**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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FORM 10-K

**ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF**

**THE SECURITIES EXCHANGEACT OF 1934**

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| **For the fiscal year ended December 31, 2004** | **Commission  file number 1-10360** |
|------------------------------------------------------|-------------------------------------|

 

**CRIIMI MAE INC.**

**(Exact name of registrant asspecified in its charter)**

| **Maryland**                                                     | **52-1622022**                         |
|------------------------------------------------------------------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) | (I.R.S.  Employer  Identification No.) |
| **11200 Rockville Pike  Rockville, Maryland**                    | **20852**                              |
| (Address of  principal executive offices)                        | (zip code)                             |

 

Registrant’s phone number, including area code:  **(301) 255-4700**

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Securities Registered Pursuantto Section 12(b) of the Act:

| Title of each class                                   | ** ** | ** **                         | ** ** | **Name of each exchange on  which registered** |
|-------------------------------------------------------|------------|------------------------------------|------------|------------------------------------------------|
| Common Stock                                          |       | New York Stock Exchange, Inc. |
| Series B Cumulative Convertible  Preferred Stock |       | New York Stock Exchange, Inc. |

 

**Securities registeredpursuant to Section 12(g) of the Act:**

None

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10Kor any amendment to this Form 10K. o

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

The aggregate market value (based upon the lastreported sale price on the New York Stock Exchange on June 30, 2004) ofthe shares of CRIIMI MAE Inc. common stock held by non-affiliates wasapproximately $169.4 million. (For purposes of calculating the previous amountonly, all directors and executive officers of the registrant are assumed to beaffiliates.)

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Securities and Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court. Yes x   No o

As of February 25, 2005, 15,584,551 shares ofCRIIMI MAE Inc. common stock with a par value of $0.01 were outstanding.

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**CRIIMI MAE INC.**

**2004 ANNUAL REPORT ON FORM 10-K**

**TABLE OF CONTENTS**
|               | ** ** | ** **                                                                                                             | ** ** | **Page** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I   |
| Item 1.       |       | Business                                                                                                               |       | 3        |
| Item 2.       |       | Properties                                                                                                             |       | 17       |
| Item 3.       |       | Legal Proceedings                                                                                                      |       | 17       |
| Item  4.      |       | Submission  of Matters to a Vote of Security Holders                                                                   |       | 17       |
| PART II  |
| Item  5.      |       | Market  for the Registrant’s Common Stock, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 18       |
| Item 6.       |       | Selected Financial  Data                                                                                               |       | 19       |
| Item  7.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |       | 20       |
| Item  7A.     |       | Quantitative  and Qualitative Disclosures About Market Risk                                                            |       | 51       |
| Item  8.      |       | Consolidated  Financial Statements and Supplementary Data                                                              |       | 53       |
| Item 9.       |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                                  |       |     |
| Item 9A.      |       | Controls and Procedures                                                                                                |       | 53       |
| Item 9B.      |       | Other Information                                                                                                      |       | 53       |
| PART III |
| Item  10.     |       | Directors  and Executive Officers of the Registrant                                                                    |       | 54       |
| Item 11.      |       | Executive Compensation                                                                                                 |       | 58       |
| Item  12.     |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                       |       | 65       |
| Item  13.     |       | Certain  Relationships and Related Transactions                                                                        |       | 68       |
| Item 14.      |       | Principal  Accountant Fees and Services                                                                                |       | 69       |
| PART IV  |
| Item 15.      |       | Exhibits and Consolidated Financial Statement  Schedules                                                               |       | 70       |
| Signatures    |       | 76                                                                                                                     |

 

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**FORWARD-LOOKING STATEMENTS.   Whenused in this Annual Report on Form 10-K, in future filings with theSecurities and Exchange Commission (the SEC or the Commission), in our pressreleases or in our other public or shareholder communications, the words “believe,”“anticipate,” “expect,” “contemplate,” “may,” “will” and similar expressionsare intended to identify forward-looking statements. Statements looking forwardin time are included in this Annual Report on Form 10-K pursuant to the“safe harbor” provision of the Private Securities Litigation Reform Act of1995. Such statements are subject to certain risks and uncertainties, whichcould cause actual results to differ materially, including, but not limited tothe risk factors contained or referenced under the headings “Business-CertainRisk Factors,” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations”. Readers are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date hereof. Weundertake no obligation to publicly revise these forward-looking statements toreflect events or circumstances occurring after the date hereof or to reflectthe occurrence of anticipated or unanticipated events.**

**PART I**

**ITEM 1.**                BUSINESS

**Overview**

CRIIMI MAE Inc. (together with its consolidatedsubsidiaries, We or CRIIMI MAE) is a commercial mortgage company structured asa self-administered real estate investment trust (or REIT). We currently ownand manage a significant portfolio of commercial mortgage-related assets. Historically,we have focused primarily on acquiring high-yielding, non-investment grade(rated below BBB- or unrated) commercial mortgage-backed securities(subordinated CMBS). We commenced operations in 1989, are incorporated in Maryland,and are not a government sponsored entity or in any way affiliated with theUnited States government or any United States government agency. Our commonstock is traded on the New York Stock Exchange under the symbol “CMM”. Our Series BPreferred Stock is traded on the New York Stock Exchange under the symbol “CMMPRB”.

Our existing business consists of investments insubordinated CMBS backed by pools of commercial mortgage loans on multifamily,retail, hotel, and other commercial real estate (core assets) and investmentsin government-insured mortgage-backed securities and a limited number of otherassets (non-core assets). We also are a trader in CMBS, residentialmortgage-backed securities, agency debt securities and other fixed incomesecurities. Through our servicing subsidiary, CRIIMI MAE Services LimitedPartnership (CMSLP), we are responsible for special servicing functions forsubstantially all of the $13.2 billion of commercial mortgage loans underlyingour subordinated CMBS.

Historically, ourstrengths have included:

·       *Subordinated CMBS Acquisitions*.   We were a leadingpurchaser of subordinated CMBS from 1996 to 1998, acquiring an aggregate faceamount of approximately $2.8 billion through 1998. We have not made any furthermaterial subordinated CMBS acquisitions since 1998.

·       *CMBS Resecuritizations*.   We completed two of thecommercial real estate industry’s first resecuritizations of subordinated CMBSin 1996 and 1998. These transactions had a combined face value of $449 millionand $1.8 billion, respectively.

·       *Loan Originations and Securitizations*.   Prior to 1999,we had originated more than $900 million in aggregate principal amount ofcommercial real estate mortgage loans. In 1998, we securitized approximately$496 million of commercial mortgage loans originated or acquired by us. We havenot originated any loans since 1998.

Currently, our revenue andcash are principally generated by our CMBS which have not been pledged tosecure non-recourse debt (Retained CMBS Portfolio) (as set forth in “FinancialCondition - Summary 

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of CMBS”).We receive cash from our Retained CMBS Portfolio in connection with paymentsmade on the underlying commercial mortgage loans. The net interest marginrelated to our CMBS is impacted by, among other things, the credit performanceof the mortgage loans underlying our CMBS and the interest expense on our debt.

**Recent Development**

Our Board of Directors hasengaged Citigroup Global Markets Inc. as its exclusive financial advisor toassist our Company in undertaking a review of our various strategicalternatives, including a possible sale of the Company. The independent membersof our Board will review and consider, among other things, all proposals madeto our Company or our shareholders, and will make recommendations regardingsuch proposals to our Board, all with the objective of maximizing shareholdervalue. There can be no assurance that the process will result in anytransaction.

**Selected 2004Highlights**

Selected 2004highlights are as follows:

·       *Filed $200Million Shelf Registration Statement—IssuedAdditional Shares of Series B Preferred Stock*

On January 27, 2004, we filed a shelfregistration statement with the Securities Exchange Commission (SEC) toregister an aggregate principal amount of $200 million of debt securities,warrants, preferred shares and common shares for sale. In March 2004, weissued $14.9 million of additional Series B Preferred Stock.

·       *CompletedModifications Related to Largest Borrowing Relationship in Special Servicingand Named “2004 Innovator of the Year”*

In April 2004, we completed modifications to theShilo Inn loans and the related pooling and servicing agreements      (PSAs) in the amount of $164 million,resulting in the restructuring of our largest borrowing relationship in specialservicing. In July 2004, we were named as “2004 Innovator of the Year” by *Real Estate Finance and Investment* for our solution to thecomplex issues involving the Shilo Inn loans in special servicing.

·       *Resolved aSignificant Amount of Specially Serviced Assets*

We resolved approximately $540 million in speciallyserviced assets during 2004.

·       *RedeemedPreferred Stock*

In April 2004, we redeemed $18.3 million of our Series Fand G Preferred Stock, which resulted in the net decrease of approximately $1million per annum in dividends to preferred shareholders.

·       *Refinancedour Insured Mortgage Securities Portfolio*

In early 2004, we completed the refinancing of ourinsured mortgage portfolio, which reduced our interest expense by approximately500 basis points, or 70%, as compared to the fixed rate debt which was paidoff.

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·       *2004Recapitalization*

On June 30,2004 we paid off a substantial portion of our then-existing $293 million ofrecourse debt using proceeds from the issuance of a repurchasable seniorinterest certificate in our BBB- rated CMBS, proceeds from the liquidation ofour interest rate swaps, and amounts drawn on a new, secured borrowing facility.A summary of this transaction follows:

·       Weissued a senior interest certificate with a face amount of $260 million, or81.5%, in our $319 million (currently BBB- rated) CMBS, and generated netproceeds of approximately $237 million. The senior interest certificate istreated as non-recourse debt, has an effective interest rate of approximately8.5%, and a coupon rate of 7%. We have retained the right to repurchase thissenior interest certificate after five years. See “Capital Resources -Non-Recourse Debt” and “Financial Condition -Summary of CMBS” and Note 6 to theconsolidated financial statements for additional information.

·       Weliquidated a $200 million aggregate notional interest rate swap position andgenerated proceeds of approximately $15.2 million. See “Results ofOperations—Net Gains on Derivatives” for additional information.

·       Weborrowed $95 million under a new, longer-term secured financing facility. The$95 million facility has a three-year term, with an option to extend the termfor one year, and is comprised of two borrowing amounts.

·       Asa result of this recapitalization, we reduced our recourse debt to $73.7million at June 30, 2004. See “Capital Resources—Recourse Debt” and “CapitalResources—Non-Recourse Debt” and Note 6 to the consolidated financialstatements for additional information.

·       Additionally,we obtained a commitment for a $500 million non-recourse warehouse facilitywhich we may use to finance the origination or purchase of new commercialmortgage loans, and which, when utilized, will bear interest at a rate ofone-month LIBOR plus 75 basis points on amounts borrowed thereunder.

·       *SignificantlyReduced Corporate General and Administrative Expenses*

We reduced our corporate general and administrativeexpenses by 14% in 2004 as compared to 2003 primarily due to reductions inexecutive cash compensation expense and certain professional fees.

·       *Standard &Poor’s Rating Services (S&P) Upgraded Ratings on CBO-2 CMBS*

In September 2004, eight of our CMBS in our CBO-2portfolio were upgraded by S&P. S&P stated that the raised ratingsreflected the continued seasoning of the underlying mortgage pools and S&P’sfuture loss expectations.

·       *HigherAdjusted Book Value per Diluted Common Share, Common Stock Price and TotalLiquidity at December 31, 2004 than at December 31, 2003*

Our adjusted book value per diluted common share as ofDecember 31, 2004 was $17.27 per diluted common share, a  37% increase over $12.59 per diluted common shareas of December 31, 2003.

As of December 31, 2004, the closing price forour common stock was $16.10 per share, a 54% increase over the $10.43 closingprice at December 31, 2003.

Our total liquidity increased to $45.1 million as of December 31,2004, an increase of 76% as compared to $25.6 million at December 31,2003.

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**Business Segments**

Management currentlyassesses our performance and allocates capital principally on the basis of twolines of business:  portfolio investmentand mortgage servicing. These two lines of business are managed separately asthey provide different sources and types of revenues.

**PortfolioInvestment**

Portfolio investmentprimarily includes (i) CMBS, (ii) investments in government insuredmortgage securities, (iii) investments in mezzanine loans and (iv) cashand liquid assets. Our income from this segment is principally generated fromour Retained CMBS Portfolio.

***CMBS***

CMBS are generally created by pooling commercialmortgage loans and directing the cash flow from such mortgage loans to varioustranches of securities. The tranches consist of investment grade (AAA to BBB-),non-investment grade (BB+ to D) and unrated securities. The first step in theprocess of creating CMBS is loan origination. Loan origination occurs when afinancial institution lends money to a borrower to refinance or to purchase acommercial real estate property, and secures the loan with a mortgage on theproperty that the borrower owns or purchases. Commercial mortgage loans aretypically non-recourse to the borrower. A pool of these commercial mortgageloans is then accumulated, often by a large commercial bank or other financialinstitution. One or more rating agencies then analyze the loans and theunderlying real estate to determine their credit quality. The mortgage loansare then deposited into an entity that is not subject to taxation, often a realestate mortgage investment conduit (or REMIC). This entity then issuessecurities backed by the cash flows from commercial mortgage loans, or CMBS.

At the time of a securitization, one or more entitiesare appointed as “servicers” for the pool of mortgage loans, and areresponsible for performing servicing duties which include collecting paymentsand monitoring performance (master or direct servicing), and working out orforeclosing on defaulted loans (special servicing). Each servicer typicallyreceives a fee and other financial incentives based on the type and extent ofservicing duties.

The CMBS are divided into tranches, which are affordedcertain priority rights to the cash flow from the underlying mortgage loans. Interestpayments typically flow first to the most senior tranche until it receives allof its accrued interest and then to the junior tranches in order of seniority. Principalpayments typically flow to the most senior tranche until it is retired. Tranchesare then retired in order of seniority, based on available principal. Losses,if any, are generally first applied against the principal balance of the lowestrated or unrated tranche. Losses are then applied in reverse order of seniority.Each tranche is assigned a credit rating by one or more rating agencies basedon the agencies’ assessment of the likelihood of the tranche receiving itsstated payment of principal. The CMBS are then sold to investors through eithera public offering or a private placement.

Historically, we have focused primarily on acquiringor retaining non-investment grade and unrated tranches, issued by mortgageconduit entities, in which we believed our market knowledge and real estateexpertise allowed us to earn attractive risk-adjusted returns. We did notacquire any material subordinated CMBS subsequent to 1998. Prior to the autumnof 1998, we generally acquired subordinated CMBS in privately negotiatedtransactions, which allowed us to perform due diligence on a substantialportion of the mortgage loans underlying the subordinated CMBS as well as theunderlying real estate prior to consummating the purchase. In connection withour subordinated CMBS acquisitions, we targeted diversified mortgage loan poolswith a mix of property types, geographic locations and borrowers.

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As of December 31,2004, our $1.1 billion portfolio of assets included $961 million of CMBS(representing approximately 90% of our total consolidated assets). Thefollowing is a summary of our CMBS as of December 31, 2004:  
| ** **                                | ** ** | **Fair Value**    | ** ** | **Amortized  Cost** | ** ** | **% of Total  Fair Value  of CMBS** | ** ** |
|-------------------------------------------|------------|------------------------|------------|---------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **(in millions)** | ** ** | ** **          | ** ** |
| CMBS Pledged to  Secure Non-Recourse Debt |       |                   | $          | 625.8               |       |                                                    |       | $ | 479.6 |   |   |   | 65 | % |   |
| Retained CMBS  Portfolio                  |       |                   | 334.9      |                |       |                                                    | 267.6      |   |   |   | 35 | % |   |
| Total CMBS  Portfolio                     |       |                   | $          | 960.7               |       |                                                    |       | $ | 747.2 |   |   |   | 100 | % |   |

 

***CMBS Resecuritizations***

We initially funded a substantial portion of oursubordinated CMBS acquisitions with short-term, variable-rate secured debt. Tomitigate our exposure to interest rate risk, our business strategy was toperiodically refinance a significant portion of this short-term, variable-raterecourse debt with fixed-rate, non-recourse debt having maturities that matchedthose of our mortgage assets securing such debt, also known as match-fundeddebt. We effected such refinancings by pooling subordinated CMBS, once asufficient pool of subordinated CMBS had been accumulated, and issuing newlycreated commercial bond obligations backed by the pooled subordinated CMBS. Thecommercial bond obligations issued in such resecuritizations were fixed-rateobligations with maturities that matched the maturities of the underlyingsubordinated CMBS. These resecuritizations also increased the amount ofborrowings available to us due to the increased collateral value of the newCMBS relative to the pooled subordinated CMBS. The increase in collateral valuewas principally attributable to the seasoning of the underlying mortgage loansand the diversification that occurred when such subordinated CMBS were pooledtogether. We generally used the cash proceeds from the investment grade CMBSthat were sold in the resecuritization to reduce the amount of our short-term,variable-rate debt. We then used the net excess borrowing capacity created bythe resecuritization to obtain new short-term, variable-rate securedborrowings, typically provided by the subordinated CMBS issuer and, to a lesserextent, cash, to purchase additional subordinated CMBS.

In December 1996, we completed our firstresecuritization of subordinated CMBS, CRIIMI MAE Trust I Series 1996-C1(CBO-1), with a combined face value of approximately $449 million involving 35 individualCMBS collateralized by 12 mortgage securitization pools. In CBO-1 we sold, in aprivate placement, securities with a face amount of $142 million and retainedsecurities with a face amount of approximately $307 million. As a result ofCBO-1, we refinanced approximately $142 million of short-term, variable-rate,secured recourse debt with fixed-rate, non-recourse, match-funded debt.

In May 1998, we completed our secondresecuritization of subordinated CMBS, CRIIMI MAE Commercial Mortgage Trust Series 1998-C1(CBO-2), with a combined face value of approximately $1.8 billion involving 75individual CMBS collateralized by 19 mortgage securitization pools and three ofthe retained securities from CBO-1. In CBO-2, we eventually sold, in privatetransactions, securities with an aggregate face amount of $673 million andretained securities with a face amount of approximately $1.1 billion. Weretained call options on $328 million of these securities and accordingly didnot surrender control pursuant to the applicable accounting requirements. Therefore,these securities sold with call options were accounted for as a financing andare included in CMBS pledged to secure non-recourse debt on the consolidatedbalance sheet.

As previously discussed, on June 30, 2004, werefinanced a substantial portion of our recourse debt outstanding usingproceeds from the issuance of a $260 million face amount, non-recourse,repurchasable senior interest certificate in our BBB- rated CMBS. We retained aCMBS with a face amount of $59 million as part of this transaction.

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As of December 31,2004, our total debt was approximately $630.0 million, of which approximately12% was recourse debt and approximately 88% was non-recourse debt. See Notes 4and 6 to the Notes to Consolidated Financial Statements for further informationregarding our CMBS resecuritizations and our non-recourse and recourse debt.

***Loan Originations and Securitizations***

From 1996 through 1998, weoriginated mortgage loans principally through mortgage loan conduit programswith major financial institutions for the primary purpose of pooling such loansfor securitization. We viewed a securitization as a means of extracting themaximum value from the mortgage loans originated. In June 1998, wesecuritized approximately $496 million of the commercial mortgage loansoriginated or acquired by us through a mortgage loan conduit program withCiticorp Real Estate, Inc. and, through our subsidiary, CRIIMI MAE CMBSCorp., issued Commercial Mortgage Loan Trust Certificates, Series 1998-1(CMO-IV). In CMO-IV, we sold all of the investment grade tranches to thirdparties and received net cash flow on the CMBS retained by us. We sold all ofour remaining interests in CMO-IV in November 2000.

**Mortgage Servicing**

We conduct our mortgage loanservicing operations through CMSLP. CMSLP’s principal focus is the specialservicing of the non-performing mortgage loans underlying our CMBS portfolio,as described below.

***Special Servicing***

A special servicertypically provides asset management and resolution services with respect tononperforming or underperforming loans within a pool of mortgage loans. When weacquired subordinated CMBS, we typically required that we retain the right toappoint the special servicer for the related mortgage pools. When serving asspecial servicer of mortgage loans in a CMBS pool, CMSLP has the authority todeal directly with any borrower that fails to perform under certain terms ofits mortgage loan, including the failure to make payments, and to manage anyloan workouts and foreclosures. As special servicer, CMSLP earns fee income onservices provided in connection with any loan servicing function transferred toit from the master servicer. We believe that because we own the first lossunrated or lowest rated bond of all but two CMBS transactions, we have anincentive to resolve quickly any loan workouts. As of December 31, 2004,CMSLP was designated as the named special servicer on substantially all of the$13.2 billion of commercial mortgage loans underlying our CMBS.

***Property Servicing***

We outsource substantially all of our contractualproperty servicing duties related to the labor-intensive tasks of financialstatement collection and analysis and property inspection performance. Thisoutsourcing does not relieve us of any of our contractual obligations or reduceany of our rights as property servicer, since CMSLP remains the propertyservicer of record, but it does relieve us of the administrative task ofcollecting financial operating data. For the outsourced loans, CMSLPcoordinates the delivery of monthly reports and inspections with thethird-party servicers. For the portfolios for which the third-party servicer isnot also the master servicer, CMSLP reviews and approves the reports from theseservicers prior to submission by CMSLP to the securitization trustees.

For all of the loansunderlying our subordinated CMBS portfolio, including those outsourced as notedabove, CMSLP performs analyses of operating performance and propertyinspections as part of its routine asset monitoring process. This allows CMSLPto identify and evaluate potential issues that could result in losses on ourCMBS.

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**The ReorganizationPlan**

On October 5, 1998,CRIIMI MAE Inc. (unconsolidated) and two operating subsidiaries, CRIIMI MAEManagement, Inc. and CRIIMI MAE Holdings II, L.P., filed for relief underChapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Courtfor the District of Maryland, Southern Division, in Greenbelt, Maryland. On November 22,2000, the United States Bankruptcy Court for the District of Maryland enteredan order confirming our reorganization plan, and we emerged from Chapter 11 on April 17,2001. Under our reorganization plan, the holders of our equity retained theirshares of stock and our creditors were paid in full.

**Certain RiskFactors**

In addition to the riskfactors set forth below, please see the discussion of various risks in “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”

***Owning subordinated CMBS subjects us to significant risks.***

*Potential Losses and Reduced Cash Flows*.   Asan owner of the most subordinate tranches of CMBS, we will be the first to bearany loss and will absorb 100% of the losses on the underlying mortgage loancollateral until cumulative losses exceed the principal amount of oursubordinated CMBS.  We will also be thelast to receive repayments of principal from the underlying mortgage loans. Interestpayments typically flow first to the most senior certificates until theyreceive all of their accrued interest and then sequentially to the juniorcertificates in order of seniority.  Principal payments typically flow to the mostsenior certificates until they are retired.  Tranches are then retired in order ofseniority based on available principal. Therefore, if delinquencies, defaultsand losses occur which are greater than those currently forecasted by us, cashflows on our subordinate CMBS will be reduced and the fair value of those CMBSis likely to decline. In addition, when delinquencies, defaults and lossesoccur, cash flows otherwise due to our subordinated CMBS may not be advanced bythe master servicers to the extent required to meet scheduled principal andinterest payments, resulting in interest shortfalls to our subordinated CMBS. Seebelow for a discussion of our most significant borrowing relationship and itspotential impact on our cash flows. All of the factors discussed above couldcontribute to a significant decline in the fair value of our CMBS.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS” and Note 4 to Notes ofConsolidated Financial Statements.

