                            PAGE

Report of Independent Auditors...........................................   F-2

Balance Sheets as of December 31, 1996 and 1995..........................   F-3

Statements of Income for the years ended December 31,
     1996, 1995 and 1994..................................................  F-4

Statements of Stockholders' Equity for the years ended
     December 31, 1996, 1995 and 1994....................................   F-5

Statements of Cash Flows for the years ended December 31,
     1996, 1995 and 1994.................................................   F-6

Notes to Financial Statements............................................   F-7


                                    F-1
<PAGE>





                         REPORT OF INDEPENDENT AUDITORS



Board of Directors and Shareowners
Commercial Assets, Inc.
Denver, Colorado


         We have audited the accompanying  balance sheets of Commercial  Assets,
Inc. as of December  31, 1996 and 1995,  and the related  statements  of income,
stockholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 1996. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

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



                                                               ERNST & YOUNG LLP
Phoenix, Arizona
February 10, 1997


                                      F-2
<PAGE>



                             COMMERCIAL ASSETS, INC.

                                 BALANCE SHEETS

                          (Dollar amounts in thousands)


                                                          December 31,
                                                    ---------------------------
                                                       1996             1995
                                                    ----------       ----------
Assets

   Cash and cash equivalents                        $    8,277       $      598
   Accrued interest receivable                             597              675
   Restricted cash                                       1,982              768
   CMBS bonds                                           61,460           69,503
   Other assets, net                                        90               46
                                                    ----------       ----------

     Total Assets                                   $   72,406       $   71,590
                                                    ==========       ==========

Liabilities

   Accounts payable and accrued liabilities         $      189       $      133
   Management fees payable                                 298              292
   Short-term notes payable                                 --              700
                                                    ----------       ----------

     Total Liabilities                                     487            1,125
                                                    ----------       ----------

Stockholders' Equity

   Preferred Stock, par value $.01 per share,
   25,000,000 shares authorized; no shares
   issued or outstanding                                    --               --

   Common  Stock,  par  value  $.01 per  share,
   75,000,000  shares  authorized; 10,315,809
   and 10,142,034 shares issued and outstanding,
   respectively                                            103              102


   Additional paid-in capital                           76,559           75,523

   Cumulative dividends declared                       (20,295)         (12,897)
   Cumulative net income                                18,941           11,982
                                                    ----------       ----------
     Dividends in excess of net income                  (1,354)            (915)
                                                    ----------       ----------

   Net unrealized holding losses on CMBS bonds          (3,389)          (4,245)
                                                    ----------       ----------

     Total Stockholders' Equity                         71,919           70,465
                                                    ----------       ----------

     Total Liabilities and Stockholders' Equity     $   72,406       $   71,590
                                                    ==========       ==========

                       See Notes to Financial Statements.

                                      F-3
<PAGE>



<TABLE>
<CAPTION>

                             COMMERCIAL ASSETS, INC.

                              STATEMENTS OF INCOME

                      (In thousands, except per share data)


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

<S>                                      <C>                 <C>                <C>
   CMBS bonds                            $   9,838           $   8,980          $   5,938
   Interest                                    319                 189              1,126
                                         ---------           ---------          ---------

     Total Revenues                         10,157               9,169              7,064
                                         ---------           ---------          ---------

Expenses

   Management fees                           1,425               1,151                598
   General and administrative                  805               1,393              1,220
   Elimination of DERs                         966                  --                 --
   Interest                                      2                 249                319
                                         ---------           ---------          ---------

     Total Expenses                          3,198               2,793              2,137
                                         ---------           ---------          ---------


Net Income                               $   6,959           $   6,376          $   4,927
                                         =========           =========          =========



Net income per share                     $     .68           $     .63          $     .49

Weighted-average shares outstanding         10,247              10,104             10,047

Dividends per share
     Regular dividends                   $     .68           $     .68          $     .50
     Special dividends                         .04                  --                .03
                                         ---------           ---------          ---------
                                         $     .72           $     .68          $     .53
                                         =========           =========          =========
</TABLE>

                       See Notes to Financial Statements.

                                      F-4
<PAGE>





                             COMMERCIAL ASSETS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

              For the Years Ended December 31, 1996, 1995 and 1994

                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                                      Net
                                                                                                   Unrealized
                                                                     Additional    Dividends In     Holding           Total
                                              Common Stock            Paid-In       Excess of      Losses on      Stockholders'
                                           Shares       Amount        Capital       Net Income     CMBS Bonds        Equity
                                           ------       ------        -------       ----------     ----------        ------

<S>                                        <C>          <C>          <C>            <C>             <C>            <C>
Balances - December 31, 1993               10,039       $  100       $  74,900      $    (24)       $    --        $  74,976

Issuance of Common Stock                       14            1              94            --             --               95
Net income                                     --           --              --         4,927             --            4,927
Dividends                                      --           --              --        (5,326)            --           (5,326)
                                          -------       ------       ---------      --------        -------        ---------

Balances - December 31, 1994               10,053          101          74,994          (423)            --           74,672

Issuance of Common Stock                       89            1             529            --             --              530
Net income                                     --           --              --         6,376             --            6,376
Dividends                                      --           --              --        (6,868)            --           (6,868)
Unrealized depreciation of CMBS bonds          --           --              --            --         (4,245)          (4,245)
                                          -------       ------       ---------      --------        -------        ---------

Balances - December 31, 1995               10,142          102          75,523          (915)        (4,245)          70,465

Issuance of Common Stock                      174            1           1,036            --             --            1,037
Net income                                     --           --              --         6,959             --            6,959
Dividends                                      --           --              --        (7,398)            --           (7,398)
Unrealized appreciation of CMBS bonds          --           --              --            --            856              856
                                          -------       ------       ---------      --------        -------        ---------

Balances - December 31, 1996               10,316       $  103       $  76,559      $ (1,354)       $(3,389)       $  71,919
                                          =======       ======       =========      ========        =======        =========
</TABLE>

                       See Notes to Financial Statements.

