FEDERAL MORTGAGE MANAGEMENT II, INC.

                       NOTES TO FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996


January 30, 1998

TO THE STOCKHOLDER
Federal Mortgage Management II, Inc.
Sarasota, Florida

                 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

We  have  audited  the  accompanying statements of financial  condition  of
Federal  Mortgage Management II, Inc. as of December 31, 1997 and 1996  and
the  related statements of operations, changes in stockholder s equity  and
cash  flows for the years then ended.  These financial statements  are  the
responsibility  of  the  Company s management.  Our  responsibility  is  to
express an opinion on these financial statements based on our audits.

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

In  our opinion, the financial statements referred to above present fairly,
in  all  material  respects,  the financial position  of  Federal  Mortgage
Management II, Inc. at December 31, 1997 and 1996, and the results  of  its
operations and its cash flows for the years then ended, in conformity  with
generally accepted accounting principles.

Certified Public Accountants


                   FEDERAL MORTGAGE MANAGEMENT II, INC.

                     STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>

                                              December 31,
                                            1997          1996

ASSETS
<S>                                       <C>          <C>
Cash                                      $   23,935   $    449
Investments                                  175,539
Accounts receivable, net                      13,050
Accrued interest receivable                   16,658
Portfolio of residential mortgage
   loans - net                             1,010,508
Prepaid expenses                              12,000
Deferred financing costs                     308,964     93,356
                                          ----------   --------
                                          $1,560,654   $ 93,805
                                          ==========   ========


LIABILITIES AND STOCKHOLDER S EQUITY (DEFICIT)

LIABILITIES
Accounts payable                          $   14,939   $  7,572
Due to affiliates                             55,532     88,290
Notes payable                              1,606,500
                                          ----------   ---------
                                           1,676,971     95,862
                                          ==========   =========

STOCKHOLDER S EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000
  shares authorized, 100 shares
  issued and outstanding                           1          1
Additional paid-in capital                       999        999
Retained deficit                            (117,317)    (3,057)
                                          -----------  ---------
                                            (116,317)    (2,057)
                                          -----------  ---------
                                          $1,560,654   $ 93,805
                                          ===========  =========
</TABLE>


                    See notes to financial statements.


                   FEDERAL MORTGAGE MANAGEMENT II, INC.

                         STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

                                        For the Years Ended
                                            December 31,
                                        -------------------
                                          1997           1996
                                          ----           ----

REVENUE
<S>                                     <C>            <C>
Interest income - mortgage loans        $   6,826      $
Interest income                            19,660
                                        ----------      ---------
                                           26,486
                                        ----------      ---------
EXPENSES
Accounting                                  3,918           2,184
Advertising                                12,935             165
Consulting                                  8,409
Interest expense                           47,098
Legal                                       6,294
Licenses and fees                           1,824             383
Management and service fees                42,596
Other                                         172             325
Provision for loss                         17,500
                                        ----------     -----------
                                          140,746           3,057
                                        ----------     -----------
NET LOSS                                $(114,260)     $   (3,057)
                                        ==========     ===========
LOSS PER COMMON SHARE                   $(1,142.60)    $   (30.57)
                                        ==========     ===========

</TABLE>

                    See notes to financial statements.



                   FEDERAL MORTGAGE MANAGEMENT II, INC.

          STATEMENTS OF CHANGES IN STOCKHOLDER S EQUITY (DEFICIT)

<TABLE>
<CAPTION>

                                Additional
                      Common     Paid-in   Retained
                      Stock      Capital   Deficit      Total
                      ------    ---------- --------     -----
<S>                   <C>       <C>        <C>          <C>
BALANCE,
January 1, 1996       $         $          $            $

ISSUANCE OF
  COMMON STOCK             1          999                   1,000

NET LOSS - 1996                                (3,057)     (3,057)
                      -------   ---------- ----------   -----------

BALANCE,
December 31, 1996           1         999      (3,057)      (2,057)

NET LOSS - 1997                              (114,260)    (114,260)
                      -------   ---------- ----------   -----------
BALANCE
at December 31, 1997  $     1   $     999  $ (117,317)  $ (116,317)
                      =======   ========== ==========   ===========

</TABLE>



                    See notes to financial statements.