*Changes in Fair Value due to Economic Factors*.   Thefair value of our subordinated CMBS, along with our book value per dilutedcommon share, can change due to a number of economic factors.  These factors include changes in the value ofthe underlying real estate, fluctuations in U.S. Treasury rates, and changes inthe spread between interest rates on our subordinated CMBS and the U.S. Treasurysecurities with comparable maturities.  For instance, changes in the performance ofthe properties securing the underlying mortgage loans can result in interest paymentshortfalls to the extent there are mortgage payment delinquencies, andprincipal losses to the extent that there are payment defaults and the amountsof such principal and interest shortfalls are not fully recovered.  These losses may result in a permanent declinein the value of our subordinated CMBS and may change our anticipated yield tomaturity on such subordinated CMBS if the losses are in excess of thosepreviously estimated. CMBS are priced at a spread above the current U.S. Treasurysecurity (such as the 10 year U.S. Treasury Note) with a maturitythat most closely matches the CMBS’s weighted average life.  The value of CMBS can be affected by changesin U.S. Treasury rates, as well as changes in the spread between such CMBS andthe U.S. Treasury security with a comparable maturity. Generally,increases and decreases in both U.S. Treasury rates or spreads will resultin temporary changes in the value of our subordinated CMBS assuming that wehave the ability and intent to hold our subordinated CMBS investments untiltheir stated maturity. Temporary changes in fair value are reflected as acomponent of shareholders’ equity.  However, such temporary changes in the fair 

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value of our subordinatedCMBS become permanent changes realized through our income statement when theexpected credit losses related to those subordinated CMBS are greater or occursooner than originally anticipated or we no longer intend or fail to have theintent and ability to hold such subordinated CMBS to maturity. See “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” andNote 4 to Notes of Consolidated Financial Statements.

*Sensitivities of assumptions used to determine FairValue of CMBS.  *Our estimate of the fair value of oursubordinated CMBS is highly sensitive to assumptions regarding the performanceof the underlying mortgage loan portfolio and other factors. For a detaileddiscussion of the determination of the fair value of our CMBS and thesensitivities of key assumptions, see Note 4 to the consolidated financialstatements “CMBS—Determining Fair Value of CMBS”.

*Significant borrowing relationship related tocertain mortgage loans underlying our subordinated CMBS.  *Asof December 31, 2004, the most significant borrowing relationship withrespect to unpaid principal balance in our specially serviced portfolio, theShilo Inn loans, consisted of 23 loans totaling an aggregate principal balanceof $135.1 million spread across three CMBS transactions and secured by 23 hotelproperties in the West and Pacific Northwestern states.

In September 2004, after the bankruptcy court haddisallowed approximately $1.6 million of the securitization trusts’ request forreimbursement of legal and other professional fees and expenses and theoutstanding principal balance of the loans were adjusted pro-rata as of September 30,2004. Although the borrowers have made monthly principal and interest paymentsunder the loan modifications through March 2005, we continue to classifythe Shilo Inn loans as specially serviced loans due to the fact that theborrowers have continued to indicate to us that, based on the operations of theproperties, they may not have the wherewithal to continue making their mortgageloan payments. We are exploring alternatives to fully resolve these speciallyserviced loans in the best interest of the securitization trusts’certificateholders, including a possible sale of one or more of these mortgageloans.

Distributions on ourRetained CMBS Portfolio, and the related fair value of the Retained CMBSPortfolio, will continue to be impacted by, among other things, the borrowers’performance under the terms of the modified loans.

***Limited liquidity of the subordinated CMBS during adverse marketconditions may result in uncertainty in the valuation of our portfolio.***

Duringadverse market conditions, the liquidity of subordinated CMBS may be limited. Futureadverse market conditions would likely adversely impact the value of oursubordinated CMBS and amounts we could realize if we were required to sell allor a portion of our subordinated CMBS. Due to this limited liquidity,among other matters, management’s estimate of the value of our subordinatedCMBS during the time such conditions exist could vary significantly from thevalue that could be realized in a current transaction or under certain market conditions.

***Economic and industry slowdowns have contributed to defaults on themortgage loans underlying our subordinated CMBS.***

Previous economic and commercialreal estate industry slowdowns have contributed to defaults on mortgage loansunderlying our subordinated CMBS. Future slowdowns could negatively impact thevalues of the commercial real estate securing the mortgage loans, weakeningcollateral coverage and the demand for the commercial real estate securing theunderlying mortgage loans and increasing the possibility of defaults and losses.Mortgage loan defaults related to our subordinated CMBS have resulted inincreased estimated losses, and may result in further increases to estimatedlosses on our subordinated CMBS. Moreover, it should be noted that ourestimates of future loss exposure relate in part to underlying mortgage loanswhich are performing today, but which we expect may default at some point inthe future, 

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atwhich time we expect that such estimated losses may occur. Such estimates areinherently difficult to make and are subject to change as market conditionschange. In particular, because such estimates (and predictions about futureevents) are made on the basis of data available to us today, they may tend tounderstate future losses in periods of strong economic performance andoverstate future losses in periods of weak performance. See Note 4 to the Notesto Consolidated Financial Statements and “MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” for information regarding theperformance of the underlying mortgage loans underlying our subordinated CMBS.

***Our currentindebtedness subjects us to a number of borrowing risks, including refinancingrisk.***

We must either refinance or retire the remainingprincipal balance of our senior subordinated secured debt (BREF Debt) currentlyheld by BREF One LLC, Series A (BREF One) at its maturity inJanuary 2006. While our current cash balance would allow us to retire theentire amount of the BREF Debt at its maturity, using our cash for this purposewould significantly reduce our cash resources and impact our liquidity.

Our current recourse debt obligations are in the formof collateralized borrowings. Our ability to meet our existing debt serviceobligations depends on a number of factors, including management’s ability tomaintain cash flow from our mortgage assets (which is impacted by, among otherthings, the credit performance of the mortgage loans underlying oursubordinated CMBS and changes in interest rates and spreads.)  See the risk factor related to owning CMBS. Adefault under our collateralized borrowings could result in a liquidation ofthe collateral. If we are forced to liquidate any assets that qualify asqualified real estate assets (under the REIT provisions of the Internal RevenueCode) to repay borrowings, there can be no assurance that we will be able tomaintain compliance with the REIT provisions of the Internal Revenue Coderegarding asset and source of income requirements. See the risk factor relatedto tax related risks. The liquidation of CMBS or other assets could also resultin the loss of our Investment Company Act exclusion. See the risk factorrelated to the Investment Company Act exclusion. A default under the operativedocuments of any collateralized borrowing could result in a default under theoperative documents of other collateralized or non collateralized borrowing orother obligations, which could result in our being required to pay all suchobligations. We may be unable to repay such obligations.

A substantial portion ofany future borrowings used to acquire mortgage-related assets may be structuredas collateralized, short-term floating-rate secured borrowings. The amountborrowed under such agreements is typically based on the market value of theassets pledged to secure specific borrowings. Under adverse market conditions,the value of pledged assets could decline, and lenders could initiate margincalls (in which case we could be required to post additional collateral or toreduce the amount borrowed to restore the ratio of the amount of the borrowingto the value of the collateral). In order to meet a margin call, we may berequired to sell assets at prices lower that their carrying value or provide additionalcollateral, which could have an adverse effect on us and our financial positionand results of operation.

***Failure to manage mismatch between long-term mortgage assets andshort-term funding could negatively impact our net income and distributions.***

Interest rates are highly sensitive to many factors,including governmental monetary and tax policies, domestic and internationaleconomic and political considerations and other factors beyond our control.Interest rate fluctuations can adversely affect our net income and value inmany ways and present a variety of risks, including the risk of a mismanagementbetween asset yields and borrowing rates and reshaping of the yield curve. Wemay continue to enter into hedging transactions, as appropriate, in an effortto protect our mortgage assets and related debt from interest ratefluctuations. See the risk factor regarding limited protection from hedgingtransactions.

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Ouroperating results depend in large part on differences between the income fromour mortgage assets and our borrowing costs. We may finance a significantportion of new fixed-rate investments with borrowings, initially, havingadjustable interest rates (or borrowing rates) that reset. If interest ratesrise, borrowing rates (and borrowing costs) are expected to rise while couponrates (and investment income) on our fixed rate mortgage assets remain constant.This would decrease both our net income, potentially resulting in a net loss,and the mark-to-market value of our fixed-rate assets, and would be expected toslow future investments of assets. Although we intend to invest primarily infixed-rate mortgage assets, we also may own adjustable rate mortgage assets. Wemay fund these adjustable rate mortgage assets with borrowings having borrowingrates which reset monthly or quarterly. To the extent that there is adifference between (i) the interest rate index used to determine thecoupon rate of the adjustable rate mortgage assets (asset index) and (ii) theinterest rate index used to determine the borrowing rate for the relatedfinancing (borrowing index), we will be exposed to “basis” risk. Typically, ifthe borrowing index rises more than the asset index, our net income woulddecrease, all other things being constant. Additionally, our adjustable ratemortgage assets may be subject to periodic rate adjustment limitations andperiodic and lifetime rate caps which limit the amount that the coupon rate canchange during any given period. No assurance can be given as to the amount ortiming of changes in interest rates or their effect on our mortgage assets,their valuation or income derived therefrom. During periods of changinginterest rates, coupon rate and borrowing rate mismatches could negativelyimpact our net income and distributions.

***Our hedging transactions provide limited protection.***

There can be no assurancethat our hedging activities will have the desired impact of protecting us fromthe risks associated with changes in interest rates. No hedging activity cancompletely protect us from the risks associated with changes in interest rates.Non-performance by counterparties to hedging transactions could result inlosses to us. We may not be able to dispose of, or close out a hedging positionwithout the consent of the counterparty, and we may not be able to enter intoan offsetting hedging contract in order to cover our risk. There can be noassurance that a liquid market will exist for the purchase or sale of hedginginstruments, and we may be required to maintain a position until expiration,which could result in losses. There can be no assurance that we will be able toreplace a hedge upon expiration which could result in increased interest raterisk. See further discussion of our derivative financial instruments in Note 7of Notes to Consolidated Financial Statements.

***Our exploration of strategic alternatives may result in uncertaintiesconcerning the direction of our business.***

Therecan be no assurance that the Company will engage in a strategic transaction. Ifthe Company does not engage in a strategic transaction, we plan to continue tomanage our CMBS assets and operate our special servicing business to maximizeshareholder value. The failure to engage in a strategic transaction may impactthe operation of our current business.

***We are dependentupon the performance of key personnel.***

Our business is dependentupon the performance of key employees, including Barry Blattman, our Chairmanand Chief Executive Officer, and Mark Jarrell, our President and ChiefOperating Officer, and other executive officers. We cannot be certain that anykey employee will continue in such capacity for any particular period of time. Allof our key employees are “at will” such that we or they may terminate theiremployment at any time and for any reason, or no reason. The loss of keypersonnel, or the inability to hire and retain qualified employees, couldadversely effect our business, financial condition and results of operations.

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***We face considerable competition from competitors with greater resources.***

Ifwe resume commercial mortgage loan originations and/or other mortgage relatedactivities, we would compete with financial institutions, mortgage REITs,specialty finance companies, banks, mortgage companies, hedge funds, otherlenders, and/or other entities originating and/or purchasing commercialmortgage-related assets. Many of these competitors may have greater access tocapital and/or other resources (or the ability to obtain capital at a lowercost) and may have other advantages over us. Although subject to anon-competition agreement with us through January 2006, BREF One and itscontrolled affiliates are permitted to sponsor collateralized bond or loanobligations, or CBOs, and to acquire subordinated CMBS for inclusion in suchCBOs. As a result, they could compete with us in connection with suchactivities.

***We are subject to anumber of tax related risks including loss of REIT status.***

***REIT Status***.   Wehave elected to qualify as a REIT for tax purposes under Sections 856-860of the Internal Revenue Code. We are required to meet income, asset, ownershipand distribution tests to maintain our REIT status. Although there can be noassurance, we believe that we have satisfied the REIT requirements for allyears through and including 2004. There can also be no assurance that we willmaintain our REIT status for 2005 or subsequent years. If we fail to maintainour REIT status for any taxable year, we will be taxed as a regular domesticcorporation subject to federal and state income tax in the year ofdisqualification and for at least the four subsequent years. Depending on theamount of any such federal and state income tax, we may have insufficient fundsto pay any such tax and also may be unable to comply with some or all of ourobligations, including our recourse debt.

***Net Operating Loss for TaxPurposes/Trader Election.  ***For tax purposes, we haveelected to be classified as a trader in securities. We trade in both short andlonger duration fixed income securities, including CMBS, residentialmortgage-backed securities and agency debt securities (such securities tradedand all other securities of the type described constituting the “Trading Assets”to the extent owned by us or any qualified REIT subsidiary, meaning generallyany wholly owned subsidiary that is not a taxable REIT subsidiary). SuchTrading Assets are classified as Other MBS on our consolidated balance sheet.

As a result of our election in 2000 to be taxed as atrader, we recognized a mark-to-market tax loss on our Trading Assets on January 1,2000 of approximately $478 million (the January 2000 Loss). Such loss wasrecognized evenly for tax purposes over four years beginning with the year 2000and ending in 2003. Such loss was ordinary, which allowed us to offset ourordinary income.

We generated net taxable income (net operating loss)of approximately $10.3 million and ($84.0) million during the years ended December 31,2004 and 2003, respectively. We utilized a portion of our net operating loss(NOL) carryforward to reduce our 2004 taxable income to common shareholders tozero and, accordingly, our REIT distribution requirement was eliminated for2004. As of December 31, 2004, our accumulated and unused net operatingloss (or NOL) was $297.5 million. Any accumulated and unused net operatinglosses, subject to certain limitations, generally may be carried forward for upto 20 years to offset taxable income until fully utilized. Accumulated and unusednet operating losses cannot be carried back because we are a REIT.

There can be no assurance that our position withrespect to our election as a trader in securities will not be challenged by theInternal Revenue Service (or IRS) and, if challenged, will be defendedsuccessfully by us. As such, there is a risk that the January 2000 Losswill be limited or disallowed, resulting in higher tax basis income and acorresponding increase in REIT distribution requirements. It is possible thatthe amount of any under-distribution for a taxable year could be corrected witha “deficiency dividend” as defined in Section 860 of the Internal RevenueCode; however, interest may also be due to the IRS on the amount of thisunder-distribution.

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If we are required to make taxable incomedistributions to our shareholders to satisfy required REIT distributions, allor a substantial portion of these distributions, if any, may be in the form ofnon-cash dividends. There can be no assurance that such non-cash dividendswould satisfy the REIT distribution requirements and, as such, we could loseour REIT status or may not be able to satisfy some or all of our contractualobligations.

Our future use of NOLs for tax purposes could besubstantially limited in the event of an “ownership change” as defined under Section 382of the Internal Revenue Code. As a result of these limitations imposed by Section 382of the Internal Revenue Code, in the event of an ownership change, our abilityto use our NOL carryforwards in future years may be limited and, to the extentthe NOL carryforwards cannot be fully utilized under these limitations withinthe carryforward periods, the NOL carryforwards would expire unutilized. Accordingly,after any ownership change, our ability to use our NOLs to reduce or offsettaxable income would be substantially limited or not available under Section 382.In general, a company reaches the “ownership change” threshold if the “5%shareholders” increase their aggregate ownership interest in the company over athree-year testing period by more than 50 percentage points. The ownershipinterest is measured in terms of total market value of the company’s capitalstock. If an “ownership change” occurs under Section 382 of the InternalRevenue Code, our prospective use of our accumulated and unused NOL will belimited. We are not aware of any acquisition of shares of our capital stockthat has created an “ownership change” under Section 382. We have adopteda shareholder rights plan and amended our charter to minimize the chance of anownership change within the meaning of Section 382 of the Internal RevenueCode; however there can be no assurance that an ownership change will notoccur.

***Changes in Tax Laws****.  *Our activities, structure and operations may beadversely affected by changes in the tax laws applicable to REITs and “tradersin securities” for tax purposes.

***If we recognize phantom income our shareholders may be required to payfederal income tax with respect to such income before such income is realizedby them in an economic sense.***

Ourinvestment in subordinated CMBS may cause us, under certain circumstances, torecognize taxable income in excess of our economic income (phantom income)actually received and to experience an offsetting excess of economic incomeover our taxable income in later years. As a result, our shareholders, fromtime to time, may be required to treat distributions that economicallyrepresent a return of capital as taxable dividends for federal income taxpurposes. Such distributions would be offset in later years by distributionsrepresenting economic income that would be treated as returns of capital forfederal income tax purposes. Accordingly, if we recognize phantom income, ourshareholders may be required to pay federal income tax with respect to suchincome on an accelerated basis (i.e., before such income is realized byshareholders in an economic sense). Taking into account the time value ofmoney, such an acceleration of federal income tax liabilities would causeshareholders to receive an after-tax rate of return on an investment in ourstock that would be less than the after-tax rate of return on an investmentwith an identical before-tax rate of return that did not generate phantomincome. As the ratio of our phantom income to our total income increases, theafter-tax rate of return received by a shareholder paying taxes on suchdistributions will decrease.

***If two trustsformed in connection with two CMBS resecuritization transactions in which weown all the equity interests were to lose their “taxable mortgage pool”exemption, we could be materially adversely affected.***

An entity that constitutes a “taxable mortgage pool”as defined in the Internal Revenue Code Section 770 (i) (TMP) istreated as a separate corporate level taxpayer for federal income tax purposes.In general, for an entity to be treated as a TMP (i) substantially all ofthe assets must consist of debt obligations and a majority of those debtobligations must consist of mortgages, (ii) the entity must have more thanone class of debt securities outstanding with separate maturities, and (iii) thepayments on the 

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debt securities must beara relationship to the payments received from the mortgages. As of December 31,2004, we owned all of the equity interests in two trusts that constitute TMPs(individually a Trust and together the Trusts). The Trusts were formed inconnection with our CBO-1 and CBO-2 resecuritization transactions. See“Business-CMBS Resecuritizations” and Note 4 to the Notes to ConsolidatedFinancial Statements for descriptions of CBO-1 and CBO-2. Thestatutory provisions and regulations governing the tax treatment of TMPs (theTMP Rules) provide an exemption for TMPs that constitute “qualified REITsubsidiaries” (that is, entities whose equity interests are wholly owned by aREIT or a qualified REIT subsidiary). As a result of this exemption and thefact that as of December 31, 2004 we owned all of the equity interests ineach of the Trusts, as of December 31, 2004 the Trusts were not requiredto pay a separate corporate level tax on income they derive from theirunderlying mortgage assets.

As of December 31, 2004, we also owned certainsecurities structured as debt issued by the Trusts (the Bonds). As of December 31,2004, certain of the Bonds owned by us served as collateral (the Pledged Bonds)for certain secured debt. If a creditor were to seize or sell the Pledged Bondsto a non-qualified REIT subsidiary and the Pledged Bonds were deemed toconstitute equity interests (rather than debt) in the Trusts, then the Trustswould no longer qualify for the exemption under the TMP Rules provided forqualified REIT subsidiaries. The Trusts would then be required to pay acorporate level federal income tax. As a result, available funds paid from theunderlying mortgage assets that would ordinarily be used by the Trusts to makepayments on certain securities issued by the Trusts (including the equityinterests and the Pledged Bonds) would instead be applied to tax payments. Sincethe equity interests and Pledged Bonds are the most subordinated securitiesand, therefore, would absorb payment shortfalls first, the loss of  the exemption under the TMP Rules couldhave a material adverse effect on their value, the payments received thereon,our cashflow and the value of our stock.

In addition to causing theloss of the exemption under the TMP Rules, a seizure or sale of the PledgedBonds and a characterization of them as equity for tax purposes, rather thandebt, could also jeopardize our REIT status if the value of the remainingownership interests in any Trust held by us (i) exceeded 5% of the totalvalue of our assets or (ii) constituted more than 10% of the Trust’svoting interests. Although it is possible that the election by the TMPs to betreated as taxable REIT subsidiaries could prevent the loss of our REIT status,there can be no assurance that a valid election could be made given the timingof a seizure or sale of the Pledged Bonds.

***Failure to qualifyfor the Investment Company Act exclusion could have a material adverse effecton us.***

Under the Investment Company Act of 1940, as amended,an investment company is required to register with the Securities and ExchangeCommission (SEC) and is subject to extensive restrictive and potentiallyadverse regulation relating to, among other things, operating methods,management, capital structure, dividends and transactions with affiliates. However,as described below, companies primarily engaged in the business of acquiringmortgages and other liens on and interests in real estate (QualifyingInterests) are excluded from the requirements of the Investment Company Act.

To qualify for the Investment Company Act exclusion,we, among other things, must maintain at least 55% of our assets in QualifyingInterests (the 55% Requirement) and are also required to maintain an additional25% in Qualifying Interests or other real estate-related assets (Other RealEstate Interests and such requirement, the 25% Requirement). According to themost recent SEC staff interpretations, we believe that all of ourgovernment-insured mortgage securities constitute Qualifying Interests. Inaccordance with the most recent SEC staff interpretations, we believe that allof our subordinated CMBS constitute Other Real Estate Interests and thatcertain of our subordinated CMBS also constitute Qualifying Interests. Oncertain of our subordinated CMBS, we, along with other rights, have theunilateral right to direct foreclosure with respect to the underlying mortgageloans. Based on such rights and our economic interest in the underlyingmortgage loans, we believe that the related subordinated 

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CMBS constitute QualifyingInterests. As of December 31, 2004, we believe that we were in compliancewith both the 55% Requirement and the 25% Requirement.

If the SEC or its staffwere to take a different position with respect to whether such subordinatedCMBS constitute Qualifying Interests, we could, among other things, be requiredeither (i) to change the manner in which we conduct our operations toavoid being required to register as an investment company or (ii) toregister as an investment company, either of which could have a materialadverse effect on us. If we were required to change the manner in which weconduct our business, we would likely have to dispose of a significant portionof our subordinated CMBS or acquire significant additional assets that areQualifying Interests. Alternatively, if we were required to register as aninvestment company, we expect that our operating expenses would significantlyincrease and that we would have to significantly reduce our indebtedness, whichcould also require us to sell a significant portion of our assets. Noassurances can be given that any such dispositions or acquisitions of assets,or deleveraging, could be accomplished on favorable terms, or at all. There arerestrictions under certain of the operative documents evidencing our recoursedebt which could limit possible actions we may take in response to any need tomodify our business plan in order to register as an investment company or avoidthe need to register. Certain dispositions or acquisitions of assets couldrequire approval or consent of certain holders of this debt. Any such resultscould have a material adverse effect on us.

**Employees**

As of February 1,2005, we had 71 employees, 44 of whom are employed by CMSLP and 27 of whom areemployed by CRIIMI MAE Management, Inc., one of our wholly ownedsubsidiaries.

**Executive Officers**

Thefollowing table sets forth information concerning our executive officers as of March 1,2005:
| **Name**            | ** ** | ** ** | ** ** | **Age**                                                          | ** ** | ** ** | **Position** | ** ** |
|---------------------|------------|------------|------------|------------------------------------------------------------------|------------|------------|--------------|------------|
| Barry S. Blattman   |       | 42         |       | Chairman of the Board  and Chief Executive Officer               |
| Mark R. Jarrell     |       | 44         |       | President and  Chief Operating Officer                           |
| Cynthia O. Azzara   |       | 45         |       | Executive Vice  President, Chief Financial Officer and Treasurer |
| Stephen M. Abelman  |       | 43         |       | Executive Vice  President, Asset Management                      |
| Daniel P. Warcholak |       | 44         |       | Senior Vice President,  Fixed Income/Capital Markets             |

 

Barry S. Blattman has served as Chairman of the Boardand Chief Executive Officer since January 2003, and as President from January 2003to September 2003.

Mark R. Jarrell has served as President and ChiefOperating Officer since September 2003, and as a director from January 2003 to August 2003.

Cynthia O. Azzara has served as Chief FinancialOfficer since 1994, Executive Vice President since August 2003, SeniorVice President from 1995 to August 2003 and Treasurer since 1997.