                                      F-5
<PAGE>


                             COMMERCIAL ASSETS, INC.

                            STATEMENTS OF CASH FLOWS

                                 (In thousands)

<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                                             -----------------------
                                                                      1996             1995               1994
                                                                      ----             ----               ----
Cash Flows From Operating Activities
<S>                                                                <C>              <C>               <C>
   Net income                                                      $  6,959         $  6,376          $   4,927
   Adjustments to reconcile net income to net cash flows from
     operating activities:
     Amortization of discount on CMBS bonds and other assets         (2,155)            (638)              (331)
     Issuance of Common Stock for elimination of DERs                   941               --                 --
     Decrease (increase) in accrued interest receivable                  78                6               (569)
     Increase in accounts payable and accrued liabilities               157              329                481
     (Increase) decrease in other assets                                (60)              78                (76)
                                                                   --------         --------          ---------

Net Cash Provided By Operating Activities                             5,920            6,151              4,432
                                                                   --------         --------          ---------

Cash Flows From Investing Activities
   Principal collections from CMBS bonds                              9,857              554                377
   Acquisitions of CMBS bonds                                            --               --            (65,628)
   Acquisition of restricted cash                                        --               --                (96)
                                                                   --------         --------          ---------

Net Cash Provided By (Used In) Investing Activities                   9,857              554            (65,347)
                                                                   --------         --------          ---------

Cash Flows From Financing Activities
   Dividends paid                                                    (7,398)          (8,879)            (3,315)
   (Repayments) borrowings of short-term notes payable                 (700)          (9,595)            10,295
                                                                   --------         --------          ---------

Net Cash (Used In) Provided By Financing Activities                  (8,098)         (18,474)             6,980
                                                                   --------         --------          ---------

Cash and Cash Equivalents
   Increase (decrease)                                                7,679          (11,769)           (53,935)
   Beginning of period                                                  598           12,367             66,302
                                                                   --------         --------          ---------
   End of period                                                   $  8,277         $    598          $  12,367
                                                                   ========         ========          =========
</TABLE>

                       See Notes to Financial Statements.

                                      F-6
<PAGE>


                             COMMERCIAL ASSETS, INC.

                          NOTES TO FINANCIAL STATEMENTS



A.       Organization

         Commercial Assets, Inc. ("the Company") was incorporated under Maryland
law on August 11, 1993 by Asset Investors.  The Company commenced  operations on
October 12,  1993,  the date on which Asset  Investors  contributed  $75,000,000
($74,800,000  pursuant to the Contribution  Agreement plus $200,000 cash) to the
capital of the Company and distributed approximately 70% of the shares of Common
Stock of Commercial Assets, Inc. to Asset Investors' shareowners.  The Company's
Common Stock is listed on the American Stock Exchange under the symbol "CAX."

         The Company's  day-to-day  operations are performed by Financial  Asset
Management  LLC,  (the  "Manager")  pursuant  to  the  Management  Agreement,  a
year-to-year  agreement  currently in effect  through  December  31,  1997.  The
Management Agreement is subject to the approval of a majority of the Independent
Directors.  Prior to April 1, 1996,  the Company was managed by Financial  Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996,  Financial Asset Management LLC assumed the obligations
of the Management  Agreement.  From April 1, 1996,  through  September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President,  Chief
Executive  Officer and a Director of the  Company.  On September  30, 1996,  MDC
acquired Mr.  Browne's 20% interest in Financial  Asset  Management LLC and then
sold 100% of the Manager to an investor group led by Terry  Considine and Thomas
L. Rhodes.  In connection with the sale,  Larry A. Mizel resigned as Chairman of
the Board of Directors and Mr. Browne  resigned as  President,  Chief  Executive
Officer and a Director of the Company. Terry Considine and Thomas L. Rhodes were
elected as Co-Chairmen of the Board of Directors and Co-Chief Executive Officers
and Leslie B. Fox was elected as President  of the  Company.  No change has been
made to the Management  Agreement  other than an extension,  and Financial Asset
Management LLC will continue its obligations under the Management Agreement.

         The Manager is subject to the supervision of the Board of Directors. As
part of its duties,  the Manager  presents  the Company  with asset  acquisition
opportunities  and furnishes the Board of Directors with information  concerning
the  acquisition,  holding  and  disposition  of  assets.  The  Company  has  no
employees.  Certain employees of the Manager have been designated as officers of
the Company.

         The Company owns, and the Manager  administers on the Company's behalf,
subordinate ownership interests in Commercial Mortgage Backed Securities,  "CMBS
bonds." The CMBS bonds are issued in commercial  mortgage  loan  securitizations
which generally are multi-class  issuances of debt securities  which are secured
and funded as to the payment of principal  and  interest by a specific  group of
mortgage loans on multi-family or other commercial real estate.

         To date, the Company's  primary emphasis has been on the acquisition of
credit support classes of commercial securitizations backed by mortgage loans on
multi-family real property.


                                      F-7
<PAGE>

B.       Summary of Significant Accounting Policies

         CMBS bonds - Earnings from CMBS bonds are comprised of coupon  interest
and the  amortization  of the purchase  discount.  Amortization  of the purchase
discount is recognized by the interest  method using a constant  effective yield
and assumes an estimated rate of future prepayments,  defaults and credit losses
which is adjusted for actual  experience.  The  allowance  for credit  losses is
equal to the undiscounted  total of future estimated credit losses. In the event
the Company adjusts the estimate of future credit losses, such adjustments would
be included in current period earnings.