                   FEDERAL MORTGAGE MANAGEMENT II, INC.

                         STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                          For the Years Ended
                                               December 31,
                                          -------------------
                                             1997             1996
                                             ----             ----
<S>                                       <C>              <C>
OPERATING ACTIVITIES
Net loss                                  $   (114,260)     $  (3,057)

Changes in operating assets
     and liabilities:
  Accounts and notes receivable, net           (13,050)
  Portfolio of residential mortgage loans   (1,010,508)
  Accrued interest receivable                  (16,658)
  Prepaid expenses                             (12,000)
  Accounts payable                               7,367         (4,767)
  Due to affiliates                            (32,758)        88,290
                                          -------------     -----------

NET CASH (USED) PROVIDED BY
     OPERATING ACTIVITIES                   (1,191,867)        80,466
                                          -------------     -----------

NET CASH USED IN INVESTING ACTIVITIES
Purchase of investments                       (175,539)

FINANCING ACTIVITIES
  Issuance of common stock                                      1,000
  Increase in deferred financing costs        (215,608)       (81,017)
  Issuance of notes payable                  1,606,500
                                          -------------     ----------

NET CASH PROVIDED (USED)
      BY FINANCING ACTIVITIES                1,390,892        (80,017)
                                          ------------      ----------

INCREASE IN CASH                                23,486            449

CASH, at beginning of year                         449
                                          ------------      -----------
CASH, at end of year                      $     23,935      $     449
                                          ============      ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid                             $     34,219           NONE
                                          ============

</TABLE>



                    See notes to financial statements.

NOTE A - ORGANIZATION

Federal  Mortgage  Management  II,  Inc.  (the   Corporation  ),  a  Florida
corporation,  was  organized  on November 13,  1995.   The  purpose  of  the
Corporation  is to acquire and market mortgage notes secured by first  liens
on  real estate, and to acquire insured instruments of deposits and/or  debt
securities  issued  by  the United States government  and  instrumentalities
thereof.   Purchase of the mortgage notes, instruments of deposits and  debt
securities  are  to  be  in  accordance  with  policies  set  forth  in  the
Acquisition  Policy  of  the Corporation as described  in  the  registration
statement.  Interest payments on the notes and other distributions  will  be
made in accordance with the registration statement.  Through the year ending
December  31,  1996,  the Corporation was considered to be  a  developmental
stage company.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Management s Estimates

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

Investment in Securities

The  Corporations  investments  in  securities  are  classified  in  three
categories and accounted for as follows:

  Trading Securities.Securities held principally for resale in the near term
  are  classified as trading securities and recorded at their  fair  values.
  Unrealized  gains and losses on securities are included in  other  income.
  The Corporation presently has no such securities.

  Securities  to be Held to Maturity.Instruments for which the  Corporation
  has  the positive intent and ability to hold to maturity are reported  at
  cost,  adjusted for amortization of premiums and accretion  of  discounts
  which  are  recognized in interest income using the interest method  over
  the   period  to  maturity.   The  Corporation  presently  has  no   such
  securities.

  Securities  Available for Sale.Securities available for sale  consist  of
  zero  coupon certificates of deposit which are not classified as  trading
  securities nor as securities to be held to maturity.

Declines in the fair value of individual held-to-maturity and available-for-
sale  securities  below  their costs that are other  than  temporary  would
result  in  write-downs of the individual securities to their  fair  value.
The Corporation presently has experienced no such declines.

Gains  and  losses  on  the  sale  of securities  available  for  sale  are
determined using the specific-identification method.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Portfolio of Residential Mortgage Loans

Residential mortgage loans are recorded at the lower of cost or fair market
value.   Purchase discounts are not amortized since the mortgage loans  are
owned  for several months and then sold to investors.  The amortization  of
the  discount would not be materially significant to the operating  results
of the Corporation.