Stephen M. Abelman has served as Executive VicePresident since October 2003.

Daniel P. Warcholak hasserved as Senior Vice President since September 2003, as Group VicePresident from March 2002 to September 2003 and as Vice Presidentfrom January 1998 to March 2002.

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**Internet Website**

Our internet website canbe found at www.criimimaeinc.com. We make available, free of charge on orthrough our website, access to our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-Kand amendments to those reports filed pursuant to Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 as soon as reasonably practicable aftersuch material is filed with, or furnished to, the SEC. We also make available,free of change, access to our Codes of Business Conduct and Ethics, Board ofDirectors Governance Guidelines, Audit Committee Charter, Compensation andStock Option Committee Charter and Nominating and Governance Committee Charter.Any of this information is available from us in print to any stockholder whorequests it. Requests for printed materials should be directed to InvestorRelations at (800) 266-0535.

**Certifications**

Our Chief ExecutiveOfficer and Chief Financial Officer executed certifications dated March 8,2005,as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and wehave included those certifications as exhibits hereunder.In addition, our Chief Executive Officer has certified to the New York StockExchange on May 28, 2004 that he was unaware of any violation by CRIIMIMAE of the NYSE’s corporate governance listing standards in effect at thattime.

**ITEM 2.**                PROPERTIES

We lease our corporateoffices at 11200 Rockville Pike, Rockville, Maryland. As of December 31,2004, we occupy approximately 34,000 square feet, which include 9,300 squarefeet that the company anticipates subletting in 2005.

**ITEM 3.**             LEGAL PROCEEDINGS

In the course of ournormal business activities, various lawsuits, claims and proceedings have beenor may be instituted or asserted against us. Although there can be noassurance, based on currently available facts, we believe that the dispositionof matters pending or asserted will not have a material adverse effect on ourconsolidated financial position, results of operations or liquidity. See Note16 of Notes to Consolidated Financial Statements.

**ITEM 4.**             SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS

We did not submit any matters to a vote of securityholders during the fourth quarter of 2004.

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**PARTII**

**ITEM 5.**                MARKET FOR THEREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

**Market Data **

Our common stock is listed on the New York StockExchange (symbol: CMM). On October 17, 2001, we implemented a one-for-tenreverse stock split designed, in part, to satisfy the New York Stock Exchangemarket price listing requirement.  Allshare and per share information in this Annual Report on Form 10-K has beenretroactively adjusted to reflect the reverse stock split.  Share information adjustments include,without limitation, adjustments to the number of common shares issued andoutstanding, issued as dividends on and upon conversion of shares of preferredstock and issuable under outstanding options.

As ofFebruary 25, 2005, we had approximately 2,405 holders of record of our commonstock.  The following table sets forththe high and low closing sales prices for our common stock during the periodsindicated.
| ** **             | ** ** | **2004**             | ** ** | **2003**             | ** ** |
|------------------------|------------|----------------------|------------|----------------------|------------|
| ** **             | ** ** | **Sales Price** | ** ** | **Sales Price** | ** ** |
| **Quarter Ended** | ** ** | ** **           | ** ** | **High**             | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| March 31               |       | $                    | 11.74      |                 | $          | 10.30 |   | $ | 10.86 |   | $ | 8.20 |   |
| June 30                |       | 11.97                |       | 10.46                |       | 11.32 |   | 8.87 |   |
| September 30           |       | 14.68                |       | 12.04                |       | 11.96 |   | 10.36 |   |
| December 31            |       | 16.52                |       | 14.79                |       | 11.40 |   | 10.00 |   |
|                        |            |                      |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

**Dividends**

No cash dividends were paid to common shareholdersduring 2004 or 2003.  See “Business—CertainRisk Factors” for a brief discussion of the elimination of our REITdistribution requirements for 2004 and 2003 due to our net operating losses fortax purposes.  

During 2004 and 2003, cashdividends were paid to preferred shareholders. See Note 11 to Notes to Consolidated Financial Statements.  

**Preferred Stock**

On March 23, 2004, we sold 585,000 additional sharesof Series B Preferred Stock, resulting in aggregate gross proceeds of $14.9million.  As of December 31, 2004 and2003, there were 2,178,982 and 1,593,982 outstanding shares of Series BPreferred Stock, respectively.

On April 28, 2004, weredeemed all 586,354 outstanding shares of our Series F Preferred Stock and all1,244,656 outstanding shares of our Series G Preferred Stock.  The total redemption prices wereapproximately $5.9 million and $12.4 million, respectively.  

**Repurchases**

We did not repurchase any shares of our equitysecurities during the fourth quarter of 2004.

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**ITEM 6.**                SELECTED FINANCIALDATA  

**SelectedConsolidated Financial Data**

Thefollowing table contains selected consolidated financial information aboutus.  The selected financial data shouldbe read in conjunction with the consolidated financial statements, the notesthereto, and “Management’s Discussionand Analysis of Financial Condition and Results of Operations” includedelsewhere in this Annual Report on Form 10-K.  There were no cash dividends declared on our common stock for any of theperiods presented.  See Note 2 to Notesto Consolidated Financial Statements and “MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” for a discussion of theaccounting for impairment, servicing revenue, derivatives, goodwill and otherintangibles, preferred stock issuance costs and a discussion of certainexpenses related to Chapter 11 reorganization, all of which affect thecomparability of the periods presented above.
| ** **                                                                           | ** ** | **For the years ended December 31,**         | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                           | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Consolidated Income Statement Data:**                                              |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Interest income                                                                      |       | $                                                                     | 95,598     |   | $ | 104,415 |   | $ | 124,460 |   | $ | 134,375 |   | $ | 195,252 |   |
| Interest expense                                                                     |       | (52,159                                                               | )          | (70,800 | ) | (93,743 | ) | (98,861 | ) | (139,366 | ) |
| Net interest margin                                                                  |       | 43,439                                                                |       | 33,615 |   | 30,717 |   | 35,514 |   | 55,885 |   |
| Servicing revenue/other  income                                                      |       | 11,928                                                                |       | 10,942 |   | 13,590 |   | 9,035 |   | 5,671 |   |
| Operating expenses                                                                   |       | (22,041                                                               | )          | (24,947 | ) | (23,501 | ) | (22,041 | ) | (13,423 | ) |
| Other                                                                                |       | (10,447                                                               | )          | (16,715 | ) | (67,164 | ) | (40,447 | ) | (196,717 | ) |
| Net income (loss) before cumulative  effect of accounting changes                    |       | 22,879                                                                |       | 2,895 |   | (46,359 | ) | (17,937 | ) | (148,584 | ) |
| Dividends paid or accrued  on preferred shares                                       |       | (6,172                                                                | )          | (7,007 | ) | (9,337 | ) | (8,146 | ) | (6,912 | ) |
| Net income (loss) to  common shareholders                                            |       | 16,707                                                                |       | (4,111 | ) | (65,462 | ) | (24,223 | ) | (155,495 | ) |
| Net earnings (loss) per  diluted share after cumulative effect of accounting changes |       | $                                                                     | 1.06       |   | $ | (0.27 | ) | $ | (4.77 | ) | $ | (2.18 | )(1) | $ | (25.02 | )(1) |
| **Financial Data:**                                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cash flows provided by (used in):                                                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Operating activities                                                                 |       | $                                                                     | 28,807     |   | $ | 20,794 |   | $ | 56,872 |   | $ | 52,679 |   | $ | (6,818 | ) |
| Investing activities                                                                 |       | 136,012                                                               |       | 141,222 |   | 86,838 |   | 53,535 |   | 113,351 |   |
| Financing activities                                                                 |       | (145,444                                                              | )          | (169,568 | ) | (131,758 | ) | (195,484 | ) | (53,474 | ) |
| **Consolidated Balance Sheet Data:**                                                 |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Mortgage Assets, at fair value:                                                      |       |                                                                  |       |   |   |   |   |   |   |   |   |
| CMBS                                                                                 |       | $                                                                     | 960,656    |   | $ | 837,003 |   | $ | 861,980 |   | $ | 824,220 |   | $ | 852,534 |   |
| Insured mortgage  securities                                                         |       | 37,783                                                                |       | 147,498 |   | 275,340 |   | 343,091 |   | 385,751 |   |
| Cash and cash  equivalents, including restricted cash(2)                             |       | 41,074                                                                |       | 21,699 |   | 37,213 |   | 55,513 |   | 202,416 |   |
| Total assets                                                                         |       | 1,069,939                                                             |       | 1,069,212 |   | 1,241,085 |   | 1,315,004 |   | 1,557,840 |   |
| Debt:                                                                                |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Total recourse debt                                                                  |       | 73,682                                                                |       | 350,043 |   | 375,952 |   | 407,637 |   | 558,585 |   |
| Total non-recourse debt                                                              |       | 556,323                                                               |       | 415,550 |   | 546,039 |   | 616,715 |   | 645,170 |   |
| Total liabilities                                                                    |       | 641,882                                                               |       | 777,432 |   | 949,424 |   | 1,053,959 |   | 1,289,582 |   |
| Shareholders' equity                                                                 |       | 428,057                                                               |       | 291,780 |   | 291,661 |   | 261,045 |   | 268,258 |   |

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(1)           Proforma net loss per diluted shareassuming the adoption of SFAS 142 and the change in accounting for servicingrevenue as of January 1, 2001 and 2000 would have been $(2.11) and $(24.51),respectively.

(2)           The years ended December 31, 2002, 2001 and 2000include restricted cash of $8.0 million, $38.2 million, and $95.8 million,respectively.

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**Tax BasisAccounting**
| ** **                                                                   | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                   | ** ** | **(in thousands)**                                      | ** ** |
| Interest income                                                              |       | $                                                            | 172,152    |   | $ | 176,976 |   | $ | 181,462 |   | $ | 187,079 |   | $ | 246,576 |   |
| Interest and  related expense                                                |       | (87,165                                                      | )          | (103,176 | ) | (120,789 | ) | (129,186 | ) | (171,282 | ) |
| Net interest margin                                                          |       | 84,987                                                       |       | 73,800 |   | 60,673 |   | 57,893 |   | 75,294 |   |
| Credit losses on  CMBS                                                       |       | (53,344                                                      | )          | (24,751 | ) | (14,540 | ) | (4,505 | ) | (1,287 | ) |
| Other, net                                                                   |       | (9,833                                                       | )          | (12,711 | ) | (10,101 | ) | (15,836 | ) | (57,114 | ) |
| January 2000 Loss  recognized                                                |       | —                                                       |       | (119,543 | ) | (119,542 | ) | (119,542 | ) | (119,542 | ) |
| Loss on  extinguishment of debt                                              |       | (5,201                                                       | )          | (738 | ) | — |   | — |   | 15,771 |   |
| Mark-to-market  loss on trading assets as of April 17, 2001             |       | —                                                       |       | — |   | — |   | (8,573 | ) | — |   |
| Mark-to-market  (loss) gain on trading assets                                |       | (102                                                         | )          | (94 | ) | (60 | ) | (135 | ) | 49,933 |   |
| Loss on sale of  trading assets                                              |       | —                                                       |       | — |   | — |   | — |   | (12,607 | ) |
| Dividends paid or  accrued on preferred shares                               |       | (6,172                                                       | )          | (7,007 | ) | (9,337 | ) | (8,145 | ) | (6,912 | ) |
| Dividends not  deductible due to net operating loss                          |       | —                                                       |       | 7,007 |   | 9,337 |   | 8,145 |   | 6,912 |   |
| Taxable income/  (net operating loss)                                        |       | 10,335                                                       |       | (84,037 | ) | (83,570 | ) | (90,698 | ) | (49,552 | ) |
| Accumulated net  operating loss, January 1                              |       | (307,857                                                     | )          | (223,820 | ) | (140,250 | ) | (49,552 | ) | — |   |
| Remaining January  2000 Loss                                                 |       | —                                                       |       | — |   | (119,543 | ) | (239,085 | ) | (358,627 | ) |
| Accumulated and unused  net operating loss and remaining January 2000   Loss |       | $                                                            | (297,522   | ) | $ | (307,857 | ) | $ | (343,363 | ) | $ | (379,335 | ) | $ | (408,179 | ) |

 

**ITEM 7.     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Introduction**

Our existingbusiness consists of:

·       investmentsin our core assets, which are CMBS backed by pools of commercial mortgage loanson multifamily, retail, hotel, and other commercial real estate;

·       investmentsin non-core assets, including investments in government-insured mortgage backedsecurities and a limited number of other assets;

·       tradingin CMBS, residential mortgage-backed securities, agency debt securities andother fixed income securities; and

·       assetmanagement through our servicing subsidiary, CRIIMI MAE Services LimitedPartnership (CMSLP). CMSLP performs special servicing on substantially all ofthe commercial mortgage loans underlying our CMBS.

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Currently, our primary source of revenue and cashrelates to our Retained CMBS Portfolio, which represents all CMBS except forthose which have been pledged to secure non-recourse debt (as set forth in “FinancialCondition—Summaryof CMBS”). We receive cash from our Retained CMBS Portfolio in connection withpayments made on the underlying commercial mortgage loans. The net interestmargin related to our CMBS is impacted by, among other things, the creditperformance of the mortgage loans underlying our CMBS and the interest expenseon our debt.

On June 30, 2004, wecompleted a comprehensive refinancing transaction that included the payoff of asubstantial portion of our recourse debt through the issuance of a repurchasablesenior interest certificate in our BBB- rated CMBS, as more fully describedbelow. This refinancing effectively completed the restructuring of our balancesheet, resulted in additional match-funding of our core assets through theissuance of non-recourse debt, and provided us with the ability to pursuestrategic alternatives while we continue our portfolio investment and assetmanagement business.

**Recent Development**

Our Board of Directors has engaged Citigroup GlobalMarkets Inc. as its exclusive financial advisor to assist our Company inundertaking a review of our various strategic alternatives, including apossible sale of the Company. The independent members of our Board will reviewand consider, among other things, all proposals made to our Company or ourshareholders, and will make recommendations regarding such proposals to ourBoard, all with the objective of maximizing shareholder value. There can be noassurance that the process will result in any transaction.

We currently face certainsignificant business risks, including those risks related to owningsubordinated CMBS and risks related to the strategic direction of our Company.

**Liquidity and CashFlow**

Liquidity is a measurement of our ability to meetpotential cash requirements, including ongoing commitments to repay borrowings,fund investments and lending activities and for other general business purposes.Currently, our primary source of funds for liquidity consists of cash flowsfrom our Retained CMBS Portfolio and, to a lesser extent, cash flows from ournon-core assets.

Our ability to make mortgage-related investments, ifany, depends on, among other things, our internally generated cash flows,available liquidity, and our ability to access additional capital. As discussedbelow, we have obtained a commitment for a $500 million non-recourse warehousefacility which may be used in connection with a loan origination program. Factorswhich could affect our ability to access additional capital include among otherthings, the amount of our debt, the cost and availability of such capital atterms that will be acceptable to us, the availability of investment products atattractive rates of return, changes in interest rates and interest ratespreads, changes in the commercial mortgage industry and the commercial realestate market, the effects of terrorism, general economic conditions,perceptions in the capital markets of our business, results of our operations,and our financial leverage, financial condition, and business prospects.

On June 30,2004, we paid off a substantial portion of our then-existing $293 million ofrecourse debt outstanding using proceeds from the issuance of a non-recourse,repurchasable senior interest certificate in our BBB- rated CMBS, proceeds fromthe liquidation of our interest rate swaps, and amounts drawn on a new, securedborrowing facility. A summary of this transaction is as follows:

·       Weissued a senior interest certificate with a face amount of $260 million, or81.5%, in our $319 million (currently BBB- rated) CMBS, and generated netproceeds of approximately $237 million. The senior interest certificate istreated as non-recourse debt, has an effective interest rate of approximately8.5%, and a coupon rate of 7%. We have retained the right to repurchase thissenior 

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interest certificate afterfive years. See “Capital Resources—Non-RecourseDebt” and “Financial Condition—Summaryof CMBS” and Note 6 to the consolidated financial statements for additionalinformation.

·       Weliquidated a $200 million aggregate notional interest rate swap position andgenerated proceeds of approximately $15.2 million. See “Results of Operations—Net Gainson Derivatives” for additional information.

·       Weborrowed $95 million under a new, longer-term secured financing facility. The$95 million facility has a three-year term, with an option to extend the termfor one year, and is comprised of two borrowing amounts.

·       Aspart of this recapitalization, we reduced our recourse debt to $73.7 million atJune 30, 2004. See “Capital Resources—RecourseDebt” and “Capital Resources—Non-RecourseDebt” and Note 6 to the consolidated financial statements for additionalinformation.

·       Additionally, we obtained acommitment for a $500 million non-recourse warehouse facility which we may useto finance the origination of new commercial mortgage loans, and, whenutilized, will bear interest at a rate of one-month LIBOR plus 75 basis pointson amounts borrowed thereunder.

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***Summary of Significant Sources and Uses of Cash:***

Thefollowing table is a summary of CRIIMI MAE’s significant sources and uses ofcash during the years ended December 31, 2004 and 2003:
| ** **                                                                         | ** ** | **For the year ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                                 | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(in millions)**                                   | ** ** |
| *Sources and Uses of Cash related to Other  Activities(1):*                        |       |                                                     |       |   |   |
| Cash received from Retained CMBS Portfolio(2)                                      |       | $                                                        | 50.3       |   | $ | 60.0 |   |
| Cash from non-core assets(3)                                                       |       | 13.2                                                     |       | 8.6 |   |
| Cash used to service debt, excluding match-funded  debt:                           |       |                                                     |       |   |   |
| Principal payments                                                                 |       | (3.1                                                     | )(4)       | (6.1 | ) |
| Interest payments                                                                  |       | (12.8                                                    | )(4)       | (22.8 | )(5) |
| Cash used to make interest rate swap payments                                      |       | (2.4                                                     | )          | (0.5 | ) |
| General and administrative expenses(6)                                             |       | (10.4                                                    | )          | (12.0 | ) |
| BREF maintenance fee(6)                                                            |       | (1.7                                                     | )          | (1.7 | ) |
| Cash used to pay preferred dividends                                               |       | (6.2                                                     | )          | (12.2 | )(7) |
| *Sources and Uses of Cash related to June 30,  2004 Refinancing Transaction:* |       |                                                     |       |   |   |
| Cash from issuance of senior interest certificate in  BBB- rated CMBS              |       | 237.1                                                    |       | — |   |
| Cash from liquidation of swap position                                             |       | 15.2                                                     |       | — |   |
| Cash from Deutsche Bank $95 million borrowing  facility                            |       | 94.7                                                     |       | — |   |
| Cash used to retire Bear Stearns Debt                                              |       | (293.1                                                   | )          | — |   |
| Cash used to pay down Bear Stearns $200 million  borrowing facility                |       | (52.7                                                    | )          | — |   |
| Other cash items related to transaction, net                                       |       | (1.2                                                     | )          | — |   |
| *Sources and Uses of Cash related to Equity/Other  Transactions:*                  |       |                                                     |       |   |   |
| Cash from issuance of additional Series B  Preferred Stock                    |       | 14.9                                                     |       | — |   |
| Cash used to redeem Series F and G Preferred  Stock                           |       | (18.3                                                    | )          | — |   |
| Cash received/used to exercise clean-up calls  related to non-recourse debt        |       | 2.1                                                      |       | (2.0 | ) |
| Cash used to purchase CMBS                                                         |       | (1.2                                                     | )          | — |   |
| Cash used to pay  executive contract termination and severance costs               |       | —                                                   |       | (4.5 | ) |
|                                                                                    |            |                                                          |            |  |  |  |  |

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(1)          CMSLP’s cash has notbeen used to service our debt or pay dividends and is therefore excluded fromthis summary table. CMSLP retains its cash to fund its operations.

(2)          The decrease in cashreceived from our Retained CMBS Portfolio is primarily due to the reimbursementof approximately $3.3 million of excess advances relating to the Shilo Innsloans and due to increased realized losses and other shortfalls during the year2004.

(3)          Includes cash receivedprimarily from our interests in the AIM Limited Partnerships, insured mortgagesecurities and mezzanine loans. Proceeds aggregating $1.8 million from theliquidation of three AIM Limited Partnerships is included in 2004. Therefinancing of our commercial mortgage obligations (CMOs) in late 2003 andearly 2004 resulted in approximately $1.8 million of additional cash receivedin 2004 compared to 2003 from our insured mortgage securities. Additionally, asa result 

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of the payoff of mezzanineloans, proceeds of $2.8 million and $1.8 million are included in 2004 and 2003,respectively.

(4)          The June 30, 2004refinancing transaction reduced our debt service requirements related tocertain of our debt. Due to the retirement of the Bear Stearns Debt and therelated refinancing, our principal debt service requirements were eliminated(for a three year term) and our interest payments were reduced.

(5)          Interest expense for2003 includes approximately $3.1 million of additional interest paid during the45 day redemption notice period on the Series A Senior Secured Notes andthe Series B Senior Secured Notes.

(6)          The general andadministrative expenses and BREF maintenance fee are the amounts as reflectedin our consolidated statements of income.

(7)          During 2003, alloutstanding accrued dividends were paid to preferred shareholders.

Cash flows from ourRetained CMBS Portfolio will continue to be affected by the amount and timingof additional actual defaults, realized losses, interest shortfalls, masterservicer advance recoveries and appraisal reduction amounts on propertiesunderlying our Retained CMBS Portfolio. Realized losses on our Retained CMBSPortfolio are expected to increase significantly during 2005 and will likelyresult in decreased cash received from our Retained CMBS Portfolio insubsequent years. Also, we currently face uncertainty regarding the potentialimpact of events involving our most significant borrowing relationship asdiscussed under the caption “Financial Condition—Summary of CMBS—SpeciallyServiced Mortgage Loans”.

**2004 compared to2003**

Net cash providedby operating activities increased by approximately $8.0 million to $28.8million during the year ended December 31, 2004 from $20.8 million duringthe year ended December 31, 2003. The increase was primarily attributableto:

·       $2.9million aggregate decrease in Portfolio Investment and Servicing general andadministrative expenses;

·       $2.4million paid to certain executives for contract terminations and $2.1 millionin severance paid to our former Chairman and former President in 2003;

·       $13.0million decrease in debt service payments related to non-match funded debt;partially offset by a

·       $9.7million decrease in cash from our Retained CMBS Portfolio.

Net cash providedby investing activities decreased by approximately $5.2 million to $136.0million during the year ended December 31, 2004 from $141.2 million duringthe year ended December 31, 2003. The decrease was primarily attributableto:

·       $7.9million decrease in proceeds from mortgage security prepayments;

·       $3.6million decrease in proceeds resulting from the difference between cash (paid)received in excess of income recognized on our Retained CMBS Portfolio, dueprimarily to the reimbursement of excess advancing related to the Shilo Innsloans in 2004;

·       $3.2million of principal payments received on CMBS in 2003;

·       $1.6million purchase of CMBS in 2004;

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·       $3.3million of proceeds from the sale of investment-grade CMBS by CMSLP in 2003;partially offset by

·       $15.2million proceeds from the liquidation of derivatives in 2004.

Net cash used infinancing activities decreased by approximately $24.2 million to $145.4 millionduring the year ended December 31, 2004 from $169.6 million during theyear ended December 31, 2003. The increase is primarily attributable to:

·       $30.6million decrease in principal payments on recourse and non-recourse debt;

·       $5.3million decrease in debt issuance costs;

·       $6.0million reduction in the payment of dividends to preferred shareholders;

·       $13.2million decrease in proceeds from the issuance of common stock; and

·       $3.7 million net decreasein cash from the issuance of the additional Series B Preferred Stock andthe subsequent redemption of the Series F and G Preferred Stock in 2004.