         The   Company   classifies   its  CMBS  bonds  as   available-for-sale.
Accordingly,  the  CMBS  bonds  are  carried  at  fair  value  in the  financial
statements. Unrealized holding gains and losses on available-for-sale securities
are excluded from earnings and reported as a net amount in stockholders'  equity
until  realized.  If the fair value of a CMBS bond declines  below its amortized
cost basis and the  decline is  considered  to be "other  than  temporary,"  the
amount of the  write-down  would be  included  in the  Company's  income  (i.e.,
accounted for as a realized loss). The decline in fair value is considered to be
other than  temporary if the cost basis exceeds the related  projected cash flow
from the CMBS bond discounted at a risk-free rate of return.

         Fair Value of Financial  Instruments  - The fair value of the Company's
CMBS  bonds  is  discussed  in Note C. The fair  value  of all  other  financial
instruments  of the  Company  generally  approximate  their  carrying  basis  or
amortized cost.

         Income  Taxes - The  Company  intends to operate in a manner  that will
permit it to qualify for the income tax  treatment  accorded to a REIT. If it so
qualifies, the Company's REIT income, with certain limited exceptions,  will not
be subject to federal or state income  tax at the corporate level.  Accordingly,
no provision for taxes has been made in the financial statements.

         In order to maintain  its status as a REIT,  the  Company is  required,
among other things,  to distribute  annually to its  shareowners at least 95% of
its REIT income and to meet certain  asset,  income and stock  ownership  tests.
Dividends  declared in 1996,  1995 and 1994  represented  ordinary income to the
shareowners, in accordance with the Code.

         Net  Income  Per Share - Net  income  per  share  for the  years  ended
December 31, 1996, 1995 and 1994 was based upon the  weighted-average  number of
shares of Common Stock  outstanding  during each such period.  In 1996, 1995 and
1994, the effect of  unexercised  stock options was not material with respect to
net income per share.

         Statements of Cash Flows - For purposes of reporting  cash flows,  cash
maintained in bank accounts,  money market funds and overnight cash  investments
are  considered  to be cash and cash  equivalents.  The  Company  paid  interest
expense in cash of $8,000,  $290,000 and  $278,000 for the years ended  December
31, 1996, 1995 and 1994, respectively.

         Non-cash  investing  and  financing  activities  for  the  years  ended
December 31, 1996, 1995 and 1994 were as follows (in thousands):


                                      F-8
<PAGE>




<TABLE>
<CAPTION>

                                                                    1996             1995              1994
                                                                   -------         --------          --------
<S>                                                                <C>             <C>               <C>
Principal collections on CMBS bonds transferred to
    restricted cash                                                $ 1,214         $    397          $    275

Unrealized holding gains (losses) on CMBS bonds                    $   856         $ (4,245)         $     --

Distributions of Common Stock pursuant to DERs                     $    96         $    376          $    227

Distributions of Common Stock as consideration for the
    elimination of DERs                                            $   941         $     --          $     --

Dividends declared but not yet paid                                $    --         $     --          $  2,011
</TABLE>

         Use of  Estimates - The  preparation  of the  financial  statements  in
conformity with generally accepted accounting  principals requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

C.       CMBS Bonds

         Based on the timing and amount of future credit losses estimated by the
Company, the  weighted-average  yield-to-maturity of the Company's CMBS bonds at
December 31, 1996 and 1995, was 11.9%. The  yield-to-maturity  on the CMBS bonds
acquired by the Company will be extremely  sensitive to defaults on the mortgage
loans  collateralizing such CMBS bonds and the severity of losses resulting from
such  defaults.  The losses are due to a decline in the value of the  properties
collateralizing  the mortgage loans  underlying  the Company's  CMBS bonds.  The
losses may not be apparent until the maturity dates of the mortgage loans as the
property  owner attempts to refinance or sell the property to repay the mortgage
loan. The  weighted-average  lives of the mortgage loans generally coincide with
the  weighted-average  lives  of  the  CMBS  bonds  owned  by the  Company.  The
weighted-average  lives listed in the table below indicate the approximate  time
until the maturity date of the Company's CMBS bonds.

         The Company's subordinate CMBS bonds provide credit support to the more
senior  bond  classes  of  the  related   commercial   securitization   and  are
collateralized by mortgage loans on multi-family  properties  located throughout
the country. Generally, any loss on an individual mortgage loan, which comprises
a portion of the collateral for all bond classes in a CMBS issuance, is absorbed
by the Company to the extent of the principal  balance and interest  payments of
the Company's  related CMBS bonds.  The mortgage loans  collateralizing  certain
CMBS bonds are held by a group of related entities,  none of which  individually
represent greater than 10% of the mortgage loans  collateralizing  the Company's
CMBS  bonds.  The  Company's  exposure to loss from its CMBS bonds is limited to
their amortized cost and restricted cash.

         In May 1996, two CMBS bonds (Aspen MHC,  Series  1994-1,  Classes C and
D-1) with an outstanding  principal balance of $9,664,000 and net carrying value
of $8,723,000 were redeemed eight years earlier than anticipated. The bonds were
acquired  on March  8,  1994,  for  $9,088,000,  or  84.3% of their  outstanding
principal balance.  Since the bonds were redeemed at par, $1,426,000 of discount
amortization was included in earnings during the year ended December 31, 1996.