Statements of Cash Flow

For  purposes of reporting cash flows, the Corporation considers  cash  and
cash equivalents as those amounts which are not subject to restrictions  or
penalties and have an original maturity of three months or less.

Reclassifications

Certain  reclassifications have been made to the 1996 financial  statements
to   conform   with  the  1997  financial  statement  presentation.    Such
reclassifications had no effect on net income as previously reported.

Earnings per Share

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share.
Statement  128  replaced  the  calculation of  primary  and  fully  diluted
earnings  per  share  with basic and diluted earnings  per  share.   Unlike
primary  earnings per share, basic earnings per share excludes any dilutive
effects  of options, warrants and convertible securities.  Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per  share.   All  earnings per share amounts for  all  periods  have  been
presented, and where appropriate, restated to conform to the Statement  128
requirements.   For  the  years  ending December  31,  1997  and  1996  the
Corporation had no dilutive securities.

NOTE C - INVESTMENTS

Investments  consist  of  a  zero  coupon  certificate  of  deposit.   This
investment  is  classified as available for sale and is  reported  at  fair
value.

The carrying amount of investment securities is as follows:

<TABLE>
<CAPTION>
                                  Gross      Gross
                    Amortized  Unrealized Unrealized       Fair
                      Cost        Gains     Losses        Value
                    ---------  ---------- ----------      -----
<S>                 <C>        <C>        <C>           <C>
December 31, 1997:
Certificates
  of deposit        $175,539                            $175,539
                    =========                           ========
</TABLE>



NOTE D - DEFERRED FINANCING COSTS

Deferred  financing costs consist of legal and other fees  associated  with
the  filing of the registration statement with the Securities and  Exchange
Commission.  These costs will be amortized over the life of the  promissory
notes commencing with the closing of the offering.

Deferred financing costs were incurred as follows:
<TABLE>
<CAPTION>
                                Years ended December 31,
                                ------------------------
                                 1997               1996
                                -----              -----
<S>                             <C>                <C>
Commission                      $109,320           $
Legal                             72,389              75,152
Offering fee                      48,195
Non-accountable expense           32,130
Other                             27,263
Pricing                           15,000              15,000
Filing fees                        4,667               3,204
                                --------           ---------
                                $308,964           $  93,356
                                ========           =========
</TABLE>

NOTE E - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS - NET

The Corporation purchases residential mortgage loans at a discount from the
face  amount of the loans with the intention of selling the loans at a gain
after  servicing them for a relatively short period of time.  The  mortgage
loans  are purchased by investors based on various factors inherent in  the
group  of  mortgages  presented  for  sale  which  are  considered  in  the
negotiation process.

The portfolio of residential mortgage loans consists of the following:

<TABLE>
<CAPTION>

                                        December 31,  1997
                                        -------------------
<S>                                     <C>
Face value                                   $1,128,563
Discount                                       (100,555)
  Less:  allowance for losses                   (17,500)
                                             -----------
                                             $1,010,508
                                             ===========
</TABLE>


NOTE E - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS - NET (CONTINUED)

The  mortgages have various maturities ranging from 6 months to  30  years,
and  varying  interest  rates  ranging from 7%  to  18%.   The  residential
mortgage  loans  are secured by first liens on residential  real  property.
The  Corporations  policy is to acquire residential mortgage  loans  with
balances that do not exceed 90% of the fair market value of the real estate
or  the loan acquisition price does not exceed 80% of the fair market value
of  the  collateral real estate at the time of the loan  acquisition.   The
Corporation purchases mortgage loans collateralized by real estate  located
in the United States.

NOTE F - INCOME TAXES

The  Corporation  is  recognized  as a Sub-Chapter  S  corporation  by  the
Internal  Revenue Service.  Therefore, the financial statements include  no
provision  for federal income taxes since the income or loss is  reportable
on the tax return of the stockholder.