**2003 compared to2002**

Net cash provided by operating activities decreased byapproximately $36.1 million to $20.8 million during 2003 as compared to $56.9million during 2002. The decrease was primarily attributable to the lapsing ofrestrictions on the use of our cash as a result of the retirement of our ExitDebt, a decrease in cash received from our Retained CMBS Portfolio, $2.4million paid to certain executives for contract terminations, and $2.1 millionof severance paid to our former Chairman and former President.

Net cash providedby investing activities increased by approximately $54.4 million to $141.2million during 2003 compared to $86.8 million during 2002. The increase wasprimarily attributable to:

·       a$50.3 million increase in proceeds from insured mortgage security prepaymentsduring 2003;

·       $1.7million of proceeds from the prepayment of a mezzanine loan during 2003;

·       $10.1million of purchases of investment-grade CMBS by CMSLP during 2002; partiallyoffset by

·       $8.8million of proceeds from the sale of servicing rights during 2002; and

·       a$2.3 million reduction in proceeds from the sale of investment-grade CMBS byCMSLP during 2003.

Net cash used in financingactivities increased by approximately $37.8 million to $169.6 million during2003 compared to $131.8 million during 2002. The increase is primarilyattributable to the payment of approximately $12.2 million in preferred stockdividends during 2003 and a $61.0 million increase in principal payments on thesecuritized mortgage obligations due to higher insured mortgage securityprepayments as discussed previously. In connection with the January 2003recapitalization, we repaid approximately $373.6 million of Exit Debt throughthe incurrence of an aggregate $330.0 million of Bear Stearns Debt and BREFDebt, the net proceeds of $13.5 million from the issuance of common stock toBREF Fund, and $30.1 million of our available cash and liquid assets. During2003, we also paid approximately $6.4 million of debt issuance costs, primarilyin connection with the January 2003 recapitalization.  During 2002, we paid $18.7 million (approximately $396,000 of which representedaccrued and unpaid dividends) to redeem the Series E PreferredStock. We redeemed all 173,000 outstandingshares of the Series E Preferred Stock at the stated redemption price of$106 per share plus accrued and unpaid dividends through and including the dateof redemption. The approximate $2.2 million difference between the aggregateliquidation value, including preferred stock issuance costs, and the redemptionprice is reflected as a dividend on preferred stock in 2002.

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**Capital Resources**

Our consolidatedindebtedness was approximately $630.0 million as of December 31, 2004. Recoursedebt was $73.7 million, or 12% of total indebtedness, and non-recourse debt was$556.3 million, or 88% of total indebtedness as of December 31, 2004, asdiscussed below.

***Recourse Debt***

Certaininformation regarding our recourse debt at December 31, 2004 is asfollows:
| ** **                             | ** ** | **Carrying  Amount(1)** | ** ** | **Stated  Interest  Rate** | ** ** | **Stated  Maturity  Date** | ** **        |
|----------------------------------------|------------|-------------------------|------------|----------------------------|------------|----------------------------|-------------------|
| ** **                             | ** ** | **(in thousands)** | ** ** | ** **                 | ** ** | ** **                 | ** **        |
| Secured by pledge  of CMBS(2)     |       |                    | $          | 42,000                     |       |                       | LIBOR  + 1.25%(3) |   | June 2007(4) |   |
| Secured by pledge  of CMBS             |       |                    | 415        |                       |       | LIBOR  + 1.5%(3)           |              | August 2005 |   |
| Senior subordinated  secured note |       |                    | 31,267     |                       |       | 15%                        |              | January 2006 |   |
| Total recourse  debt                   |       |                    | $          | 73,682                     |       |                       |              |   |   |   |

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(1)          Carrying amount approximates face amount.

(2)          Recourseis limited to 10% of this outstanding debt, or $4.2 million, as of December 31,2004.

(3)          LIBORequals one-month LIBOR.

(4)          The termsof the debt permit us to extend the term for one twelve-month period. If weextend, we will be required to retire 25% of the then outstanding debt balanceeach quarter over the remaining year of the term.

Substantially all of our recourse debt secured bypledge of CMBS is collateralized by the retained junior interest in ourcurrently BBB- rated CMBS and by our currently BB+ rated CMBS. The senior subordinated secured note iscollateralized by an indirect second lien on our Retained CMBS Portfolio and isnot prepayable.

See Note 6 in our notes toconsolidated financial statements for a more detailed discussion of ourrecourse debt.

***Non-Recourse Debt***

Certaininformation regarding our non-recourse debt at December 31, 2004 is asfollows:
| ** **                                        | ** ** | **Carrying  Amount**    | ** ** | **Face  Amount**        | ** ** | **Stated  Interest  Rate** | ** ** | **Stated  Maturity  Date** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** | **(in thousands)** | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Secured by pledge  of CMBS                        |       |                    | $          | 526,838                 |       |                       |       | $                          | 585,198    |   |   | 7.0% |   | 2033 |   |
| Secured by pledge  of insured mortgage securities |       |                    | 29,485     |                    |       |                       | 29,485     |                       |       | LIBOR  + 0.10%(1) |   | June 2007 | (2) |
| Total  non-recourse debt                          |       |                    | $          | 556,323                 |       |                       |       | $                          | 614,683    |   |   |   |   |   |   |

----

(1)          LIBOR equals one-monthLIBOR.

(2)          The terms of the debt permit us to extend the term for one twelve-monthperiod. If we extend, we will be required to retire 25% of the then outstandingdebt balance each quarter over the remaining year of the term.

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Our non-recourse debt totals approximately $556.3million as of December 31, 2004, $526.8 million of which is secured by ourinvestment grade CMBS (not including 18.5% of our BBB- rated CMBS), and $29.5million of which is secured by our insured mortgage securities. Principalpayments on these debt obligations are required to the extent of principalpayments received on the underlying CMBS and insured mortgage securities.

See Note 6 in our notes toconsolidated financial statements for a more detailed discussion of ournon-recourse debt.

***Derivative Financial Instruments***

Thefollowing is a summary of our derivative financial instrument as of December 31,2004:
| ** **             | ** ** | **Notional Amount** | ** ** | **Estimated Fair Value  Asset (Liability)** | ** ** | **Fixed Pay  Rate** | ** ** | **Maturity  Date** | ** ** |
|------------------------|------------|--------------------------|------------|------------------------------------------------------------|------------|--------------------------|------------|--------------------|------------|
| ** **             | ** ** | **(in thousands)**  | ** ** | **(in thousands)**                                    | ** ** | ** **               | ** ** | ** **         | ** ** |
| Interest rate  swap(1) |       |                     | $          | 40,000                                                     |       |                     |       | $                  | (689       | ) |   |   | 4.70 | % |   | August 5, 2014 |   |
|                        |            |                          |            |                                                            |            |                          |            |                    |            |  |  |  |  |  |  |  |  |

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(1)          Pursuantto this swap, we agreed to pay Deutsche Bank a fixed interest rate of 4.70% perannum in exchange for floating payments based on one-month LIBOR. For furtherdiscussion of our interest rate swap see “Results of Operations—Net Gains(Losses) on Derivatives.”

***Summary of Contractual Obligations***

Thefollowing table summarizes our contractual obligations as of December 31,2004. For debt obligations, the table presents the contractual principal payments.
| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                 | ** ** | **2005** | ** ** | **2006 -  2007** | ** ** | **2008 -  2009** | ** ** | **Thereafter** | ** ** |
| ** **                      | ** ** | **(in thousands)**                   | ** ** |
| Long-Term Debt:                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Recourse to CRIIMI MAE          |       | $                                         | 73,681     |   | $ | 415 |   | $ | 73,266 |   |   | $ | — |   |   | $ | — |   |
| Non-Recourse to CRIIMI MAE(1)   |       | 614,683                                   |       | 60,355 |   | 28,494 |   |   | — |   |   | 525,834 |   |
| Operating Lease  Obligations(2) |       | 3,938                                     |       | 1,313 |   | 2,625 |   |   | — |   |   | — |   |
| Purchase  Obligations           |       | 2,273                                     |       | 2,227 |   | 46 |   |   | — |   |   | — |   |
| Totals                          |       | $                                         | 694,575    |   | $ | 64,310 |   | $ | 104,431 |   |   | $ | — |   |   | $ | 525,834 |   |

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(1)          Mostof these obligations relate to our securitized mortgage obligations. Paymentsof principal on the securitized mortgage obligations are required to the extentmortgage principal is received on the related collateral. The projectedprincipal payments on the securitized mortgage obligations are based on thestated terms of the underlying mortgages.

(2)          Theseamounts have not been reduced by sublet rental income of $251,000, $271,000 and$284,000 for 2005, 2006 and 2007, respectively, which we are to receive undernon-cancelable subleases.

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We have entered into employment agreements with threeof our senior executive officers. The significant contract provisions of theemployment agreements include minimum annual base salaries, guaranteed minimumcash bonus payments, and restricted stock awards and stock bonuses. Thesecontracts are primarily “at will” employment agreements, under which we or theexecutive may terminate employment for any reason or no reason. If we terminateany of these executives without cause, then we are obligated to pay theexecutive as specified in their individual contracts. Under the employmentagreements, minimum aggregate severance payments payable by us through December 31,2005 would be approximately $400,000.

We entered into Change inControl Agreements with five of our senior executive officers which provide forcertain payments upon the termination of such officer’s employment by uswithout cause or by such officer for “good reason” following a “change incontrol” of CRIIMI MAE Inc. (each as defined in the agreement). Aggregatepayments under the Change in Control Agreements would approximate $7.8 million,excluding items such as prorated guaranteed minimum cash bonus paymentspursuant to their respective employment agreement.

**Results of Operations**

**2004 compared to 2003**

Net income (loss) to common shareholders for the yearsended December 31, 2004 and 2003 was approximately $16.7 million and$(4.1) million, respectively.

2004 resultsinclude:

·       $43.4million of net interest margin;

·       $15.7million of impairment of CMBS;

·       $13.4million of net gains on derivatives;

·       $3.4million of net loss on extinguishment of debt; and

·       $3.1million of impairment of non-core assets.

2003 resultsinclude:

·       $33.6million of net interest margin;

·       $14.7million of impairment of CMBS;

·       $6.7million of net gain on extinguishment of debt;

·       $3.3million of additional amortization expense on collateralized mortgageobligations;

·       $3.2million of recapitalization expenses;

·       $2.9million in executive contract termination expenses;

·       $3.1million of additional interest expense during the 45 day redemption noticeperiod for the Series A and Series B Senior Secured Notes; and

·       $1.9 million of net loss onderivatives.

***Net Interest Margin***

Net interest marginincreased by approximately $9.8 million to $43.4 million during 2004 comparedto $33.6 million during 2003, primarily due to the decrease in our averageoutstanding balance of recourse debt and the additional interest expense wepaid in 2003 in connection with the redemption of outstanding 

28

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Series Aand Series B senior secured notes on March 10, 2003. Additionally, thenet interest margin was impacted by the reduced cost of borrowing resultingfrom the refinancings of our insured mortgage portfolio, along with a reductionin the related amortization of the discount and deferred financing costsincluded in interest expense.

***Interest Income—CMBS***

The change in interest income from CMBS pledged tosecure recourse debt, CMBS and CMBS pledged to secure non-recourse debt for theyear ended December 31, 2004 as compared to 2003 was due to incomestatement reclassifications resulting from our June 2004 refinancing ofour CMBS. Total CMBS income was approximately $90.4 million and $88.9 millionfor the years ended December 31, 2004 and 2003, respectively. There wasnot a significant difference in the weighted average yield-to-maturity used tocalculate our CMBS interest income during 2004 as compared to 2003.

The effective interestmethod of recognizing interest income on CMBS results in income recognitionthat differs from cash received. Cash received from our Retained CMBS Portfoliowas $50.3 million and $60.0 million in 2004 and 2003, respectively.

***Interest Income—InsuredMortgage Securities***

Interest income frominsured mortgage securities decreased from $15.5 million in 2003 to $5.2million in 2004. The decrease is primarily due to significant prepayments ofthe mortgages underlying our insured mortgage securities, and to a lesserextent, the sale of approximately $17.7 million of FHA loans in the secondquarter of 2004.

***Interest Expense***

*Interest ExpenseRelated to Recourse Debt*

Interest expense related to recourse debt ofapproximately $13.0 million for 2004 was approximately $11.1 million lower thaninterest expense of approximately $24.1 million for 2003. The decrease isprimarily due to a decrease in the average outstanding balance of recourse debtand the additional interest expense we paid in early 2003 in connection withthe redemption of our outstanding Series A and Series B SeniorSecured Notes. This redemption required a deposit of the redemption amount 45days prior to the actual redemption of the notes. The 45 day notice periodresulted in approximately $3.1 million of additional interest expense duringthe period January 23, 2003 through March 10, 2003 since the BREFDebt, the Bear Stearns Debt and the Series A and B secured notes were alloutstanding at the same time.

The overall weightedaverage effective interest rate on the recourse debt was 6.1% for 2004,compared to 6.7% for 2003.

*Interest ExpenseRelated to Non-Recourse Debt*

Interest expense related to non-recourse debt ofapproximately $39.1 million for 2004 was approximately $6.6 million lower thaninterest expense of approximately $45.6 million for the same period in 2003. Thisnet decrease is primarily due to a decrease in the average outstanding balanceof non-recourse debt and the reduction in discount amortization and deferredfinancing costs.

The overall weightedaverage effective interest rate on the non-recourse debt was 8.6% for 2004,compared to 9.4% for 2003.

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***General and Administrative Expenses***

Portfolio Investmentgeneral and administrative expenses declined by approximately 14% to $10.4million during 2004 compared to $12.0 million in 2003 primarily due to lowerlegal fees, reduced compensation expense, and fewer employees in 2004 ascompared to 2003.

***Mortgage Servicing***

Thefollowing is a summary of the consolidated results of operations of CMSLP:
| ** **                                           | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                | ** ** |
| Servicing revenue                                    |       | $                                      | 9,643      |   | $ | 9,483 |   |
| Servicing general  and administrative expenses       |       | (8,032                                 | )          | (9,317 | ) |
| Servicing  amortization, depreciation and impairment |       | (868                                   | )          | (1,811 | ) |
| Servicing loss on  sale of investment-grade CMBS     |       | —                                 |       | (5 | ) |
| Net income (loss) from  CMSLP                        |       | $                                      | 743        |   | $ | (1,650 | ) |

 

The net income from CMSLPincreased by approximately $2.4 million for 2004 compared to 2003. This netincrease is primarily the result of a reduction in general and administrativeexpenses during 2004 compared to 2003 due to fewer employees and to someextent, reduced compensation levels. A decrease in impairment charges alsoimpacted the increase in net income.

***BREF Maintenance Fee***

Pursuant to the InvestmentAgreement with Brascan Real Estate Financial Investments LLC which we refer toas BREF Investments (subsequently assigned to BREF One), we are obligated topay BREF One a quarterly maintenance fee of $434,000 through January 2006.The expense is slightly higher during 2004 as compared to 2003 because, in2003, the expense did not begin to accrue until the date of therecapitalization on January 13, 2003.

***Net (Loss) Gain onExtinguishment of Debt and Impairment of REO Asset***

During the year ended December 31, 2004, werecognized a net loss on extinguishment of debt of approximately $3.4 million. Thisnet loss resulted from a $5.2 million loss on the extinguishment of debt due tothe write-off of unamortized discount and deferred financing costs related tothe extinguishment of the Bear Sterns Debt and certain non-recourse debt andtermination fees related to the Bear Sterns Debt, and a $1.8 million gain fromthe foreclosure sale of our REO asset, as discussed below.

Through a limited partnership (the borrower), forwhich another limited partnership that we controlled served as the managinggeneral partner, we owned a shopping center in Orlando, Florida which weaccounted for as real estate owned. The asset was subject to $8.6 million faceamount of non-recourse, first mortgage debt for which the borrower was theobligor. The debt was reflected as non-recourse debt secured by real estateowned (REO) asset on our consolidated balance sheet as of December 31,2003. In March 2004, we wrote down the value of the asset to estimatedfair value and recorded a resulting impairment charge of approximately $2.6million during the first quarter of 2004. Included in our consolidatedstatements of income for the year ended December 31, 2004 was theimpairment charge of $2.6 million and other loss of approximately $(330,000)relating to this REO.  On October 5,2004, the shopping center was sold at foreclosure. At the date of sale, we hadapproximately $6.3 million in assets and approximately $8.1 million ofliabilities included in our consolidated balance sheet relating to this 

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property. As a result ofthe sale to satisfy the related first mortgage non-recourse debt, we removedthe assets and liabilities relating to the REO which resulted in a gain ofapproximately $1.8 million.

During the year ended December 31, 2003, wereversed approximately $7.8 million of accrued extension fees related to thesecured debt incurred upon our emergence from Chapter 11 in April 2001since the debt was repaid and the extension fees were no longer payable. Thisreversal is reflected as a gain on extinguishment of debt in our 2003consolidated statement of income. This reversal was partially offset byapproximately $403,000 of breakage fee paid to a lender and legal fees ofapproximately $47,000, resulting in a net gain on extinguishment of debt ofapproximately $7.3 million.

Additionally, in December 2003,we repaid a funding note related to our non-recourse debt secured by insuredmortgage securities. In connection with the funding note repayment, werecognized a $665,000 loss on extinguishment of debt for the write-off of unamortizedbond discount and deferred financing fees.

***Impairment of CMBS***

We increased our overall expected loss estimaterelated to our subordinated CMBS from approximately $581 million as of December 31,2003 to $628 million as of December 31, 2004, with such total lossesoccurring or expected to occur through the life of the CMBS portfolio. Thisrevision  to the overall expected lossestimate includes changes in the anticipated timing of resolution anddisposition of certain specially serviced assets and the impact of increasedprojected losses due to lower internal estimates of values on propertiesunderlying certain mortgage loans. The primary reasons for lower estimates ofvalue in 2004 and 2003 includes changes in the operating performance of certainproperties and related markets and changes to workout negotiations and/orstrategies. Additionally in 2003, the lower estimates of value were alsoattributed to the softness in the economy and the lag typically associated withreal estate fundamentals, the continued slowdown in travel and, in some cases,over-supply of hotel properties, and a shift in retail activity in some markets.Additionally, our estimate of overall expected losses include estimates offuture loss exposure which relate in part to underlying mortgage loans whichare performing today, but which we expect may default at some point in thefuture, at which time we estimate that losses may occur. Such estimates aresubject to change as market conditions change. There can be no assurance thatour overall expected loss estimate of approximately $628 million as of December 31,2004, will not be exceeded as a result of additional or existing adverse eventsor circumstances.

We recognizedapproximately $15.7 million and $14.7 million of impairment on certain of ourCMBS during the years ended December 31, 2004 and 2003, respectively. Sincewe determined that there had been an adverse change in expected future cashflows on these CMBS due primarily to the factors mentioned previously, theseCMBS were impaired under Emerging Issues Task Force (EITF) Issue No. 99-20,“Recognition of Interest Income and Impairment on Purchased and RetainedBeneficial Interests in Securitized Financial Assets”. The impairment chargesreduced our basis in the impaired CMBS.

***Impairment of Mezzanine Loan***

Inearly 2004, we received notification of an imminent default of one of ourmezzanine loans. In July 2004, the borrower defaulted on such loan. Themarket in which the underlying property is located had deteriorated resultingin increased vacancy and declining rental rates. Based on our review ofavailable information, we did not believe that we would be able to collectamounts due under the contractual terms of the loan agreement. As a result,during the first quarter of 2004, we recognized $527,000 of impairment on themezzanine loan, which represented our entire loan receivable relating to thismezzanine loan.

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***Net Gains (Losses) on Derivatives***

In 2003, we entered into a total of three interestrate swaps to hedge the variability of the future interest payments on the thenanticipated collateralized debt obligation (CDO) attributable to future changesin interest rates.  Under these swaps, weagreed to pay Bear Stearns a weighted average fixed interest rate of 4.15% perannum in exchange for floating payments based on one-month LIBOR on the totalnotional amount of $100 million. These swaps were effective on October 15,2003. On November 15, 2003 we began making monthly payments to BearStearns equal to the difference between the weighted average swap rate of 4.15%per annum and the current one-month LIBOR rate on the notional amount of $100million. The interest rate swaps were originally designated to hedge futurefixed-rate interest payments on the then anticipated CDO. Through December 31,2003, these swaps were treated as cash flow hedges for GAAP. During the firstquarter of 2004, we started exploring other refinancing alternatives. As aresult, effective January 1, 2004, we began reflecting changes in the fairvalue of the swaps through earnings. Additionally, during the first quarter of2004, we reclassified $4.7 million in Accumulated Other Comprehensive Income toearnings as hedge ineffectiveness based on our reassessment of the probabilityof the CDO as originally specified and contemplated at the inception of theinterest rate swaps. Ineffectiveness and subsequent fair-value adjustments areincluded in net gains on derivatives in the accompanying consolidatedstatements of  income.

On April 1, 2004, we entered into an additionalinterest rate swap in which we agreed to pay Bear Stearns a fixed interest rateof 4.21% per annum in exchange for floating payments based on one-month LIBORon a notional amount of $100 million.  The monthly interest payments commenced on May 15,2004. The swap was not designated as a hedging instrument, and as a result,changes in fair value, as well as the impact of any cash payments made orreceived, were recognized in current period earnings as net (losses) gain onderivatives. In connection with the refinancing of the Bear Stearns debt in June 2004,we liquidated this swap and the swaps that we entered into in 2003 generatingapproximately $15.2 million in proceeds.

On August 6, 2004, we entered into an interestrate swap to manage the interest rate risk associated with our $42.4 million ofrecourse debt secured by pledge of CMBS. Under this swap we agreed to payDeutsche Bank a fixed interest rate of 4.70% per annum in exchange for floatingpayments based on one-month LIBOR on a notional amount of $40 million over a10-year term.  The monthly interestpayments commenced on September 7, 2004. The swap was not designated as ahedging instrument, and as a result, changes in fair value, as well as theimpact of any cash payments made or received, were recognized in current periodearnings as net (losses) gains on derivatives. In connection with this swap andpursuant to the interest rate swap documents and Master Netting Agreement withDeutsche Bank, we have granted to Deutsche Bank a security interest in all ofour right, title and interest in certain assets, and property (including ourright to any “Excess” as defined in the Master Netting Agreement) related tothe collateral securing the Deutsche Bank debt secured by CMBS, to secure ourobligations under the interest rate swap documents and the Deutsche Bank debtsecured by CMBS. This security interest constitutes additional collateral forthe Deutsche Bank debt secured by CMBS. Under the Master Netting Agreement, onany day on which we have any obligation to deliver cash or additional eligiblecollateral under either the interest rate swap or the Deutsche Bank debt, suchobligation will be deemed satisfied to the extent there exists an Excess underthe Deutsche Bank debt or an obligation for Deutsche Bank to deliver cash oreligible collateral to us under the interest rate swap. The fair value of thisswap was a liability of approximately $689,000 at December 31, 2004.

As a result of the abovederivative transactions, we recognized approximately $13.4 million of net gainson derivatives during the year ended December 31, 2004, and approximately$(1.9) million of net losses on derivatives during the year ended December 31,2003.

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***Lease Termination and Recapitalization Expenses***

We consolidated our office space in connection withour January 2003 recapitalization and, as a result, we recordedapproximately $580,000 of expense for vacant office space during 2003. During2004, we reassessed the accrual and recorded an additional $183,000 of expense.Additionally, during 2004 we paid $454,000 of lease termination fees and brokerfees to exit certain office space not included in the 2003 recapitalizationplan. The accrual for the vacant space is $507,000 and $580,000 in December 31,2004 and 2003, respectively. These expenses are reflected in lease terminationand recapitalization expenses in our consolidated statements of income.