         The outstanding balance of the mortgage loans  collateralizing the CMBS
bonds and the  outstanding  principal  of the CMBS  bonds that are senior to the


                                      F-9
<PAGE>

Company's  CMBS  bonds  was  $912,879,000  and  $818,291,000,  respectively,  at
December  31,  1996.  The Company  provided an  allowance  for credit  losses of
$12,720,000  at  December  31,  1996 and 1995 on certain of its CMBS  bonds.  At
December  31,  1996, a mortgage  loan with an  outstanding  balance of $788,000,
which  collateralizes  the Company's CMBS bonds, was foreclosed and subsequently
refinanced with a new property  owner.  During the years ended December 31, 1996
and 1995,  there were no credit  losses  charged to  operations  or  write-downs
charged  against the allowance for credit losses.  The mortgages  which comprise
the collateral for the Company's subordinate CMBS bonds are secured by apartment
complexes in 36 states,  with  concentrations in Texas (26%),  Arizona (13%) and
Georgia (8%).

         Pursuant to the provisions of certain of the Company's CMBS bonds, cash
collections which would otherwise be attributable to the Company's interests are
required to be set aside in reserve  accounts to support the eventual payment of
more senior  classes of CMBS bonds.  At December 31, 1996 and 1995,  the amounts
set aside of $1,982,000 and $768,000, respectively, are shown as restricted cash
on the balance sheet.

         Due to the complex nature of CMBS bonds, each instrument has a discrete
and unique risk/return  profile.  Not only do CMBS bonds vary significantly from
issuance to issuance,  but the  characteristics of the individual mortgage loans
underlying  the  securities of one issuance are distinct from the mortgage loans
underlying  certificates  of another  issuance.  There is no  exchange  or other
active  market from which to obtain a quoted  market  price for these  financial
instruments.  The  estimates of fair value have been  determined  by the Company
using available  market  information and valuation  methodologies.  Considerable
judgment  was  required  to  interpret  the market  information  and develop the
estimates of fair value.

         THE  ESTIMATES  OF FAIR  VALUE  PRESENTED  HEREIN  ARE NOT  NECESSARILY
INDICATIVE  OF THE  AMOUNTS  THE  COMPANY  COULD  REALIZE  IN A  CURRENT  MARKET
EXCHANGE.  THE USE OF DIFFERENT MARKET ASSUMPTIONS,  VALUATION  METHODOLOGIES OR
BOTH MAY HAVE A MATERIAL  EFFECT ON THE ESTIMATES OF FAIR VALUE.  THE FAIR VALUE
ESTIMATES  PRESENTED  HEREIN ARE BASED ON  PERTINENT  INFORMATION  AVAILABLE  TO
MANAGEMENT  AS OF DECEMBER 31, 1996.  FUTURE  ESTIMATES OF FAIR VALUE MAY DIFFER
SIGNIFICANTLY FROM THE AMOUNTS PRESENTED HEREIN.

         The estimated fair value of the Company's CMBS bonds was $61,460,000 on
$89,297,000  of  outstanding  principal  of  bonds at  December  31,  1996,  and
$69,503,000 on  $100,368,000  of outstanding  principal of bonds at December 31,
1995. The estimate of fair value was  determined by discounting  the future cash
flows  before  estimates  of credit  losses of the CMBS bonds at interest  rates
equal to a spread over U.S.  Treasury rates with  comparable  terms to maturity.
The discount rates range from 10% to 27%. The interest rate spread over the U.S.
Treasury  rate was based  upon  current  market  information  of CMBS bonds with
similar  characteristics.  The fair value of CMBS bonds will fluctuate over time
due to, among other things,  changes in prevailing interest rates,  liquidity in
the CMBS bonds market,  paydowns on the mortgage loans  collateralizing the CMBS
bonds and changes in real estate  values of the related  commercial  properties.
The decline in fair value below  amortized  cost is considered  temporary,  and,
accordingly,   is  excluded  from  earnings  and  reported  as  a  component  of
stockholders' equity.

         Certain of the Company's  CMBS bonds are pledged as collateral  for the
Company's short-term notes payable (see Note D).


                                      F-10
<PAGE>


        Presented below is a schedule of the CMBS bonds owned by the Company as
of December 31, 1996 and 1995 (dollar amounts in thousands):
<TABLE>
<CAPTION>

                                                                  Weighted-                                      Outstanding Balance
                                                       Maturity    Average     Date                  Senior        at December 31,
                Description                   Coupon     Date      Life(5)   Acquired   Rating    CMBS Bonds(4)    1996       1995
--------------------------------------------  ------   --------   --------   --------  --------   -------------  --------  --------
<S>                                            <C>      <C>         <C>      <C>        <C>         <C>         <C>        <C>
Kidder, Peabody Acceptance Corporation I,
  Series 1993-M2, Class E(1)                   8.88%     8/2021     3.7 yrs  11/16/93      BB       $ 79,744    $ 10,000   $ 10,000
Lehman Capital Corporation Trust
  Certificate, Series 1994-2(2)                6.50%    10/2003     6.8       2/24/94   Unrated                    2,143      2,143
Lehman Capital Corporation Trust
  Certificate, Series 1994-3                   6.50%    10/2003     6.8       2/24/94   Unrated      125,892       4,162      4,162
Aspen MHC, Series 1994-1, Class C(3)                                                                                  --      6,261
Aspen MHC, Series 1994-1, Class D-1(3)                                                                                --      3,596
Fannie Mae Multi-Family REMIC Trust
  1994-M2, Class C(6)                          7.99%     1/2001     3.9       3/30/94   Unrated      321,980      10,704     11,587
Fannie Mae Multi-Family REMIC Trust
  1994-M2, Class D(6)                          8.18%     1/2004     6.7       3/30/94   Unrated                   38,384     38,715
DLJ Mortgage Acceptance Corporation,
  Series 1994-MF4, Class B-3                   8.50%     4/2001     4.3       6/15/94      B          91,521       3,136      3,136
DLJ Mortgage Acceptance Corporation,
  Series 1994-MF4, Class C                     8.50%     4/2001     4.3       6/15/94   Unrated                    4,183      4,183
Kidder, Peabody Acceptance Corporation I,
  Series 1994-M1, Class C                      8.25%    11/2002     4.6      11/29/94      B          199,154       8,930      8,930
Kidder, Peabody Acceptance Corporation I,
  Series 1994-M1, Class D                      8.25%    11/2002     4.9      11/29/94   Unrated                     7,655      7,655
                                               ----                 ---                              --------    --------   --------
     Total outstanding balance                 8.15%                5.5 yrs                          $818,291      89,297    100,368
                                               ====                 ===                              ========