NOTE G - NOTES PAYABLE

During  the  year  ended  December 31, 1997, the Corporation  issued  notes
through  a public offering to finance the purchase of residential  mortgage
loans.   The notes have interest rates ranging from 8% to 10% depending  on
the  terms  which  range  from 48 months to 72 months.   Interest  is  paid
monthly with principal due at maturity.  Aggregate principal maturities  on
notes are as follows:

<TABLE>
<CAPTION>

          <S>                           <C>
          2001                          $     29,000
          2002                                79,000
          2003                             1,498,500
                                        ------------
                                        $  1,606,500
                                        ============
</TABLE>

The notes are collateralized by all the assets of the Corporation.  For the
year ended December 31, 1997, the Corporation incurred interest expense  of
$47,098, related to the notes payable.

NOTE H - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In  addition  to  the  portfolio of residential mortgage  loans,  financial
instruments that also subject the Corporation to concentrations  of  credit
risk  consist  principally of cash deposits.  The Corporation places  these
investments with a single financial institution.  Deposits are  insured  up
to  $100,000.   At any given time, the Corporation may have  cash  deposits
exceeding the insured amount.


NOTE I - RELATED PARTY TRANSACTIONS

The  Corporation  paid  commission and fees of approximately  $110,000  and
$80,000 respectively, relating to the offering of the notes payable, to  an
affiliated  company.   The  sole stockholder  of  the  Corporation  is  the
controlling stockholder of the affiliated company.

In December of 1997, the Corporation purchased mortgages from an affiliated
company.   The  purchase  price  totaled  approximately  $1,028,000.    The
transaction was at fair market value.

An  affiliated company services the mortgages of the Corporation.  For  the
year  ended December 31, 1997, the Corporation incurred servicing  fees  of
$1,500.   This  amount was due to the affiliated company  at  December  31,
1997.

For  his  general  management services, the sole  stockholder  receives  an
annual  management fee equal to 3% of the aggregate face value of  eligible
collateral.   The  management  fee for the year  ended  December  31,  1997
totaled  approximately  $41,000.   This  amount  is  included  in  due   to
affiliates at December 31, 1997.

NOTE J - FAIR VALUE OF FINANCIAL INSTRUMENTS IN ACCORDANCE
       WITH THE REQUIREMENTS OF SFAS NO. 107

The  Corporation s financial instruments consist of all of its  assets  and
liabilities with the exception of other real estate and deferred  financing
costs.  The Corporation s management has determined that the fair value  of
all  of its financial instruments is equivalent to the carrying cost.   The
mortgage  portfolio  is  purchased with the intent of  a  relatively  short
holding period of several months.  Therefore, any differences in the  value
of  the  mortgage  portfolio due to changes in market  interest  rates  are
minimal.   Furthermore,  each  purchase  and  sale  of  mortgages  by   the
Corporation  is  a private, negotiated transaction.  There  is  no  readily
established market for the Corporation s mortgage portfolio.

The  Corporation s note obligations are not traded on an established market
and the only activity with respect to the obligations are normal, scheduled
redemptions.   The  Corporation s management  estimates  that  the  current
interest  rate  which the Corporation would need to pay in  order  to  sell
similar  note obligations is approximately equivalent to the rates  of  the
outstanding note obligations.

NOTE K -  CLASSIFICATION OF MORTGAGE PORTFOLIO IN ACCORDANCE
         WITH THE REQUIREMENTS OF SFAS NO. 115

The Corporation s mortgage portfolio is a trading security.  As such, it is
required to be carried at fair value, with any unrealized holding gains  or
losses  included in earnings.  For the reasons discussed  in  Note  I,  the
carrying  value  of  the  mortgage portfolio has  been  determined  by  the
Corporation s management to be equivalent to its carrying cost.

NOTE L - SUBSEQUENT EVENTS

During  the  period January 1, 1998 through February 28,  1998,  additional
notes payable totaling  $454,000 were issued.  (See Note G)