In connection with the January 2003recapitalization, we amended the employment contracts of our former Chairman,William B. Dockser, and former President, H. William Willoughby, to provide fortheir termination on January 23, 2003. During  2003, we recognized approximately $2.6million of expenses related to severance and related benefit payments, andaccelerated vesting of certain outstanding stock options held by Messrs. Dockserand Willoughby. These expenses are reflected as lease termination andrecapitalization expenses in our consolidated statements of income.

***REIT Status and Other Tax Matters***

See “BUSINESS—Certain Risk Factors”, under the caption“We are subject to a number of tax related risks including loss of REIT status”,for a discussion of REIT status, NOL and other tax matters.

***Net Operating Loss for TaxPurposes.  ***We generated net taxable income ofapproximately $10.3 million during the year ended December 31, 2004 beforethe application of our NOL carryforward compared to a NOL of approximately$84.0 million during the year ended December 31, 2003. For the year ended December 31,2004, we utilized a portion of our NOL carryforward to reduce our 2004 taxableincome to common shareholders to zero. As a result of our trader election inearly 2000, we recognized a mark-to-market tax loss of approximately $478million on certain trading assets on January 1, 2000. The January 2000loss was recognized evenly from 2000 through 2003 for tax purposes(approximately $120 million per year).

Asummary of our 2004 and 2003 estimated taxable income (net operating loss) tocommon shareholders and the remaining NOL carryforward is as follows:
| ** **                                                                                                                     | ** ** | **2004**               | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                                                                                     | ** ** | **(in millions)** | ** ** |
| Taxable income to  common shareholders for the year ended prior to NOL carryforward and  recognition of January 2000 loss |       | $                      | 10.3       |     | $          | 35.7 |   |
| LESS: Utilization  of NOL carryforward                                                                                         |       | (10.3                  | )          | —   |       |
| LESS:  January 2000 loss recognized                                                                                       |       | —                 |       | (119.7   | )          |
| Taxable income  (net operating loss) to common shareholders for the year                                                       |       | $                      | —     |     | (84.0      | ) |
| Accumulated NOL at beginning of year                                                                                           |       | $                      | (307.8     | )        | $          | (223.8 | ) |
| NOL utilized  (created) during the year                                                                                        |       | 10.3                   |       | (84.0    | )          |
| Accumulated NOL at end  of year available for use in future periods                                                       |       | $                      | (297.5     | )        | $          | (307.8 | ) |

 

The NOL carryforward of $297.5 million at December 31,2004 can be carried forward to offset future taxable income until it is fullyutilized or it expires. If the carryforwards are not used, they will expirebetween the years 2021 and 2024.

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Asdiscussed above, taxable income will generally differ from GAAP net incomeduring a given period, and such differences may be material. A summary ofsignificant items that give rise to differences in GAAP net income (loss) andtaxable net income (loss) is as follows: 
| ** **                            | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(in millions)** | ** ** |
| Included in  taxable income (loss):   |       |                   |       |     |       |     |       |
| Realized credit losses on CMBS        |       | $                      | 53.3       |     | $          | 24.8     |       | $ | 14.5 |   |
| Excluded from  taxable income (loss): |       |                   |       |     |       |     |       |
| Net gains (losses) on derivatives     |       | 13.4                   |       | (1.9     | )          | —   |       |
| Impairment on  CMBS                   |       | 15.7                   |       | 14.7     |       | 70.2     |       |
|                                       |            |                        |            |          |            |          |            |  |  |  |

 

The adjusted tax basis ofthe underlying CMBS was approximately $1.1 billion and $1.2 billion as of December 31,2004 and 2003, respectively. For GAAP purposes, the amortized cost basis of ourCMBS was approximately $747.2 million and $750.3 million as of December 31,2004 and 2003, respectively. The tax and GAAP basis of the aggregate debtobligations related to the financings of our CMBS was approximately $967.2million and $600.5 million, respectively, at December 31, 2004 and $1.1billion and $639.0 million, respectively, at December 31, 2003.

**Results of Operations**

**2003 compared to 2002**

Net loss to common shareholders for the years ended December 31,2003 and 2002 was approximately $(4.1) million and $(65.5) million,respectively. The significant reduction in net loss in 2003 as compared to 2002was primarily the result of $14.7 million of impairment charges related tocertain subordinated CMBS that were recognized during 2003 compared toimpairment charges of $70.2 million that were recognized during 2002.

2003 resultsinclude

·       $33.6million of net interest margin;

·       $14.7million of impairment of CMBS;

·       $6.7million of net gain on extinguishment of debt;

·       $3.3million of additional amortization expense on collateralized mortgageobligations;

·       $3.2million of recapitalization expenses;

·       $2.9million in executive contract termination expenses;

·       $3.1million of additional interest expense during the 45 day redemption noticeperiod for the Series A and Series B Senior Secured Notes; and

·       $1.9million of net loss on derivative.

2002 resultsinclude

·       $30.7million of net interest margin;

·       $70.2million of impairment of CMBS;

·       a$9.8 million non-cash charge to write-off goodwill upon the adoption ofStatement of Financial Accounting Standards (or SFAS) No. 142;

·       $4.9million from the gain on the sale by CMSLP of master and direct servicingrights;

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·       $2.8million of additional amortization expense on collateralized mortgageobligations;

·       $2.2million reflected as an additional dividend on preferred stock in connectionwith the redemption of the Series E Preferred Stock (representing thedifference between the aggregate liquidation value, including the initialpreferred stock issuance costs, and the redemption price); and

·       $1.0 million ofrecapitalization expenses.

***Net Interest Margin***

Net interest marginincreased by approximately $2.9 million to $33.6 million during 2003 comparedto $30.7 million during 2002, primarily due to reduced borrowing costs relatedto the January 2003 recapitalization, partially offset by additional interest expense related to discountamortization of our collateralized mortgage obligations.

***Interest Income—CMBS***

Interest income from CMBS pledged to securenon-recourse debt did not change significantly during 2003 as compared to 2002.Interest income from CMBS pledged to secure recourse debt decreased byapproximately $12.0 million, or 16%, to $62.6 million during 2003 as comparedto $74.6 million during 2002, primarily due to changes in our loss estimatesrelated to CMBS during 2002 and 2003 and the resulting reduction in interestincome on CMBS. GAAP require that yields on CMBS be recalculated and revised asestimated future cash flows change. The revised yield on CMBS was based on thethen current amortized cost (adjusted for impairment) and the revised futurecash flows, including the assumed timing and amount of future defaults andcredit losses. The revised weighted average yield as of January 1, 2003and 2002 was 11.6% and 12.4%, respectively.

The effective interestmethod of recognizing interest income on CMBS results in income recognitionthat differs from cash received. Cash received from our Retained CMBS Portfoliowas $60.0 million and $70.6 million in 2003 and 2002, respectively.

***Interest Income - Insured Mortgage Securities***

Interest income frominsured mortgage securities decreased by approximately $8.3 million, or 35%, to$15.5 million during 2003 from $23.8 million during 2002. This decrease wasprincipally due to the prepayment or sale of approximately 45% of the totalinsured mortgage portfolio from December 31, 2002 through December 31,2003. The prepayment activity corresponded with the low mortgage interest rateenvironment during this period. These prepayments resulted in correspondingreductions in the outstanding principal balances of the related debt andinterest expense.

***Interest Expense***

*Interest ExpenseRelated to Recourse Debt*

Interest expense related to recourse debt ofapproximately $24.1 million for 2003 was approximately $16.4 million lower thaninterest expense of approximately $40.5 million for 2002. The decrease was primarilydue to a decrease in the average outstanding balance of recourse debt and thedecrease in borrowing costs related to the January 2003 recapitalization.

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The overall weightedaverage effective interest rate on the recourse debt was 6.7% for 2003,compared to 10.4% for 2002.

*Interest ExpenseRelated to Non-Recourse Debt*

Interest expense related to non-recourse debt ofapproximately $45.6 million for 2003 was approximately $6.4 million lower thaninterest expense of approximately $52.0 million for 2002. The net decrease in2003 is primarily due to a decrease in the average outstanding balance ofnon-recourse debt and the reduction in discount amortization and deferredfinancing costs, as previously discussed.

The overall weightedaverage effective interest rate on the non-recourse debt was 9.4% for 2003,compared to 8.9% for 2002.

***General and Administrative Expenses***

Portfolio Investment general and administrativeexpenses increased by approximately $1.4 million to $12.0 million during 2003as compared to $10.6 million during 2002 primarily due to an increase inprofessional fees incurred in connection with the interest rate swap andrelated netting agreement and corporate governance compliance due to theSarbanes-Oxley Act of 2002, and an increase in compensation expenses.

***Mortgage Servicing***

Thefollowing is a summary of the consolidated results of operations of CMSLP (inthousands):
| ** **                                              | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------|------------|
| **Description**                                         | ** ** | ** **                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Servicing revenue                                       |       | $                                      | 9,483      |   | $ | 10,986 |   |
| Servicing general  and administrative expenses          |       | (9,317                                 | )          | (9,043 | ) |
| Servicing  amortization, depreciation and impairment    |       | (1,811                                 | )          | (2,173 | ) |
| Servicing gain on  sale of servicing rights             |       | —                                 |       | 4,864 |   |
| Servicing (loss)  gain on sale of investment-grade CMBS |       | (5                                     | )          | 241 |   |
| GAAP net (loss) income  from CMSLP                      |       | $                                      | (1,650     | ) | $ | 4,875 |   |
|                                                         |            |                                        |            |  |  |  |  |  |  |

 

The net loss from CMSLP of $(1.7) million for the year2003 compared to net income of $4.9 million for 2002. This decrease wasprimarily the result of the decrease in mortgage servicing income, otherservicing revenue and interest income earned on cash and investments and the$4.9 million gain from the sale of servicing rights in 2002. General andadministrative expenses increased during 2003 compared to 2002 primarily due toadditional resources dedicated to special servicing resolutions and severancepayments made in connection with managerial changes.

In April 2003, we restructured CMSLP’s propertyservicing group resulting in the termination of 10 employees. In conjunctionwith this restructuring, we outsourced substantially all of our contractualproperty servicing duties related to the labor-intensive tasks of financialstatement collection and analysis and property inspection performance. Theoutsourcing was completed in February 2004. This outsourcing did notrelieve us of any of our contractual obligations or reduce any of our rights asproperty servicer, since CMSLP remains the property servicer of record, but itdid relieve us of the administrative task of collecting financial operatingdata. This allowed the remaining resources in CMSLP’s surveillance group tofocus more on collateral analysis. For the outsourced loans, CMSLP coordinatesthe delivery of monthly reports and inspections with the third-party servicers.For the portfolios for which the third-party servicer is not also the masterservicer, CMSLP reviews and approves the reports from these servicers prior tosubmission by CMSLP to the securitization trustees.

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In February 2002,CMSLP sold all of its rights and obligations under its CMBS master and directservicing contracts primarily because the contracts were not profitable, giventhe relatively small volume of master and direct CMBS servicing that CMSLP was performing.This sale resulted in a gain of approximately $4.9 million during the yearended December 31, 2002. In connection with this restructuring, 34employee positions were eliminated. During 2002, net restructuring expenses ofapproximately $189,000 were recorded primarily to account for vacant officespace that was taking longer to sublease than originally anticipated.

***Income Tax Benefit (Expense)***

During 2003, we recordedan income tax benefit of approximately $603,000. During 2002, we recorded incometax expense of approximately $460,000. During 2002, approximately $1.0 millionof income tax expense was recognized as a result of the gain on the sale byCMSLP of its CMBS master and direct servicing rights. This tax expense of $1.0million was partially offset by tax refunds that were not previously accrued ofapproximately $552,000 that were recognized during 2002. The income tax benefit(expense) was recognized by our TRSs that own the partnership interests inCMSLP. These TRSs are separately taxable entities that cannot use CRIIMI MAEInc.’s net operating loss carryforward to reduce their taxable income. Theincome tax benefit (expense) that was recognized by our TRSs was the result ofCMSLP’s financial results.

***BREF Maintenance Fee***

Pursuant to the InvestmentAgreement with BREF Investments (subsequently assigned to BREF One), we are obligated to pay BREF One a quarterlymaintenance fee of $434,000 through January 2006. The expense ofapproximately $1.7 million during 2003 represented the maintenance fee for theperiod January 14 through December 31, 2003.

***Net (Loss) Gain onExtinguishment of Debt***

During the three months ended March 31, 2003, wereversed approximately $7.8 million of accrued extension fees related to theExit Debt since the debt was repaid and the extension fees were no longerpayable. This reversal was reflected as a gain on extinguishment of debt in ourconsolidated statements of income. This reversal was partially offset byapproximately $403,000 of breakage fee paid to a lender and legal fees ofapproximately $47,000, resulting in a net gain on extinguishment of debt of$7.3 million.

In December 2003, werepaid a funding note related to our non-recourse debt secured by insuredmortgage securities, which had an unpaid principal balance of approximately$24.5 million by using approximately $22.5 million available under our $200million repurchase facility with Bear Stearns and approximately $2.0 million ofour cash. In connection with the funding note repayment, we recognized a$665,000 loss on extinguishment of debt for the write-off of unamortized bonddiscount and deferred financing fees.

***Impairment of CMBS***

Impairment on subordinated CMBS decreased to $14.7million during 2003 compared to $70.2 million during 2002. As of December 31,2003, the projected loss severities of certain of the underlying mortgage loansincreased which resulted in an increase in our overall expected loss estimaterelated to our subordinated CMBS to $581 million. This revision to the overallexpected loss estimate was primarily the result of increased projected lossesdue to lower internal estimates of values on properties underlying certainmortgage loans and real estate owned by underlying trusts, and, in some cases,changes in the timing of resolution and disposition of certain speciallyserviced assets, which when combined, resulted in higher projected lossseverities on certain loans and real estate owned by underlying trustscurrently or 

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anticipated to be inspecial servicing. The primary reasons for lower estimates of value include thepoor performance of certain properties and related markets and changes toworkout negotiations due, in large part, to the softness in the economy and thelag typically associated with real estate fundamentals, the continued slowdownin travel and, in some cases, over-supply of hotel properties, and a shift inretail activity in some markets.

As we determined that there had been an adverse changein expected future cash flows, we believed some of our subordinated CMBS hadbeen impaired under EITF 99-20 and SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” as of June 30, 2003, September 30,2003 and December 31, 2003. As the fair values of the impairedsubordinated CMBS aggregated approximately $8.9 million, $4.7 million and $1.1million below the amortized cost basis as of June 30, 2003, September 30,2003 and December 31, 2003, respectively, we recorded other than temporaryimpairment charges (aggregating $14.7 million) through the consolidated statementsof income of these same amounts during the second, third and fourth quarters of2003. The impairment charges reduced our basis in those impaired bonds (seealso “Interest Income—CMBS”).

During 2002, we also revised our overall expected lossestimate related to our subordinated CMBS. The revisions to the overallexpected loss estimate during 2002 were primarily the result of the samefactors as those described above. As we determined that there had been anadverse change in expected future cash flows, we believed some of our CMBS hadbeen impaired during 2002 and recorded other than temporary impairment chargesaggregating $70.2 million through the consolidated statements of income during2002.

For further discussion ofour loss estimate see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Financial Condition—Summary of CMBS”.

***Net Gains (Losses) on Derivatives***

As previously discussed,during 2003, we entered into a total of three interest rate swaps to hedge thevariability of the future interest payments on the anticipated CDO attributableto future changes in interest rates. Through December 31, 2003, theseswaps were treated as cash flow hedges for GAAP. Under these swaps, we agreedto pay Bear Stearns a weighted average fixed interest rate of 4.15% per annumin exchange for floating rate payments based on one-month LIBOR on the totalnotional amount of $100 million. These swaps were effective on October 15,2003. On November 15, 2003, we began making monthly payments to BearStearns equal to the difference between the weighted average swap rate of 4.15%per annum and the then current one-month LIBOR rate, on the notional amount of$100 million. We made actual payments of approximately $501,000 during 2003. Theinterest rate swaps were designated to hedge future interest payments on theanticipated CDO. When the expected date of the CDO changed, we recognizedapproximately $1.9 million of hedge ineffectiveness during the year ended December 31,2003, in accordance with SFAS No. 133. We had an asset of approximately$3.4 million in Other Assets as of December 31, 2003, representing theaggregate fair value of the interest rate swaps. During the first quarter of2004, we started exploring other refinancing alternatives, including the CDO. Asa result, we began reflecting changes in the fair value of the swaps throughearnings as net gains (losses) on derivatives in 2004.

***Executive Contract TerminationCosts***

In August 2003,the employment contracts for former executive officers David Iannarone andBrian Hanson, and Cynthia Azzara expired and were not renewed. These contractswere put into place in 2001 to ensure management continuity following ouremergence from Chapter 11 proceedings and through our January 2003recapitalization. In connection with the contract terminations, we recognizedapproximately $1.0 million of executive contract termination expenses for eachof Mr. Iannarone and Ms. Azzara and 

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approximately $825,000 of executive contract terminationexpense related to severance and related benefit payments for Mr. Hanson.Ms. Azzara continued with us as an “at will” employee and was promoted toExecutive Vice President, Chief Financial Officer and Treasurer.

***Lease Termination and Recapitalization Expense***

We consolidated our office space in connection withour January 2003 recapitalization and, as a result, we recordedapproximately $580,000 of expense for vacant office space during 2003. Theaccrual for the vacant space represents the fair value of lease payments through2007, a tenant improvement allowance and a broker commission, all net ofestimated sublease revenue in accordance with SFAS No. 146.

In connection with the January 2003recapitalization, we amended the employment contracts of our former Chairman,William B. Dockser, and former President, H. William Willoughby, to provide fortheir termination on January 23, 2003. During the first quarter 2003, werecognized approximately $2.6 million of expenses related to severance andrelated benefit payments and accelerated vesting of certain outstanding stockoptions held by Messrs. Dockser and Willoughby.

During 2002, we recognizedapproximately $1.0 million of recapitalization expenses related to the servicesperformed by an investment banking firm that we retained to explore strategicalternatives in 2002.

***Cumulative Effect of Adoption of SFAS 142***

In 2001, the FinancialAccounting Standards Board issued SFAS No. 142. SFAS No. 142, amongother things, prohibits the amortization of existing goodwill and certain typesof other intangible assets and establishes a new method of testing goodwill forimpairment. Under SFAS No. 142, the method for testing goodwill forimpairment occurs at the reporting segment level (as defined in SFAS No. 142)and is performed using a fair value based approach. SFAS No. 142 waseffective for us on January 1, 2002. Effective upon adoption on January 1,2002, we wrote off our goodwill and recorded a resulting impairment charge ofapproximately $9.8 million for this change in accounting principle. Thegoodwill relates to the Portfolio Investment reporting segment (as defined inNote 18 of the Notes to Consolidated Financial Statements). The fair value ofthe reporting segment was determined using a market capitalization approach,and the impairment was primarily a result of the significant decrease in theprice of our common stock price since the merger of certain mortgage businessesaffiliated with CRI, Inc. into CRIIMI MAE in 1995. This change inaccounting principle reduced our annual amortization expense by approximately$2.8 million through June 2005. The pro forma consolidated net income andpro forma earnings per share disclosures in Note 2 of the Notes to ConsolidatedFinancial Statements present our consolidated net income and earnings per shareas if this accounting principle had been applied to those periods presented.

**Financial Condition**

***Summary of Cash Position and Shareholders’ Equity***

As of December 31, 2004, our consolidated cashand cash equivalents aggregated approximately $41.1 million. In addition to ourcash, liquidity at December 31, 2004 included $4.1 million in Other MBS.

As of December 31,2004 and 2003, shareholders’ equity was approximately $428.1 million or $23.49per diluted common share and approximately $291.8 million or $14.91 per dilutedcommon share, respectively. The dilutive book value per common share amountsare based on shareholders’ equity less the liquidation value of our thenoutstanding preferred stock. The net increase in total shareholders’ equity wasprimarily attributable to:

·       $126.6million increase in net unrealized gains on CMBS and insured mortgages;

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·       $16.7million net income to common shareholders for the year ended December 31,2004; and

·       issuanceof 585,000 shares of additional Series B Preferred Stock which generatednet proceeds of $14.6 million; partially offset by

·       $18.3million redemption of all of our outstanding Series F and Series GPreferred stock.

The December 31, 2004 diluted book value percommon share amount is based on shareholders’ equity presented in accordancewith GAAP. This amount includes, among other things, approximately $98.9million of net assets related to our CMBS rated AAA and a portion of our BBB-bonds, which we do not actually own, but are required by GAAP to include in ourconsolidated balance sheet (see “Summary of CMBS” below for a furtherdiscussion). These CMBS not owned but consolidated by us have an aggregate fairvalue of approximately $625.8 million at December 31, 2004, as reflectedin our consolidated balance sheet and the related non-recourse debt secured bysuch CMBS have an aggregate amortized cost of approximately $479.6 million at December 31,2004, as reflected in our consolidated balance sheet.

After removing the excess of the carrying amount ofthe CMBS pledged to secure non-recourse debt over the non-recourse debt securedby such CMBS, our adjusted book value was $17.27 per diluted common share and$12.59 per diluted common share at December 31, 2004 and 2003,respectively. We believe adjusted book value per diluted common share providesa more meaningful measure instead of our book value because we receive no cashflows from the CMBS pledged to secure non-recourse debt that are reflected onour consolidated balance sheet and used to calculate our book value. All cashflows related to the CMBS pledged to secure non-recourse debt are used toservice the related non-recourse debt.