Unamortized discount(7)                                                                                          (12,077)   (14,393)
Allowance for credit losses(7)                                                                                   (12,720)   (12,720)
Unamortized acquisition costs(7)                                                                                     349        493
                                                                                                                 --------   --------
     Amortized cost                                                                                                64,849     73,748
Net unrealized holding losses(7)                                                                                  (3,389)    (4,245)
                                                                                                                 --------   --------
Total net book value                                                                                             $ 61,460   $ 69,503
                                                                                                                 ========   ========
<FN>
------------------------------------------------------------------
1    The Company has a 75.2% ownership interest in this CMBS bond.
2    The Company has a 51.7% ownership interest in this CMBS bond.
3    These bonds redeemed in May 1996.
4    The outstanding  principal  balance at December 31, 1996, of the CMBS
     bonds senior to the Company's subordinate CMBS bond classes. The amount is
     aggregated for classes from a single issuance.
5    Remaining weighted-average life at December 31, 1996.
6    Payment of principal and interest is not guaranteed by FNMA.
7    The amounts are specifically identified to individual CMBS bonds.
</FN>
</TABLE>


                                      F-11
<PAGE>



D.       Short-Term Notes Payable

         The Company renewed its Loan and Security  Agreement  collateralized by
four CMBS bonds (FNMA  94-M2C,  FNMA 94-M2D,  Kidder  94-M1C and Kidder  94-M1D)
through  November 29,  1997.  No  borrowings  were  outstanding  on this line at
December 31, 1996 or 1995 and $21,616,000 was available to be borrowed. Advances
bear  interest  based  upon a spread  over  the  LIBOR.  The  Loan and  Security
Agreement contains certain covenants with which the Company was in compliance at
December 31, 1996 and 1995.  The amount the Company will be able to borrow under
its  secured  credit  facility  is  subject  to  lender  approval  and will vary
depending on the value of the collateral pledged to secure such facility.

         On July 19, 1996,  the Company  renewed a one-year,  unsecured  line of
credit with a bank for  $1,000,000.  Advances  under this line bear  interest at
prime. Two of the Company's  Independent  Directors were members of the Board of
Directors of the holding  company of the bank during 1995 and 1996.  At December
31, 1996, no advances were  outstanding on this line of credit.  At December 31,
1995,  $700,000 was  outstanding  on this line of credit at an interest  rate of
8.5% per annum.

E.       Stock Option Plan

         The Company has a Stock Option Plan for the  issuance of  non-qualified
stock  options to its  directors  and  officers  which as of January 1, 1997 and
1996,  permits  the  issuance  of up to an  aggregate  of 947,693  and  701,948,
respectively,  shares of Common Stock.  The exercise price for stock options may
not be less than 100% of the fair market  value of the shares of Common Stock at
the date of the grant. Each of the stock options granted to date has a five-year
term.

         Prior to May 30, 1996,  stock  options  granted  under the Stock Option
Plan automatically accrued dividend equivalent rights ("DERs") based on: (i) the
number  of  shares  underlying  the  unexercised  portion  of the  option;  (ii)
dividends  declared on the outstanding  shares of the Company between the option
grant  date and the option  exercise  date;  and (iii) the  market  price of the
shares on the dividend record date. DERs were paid in shares of Common Stock (or
in other  property that  constituted  the dividend) at the time of each dividend
distribution.  During the years ended  December  31,  1996,  1995 and 1994,  the
Company incurred $96,000,  $376,000 and $227,000,  respectively,  of general and
administrative   expenses  from  DERs  covering   16,362,   63,566  and  36,485,
respectively,  shares of Common Stock which were subject to issuance pursuant to
options granted under the Plan.

         On May 30, 1996, the Company's shareowners approved an amendment to the
Stock  Option Plan which  provided  for the issuance of Common Stock in exchange
for the  elimination of the accrual of DERs for options  granted under the Stock
Option Plan.  Pursuant to the amendment,  the Company incurred a $966,000 charge
(a $941,000  non-cash charge from the issuance of 157,413 shares of Common Stock
plus $25,000 of transactions costs) during 1996.

         Presented  below is a summary of the  changes in stock  options for the
three years ended  December 31, 1996.  The options  outstanding  at December 31,
1993 were granted at the inception of the Company.  As of December 31, 1996, the
outstanding  options have exercise prices ranging from $5.62 to $7.50 and have a
remaining weighted-average life of 2.1 years.


                                      F-12
<PAGE>




                                                  Average
                                              Exercise Price
                                                                   Shares
Outstanding - December 31, 1993                    $ 7.50            311,500
     Granted                                         6.32            169,500
                                                   ------            -------
Outstanding - December 31, 1994                      7.09            481,000

     Granted                                         6.15             92,500
                                                   ------          ---------
Outstanding - December 31, 1995                      6.94            573,500

     Granted                                         5.86             82,500
     Forfeited                                       6.68              8,500
                                                   ------          ---------
Outstanding - December 31, 1996                    $ 6.80            647,500
                                                   ======            =======

        As of December 31, 1996, no options have been exercised. Options granted
to date vest over a two year period.  As of December  31,  1996,  1995 and 1994,
453,500,  484,875,  and 318,375,  respectively,  of the outstanding options were
exercisable.

         The Company has elected to follow  Accounting  Principles Board Opinion
No.  25,  "Accounting  for  Stock  Issued  to  Employees"  (APB 25) and  related
Interpretations  in accounting  for its employee  stock options  rather than the
alternative  fair value  accounting  provided for under FASB  Statement No. 123,
"Accounting  for Stock-Based  Compensation."  Under APB 25, because the exercise
price of the Company's  employee  stock  options  equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.

         Pro forma  information  regarding  net income and earnings per share is
required  by  Statement  123,  and has been  determined  as if the  Company  had
accounted  for its employee  stock  options  under the fair value method of that
Statement.  The fair value for these  options was estimated at the date of grant
using an option pricing model.

         Option  valuation  models  require  the  input  of  highly   subjective
assumptions including the expected stock price volatility. Because the Company's
stock options have characteristics  significantly different from those of traded
options,  and because changes in the subjective input assumptions can materially
affect the fair value estimate,  in management's opinion, the existing models do
not  necessarily  provide a  reliable  single  measure  of the fair value of its
employee stock options.

         During  the years  ended  December  31,  1996 and 1995,  the  estimated
weighted-average, grant-date  fair value of options  granted  was $.45 and $.23,
respectively,  and the estimated total fair value of options granted was $27,000
and $30,000,  respectively.  The pro forma net income of the Company  reflecting
the fair value of options granted was $6,932,000 ($.68 per share) and $6,346,000
($.63 per share) for the years ended  December 31, 1996 and 1995,  respectively.
The  estimated  fair value of the  options  is  amortized  to  expense  over the
options' vesting period.  The Company assumed a life of five years and risk-free
interest rate equal to the Five-Year U.S.  Treasury rate on the date the options
were granted.  In addition,  the expected  stock price  volatility and dividends
growth rates were estimated based upon historical  averages over the three years
ended December 31, 1996.

                                      F-13
<PAGE>

F.       Other Matters

         The Company  operates  under a Management  Agreement  with the Manager,
pursuant to which the Manager  advises the Company on its  business and oversees
its day-to-day operations,  subject to the supervision of the Company's Board of
Directors.

         The Company's  day-to-day  operations are performed by Financial  Asset
Management  LLC,  (the  "Manager")  pursuant  to  the  Management  Agreement,  a
year-to-year  agreement  currently in effect  through  December  31,  1997.  The
Management Agreement is subject to the approval of a majority of the Independent
Directors.  Prior to April 1, 1996,  the Company was managed by Financial  Asset
Management Corporation, a wholly owned subsidiary of MDC Holdings, Inc. ("MDC").
Effective April 1, 1996,  Financial Asset Management LLC assumed the obligations
of the Management  Agreement.  From April 1, 1996,  through  September 30, 1996,
Financial Asset Management LLC was 80% owned by two wholly owned subsidiaries of
MDC and 20% owned by Spencer I. Browne who was at the time the President,  Chief
Executive  Officer and a Director of the  Company.  On September  30, 1996,  MDC
acquired Mr.  Browne's 20% interest in Financial  Asset  Management LLC and then
sold 100% of the Manager to an investor group led by Terry  Considine and Thomas
L. Rhodes. MDC received sales proceeds of $11,450,000,  including  $6,000,000 of
cash and $5,450,000 of subordinated  convertible notes. The notes are payable at
specified  dates during the next ten years and are  convertible,  under  certain
circumstances,  into as much as a 47.6%  ownership  interest in Financial  Asset
Management LLC.

         In connection with the sale, Larry A. Mizel resigned as Chairman of the
Board of Directors and Mr. Browne resigned as President, Chief Executive Officer
and a Director of the Company. Terry Considine and Thomas L. Rhodes were elected
as  Co-Chairmen  of the Board of Directors and Co-Chief  Executive  Officers and
Leslie B. Fox was elected as President  of the Company.  No change has been made
to the  Management  Agreement  other  than an  extension,  and  Financial  Asset
Management LLC will continue its obligations under the Management Agreement.

         During the years ended December 31, 1996,  1995 and 1994, the Company's
total  management fees were $1,425,000,  $1,151,000 and $924,000,  respectively,
consisting of: (i) Base Fees of $654,000,  $751,000 and $556,000,  respectively;
(ii)  Administrative  Fees of $58,000,  $65,000 and $42,000,  respectively;  and
(iii) Incentive Fees of $713,000,  $335,000 and $0, respectively.  There were no
acquisition  fees  incurred  during 1996 and 1995 while  $326,000  were incurred
during 1994.  Acquisition  Fees are capitalized as part of the cost of acquiring
CMBS bonds.

         The  Company's  Charter  authorizes  the  Board of  Directors  to issue
25,000,000  shares,  par value $.01 per share, of Preferred  Stock. To date, the
Company has not issued any classes of stock other than its Common  Stock and has
not  determined  the terms under which any other  classes  would be issued.  The
Charter  of the  Company  authorizes  the Board of  Directors,  without  further
shareowner  action,  to  fix  the  terms  of  the  Preferred  Stock,   including
preferences,  powers and rights  (including  voting rights) senior to the Common
Stock.