Adjustedbook value per diluted common share (a non-GAAP financial measure) isreconciled to shareholders’ equity as follows:
| ** **                                                             | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2003**      | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Amount**                                      | ** ** | **Book Value per  Diluted  Common  Share** | ** ** | **Amount** | ** ** | **Book Value per  Diluted  Common  Share** | ** ** |
| ** **                                                             | ** ** | **(in thousands)**                         | ** ** | ** **                                           | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Total  shareholders’ equity in conformity with GAAP               |       |                                            | $          | 428,058                                              |       |   |   |   |   |   |   | $ | 291,780 |   |   |   |   |   |   |
| LESS: Liquidation value of preferred stock                             |       |                                            | (54,475    | )                                                    |       |   |   |   |   |   | (58,160 | ) |   |   |   |   |   |
| Shareholders’  equity attributable to common shareholders         |       |                                            | 373,583    |                                                 |       |   | $ | 23.49 |   |   |   | 233,620 |   |   |   | $ | 14.91 |   |   |
| LESS: CMBS pledged to secure non-recourse debt                         |       |                                            | (625,752   | )                                                    |       |   | (39.34 | ) |   |   | (325,321 | ) |   |   | (20.77 | ) |   |
| ADD: Non-recourse debt secured by pledge of CMBS                       |       |                                            | 526,839    |                                                 |       |   | 33.12 |   |   |   | 288,979 |   |   |   | 18.45 |   |   |
| Adjusted shareholders’  equity attributable to common shareholder |       |                                            | $          | 274,670                                              |       |   |   | $ | 17.27 |   |   |   | $ | 197,278 |   |   |   | $ | 12.59 |   |   |

 
| ** **                                                                            | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| Shares used in  computing book value and adjusted book value per diluted common share |       | 15,906,650                                      |       | 15,666,431                                      |       |

 

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***Summary of CMBS***

As of December 31,2004, our assets include CMBS with an aggregate face amount of approximately$1.4 billion rated from AAA to D and unrated. Certain of the CMBS assets relateto securitization transactions in which we did not surrender control of theassets and thus the assets and the associated non-recourse debt are reflectedin the consolidated balance sheet. Accordingly, the interest income from suchassets and interest expense from the associated non-recourse debt are alsoreflected in the consolidated income statements. However, cash flows from suchassets are all required to service the debt and therefore we currently receiveno cash flows from those assets.  Substantially all of our CMBS portfoliorepresents investments in securities issued in connection with CRIIMI MAE Trust1 Series 1996-C1 (or CBO-1) and CRIIMI MAE Commercial Mortgage Trust Series 1998-C1(or CBO-2). The following is a summary of our CMBS as of December 31,2004:
| ** **                                | ** ** | **Fair Value**    | ** ** | **Amortized Cost** | ** ** | **% of Total Fair  Value of CMBS** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                | ** ** | **(in millions)** | ** ** | ** **              | ** ** |
| CMBS Pledged to  Secure Non-Recourse Debt |       |                   | $          | 625.8                   |       |                                                        |       | $ | 479.6 |   |   |   | 65 | % |   |
| Retained CMBS  Portfolio                  |       |                   | 334.9      |                    |       |                                                        | 267.6      |   |   |   | 35 | % |   |
| Total CMBS  Portfolio                     |       |                   | $          | 960.7                   |       |                                                        |       | $ | 747.2 |   |   |   | 100 | % |   |

 

The aggregate investment by the S&P rating of theCMBS is as follows:
| **Security Rating**                                  | ** ** | ** **             | ** ** | **Face  Amount  as of  12/31/04** | ** ** | **Weighted  Average  Pay Rate  as of  12/31/04** | ** ** | **Loss Adjusted  Weighted  Average  Life as of  12/31/04(1)** | ** ** | **Fair Value  as of  12/31/04(7)** | ** ** | **Discount Rate  or Range  of Discount  Rates Used  to Calculate  Fair Value  as of  12/31/04** | ** ** | **Amortized  Cost as of  12/31/04(5)(6)** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **(in millions)** | ** ** | ** **                             | ** ** | ** **                                                 | ** ** | **(in millions)**                                                  | ** ** | ** **                                   | ** ** | **(in millions)**                                                                                                             | ** ** |
| ***CMBS Pledged To Secure***

***Non-Recourse Debt***     |       |                   |       |                                   |       |                                                       |       |                                                                    |       |                                         |       |                                                                                                                               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| AAA(3)                                                    |       |                   | $          | 325.2                                  |       |                                                       |       | 7.0                                                                     | %          |                                         |       | 6 years                                                                                                                            |       |                                                |       | $ | 352.7 |   |   |   | 3.8 - 5.5 | % |   |   | $ | 290.8 |   |   |
| BBB–(4)                                              |       |                   | 260.0      |                                   |       |                                                       | 7.0        | %                                                                       |       |                                         | 9 years    |                                                                                                                               |       |                                                | 273.1      |   |   |   | 6.1 - 6.4 | % |   |   | 188.8 |   |   |
| Total CMBS Pledged to Secure  Non-Recourse Debt |       |                   | 585.2      |                                   |       |                                                       | 7.0        | %                                                                       |       |                                         | 8 years    |                                                                                                                               |       |                                                | 625.8      |   |   |   |   |   |   |   | 479.6 |   |   |
| ***Retained CMBS Portfolio***                             |       |                   |       |                                   |       |                                                       |       |                                                                    |       |                                         |       |                                                                                                                               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| *CMBS Pledged to Secure Recourse  Debt*                   |       |                   |       |                                   |       |                                                       |       |                                                                    |       |                                         |       |                                                                                                                               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| BBB–(4)                                              |       |                   | 59.0       |                                   |       |                                                       | 7.0        | %                                                                       |       |                                         | 9 years    |                                                                                                                               |       |                                                | 62.0       |   |   |   | 6.1 - 6.4 | % |   |   | 42.8 |   |   |
| BB+                                                       |       |                   | 70.9       |                                   |       |                                                       | 7.0        | %                                                                       |       |                                         | 12 years   |                                                                                                                               |       |                                                | 68.0       |   |   |   | 7.6 | % |   |   | 48.3 |   |   |
| B–                                                   |       |                   | 2.5        |                                   |       |                                                       | 6.8        | %                                                                       |       |                                         | 9 years    |                                                                                                                               |       |                                                | 1.6        |   |   |   | 15.1 | % |   |   | 1.6 |   |   |
|                                                      |       |                   | 132.4      |                                   |       |                                                       |       |                                                                    |       |                                         |       |                                                                                                                               |       |                                                | 131.6      |   |   |   |   |   |   |   | 92.7 |   |   |
| *CMBS*                                                    |       |                   |       |                                   |       |                                                       |       |                                                                    |       |                                         |       |                                                                                                                               |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| BB                                                        |       |                   | 35.5       |                                   |       |                                                       | 7.0        | %                                                                       |       |                                         | 12 years   |                                                                                                                               |       |                                                | 31.0       |   |   |   | 8.9 | % |   |   | 21.6 |   |   |
| B+                                                        |       |                   | 88.6       |                                   |       |                                                       | 7.0        | %                                                                       |       |                                         | 14 years   |                                                                                                                               |       |                                                | 56.4       |   |   |   | 13.5 | % |   |   | 47.8 |   |   |
| B–(2)                                                |       |                   | 189.2      |                                   |       |                                                       | 8.9        | %                                                                       |       |                                         | 20 years   |                                                                                                                               |       |                                                | 86.3       |   |   |   | 15.0  - 15.8 | %(8) |   |   | 78.4 |   |   |
| CCC(2)                                                    |       |                   | 70.9       |                                   |       |                                                       | 0.0        | %                                                                       |       |                                         | —     |                                                                                                                               |       |                                                | —     |   |   |   | — |   |   |   | — |   |   |
| D(2)(9)                                                   |       |                   | 106.3      |                                   |       |                                                       | N/M        |                                                                    |       |                                         | 23 years   |                                                                                                                               |       |                                                | 14.2       |   |   |   | 15.0 | %(8) |   |   | 13.3 |   |   |
| Unrated/Issuer’s Equity(2)                           |       |                   | 142.1      |                                   |       |                                                       | N/M        |                                                                    |       |                                         | 0.9 year   |                                                                                                                               |       |                                                | 15.4       |   |   |   | 15.0 | %(8) |   |   | 13.8 |   |   |
|                                                      |       |                   | 632.6      |                                   |       |                                                       |       |                                                                    |       |                                         |       |                                                                                                                               |       |                                                | 202.3      |   |   |   |   |   |   |   | 174.9 |   |   |
| Total Retained  CMBS  Portfolio                      |       |                   | 765.0      |                                   |       |                                                       | 4.5        | %(2)                                                                    |       |                                         | 14 years   |                                                                                                                               |       |                                                | 334.9      |   |   |   |   |   |   |   | 267.6 |   |   |
| Total CMBS                                                |       |                   | $          | 1,350.2                                |       |                                                       |       | 5.6                                                                     | %          |                                         |       | 10 years                                                                                                                           |       |                                                |       | $ | 960.7 |   |   |   |   |   |   |   | $ | 747.2 |   |   |

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(1)    The loss adjusted weighted average life was weightedusing fair values as of December 31, 2004 and represents the weightedaverage expected life of the CMBS based on our current estimate of futurelosses.

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(2)    TheseCMBS experience interest shortfalls when the weighted average net coupon rateon the underlying CMBS is less than the weighted average stated coupon paymentson our Retained CMBS Portfolio. Such interest shortfalls will continue toaccumulate until they are repaid through either excess interest and/orrecoveries on the underlying CMBS or a re-characterization of principal cashflows, in which case they may be realized as a loss of principal on theRetained CMBS Portfolio. Such anticipated losses, including shortfalls, havebeen taken into consideration in the calculations of fair market values andyields to maturity used to recognize interest income as of December 31,2004. The weighted average pay rate as of December 31, 2004 reflects anannualization of cash received as of year end based on the face amountoutstanding. This weighted average pay rate will likely change on a periodicbasis due to the volatility of interest cash flows, certain reasons of whichare described herein. The unrated/issuer’s equity CMBS from CBO-1 and CBO-2currently do not have a stated coupon rate since these securities are onlyentitled to the residual cash flow payments, if any, remaining after paying thesecurities with a higher payment priority. As a result, effective coupon rateson these securities are highly sensitive to the monthly cash flow paymentsreceived from the underlying CMBS that represent the collateral for CBO-1 andCBO-2. Additionally, certain weighted average pay rates are not meaningful(N/M) due to the in frequent, volatile cash flows associated with such bonds.

(3)    Inconnection with CBO-2, $328.4 million (currently AAA rated) face amount ofCMBS were sold with call options and $345 million (currently AAA rated)face amount were sold without call options. Since we retained call options oncertain sold CMBS, we did not surrender control of these CMBS pursuant toapplicable accounting requirements, and thus these CMBS are accounted for as afinancing and are reflected as “CMBS Pledged to Secure Non-Recourse Debt” onthe consolidated balance sheet. See Note 6 to the consolidated financialstatements for a discussion of the non-recourse debt issued in connection withthis securitization transaction.

(4)    On June 302004, we issued a senior interest certificate with a face amount of$260.0 million in our $319.0 million (currently BBB- rated) CMBS andretained an option to repurchase the senior interest certificate, after fiveyears, at a fixed spread over applicable swap rates. Since we retained arepurchase option, we did not surrender control of these CMBS pursuant to therequirements of SFAS No. 140, and thus these CMBS and the associatednon-recourse debt are reflected on the consolidated balance sheet. Forpresentation purposes, approximately 81.5% of the (currently BBB- rated) CMBSasset-related information is reflected in “CMBS Pledged to Secure Non-RecourseDebt” and the remaining 18.5% of the (currently BBB- rated) asset-relatedinformation is reflected in “Retained CMBS Portfolio—CMBS Pledged to Secure RecourseDebt”. See Note 6 to our notes to consolidated financial statements for adiscussion of the non-recourse debt issued in connection with thissecuritization transaction.

(5)    Amortizedcost reflects approximately $15.7 million of impairment charges related toour CMBS, which was recognized during 2004. These impairment charges are inaddition to the cumulative impairment charges of approximately $263.1 millionthat were recognized through December 31, 2003.

(6)    SeeNote 8 to our notes to consolidated financial statements for informationregarding certain tax information related to our CMBS.

(7)    As of December 31,2004, the aggregate fair values of the CBO-1, CBO-2, Nomura and MSC 1997-WF1bonds were approximately $13.8 million, $939.2 million, $6.1 millionand $1.6 million, respectively.

(8)    As aresult of the estimated loss of principal on these CMBS, or a portion thereof,the fair values and discount rates of these CMBS are based on a loss adjustedyield to maturity. The fair values of the B-, CCC, D rated and theunrated/issuer’s equity were derived primarily from interest cash flow and/orrecoveries of prior interest shortfalls anticipated to be received since ourcurrent loss expectation assumes that the full principal amount of thesesecurities will not be recovered. See also “Advance Limitations, AppraisalReductions and Losses on CMBS” below.

(9)    Although the principal balance of the D rated bond inCBO-2 is expected to be outstanding for approximately 23 years, it is notanticipated that any principal will be collected. Cash receipts from this bondare not received on a regular basis and, when and if received, are expected tobe only in the form of recoveries of prior interest shortfalls to the extentinterest shortfalls are claimed by any CBO-2 CMBS or other REMIC higher inpriority.

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**Determination ofFair Value of CMBS**

Our determination of fair values of our CMBS portfoliois a subjective process. The process begins with the compilation and evaluationof pricing information (such as spreads to U.S. Treasury securities or yields)that, in our view, is commensurate with the market’s perception of value andrisk of comparable assets. We use a variety of sources to compile such pricinginformation including: (i) recent offerings and/or secondary trades ofcomparable CMBS (i.e., securities comparable to our CMBS or to the CMBS (orcollateral) underlying our CMBS issued in connection with CBO-1 and CBO-2), (ii) communicationswith dealers, lenders,  and active CMBSinvestors and/or advisors regarding the pricing and valuation of our securitiesand comparable securities, (iii) institutionally available research  reports, (iv) analyses prepared by thenationally recognized rating organizations responsible for the initial ratingassessment and on-going surveillance of such CMBS, and (v) otherqualitative and quantitative factors that may impact the value of the CMBS suchas the market’s perception of the issuers of the CMBS and the creditfundamentals of the commercial properties securing each pool of underlyingcommercial mortgage loans. We make further adjustments to such pricinginformation based on our specific knowledge of our CMBS, including cash flowand characteristics of the particular CMBS and the impact of relevant events,which is then used to determine the fair value of our CMBS using a discountedcash flow approach. Expected future gross cash flows are discounted at assumedmarket yields for our CMBS rated AAA through generally B+, depending on therating. The fair value for those CMBS, or portion thereof, expected to incurprincipal losses and interest shortfalls (i.e., generally B- rated bondsthrough our unrated/issuer’s equity) based on our overall expected lossestimate are valued using a discounted cash flow approach applied to lossadjusted cash flows and a yield to maturity that, in our view, is commensuratewith the market’s perception of the value and risk of comparable securities. Suchanticipated principal losses and interest shortfalls, as well as the timing andamount of potential recoveries of such shortfalls, are critical estimates andhave been taken into consideration in the calculation of fair values and yieldsto maturity used to recognize interest income. We have disclosed the range ofdiscount rates by rating category used in determining the fair values as of December 31,2004 in the table above.

The liquidity of thesubordinated CMBS market has historically been limited. Additionally, duringadverse market conditions, the liquidity of such market has been severelylimited. For this reason, among others, management’s estimate of the value ofour subordinated CMBS could vary significantly from the value that could berealized in a current transaction.

**Mortgage Loan Pool**

We have $13.2 billion and$15.3 billion of seasoned commercial mortgage loans underlying our CMBSportfolio as of December 31, 2004 and 2003, respectively.  As of December 31, 2004, the commercialmortgage loans are secured by properties of the types and in the geographiclocations identified below:
| **Property Type** | ** ** | ** ** | ** ** | **12/31/04  Percentage(1)** | ** ** |
|------------------------|------------|------------|------------|-----------------------------|------------|
| Retail(2)              |       |       | 30         | %                           |       |
| Multifamily            |       |       | 25         | %                           |       |
| Hotel                  |       |       | 16         | %                           |       |
| Office                 |       |       | 14         | %                           |       |
| Other                  |       |       | 15         | %                           |       |
| Total                  |       |       | 100        | %                           |       |

 

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| **Geographic Location** | ** ** | ** ** | ** ** | **12/31/04  Percentage(1)** | ** ** |
|------------------------------|------------|------------|------------|-----------------------------|------------|
| California                   |       |       | 16         | %                           |       |
| Texas                        |       |       | 12         | %                           |       |
| Florida                      |       |       | 7          | %                           |       |
| Pennsylvania                 |       |       | 6          | %                           |       |
| Other(3)                     |       |       | 59         | %                           |       |
| Total                        |       |       | 100        | %                           |       |

 

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(1)          Based on a percentage ofthe total unpaid principal balance of the underlying loans.

(2)          On February 21,2005, Winn-Dixie Inc. filed for bankruptcy reorganization. In the performingloan portfolio that underlies our CMBS, there are 23 loans with an aggregate scheduledprincipal balance of approximately $236 million as of February 1, 2005,spread across 12 CMBS transactions and secured by 55 total shopping centerproperties, for which the borrowers have leased a portion of the space to atotal of 36 Winn-Dixie stores. Our estimates of distributions on our RetainedCMBS Portfolio and the determination of the related fair value of our CMBS asof December 31, 2004 are based on assumptions related to these performing loansin our portfolio which have leases to these Winn-Dixie stores. Our estimateddistributions on our Retained CMBS Portfolio and the determination of therelated fair value of our CMBS may be impacted by future events related to theWinn-Dixie bankruptcy reorganization and there can be no assurance that futureevents will not have a material effect on such estimated distributions and thedetermination of the related fair value of our CMBS.

(3)          No other individualstate makes up more than 5% of the total.

**Specially ServicedMortgage Loans**

Our servicing subsidiary, CMSLP, performs specialservicing on substantially all of the loans underlying our CMBS portfolio. Aspecial servicer typically provides asset management and resolution serviceswith respect to nonperforming or underperforming loans within a pool ofmortgage loans. When serving as special servicer of a mortgage loan pool, CMSLPhas the authority, subject to certain restrictions in the applicable CMBSpooling and servicing documents, to deal directly with any borrower that failsto perform under certain terms of its mortgage loan, including the failure tomake payments, and to manage any loan workouts and foreclosures. As specialservicer, CMSLP earns fee income on services provided in connection with anyloan servicing function transferred to it from the master servicer. The actionsundertaken by CMSLP with respect to each loan are governed by the servicingstandard and the pooling and servicing agreement (PSA) for each pool whichgenerally requires CMSLP to operate in the best interest of all of thecertificateholders which may not necessarily be in the best interest of CRIIMIMAE. Because CRIIMI MAE owns the first loss, unrated or lowest rated bond ofvirtually all of the CMBS transactions underlying our CMBS, CRIIMI MAE retainscertain additional rights with respect to each specially serviced loan whichrights are also set forth in the applicable PSA. As discussed below, althoughCMSLP is not currently the special servicer on a group of healthcare and seniorhousing mortgage loans, such loans have been included in the total speciallyserviced loans as of December 31, 2004 due to the anticipated transfer ofspecial servicing rights and obligations related to such loans.

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As of December 31,2004 and December 31, 2003, specially serviced mortgage loans included inthe commercial mortgage loans described above are as follows:
| ** **                                                 | ** ** | **12/31/04**           | ** ** | **12/31/03** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|--------------|------------|
| ** **                                                 | ** ** | **(in millions)** | ** ** |
| Specially  serviced loans due to monetary default(1)(2)(3) |       | $                      | 779.1      |         | $          | 963.8 |   |
| Specially  serviced loans due to covenant default/other(3) |       | 41.4                   |       | 58.2         |       |
| Total specially  serviced loans                            |       | $                      | 820.5      |         | $          | 1,022.0 |   |
| Percentage of total  mortgage loans                        |       | 6.2                    | %          | 6.7          | %          |

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(1)          Includes $208.6 millionand $163.8 million, respectively, of real estate owned by the underlyingsecuritization trusts. See the table below regarding property typeconcentrations for further information on real estate owned by underlyingtrusts. Also includes loans transferred into special servicing for “imminentdefault” but where monetary default may not yet actually have occurred.

(2)          As discussed below, wecontinue to classify the $135.1 million in Shilo Inn loans as speciallyserviced.

(3)          As of December 31,2004, our ownership interest in one of our CMBS transactions underlying CBO-2includes CMBS in which our exposure to losses arising from certain healthcareand senior housing mortgage loans is limited to the extent of losses in excessof other subordinated CMBS (referred to herein as the SubordinatedHealthcare/Senior-Housing CMBS). These Subordinated Healthcare/Senior HousingCMBS are not owned by us and are subordinate to our CMBS in this transaction. Asa result, the value of our CMBS will be affected if interest shortfalls and/orrealized losses on such healthcare and senior housing mortgage loans are inexcess of the principal balance of such Subordinated Healthcare/Senior-HousingCMBS. We currently estimate that the interest shortfalls and/or realized losseson such healthcare and senior housing mortgage loans will exceed theoutstanding principal balance of Subordinated Healthcare/Senior Housing CMBS.The principal balance of the Subordinated Healthcare/Senior Housing CMBS as of December 31,2004 is approximately $3.4 million. As of December 31, 2004, thescheduled principal balance of healthcare and senior housing mortgage loansunderlying the Subordinated Healthcare/Senior Housing CMBS that are included inour total specially serviced loan balance is approximately $72.0 million,$53.1 million of which is included in monetary default and $18.9 millionof which is included in covenant default.

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Thespecially serviced mortgage loans as of December 31, 2004 were secured byproperties of the types and located in the states identified below:
| **Property Type** | ** ** | ** ** | ** ** | **$ (in millions)** | ** ** | **Percentage** | ** ** |
|------------------------|------------|------------|------------|-------------------------------|------------|----------------|------------|
| Hotel                  |       |       | $          | 375.7                         | (1)(2)     |           |       | 46 | % |   |
| Retail                 |       |       | 145.3      | (1)                           |       |           | 18         | % |   |
| Healthcare             |       |       | 141.2      |                          |       |           | 17         | % |   |
| Multifamily            |       |       | 81.0       |                          |       |           | 10         | % |   |
| Office                 |       |       | 52.1       |                          |       |           | 6          | % |   |
| Industrial             |       |       | 20.4       |                          |       |           | 2          | % |   |
| Other                  |       |       | 4.8        |                          |       |           | 1          | % |   |
| Total                  |       |       | $          | 820.5                         |       |           |       | 100 | % |   |

 
| **Geographic Location** | ** ** | ** ** | ** ** | **$ (in millions)** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|------------|------------|-------------------------------|------------|----------------|------------|
| Florida                      |       |       | $          | 132.6                         |       |           |       | 16 | % |   |
| Texas                        |       |       | 85.5       |                          |       |           | 10         | % |   |
| Oregon                       |       |       | 80.1       |                          |       |           | 10         | % |   |
| North Carolina               |       |       | 47.2       |                          |       |           | 6          | % |   |
| California                   |       |       | 44.5       |                          |       |           | 5          | % |   |
| Other                        |       |       | 430.6      |                          |       |           | 53         | % |   |
| Total                        |       |       | $          | 820.5                         |       |           |       | 100 | % |   |

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(1)          Approximately $97.6million and $46.1 million, respectively, of these loans in special servicingare real estate owned by the underlying securitization trusts.

(2)          See below for adiscussion related to the Shilo Inn loans.

Thefollowing table provides a summary of the change in the balance of speciallyserviced loans from December 31, 2003 to December 31, 2004:
| ** **                                          | ** ** | **(in millions)** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|
| Specially  Serviced Loans at December 31, 2003 |       |                   | $          | 1,022.0 |   |   |
| Transfers out of special servicing                  |       |                   | (543.1     | ) |   |
| Transfers in due to monetary default(1)             |       |                   | 216.9      |   |   |
| Transfers in due to covenant default and other(1)   |       |                   | 120.2      |   |   |
| Other(2)                                            |       |                   | 20.5       |   |   |
| Loan amortization(3)                                |       |                   | (16.0      | ) |   |
| Specially Serviced Loans  at December 31, 2004 |       |                   | $          | 820.5 |   |   |

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(1)          Although CMSLP is notcurrently the special servicer on a group of healthcare and senior housingmortgage loans, such loans have been included in the total specially servicedloans as of December 31, 2004 due to the anticipated transfer of specialservicing rights and obligations related to such loans. Accordingly, transfersin due to monetary default and transfers in due to covenant default and otherinclude $53.1 million and $18.9 million, respectively, for the yearended December 31, 2004.

(2)          Represents theadjustment of the underlying trusts for the aggregate amount of the Shilo Inn’sadvance notes created as a result of the amendment of each trust’s respectivePSA.

(3)          Represents the reductionof the scheduled principal balances due to borrower payments or, in the case ofloans in monetary default, advances made by master servicers.

As of December 31, 2004, the most significantborrowing relationship with respect to unpaid principal balance in ourspecially serviced portfolio, the Shilo Inn loans, consisted of 23 loanstotaling an aggregate 

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principal balance of$135.1 million spread across three CMBS transactions and secured by 23hotel properties in the West and Pacific Northwestern states. The specialpurpose borrowing entities had filed for bankruptcy protection in February 2002and CMSLP, as special servicer for the related securitization trusts, enteredinto comprehensive loan modifications in March 2003. In April 2004,the related PSAs were amended to clarify the manner by which the masterservicers could recoup their outstanding liquidity and property protectionadvances. All outstanding master servicer advances have since been repaid.

In September 2004, after the bankruptcy court haddisallowed approximately $1.6 million of the securitization trusts’request for reimbursement of legal and other professional fees and expenses andthe outstanding principal balance of the loans were adjusted pro-rata as of September 30,2004. Although the borrowers have made monthly principal and interest paymentsunder the loan modifications through March 2005, we continue to classifythe Shilo Inn loans as specially serviced loans due to the fact that theborrowers have continued to indicate to us that, based on the operations of theproperties, they may not have the wherewithal to continue making their mortgageloan payments. We are exploring alternatives to fully resolve these speciallyserviced loans in the best interest of the securitization trusts’certificateholders, including a possible sale of one or more of these mortgageloans.