         The  officers  and  certain  directors  of the  Company  also  serve as
officers, employees, directors or all three of Asset Investors and the Manager.

         At  December  31,  1995,  the  shares  of  Common  Stock  owned  by MDC
represented 0.8% of the outstanding shares of Common Stock.


                                      F-14
<PAGE>
G.       Selected Quarterly Financial Data (unaudited)

         Presented  below is  selected  quarterly  financial  data for the years
ended December 31, 1996 and 1995 (in thousands, except per share data).
<TABLE>
<CAPTION>

                                                                       Three Months Ended,
                                             -----------------------------------------------------------------------
                                                 December 31,      September 30,        June 30,       March 31,
1996
--------------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>                <C>              <C>
Revenues                                              2,146             2,167              3,526            2,318
Net income                                            1,595             1,765              1,992            1,607
Net income per share                                    .16               .17                .19              .16
Regular dividends declared per share                    .17               .17                .17              .17
Special dividends declared per share                     --               .04                 --               --

Stock prices(1)
     High                                             6-3/4             6-1/2              6-1/4            6-1/8
     Low                                             6-3/16             5-7/8              5-3/4            5-3/4
Common Stock outstanding                         10,315,809        10,315,809         10,315,809       10,158,396

1995
--------------------------------------------------------------------------------------------------------------------
Revenues                                             $2,325            $2,243             $2,240           $2,349
Net income                                            1,508             1,686              1,649            1,533
Net income per share                                    .15               .17                .16              .15
Regular dividends declared per share                    .17               .17                .17              .17

Stock prices(1)
     High                                                 6            6-5/16              6-1/2            6-3/8
     Low                                              5-5/8             5-3/4              5-3/4            5-1/2
Common Stock outstanding                         10,142,034        10,124,698         10,092,674       10,078,468

<FN>
-----------------------
1    Daily closing prices as reported on the AMEX Composite Tape.
</FN>
</TABLE>

                                      F-15
<PAGE>
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.

         Information  required to be set forth  hereunder  has been  omitted and
will be incorporated by reference,  when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.


Item 11. EXECUTIVE COMPENSATION.

         Information  required to be set forth  hereunder  has been  omitted and
will be incorporated by reference,  when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information  required to be set forth  hereunder  has been  omitted and
will be incorporated by reference,  when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information  required to be set forth  hereunder  has been  omitted and
will be incorporated by reference,  when filed, to the Company's Proxy Statement
for its 1997 Annual Meeting of Shareowners.


                                     - 22 -
<PAGE>
                                     PART IV

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

         (a)      Documents filed as part of this report:

         1.       The following Financial Statements of the Company are included
                  in Part II, Item 8 of this Annual Report on Form 10-K:

                                                                            PAGE

                  Report of Independent Auditors.........................    F-2

                  Balance Sheets as of December 31, 1996 and 1995........    F-3

                  Statements of Income for the years ended
                  December 31, 1996, 1995 and 1994.......................    F-4

                  Statements of Stockholders' Equity for the years
                  ended December 31, 1996, 1995 and 1994.................    F-5

                  Statements of Cash Flows for the years ended
                  December 31, 1996, 1995 and 1994.......................    F-6

                  Notes to Financial Statements..........................    F-7

         2.       Schedules to Financial Statements:

                           All financial  statement  schedules have been omitted
                  because they are  inapplicable  or the information is provided
                  in the  Company's  Financial  Statements  and  notes  thereto,
                  included  in Part II,  Item 8, of this  Annual  Report on Form
                  10-K.

         3.       Exhibits:

                Exhibit
                   No.      Description

                3.1         Amended and Restated  Charter of Commercial  Assets,
                            Inc.  (the  "Registrant"),  (incorporated  herein by
                            reference to Exhibit 3.1 to  Amendment  No. 1 to the
                            Registrant's  Registration  Statement on Form 10 (as
                            amended,   the   "Form   10")  of  the   Registrant,
                            Commission  File No.  1-22262,  filed on August  31,
                            1993).

                3.2         By-laws of the Registrant,  (incorporated  herein by
                            reference to Exhibit 3.2 to  Amendment  No. 1 to the
                            Form  10 of  the  Registrant,  Commission  File  No.
                            1-22262, filed on August 31, 1993).

                3.3         Amendment to the By-laws of the Registrant  dated as
                            of January 14, 1997.

                                     - 23 -
<PAGE>

                4.1         Form of certificate representing common stock of the
                            Registrant  (incorporated  herein  by  reference  to
                            Exhibit  4.2 to the Form 10-Q for the  period  ended
                            March 31, 1994, of the  Registrant,  Commission File
                            No. 1-22262 filed on May 16, 1994).

                4.2         Automatic Dividend Reinvestment Plan relating to the
                            common stock of the Registrant  (incorporated herein
                            by reference  to Exhibit 4.2 to  Amendment  No. 1 to
                            the Form 10 of the  Registrant,  Commission File No.
                            1-22262, filed on August 31, 1993).

                10.1        Contribution Agreement, dated as of August 20, 1993,
                            between   the   Registrant   and   Asset   Investors
                            (incorporated herein by reference to Exhibit 10.1 to
                            Amendment  No. 1 to the  Form 10 of the  Registrant,
                            Commission  File No.  1-22262,  filed on August  31,
                            1993).

                10.2        Registration  Rights  Agreement,  dated as of August
                            20, 1993, between the Registrant and Asset Investors
                            (incorporated herein by reference to Exhibit 10.2 to
                            Amendment  No. 2 to the  Form 10 of the  Registrant,
                            Commission File No. 1-22262,  filed on September 15,
                            1993).