Distributions on ourRetained CMBS Portfolio, and the related fair value of the Retained CMBSPortfolio, will continue to be impacted by, among other things, the borrowers’performance under the terms of the modified loans.

**AdvanceLimitations, Appraisal Reductions and Losses on CMBS**

We experience shortfalls in expected cash flow on ourCMBS prior to the recognition of a realized loss primarily due to servicingadvance limitations resulting from appraisal reductions and/or advancelimitations specific to certain trusts. An appraisal reduction event can resultin reduced master servicer principal and interest advances based on the amountby which the sum of the unpaid principal balance of the loan, accumulatedprincipal and interest advances and other expenses exceeds 90% (in most cases)of the newly appraised value of the property underlying the mortgage loan. Asthe holder of the lowest rated and first loss bonds, our bonds are the first toexperience interest shortfalls as a result of the reduced advancing requirement.In general, the master servicer can advance up to a maximum of the differencebetween 90% of the property’s appraised value and the sum of accumulatedprincipal and interest advances and expenses. The ultimate disposition orwork-out of the mortgage loan may result in a higher or lower realized loss onour Retained CMBS Portfolio than the calculated appraisal reduction amount. Totalappraisal reductions as of December 31, 2004 for the CMBS transactions inwhich we retain an ownership interest were approximately $40.1 million, $145.6million and $8.9 million for CBO-1, CBO-2 and Nomura Asset Securities Corp. Series 1998-D6(Nomura), respectively, for a total of $194.6 million.

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CertainCMBS from the CBO-1, CBO-2 and Nomura transactions are expected to experienceprincipal write-downs over their expected lives. The following table summarizesthe actual realized losses on our CMBS through December 31, 2004(including realized mortgage loan losses expected to pass through to our CMBSduring the next month) and the expected future real estate losses underlyingour CMBS, including real estate losses which may be realized outside of ourCMBS ownership:
| ** **                                                                                              | ** ** | **CBO-1**               | ** ** | **CBO-2** | ** ** | **Nomura** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------|------------|------------|------------|-----------|------------|
| ** **                                                                                              | ** ** | **(in thousands)** | ** ** |
| Years 1999  through 2002 actual realized losses                                                         |       | $                       | 16,038     |      | $          | 34,597     |       | $         | 801        |   | $ | 51,436 |   |
| Year 2003 actual realized losses                                                                        |       | 11,796                  |       | 57,913    |       | 1,920      |       | 71,629    |       |
| Year 2004 actual realized losses                                                                        |       | 46,116                  |       | 72,689    |       | 13,961     |       | 132,766   |       |
| Cumulative actual realized losses through December 31, 2004                                        |       | 73,950                  |       | 165,199   |       | 16,682     |       | 255,831   |       |
| Expected loss estimates for the year 2005                                                               |       | 39,994                  |       | 192,366   |       | 11,653     |       | 244,013   |       |
| Expected loss estimates for the year 2006                                                               |       | 3,991                   |       | 35,919    |       | 6,534      |       | 46,444    |       |
| Expected loss estimates for the year 2007                                                               |       | 16,169                  |       | 12,062    |       | 4,611      |       | 32,842    |       |
| Expected loss estimates for the year 2008                                                               |       | 526                     |       | 3,683     |       | 2,571      |       | 6,780     |       |
| Expected loss estimates for the year 2009                                                               |       | 489                     |       | 5,953     |       | 2,094      |       | 8,536     |       |
| Expected loss estimates for the remaining life of CMBS                                                  |       | 1,561                   |       | 25,325    |       | 6,399      |       | 33,285    |       |
| Cumulative  expected loss estimates (including cumulative actual realized losses) through  life of CMBS |       | $                       | 136,680    |      | $          | 440,507    |       | $         | 50,544     |   | $ | 627,731 |   |

 

As previously discussed, we increased our overallexpected loss estimate related to our subordinated CMBS from approximately $581million as of December 31, 2003 to $628 million as of December 31,2004, with such total losses occurring or expected to occur through the life ofthe CMBS portfolio. For a more detailed discussion, see “Management’sdiscussion and analysis of Financial Condition and Results of Operations—2004compared to 2003—Impairment of CMBS”.

During the years ended December 31,2004, 2003 and 2002 we determined that there had been an adverse change inexpected future cash flows for certain of our CMBS due primarily to the factorspreviously mentioned. As a result, we determined that these CMBS had beenimpaired under EITF 99-20. We recorded other than temporary impairment chargeson these CMBS through the consolidated statements of income of $15.7 million,$14.7 million and $70.2 million for the years ended December 31, 2004,2003 and 2002, respectively.

**Yield to Maturity**

Thefollowing table summarizes yield-to-maturity information relating to our CMBS:
| **Pool**                                  | ** ** | ** ** | ** ** | **Anticipated  Yield-to-Maturity  as of 1/1/04(1)** | ** ** | **Current  Anticipated  Yield-to-Maturity  as of 1/1/05(1)** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| CMBS Pledged to  Secure Non-Recourse Debt |       |       | 9.1        | %                                                             |       |                                                                   | 10.4       | %(2) |   |
| Retained CMBS  Portfolio                  |       |       | 13.6       | %                                                             |       |                                                                   | 15.8       | % |   |
| Weighted Average                          |       |       | 11.9       | %                                                             |       |                                                                   | 12.3       | % |   |

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(1)          Represents theanticipated weighted average yield, based on amortized cost, over the remainingexpected life of the CMBS based on our estimate of the timing and amount offuture credit losses and other significant items that are anticipated to affectfuture cash flows.

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(2)          Effective July 1,2004, CMBS Pledged to Secure Non-Recourse Debt includes approximately 81.5% ofour BBB- rated CMBS, as previously discussed.

***Summary of Other Assets***

As of December 31, 2004 and 2003, our non-coreassets consisted primarily of cash and cash equivalents,  insured mortgage securities,  mezzanine loans, Other MBS, equityinvestments, principal and interest receivables, CMSLP’s other assets, and, asof December 31, 2003, derivative financial instruments and REO. Other MBSdid not change significantly from December 31, 2003 compared to December 31,2004. Receivables and other assets decreased to $26.4 million at December 31,2004 from $59.1 million at December 31, 2003, due to a variety of factors,including the disposition of our REO asset, timing of payments of interestincome related to CMBS, the liquidation of our interest rate swaps, decrease indeferred financing costs, and a decrease in equity investments (see below). Fora further discussion of our insured mortgage securities and CMSLP’s otherassets see below.

We had $37.8 million and $147.5 million (in each case,at fair value) invested in insured mortgage securities as of December 31,2004 and 2003, respectively. The reduction in total fair value is primarilyattributable to significant prepayments of insured mortgage securities and, toa lesser extent, the sale of $17.7 million of our FHA loans during the secondquarter of 2004. As of December 31, 2004, all of our investments ininsured mortgage securities were GNMA mortgage-backed securities.

As of December 31, 2004 and December 31,2003, CMSLP’s other assets consisted primarily of advances receivable,investments in CMBS and interest-only MBS, and fixed assets. The servicingother assets have increased to $8.1 million at December 31, 2004 from $6.0million at December 31, 2003, primarily resulting from an increase inadvances receivable.

As of December 31,2004 and December 31, 2003, we had approximately $223,000 and $3.5million, respectively, in investments accounted for under the equity method ofaccounting. Included in the December 31, 2004 equity investment is (a) thegeneral partnership interest (3.9% ownership interest) in the one remaining AIMLimited Partnership, and (b) a 20% limited partnership interest in theadvisor to the AIM Limited Partnership. The decrease in these equityinvestments is primarily due to the liquidations of three of the AIM LimitedPartnerships (AIM 84, AIM 86 and AIM 88) in February 2004. The carryingvalue of our remaining equity investment is expected to continue to declineover time as the asset base of the AIM Limited Partnership decreases andproceeds are distributed to partners.

***Summary of Liabilities***

As of December 31,2004 and December 31, 2003, our liabilities consisted primarily of debt,accrued interest and accrued payables. Total recourse debt decreased byapproximately $276.4 million to $73.7 million as of December 31, 2004 from$350.0 million as of December 31, 2003 primarily due the payoff of theBear Stearns Debt and substantially all of our Bear Stearns $200 millionsecured borrowing facility. Total non-recourse debt increased by approximately$140.8 million to $556.3 million at December 31, 2004 from $415.5 millionat December 31, 2003. This increase is primarily attributable to the issuanceof a $260 million face amount repurchasable senior interest certificate in ourBBB- rated CMBS partially offset by reductions to non-recourse debt due to theprepayments in our insured mortgage securities portfolio. Payables and accruedliabilities did not change significantly as of December 31, 2004 ascompared to December 31, 2003. The net interest rate swap liability ofapproximately $689,000 included in accrued liabilities at December 31,2004 was offset by the $841,000 decrease in servicing liabilities resultingfrom the payment of accrued executive contract termination and severance costsand other normal operating expenses.

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***Dividends/Other***

No cash dividends were paid to common shareholdersduring 2004 and 2003 due to the utilization of a portion of our NOLcarryforward which reduced our taxable income to common shareholders to zero. Asof December 31, 2004, there were no unpaid preferred dividends. On April 28,2004, we redeemed all outstanding shares of our Series F Preferred Stockand our Series G Preferred Stock for the stated redemption price of $10.00per share in cash.

Factors which could impactour ability and requirement to pay common dividends include (i) the levelof income earned on mortgage assets, including our CMBS (including, but notlimited to, the amount of original issue discount income, interest shortfallsand realized losses on our CMBS), (ii) NOLs, (iii) the rate we pay onour borrowings and fluctuations in interest rates, (iv) changes inoperating expenses, including hedging costs, (v) margin calls, (vi) thelevel of income earned on our insured mortgage securities and the impact ofprepayments, (vii) the rate at which cash flows from mortgage assets,mortgage dispositions, and, to the extent applicable, distributions from our subsidiariescan be reinvested, (viii) cash dividends paid on preferred shares, (ix) tothe extent applicable, whether our taxable mortgage pools continue to be exemptfrom corporate level taxes, (x) realized losses on certain transactions,and (xi) the timing and amounts of cash flows attributable to our other linesof business. Cash dividends on our common stock are subject to the priorpayment of all accrued and unpaid dividends on our preferred stock.

**Investment Company Act**

Under the Investment Company Act of 1940, as amended,an investment company is required to register with the SEC and is subject toextensive restrictive and potentially adverse regulation relating to, amongother things, operating methods, management, capital structure, dividends and transactionswith affiliates. However, as described below, companies primarily engaged inthe business of acquiring mortgages and other liens on and interests in realestate (Qualifying Interests) are excluded from the requirements of theInvestment Company Act.

To qualify for theInvestment Company Act exclusion, we, among other things, must maintain atleast 55% of our assets in Qualifying Interests (the 55% Requirement) and arealso required to maintain an additional 25% in Qualifying Interests or other realestate-related assets (Other Real Estate Interests and such requirement, the25% Requirement). According to the most recent SEC staff interpretations, webelieve that all of our government-insured mortgage securities constituteQualifying Interests. In accordance with the most recent SEC staffinterpretations, we believe that all of our CMBS constitute Other Real EstateInterests and that certain of our CMBS also constitute Qualifying Interests. Oncertain of our CMBS, we, along with other rights, have the unilateral right todirect foreclosure with respect to the underlying mortgage loans. Based on suchrights and our economic interest in the underlying mortgage loans, we believethat the related CMBS constitute Qualifying Interests. As of December 31, 2004,we believe that we were in compliance with both the 55% Requirement and the 25%Requirement. If the SEC or its staff were to take a different position withrespect to whether such CMBS constitute Qualifying Interests, we could, amongother things, be required either (i) to change the manner in which weconduct our operations to avoid being required to register as an investmentcompany or (ii) to register as an investment company, either of whichcould have a material adverse effect on us.

**Critical Accounting Policies**

Our consolidated financial statements are based on theselection and application of critical accounting policies, which requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting periods. We continually evaluate theestimates we use to prepare the consolidated financial statements, and update 

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those estimates asnecessary. In general, management’s estimates are based on historicalexperience, on information from third party professionals, and other variousassumptions that are believed to be reasonable under the facts and circumstances.Actual results could differ materially from those estimates.

Managementconsiders an accounting policy to be critical if:

·       itrequires assumptions to be made that were uncertain at the time the estimatewas made; and

·       changesin the estimate or different estimates that could have been selected could havea material impact on our consolidated results of operations or financialcondition.

We believe ourcritical accounting policies include the determination of fair value of ourCMBS and interest income recognition related to our CMBS.

·       *Fair value of CMBS Portfolio*—Due to the limited liquidity ofthe subordinated CMBS market and the resulting lack of a secondary market, thevalues of our CMBS portfolio are based on available market and certain thirdparty information and management’s estimates. These estimates requiresignificant judgment regarding assumptions for defaults on the underlyingcommercial mortgage loan collateral, timing of loss realization and resultantloss severity, timing and amount of principal losses and interest shortfalls,timing and amount of potential recoveries of such shortfalls and discount rates.Notes 3 and 4 in our notes to consolidated financial statements contain adetailed discussion of the methodology used to determine the fair value of ourCMBS portfolio as well as a sensitivity analysis related to the fair value ofthe CMBS portfolio due to changes in assumptions related to losses on theunderlying commercial mortgage loan collateral and discount rates.

·       *Interest incomerecognition related to CMBS*—Interest income recognition under EITF No. 99-20requires us to make estimates based on certain assumptions including expectedlosses on the underlying commercial mortgage loan collateral (which directlyimpact the cash flows on our Retained CMBS Portfolio in the form of interestshortfalls and loss of principal) and the impact these factors would have onfuture cash flow. Note 4 in our notes to the consolidated financial statementsdetails the expected realized losses by year that we expect to incur related toour Retained CMBS Portfolio. The cash flows we project to arrive at theeffective interest rate to recognize interest income are adjusted for theseexpected losses. The judgment regarding future expected credit losses issubjective as credit performance is particular to an individual deal’s specificunderlying commercial mortgage loan collateral. In general, if we increase ourexpected losses or determine such losses will occur sooner than previouslyprojected and the resulting fair value of the CMBS is below cost, then the CMBSwill be considered impaired and adjusted to fair value with the impairmentcharge recorded through our earnings.

**ITEM 7A.**        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our principal market riskis exposure to changes in interest rates related to the U.S. Treasury market aswell as the LIBOR market. We will experience fluctuations in the market valueof our mortgage assets related to changes in the yields of U.S. Treasurysecurities as well as changes in the spread between U.S. Treasury securitiesand the mortgage assets and overall required returns. The combination of therisk free rate (U.S. Treasury yields) and the related spread is the discountrate used to determine the fair value of our mortgage assets. As of December 31,2004, the average U.S. Treasury rate used to price our CMBS, excludinggenerally the B- through unrated/issuer’s equity CMBS, had decreased by 3 basispoints, compared to December 31, 2003. As of December 31, 2004,credit spreads used to price our CMBS generally tightened, compared to December 31,2003. The fair values of our B- through unrated/issuer’s equity CMBS aredetermined using a discounted cash flow approach applied to loss adjusted cashflows and a yield to maturity, which, in our view, is commensurate with themarket’s perception of value and risk of comparable assets.  As described above, interest rates andspreads, which are reflective of the credit 

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fundamentalsof the underlying commercial real estate assets, impact the fair values of ourCMBS. We will also have fluctuations in the amount of interest expense paid oncertain of our recourse debt primarily due to changes in one-month LIBOR.

**CMBS**

The required rate of return used to determine the fairvalues of our CMBS is comprised of many variables, such as a risk-free rate, aliquidity premium and a credit risk premium. These variables are combined todetermine a total rate that, when used to discount the CMBS’s assumed stream offuture cash flows, results, in our view, in the fair value of such CMBS. Thedetermination of such rate is dependent on many quantitative and qualitativefactors, such as, but not limited to, the market’s perception of the issuers ofthe CMBS and the credit fundamentals of the commercial properties underlyingeach underlying pool of commercial mortgage loans. See also Notes 3 and 4 tothe consolidated financial statements for a discussion of other factors thatcould affect the fair values of our CMBS, including among other factors, changesin the timing and/or amount of credit losses on underlying mortgage loans,master servicer advances, and delays in the receipt of monthly cash flowdistributions on CMBS due to mortgage loan defaults and/or extensions in loanmaturities.

If we assumed that thediscount rate used to determine the fair values of our CMBS (AAA throughunrated bonds) increased by 100 basis points and 200 basis points, the increasein the discount rate would have resulted in a corresponding decrease in thefair values of our total CMBS (AAA through unrated bonds) of approximately$51.0 million (or 5.3%) and approximately $99.3 million (or 10.3%),respectively, as of December 31, 2004. A 100 basis point and 200 basispoint increase in the discount rate would have resulted in a correspondingdecrease in the value of our Retained CMBS Portfolio (portion of BBB- throughunrated bonds) of approximately $17.9 million (or 5.3% and $35.4 million (or10.6%), respectively, as of December 31, 2004.

**Variable Rate Debt**

A 100 basis point increasein the one-month LIBOR index would have increased our interest expense on ourvariable rate debt by approximately $2.1 million during the year ended December 31,2004. The carrying amount of our variable rate debt approximates fair valuebecause the current rate on the debt resets monthly based on market rates.

**Derivatives**

On August 6, 2004, weentered into an interest rate swap in which we agreed to pay Deutsche Bank afixed interest rate of 4.70% per annum in exchange for receiving floating paymentsbased on one-month LIBOR on a notional amount of $40 million over a 10-yearterm. The fair value of this swap was a liability of approximately $689,000 at December 31,2004. A 100 and 200 basis point increase in one-month LIBOR index woulddecrease our net cash payments by approximately $400,000 and $800,000,respectively, per year. A 100 and 200 basis point change in the 10-yearinterest rate swap rate would cause the fair value of this swap to change byapproximately $3.1 million and $6.2 million, respectively.

**Insured Mortgage Securities**

There would not be amaterial change in the fair values of our insured mortgage securities if weassumed that the discount rate used to determine the fair values increased by100 basis points and 200 basis points as of December 31, 2004 since theunderlying mortgages are generally prepayable and have an assumed weightedaverage life of less than one year.

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**ITEM 8.**                CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statementsand supplementary data are set forth in this Annual Report on Form 10-Kcommencing on page F-1.

**ITEM 9A.**        CONTROLS AND PROCEDURES

We have carried out an evaluation, under thesupervision and with the participation of our management including ourprincipal executive officer and principal financial officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as that term is defined in Rule 13a-15(e) under theSecurities and Exchange Act of 1934, as amended. Based on that evaluation, ourprincipal executive officer and principal financial officer concluded that asof December 31, 2004, which is the end of the period covered by thisAnnual Report on Form 10-K, our disclosure controls and procedures areeffective.

There have been no changesin our internal controls over financial reporting in the fiscal quarter ending December 31,2004 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

**ITEM 9B.**       OTHER INFORMATION

There are no items that were required to be disclosedin a report on Form 8-K during the fourth quarter of the year covered bythis Form 10-K that were not reported.

On March 3, 2005, our Board of Directors adopted anamendment to the CRIIMI MAE Inc. Deferred Compensation Plan (the “DeferredCompensation Plan”), effective as of January 1, 2005, in order to comply withcertain requirements of the American Jobs Creation Act of 2004 governing thetiming and conditions of payments thereunder, and to provide the same treatmentfor restricted stock units (“RSUs”) upon a Change of Control as provided foroptions and restricted stock awards granted under our 2001 Stock IncentivePlan. Pursuant to the terms of the amendment, RSUs issued under the DeferredCompensation Plan with respect to a participant’s election to defer the receiptof a restricted stock award will vest 100% upon a Change of Control of theCompany (as defined in the Deferred Compensation Plan), and participants willreceive a lump sum cash payment equal to their account balance within 12 monthsof a Change of Control.

On March 3, 2005, ourBoard of Directors formed a Special Committee (“Special Committee”) ofindependent directors to consider strategic alternatives for the Company,including a possible sale of the Company. In addition to their regular meetingfees, the members of the Special Committee will receive a fee of $30,000 eachfor their service on the Special Committee. The Special Committee appointedMr. Rufrano to be the Chair for which he will receive an additional fee of$10,000.

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**PART III**

**ITEM 10.**         DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT

**Identificationof Directors and Executive Officers**
| **Name**            | ** ** | ** ** | ** ** | ** **                                                       | **Age** | ** ** | **Position** | ** ** | **Year Board Term Expires** |
|---------------------|------------|------------|------------|------------------------------------------------------------------|---------|------------|--------------|------------|-----------------------------|
| Barry S. Blattman   |       | 42         |       | Chairman of the Board and Chief Executive Officer                |    | 2005       |
| Mark R. Jarrell     |       | 44         |       | President and Chief Operating Officer                            |    |       |
| Cynthia O. Azzara   |       | 45         |       | Executive Vice President, Chief Financial Officer  and Treasurer |    |       |
| Stephen M Abelman   |       | 43         |       | Executive Vice President/Asset Management                        |    |       |
| Daniel P. Warcholak |       | 44         |       | Senior Vice President/Fixed Income and Capital  Markets          |    |       |
| Jeffrey M. Blidner  |       | 56         |       | Director                                                         |    | 2006       |
| Joshua B. Gillon    |       | 42         |       | Director                                                         |    | 2005       |
| Arthur N. Haut      |       | 69         |       | Director                                                         |    | 2006       |
| Robert J. Merrick   |       | 59         |       | Director                                                         |    | 2006       |
| John S. Moody       |       | 56         |       | Director                                                         |    | 2007       |
| Bruce K. Robertson  |       | 38         |       | Director                                                         |    | 2005       |
| Glenn J. Rufrano    |       | 55         |       | Director                                                         |    | 2007       |
| Robert E. Woods     |       | 57         |       | Director                                                         |    | 2007       |

 

Mr. Barry S. Blattmanhas been Chairman of our Board of Directors and our CEO since January 23,2003.  From January 23, 2003 until September 15,2003, he also served as our President. Mr. Blattman has been the ManagingPartner of Brascan Real Estate Financial Partners LLC since 2002. From 1996through December 2001, Mr. Blattman was a Managing Director of RealEstate Investment Banking at Merrill Lynch, where he oversaw the real-estatedebt group which was responsible for United States and Canadian conduit loanprograms, large-loan originations, syndicated lending, mezzanine lending,third-party portfolio financing and securitizations, unsecured bond and preferredequity issuances, and rating agency advisory services. Mr. Blattmanreceived a Master of Business Administration degree from New York Universityand Bachelor of Arts degree from the University of Michigan.

Mr. Mark R. Jarrell has been our President andChief Operating Officer since September 15, 2003. Mr. Jarrell servedas a director of CRIIMI MAE from January 23, 2003 to August 13, 2003.From April 2002 to September 2003, Mr. Jarrell served as SeniorVice President and head of the Debt Group at The Community Development Trust, Inc.(“CDT”), a private hybrid REIT focused on debt and equity investments inprojects that support affordable housing and community development. As head ofthe Debt Group at CDT, he was responsible for all debt origination, underwritingand capital markets activities and was a member of the REIT’s ManagementCommittee. Prior to joining CDT, Mr. Jarrell spent fifteen years in thecommercial mortgage-backed securities (CMBS) industry at a number of WallStreet firms. From 1997 to 2002, he was a Senior Vice President at GreenwichCapital Markets, Inc., where he headed that firm’s conduit loan productionand securitization effort. Mr. Jarrell received his Bachelor of Artsdegree in Urban Studies (summa cum laude) from Columbia College and Master ofPublic Affairs degree from the Woodrow Wilson School at Princeton University.