                10.3*       Management  Agreement,  dated as of January 1, 1995,
                            between   the   Registrant   and   Financial   Asset
                            Management   Corporation   (incorporated  herein  by
                            reference  to  Exhibit  10.3(b)  to the  Registrants
                            Quarterly  Report on Form 10Q,  Commission  filed on
                            May 12, 1995).

                10.3(a)*    Amendment to the  Management  Agreement  dated as of
                            January 1, 1996 between the Registrant and Financial
                            Asset Management Corporation (incorporated herein by
                            reference  to  Exhibit  10.3(a)  to the  Registrants
                            Quarterly  Report on Form 10-Q for the period  ended
                            March 31, 1996, Commission File No.
                            1-22262, filed on May 15, 1996).

                10.3(b)*    Assignment of the Management  Agreement  dated as of
                            April 1, 1996  between  Financial  Asset  Management
                            Corporation  and  Financial  Asset   Management  LLC
                            (incorporated herein by reference to Exhibit 10.3(b)
                            to the  Registrants  Quarterly  Report on Form 10-Q,
                            Commission File No. 1-22262, filed on May 15, 1996).

                10.3(c)*    Amendment to the  Management  Agreement  dated as of
                            January  1,  1997,   between  the   Registrant   and
                            Financial Asset Management LLC.

                10.4*       Commercial  Assets,  Inc.  1993  Stock  Option  Plan
                            (incorporated herein by reference to Exhibit 10.4 to
                            Amendment  No. 2 to the  Form 10 of the  Registrant,
                            Commission File No. 1-22262,  filed on September 15,
                            1993).

                10.4(a)*    First  Amendment to  Commercial  Assets,  Inc.  1993
                            Stock Option Plan (incorporated  herein by reference
                            to  Exhibit  10.4(a)  to the  Registrants  Quarterly
                            Report on Form 10-Q for the  period  ended  June 30,
                            1996,  Commission File No. 1-22262,  filed on August
                            13, 1996).

                                     - 24 -
<PAGE>
                10.5*       Form of Non-Officer Directors Stock Option Agreement
                            (incorporated herein by reference to Exhibit 99.2 to
                            the Registration Statement on Form S-8, Registration
                            No. 33-7467B, filed on February 1, 1994).

                10.6*       Form   of   Officers    Stock    Option    Agreement
                            (incorporated herein by reference to Exhibit 99.3 to
                            the Registration Statement on Form S-8, Registration
                            No. 33-7467B, filed on February 1, 1994).

                10.7*       Form  of   Indemnification   Agreement  between  the
                            Registrant  and  each  Director  of  the  Registrant
                            (incorporated herein by reference to Exhibit 10.5 to
                            Amendment  No. 1 to the  Form 10 of the  Registrant,
                            Commission  File No.  1-22262,  filed on August  31,
                            1993).

                10.8        Loan and  Security  Agreement,  dated as of November
                            29, 1994,  between the  Registrant  and  PaineWebber
                            Real Estate Securities, Inc. (incorporated herein by
                            reference to Exhibit 10.8 to the  Registrant  Annual
                            Report on Form 10-K,  Commission  File No.  1-22262,
                            filed on March 29, 1995).

                10.8(a)     Amendment to the Loan and Security Agreement,  dated
                            as of August 28, 1995,  between the  Registrant  and
                            PaineWebber    Real    Estate    Securities,    Inc.
                            (incorporated herein by reference to exhibit 10.8(a)
                            to the  Registrants  Annual  Report  on  Form  10-K,
                            commission  File No.  1-22262,  filed  on March  28,
                            1996).

                10.8(b)     Amendment to the  Loan and Security Agreement, dated
                            as of  October 25, 1996, between the Registrant  and
                            PaineWebber Real Estate Securities, Inc.

                23          Independent Auditors' Consent - Ernst & Young LLP.

                27          Financial Data Schedule.

*  Management contract or compensatory plan or arrangement.

         (b)      Reports on Form 8-K

                  No Current  Reports  on Form 8-K were filed by the  Registrant
during the fourth quarter of 1996 covered by this Annual Report on Form 10-K.


                                     - 25 -
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly authorized.  COMMERCIAL  ASSETS,
INC. (Registrant)

Date: March 24, 1997                              By /s/Terry Considine
                                                     ---------------------------
                                                     Terry Considine
                                                     Co-Chief Executive Officer

Date: March 24, 1997                              By /s/Thomas L. Rhodes
                                                     ---------------------------
                                                     Thomas L. Rhodes
                                                     Co-Chief Executive Officer

Date: March 24, 1997                              By /s/Kevin J. Nystrom
                                                     ---------------------------
                                                     Kevin J. Nystrom
                                                     Chief Financial Officer

Date: March 24, 1997                              By /s/Diane Schott Armstrong
                                                     ---------------------------
                                                     Diane Schott Armstrong
                                                     Controller

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

                 Name                       Capacity                  Date

/s/Terry Considine                          Director              March 24, 1997
---------------------------------
Terry Considine


/s/Thomas L. Rhodes                         Director              March 24, 1997
---------------------------------
Thomas L. Rhodes


/s/Donald L. Kortz                          Director              March 24, 1997
---------------------------------
Donald L. Kortz


/s/Raymond T. Baker                         Director              March 24, 1997
---------------------------------
Raymond T. Baker


/s/Robert J. Malone                         Director              March 24, 1997
---------------------------------
Robert J. Malone


/s/Bruce D. Benson                          Director              March 24, 1997
---------------------------------
Bruce D. Benson


/s/Thomas C. Fries                          Director              March 24, 1997
---------------------------------
Thomas C. Fries


                                     - 26 -