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Ms. Cynthia O. Azzara has been our Executive VicePresident since September 2003, Chief Financial Officer since 1994 and ourTreasurer since 1997. She was a Senior Vice President from 1995 to September 2003.Ms. Azzara is responsible for accounting, financial and treasury mattersof CRIIMI MAE. Prior to 1994, she held various senior positions overseeing theaccounting and financial functions for numerous public companies, affiliatedwith the former advisor of CRIIMI MAE that invested, directly or indirectly, incommercial and multi-family mortgage assets. Ms. Azzara has over 16 yearsof experience in accounting, corporate finance and regulatory matters.Ms. Azzara is a Certified Public Accountant and holds a Bachelor ofBusiness Administration degree in Accounting from James Madison University,Magna Cum Laude.

Mr. Stephen M. Abelman has been our ExecutiveVice President, Asset Management since October 29, 2003. Mr. Abelmanis responsible for all asset management functions, including surveillance, loanmanagement and special servicing. From 1993 to 2003, Mr. Abelman servedwith Archon Group, a wholly-owned subsidiary of Goldman Sachs, most recently asVice President responsible for the asset management of real estate, real estatedebt, and mezzanine and preferred equity investments owned by Goldman and itsWhitehall Street Funds. Mr. Abelman was also responsible for asset andportfolio projections and performance, including investments in mortgage-backedsecurities and real estate. From 1997 to 2001, he managed Archon’s $1billion-plus northeast portfolio, comprised primarily of real estate andnon-performing loans from Washington, D.C. through New England. Mr. Abelmanreceived a Bachelor of Science in Business Administration from BostonUniversity and a Master of Business Administration from Rice University.

Mr. Daniel P. Warcholak has been Senior VicePresident, Fixed Income and Capital Markets since September 2003. He isresponsible for structured finance, corporate finance transaction analytics,securities trading, and derivatives based interest rate risk management. Sincejoining us in 1998, he has held the positions of Group Vice President and VicePresident, focusing on financial restructuring and transaction analytics. From1995 to 1998, he held various positions in financial services, software, andsystems consulting, most recently with KPMG Peat Marwick. From 1988 to 1995, Mr. Warcholakwas Vice President with JHM Financial Services Corp and JHM Capital Management,a portfolio investment management firm which specializes in mortgage-backedsecurities. Mr. Warcholak holds a Bachelor of Science degree from DrexelUniversity, is a CFA Charterholder, and is a Certified Public Accountant.

Mr. Jeffrey M. Blidner has served as a directorsince May 15, 2003. Mr. Blidner has served as a managing partner ofBrascan Corporation (NYSE/TSX:BNN) since February 2002 where he isresponsible for asset management activities and strategic initiatives. He hasalso served as the Vice Chairman of Brascan Financial Corporation since October 2002where he is responsible for merchant banking and asset management activities. From1980 to February 2002, he was a senior partner at Goodman and Carr LLP, aToronto law firm. Mr. Blidner serves on the Board of Directors of TeknionCorporation and is a member of its Safety, Health and Environmental Committee.

Mr. Joshua B. Gillonhas served as a director since January 23, 2003. Mr. Gillon serves asthe Executive Vice President and General Counsel of Traffix, Inc.(NASDAQ:TRFX), and has been an executive officer of Traffix since April 2000.Mr. Gillon is responsible for all legal and regulatory affairs, strategicbusiness transactions, public relations, and investor relations. In 1999, Mr. Gillonserved as the Project Director of a 20-company industry consolidation inNew Jersey. He practiced corporate law from 1988 to 1999 at the law firms ofSchneck, Weltman and Hashmall LLP, Kronish Lieb Weiner and Hellman LLP, andSeward and Kissel LLP.

Mr. Arthur N. Haut has served as a director sinceMay 15, 2003. Since 1999,  Mr. Hauthas served as director of Business Valuation Services in UHY AdvisorsLitigation and Valuation Support Group (“UHY”) where he is responsible for thevaluation of minority and controlling interests for purposes of estate andfinancial planning, purchase or sale of a business and employee stock ownershipplans. He also 

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provides assistance instructuring, planning and implementing business combinations. From 1978 untilhe joined UHY, Mr. Haut operated his own business valuation firm. Prior to1978, Mr. Haut was a partner in the international accounting firm, Coopersand Lybrand. Since 1975, Mr. Haut has taught various courses in accounting,federal income taxes and corporate financial reporting and valuation at theYale School of Management, Yale Law School and Yale College.

Mr. Robert J. Merrick has served as a directorsince 1997. Since February 1998, Mr. Merrick has served as the ChiefCredit Officer and Director of MCG Capital Corporation where he is responsiblefor approval of all of MCG’s loans and investments. From 1985 to 1997, heserved as Executive Vice President and Chief Credit Officer of Signet BankingCompany (“Signet”). While at Signet, Mr. Merrick also served as Chairmanof the Credit Policy Committee and was a member of the Asset and LiabilityCommittee, and the Management Committee. Mr. Merrick currently serves as adirector of the Bank of Richmond.

Mr. John S. Moody has served as a director since February 26,2004. Since April 1, 2004, Mr. Moody served as President and ChiefExecutive Officer of HRO Asset Management, LLC, real estate advisor toHausInvest, a subsidiary of Commerzbank AG. HRO provides acquisition, dispositionand asset management services to HausInvest. From 2001 to April 2004, heserved as President of the Real Estate Division at Marsh & McLennanCompanies, Inc. Mr. Moody served as President and Chief ExecutiveOfficer of Cornerstone Properties, Inc. from 1995 to 2001 and as Presidentand Chief Executive Officer of Deutsche Bank Realty Advisors from 1992 to 1995.

Mr. Bruce K. Robertson has served as a directorsince February 2004. Mr. Robertson has served as President of BrascanAsset Management since 2004. He has served as Managing Partner, FinancialServices, with Brascan Corporation and has been responsible for Brascan’slending operations and its financial services investments since 1998. In 1997,he was Vice President and Chief Financial Officer of Brascan and during 1996,he was Vice President of its Investment Banking subsidiary. Mr. Robertsonis a member of the Board of Directors of NBS Technologies Inc. and serves onits governance and human resources committee.

Mr. Glenn J. Rufrano has served as a directorsince February 26, 2004.  Mr. Rufranohas served in the position of Chief Executive Officer of New Plan Excel, one ofthe nation’s largest real estate companies focused on the ownership andmanagement of community and neighborhood shopping centers, since February 2000.From 1983 to February 2000, Mr. Rufrano was a partner at The O’ConnorGroup, a diversified real estate investment firm. During this period, he held avariety of positions including President, Chief Operating Officer and ChiefFinancial Officer. He also served as Co-Chairman of The Peabody Group, anassociation between The O’Connor Group and J.P. Morgan & Co., Inc.Mr. Rufrano is an adjunct professor at New York University’s Real EstateInstitute and is a member of the Board of NAREIT and the International Councilof Shopping Centers. He is also a member of the Board of Directors of TRIZECProperties, Inc. and serves on its Audit Committee.

Mr. Robert E. Woods has served as a directorsince 1998. Since 1997, Mr. Woods has served as the Managing Director andHead of Debt Syndicate at Societe Generale in New York where he is responsiblefor structuring, underwriting and distribution of private and public debt inNorth and South America, and Vice Chairman of the Debt Screening Committee. From1991 to 1997, Mr. Woods was Managing Director and Head of the Real EstateCapital Markets and Mortgage-Backed Securities division of Citicorp and aSenior Credit and Securities Officer. From 1990 to 1991, he was GlobalPortfolio Manager of Citicorp’s Global Corporate Finance business.

Our Board of Directors has affirmatively determinedthat Messrs. Gillon, Haut, Merrick, Moody, Rufrano and Woods are “independent”in accordance with corporate governance standards of the New York StockExchange (the “NYSE”). In making this independence determination, the Boardconcluded, based upon inquiries made of each director and disclosure by eachdirector of all relevant facts and circumstances, that each of Messrs. Gillon,Haut, Merrick, Moody, Rufrano and Woods had no 

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relationship with CRIIMIMAE, either directly or as a partner, shareholder or officer of an organizationthat has a relationship with us, other than through their positions as ourdirectors.

There are no family relationships among any of ourdirectors or executive officers.

Pursuant to our Board of Directors GovernanceGuidelines (the “Governance Guidelines”), the non-management directors meetregularly, and at a minimum after every Board meeting in executive sessionwithout management participation. The Chairman of the Nominating and GovernanceCommittee of our Board of Directors, currently Mr. Gillon, is the leaddirector during the executive sessions.

Our Governance Guidelines set forth our policy withrespect to stockholder communications with our Board and its individual members.All stockholder communications addressed to the Board, non-management directorsas a group or a specified individual director will be forwarded to therespective addressee. Stockholders may communicate with our directors by writingour Corporate Secretary at our address at 11200 Rockville Pike, 4thFloor, Rockville, MD  20852, or bye-mailing us at shareholders@criimi.com.

Our Governance Guidelinescan be found on our website located at www.criimimaeinc.com on the CorporateProfile page under Corporate Governance, and are available in print to anystockholder who makes a request in writing to our Corporate Secretary at ouraddress listed in the previous paragraph.

**AuditCommittee Financial Experts**

The Board of Directors has an Audit Committee currently comprised of Messrs. Merrick,Haut and Woods. Our Board of Directors has determined that each of themembers of the Audit Committee is an “audit committee financial expert” asdefined in the Securities and Exchange Commission (SEC) rules.

In addition, the Board of Directors has determinedthat each of the members of the AuditCommittee is “independent” as that term is defined in the corporategovernance standards of the NYSE.

**BeneficialOwnership Reporting Compliance**

Section 16(a) of the Exchange Act requireseach of our directors and executive officers and each person who owns more than10% of our Common Stock to report to the SEC, by a specified date, his, her orits beneficial ownership of, and certain transactions in, our listed common andpreferred stock. Except as otherwise noted below, based solely on its review ofForms 3 and 4 and amendments thereto furnished to us, and writtenrepresentations from certain reporting persons that no Form 5 was requiredfor those persons, we believe that all directors, officers and beneficialowners of more than 10% of the Common Stock have filed on a timely basisForms 3, 4 and 5 as required in the year ended December 31, 2004,except the delinquent Form 4 that was filed by Mr. Blattman in connectionwith the transfer of ownership of shares of our common stock from Brascan RealEstate Finance Fund I, L.P. to BREF One, LLC.

**Code of Ethics**

On March 26, 2003, our Board of Directors adopteda Code of Business Conduct and Ethics that applies to our directors andexecutive officers, including our Chief Executive Officer and our ChiefFinancial Officer. Our Chief FinancialOfficer serves as our principal financial and accounting officer. Our Code ofBusiness Conduct and Ethics can be found on our website at www.criimimaeinc.comon the Corporate Profile page, and is available in print to any stockholder whorequests it by writing to our Corporate Secretary at 11200 Rockville Pike, 4thFloor, Rockville, Maryland 20852.

Any waiver of a provision of our Code of BusinessConduct and Ethics for a director or an executive officer or amendment of theCode must be approved by our Board of Directors or its designated committee andwill be disclosed on our website.

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**ITEM 11.**         **EXECUTIVECOMPENSATION**

**Summary Compensation Table**

The following table setsforth certain information concerning compensation earned during the last threeyears by the current Chairman of the Board of Directors and Chief ExecutiveOfficer and each of our other four most highly compensated executive officerswhose income exceeded $100,000 during the year ended December 31, 2004(collectively, the “Named Executive Officers”).
|                                                | ** ** | ** ** | ** ** | ** **                   | ** ** | **Long Term  Compensation** | ** ** | ** **     | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|----------------------------------|------------|----------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Awards**                       | ** ** | ** **     | ** ** |
| **Name and Principal Position** | ** ** | ** ** | ** ** | **Year**                     | ** ** | **Salary  ($)**                  | ** ** | **Bonus  ($)** | ** ** | **Other  Annual  Compensation  ($)** | ** ** | **Restricted  Stock  Awards  ($)** | ** ** | **Securities   Under-  lying  Options  (#)** | ** ** | **All Other  Compensation  ($)** | ** ** |
| Barry S. Blattman                              |       | 2004       |       | $                            | 750,000    | (1)                              | $          | —         |       |   | $ | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |
| Chairman of the Board                          |       | 2003       |       | 1,000,000                    | (1)        | —                           |       |           | —     |   |   | — |   |   | — |   |   |   | — |   |   |
| and CEO                                        |       | 2002       |       | —                       |       | —                           |       |           | —     |   |   | — |   |   | — |   |   |   | — |   |   |
| Mark R. Jarrell                                |       | 2004       |       | $                            | 400,000    |                             | $          | 200,000        |       |   | $ | — |   |   | $ | 250,000 |   |   | — | (2) |   |   | $ | — |   |   |
| President and COO                              |       | 2003       |       | 113,612                      | (3)        | 100,000                          |       |           | —     |   |   | 637,651 |   |   | 4,000 | (4) |   |   | 25,500 | (5) |   |
|                                           |       | 2002       |       | —                       |       | —                           |       |           | —     |   |   | — |   |   | — |   |   |   | — |   |   |
| Cynthia O. Azzara                              |       | 2004       |       | $                            | 300,000    |                             | $          | 100,000        |       |   | $ | — |   |   | $ | 150,000 |   |   | — | (6) |   |   | $ | — |   |   |
| Executive Vice President,                      |       | 2003       |       | 420,948                      |       | 150,467                          |       |           | —     |   |   | 139,689 |   |   | — | (6) |   |   | 989,445 | (7) |   |
| CFO and Treasurer                              |       | 2002       |       | 364,875                      |       | 126,000                          |       |           | —     |   |   | 49,875 |   |   | 45,000 | (8) |   |   | — |   |   |
| Stephen M. Abelman                             |       | 2004       |       | $                            | 300,000    |                             | $          | 100,000        |       |   | $ | — |   |   | $ | 150,000 |   |   | — | (9) |   |   | $ | — |   |   |
| Executive Vice President/                      |       | 2003       |       | 53,462                       | (10)       | —                           |       |           | —     |   |   | 142,125 |   |   | — | (9) |   |   | 77,000 | (11) |   |
| Asset Management                               |       | 2002       |       | —                       |       | —                           |       |           | —     |   |   | — |   |   | — |   |   |   | — |   |   |
| Daniel P. Warcholak                            |       | 2004       |       | $                            | 300,000    |                             | $          | 25,000         |       |   | $ | — |   |   | $ | 75,000 |   |   | — | (12) |   |   | $ | — |   |   |
| Senior Vice President/                         |       | 2003       |       | 229,360                      |       | 37,500                           |       |           | —     |   |   | — |   |   | — |   |   |   | — |   |   |
| Fixed Income/Capital Markets                   |       | 2002       |       | 193,125                      |       | 28,000                           |       |           | —     |   |   | — |   |   | 9,000 | (13) |   |   | — |   |   |
|                                                |            |            |            |                              |            |                                  |            |                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Upon the recommendation of the Compensation and StockOption Committee and approval of our Board, we paid BREF Partners for Mr. Blattman’sservices as our Chairman of the Board and CEO.

(2)             For performance in 2004, Mr. Jarrell was awarded 15,528 shares of restricted stock on January 2,2005 for which restrictions lapse on one-third of the shares on each of January 2,2006, January 2, 2007 and January 2, 2008 provided that he is stillemployed by us on such dates.

(3)             Includes salary from commencement of Mr. Jarrell’semployment, September 15, 2003 through December 31, 2003.

(4)             Mr. Jarrell was awarded 58,021 shares of restricted stock on September 13,2003 for which all restrictions have lapsed. Mr. Jarrell received agrant of 4,000 options to purchase our common stock on February 24, 2003as part of his compensation as a member of the Board in 2003, 2,000 of whichvested upon grant and 1,000 of which vested on each of the first and secondanniversaries of the date of grant. Upon his resignation from the Board on August 13,2003, Mr. Jarrell forfeited 2,000 options.

(5)             Includes Board and committee fees paid to Mr. Jarrellprior to his resignation from the Board on August 13, 2003.

(6)             Forperformance in 2004, Ms. Azzara wasawarded 9,317 shares of restricted stock on January 2, 2005 for whichrestrictions lapse on one-third of the shares on each of January 2, 2006, January 2,2007 and January 2, 2008 provided that she is still employed by us on suchdates.  Ms. Azzara was awarded 13,055 shares of restricted stock on October 3,2003 for which restrictions lapsed on one-third of the shares on December 31,2004 and restrictions will lapse on one-third of the shares on each of December 31,2005 and December 31, 2006 provided that she is still employed by us onsuch dates.

(7)             Ms. Azzara was paid $989,445 in cash and relatedbenefit payments as a result of the termination of her employment agreement dueto non-renewal on August 25, 2003.

(8)             Ms. Azzara wasawarded 12,500 shares of restricted stock on January 2, 2002 for which allrestrictions have lapsed. Ms. Azzara was awarded a grant of 45,000options to purchase our common stock at $7.00 per share on June 5, 2002,all of which have vested.

(9)             For performance in 2004, Mr. Abelman was awarded 9,317 shares of restricted stock on January 2,2005 for which restrictions lapse on one third of the shares on each of January 2,2006, January 2, 2007 and January 2, 2008 provided that he is stillemployed 

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by uson such dates.  Mr. Abelman wasawarded 12,500 shares of restricted stock on November 6, 2003 for whichrestrictions lapsed on one-third of the shares on December 31, 2004 andrestrictions will lapse on one-third of the shares on each of December 31,2005 and December 31, 2006 provided that he is still employed by us onsuch dates.

(10)       Includes salary upon commencement of Mr. Abelman’semployment from October 29, 2003 through December 31, 2003.

(11)       For services as a consultant provided by Mr. Abelmanto CRIIMI MAE Services Limited Partnership, a wholly owned subsidiary, from August 12,2003 to October 28, 2003.

(12)       For performance in 2004, Mr. Warcholak was awarded 4,658 shares of restricted stock on January 2,2005 for which restrictions lapse on one-third of the shares on each of January 2,2006, January 2, 2007 and January 2, 2008 provided that he is stillemployed by us on such dates.

(13)       Mr. Warcholak was awarded a grant of9,000 options to purchase our common stock at $7.00 per share on June 5,2002, all of which have vested.

**Option Grants in Last Fiscal Year**

There were no optionsgranted to any of the Named Executive Officers during the year ended December 31,2004.

**AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2004 ANDYEAR END 2004 OPTION VALUES**

The following tableprovides information concerning the exercise of options during the year ended December 31,2004 for each of the Named Executive Officers:
| ** **           | ** ** | **Shares of  Common  Stock Acquired  on Exercise (#)** | ** **                                                         | **Value  Realized  ($)** | ** ** | **Number of Shares of  Common Stock  Underlying Unexercised  Options at FY-end (#)  Exercisable/Unexercisable** | ** ** | **Value of Unexercised In-the-  Money Options at FY-end ($)  Exercisable/Unexercisable(1)** | ** ** |
|----------------------|------------|----------------------------------------------------------------------------|--------------------------------------------------------------------|--------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
| Barry S. Blattman    |       |                                                                       | —                                                             |                     |       |    —                                                                                                                 |       | —                                                                                                     |       | — |   | — |   | — |   |
| Mark R. Jarrell      |       |                                                                       | —                                                             |                     |       |    —                                                                                                                 |       | —                                                                                                     |       | — |   | — |   | — |   |
| Cynthia O. Azzara    |       |                                                                       |      —      |                     |       |    —                                                                                                                 |       |     106,718                                                                            |       |         —         |   | $ | 977,692 |   |           —           |   |
| Stephen M. Abelman   |       |                                                                       | —                                                             |                     |       |    —                                                                                                                 |       | —                                                                                                     |       | — |   | — |   | — |   |
| Daniel P.  Warcholak |       |                                                                       | —                                                             |                     |       |    —                                                                                                                 |       |   26,126                                                                                                             |       | — |   | $ | 281,849 |   | — |   |

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(1)          Thevalue of the in-the-money options was determined by taking the differencebetween $16.10, the closing  price of the shares of our Common Stock on December 31,2004, and the exercise price of each option.

**EmploymentContracts, Termination of Employment and Change in Control Arrangements**

*EmploymentArrangement with Mr. Blattman*

Mr. Blattman serves as ourChairman and Chief Executive Officer pursuant to the terms of the InvestmentAgreement between BREF One and us. The compensation for Mr. Blattman’s servicesas our Chairman and Chief Executive Officer is determined by the Compensationand Stock Option Committee.

*Employment Agreementswith Messrs. Jarrell and Abelman and Ms. Azzara*

We are a  partyto employment agreements with each of Messrs. Jarrell and Abelman and Ms.Azzara. Under their respective employment agreements, each of Messrs. Jarrelland Abelman and Ms. Azzara are employees “at will” whose employment may beterminated by us or by the employee at any time and for any reason or noreason. The employment agreements provide for a minimum annual base salary of$400,000 for Mr. Jarrell and $300,000 for Mr. Abelman and Ms. Azzara. Each ofthe base salaries for Messrs. Jarrell and Abelman and Ms. Azzara are subject toan annual increase (but not a decrease).

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Mr. Jarrell’s employment agreement provides for aguaranteed minimum annual bonus of $200,000 for each of the years 2004, 2005and 2006. If Mr. Jarrell’s employment is terminated by us for any reason otherthan cause during either 2005 or 2006, he shall be paid a pro-rated portion ofhis guaranteed minimum annual bonus for the year of termination, and if hisemployment is terminated due to death or permanent and total disability duringeither 2005 or 2006, he shall be paid his guaranteed minimum annual bonus forthe year of termination. If Mr. Jarrell terminates his employment or isterminated for cause, no guaranteed minimum annual bonus shall be paid to him.

Mr. Jarrell’s employment agreement also provided foran initial restricted common stock award having a value of $666,666.67 upon theeffective date of his employment, and further stock awards subject to Mr.Jarrell’s continued employment with us on the last day of the year of eachaward, having a value of $500,000 in each of 2005 and 2006. Mr. Jarrell’sinitial restricted stock award vested 25% on December 31, 2003 and 75% onDecember 31, 2004. If Mr. Jarrell’s employment is terminated at any time during2005 or 2006 due to his death or permanent and total disability, he shall bepaid his entire stock award for the year of termination. If Mr. Jarrell’semployment is terminated by us without cause during 2005 or 2006, he shall bepaid a pro-rated portion of his stock award for the year of termination. If Mr.Jarrell terminates his employment or is terminated by us for cause, no portionof his unpaid stock award for 2005 or 2006 shall be paid to him.

Mr. Abelman’s and Ms. Azzara’s employment agreementsprovide for a guaranteed minimum annual bonus of $100,000 for each of the years2004, 2005 and 2006. For each of Mr. Abelman and Ms. Azzara, if theirrespective employment is terminated either by us for any reason other than causeor due to death or permanent and total disability, each of them shall be paid apro-rated portion of their guaranteed minimum annual bonus for the year oftermination. If either Mr. Abelman or Ms. Azzara terminates their respectiveemployment or is terminated for cause, they shall not receive their respectiveguaranteed minimum annual bonus for the year of termination or any future year.

Mr. Abelman’s and Ms. Azzara’s employment agreementsprovide for annual awards of restricted stock, subject to the approval of theCompensation and Stock Option Committee and each of their continued employmentwith us on the last day of the year of each award, having a value of $50,000 ineach of the years 2004, 2005 and 2006. Mr. Abelman’s and Ms. Azzara’srestricted stock awards will vest one-third on each of the first threeanniversaries of the date of grant provided each is employed by us on therelevant vesting dates. For each of Mr. Abelman and Ms. Azzara, if theirrespective employment is terminated either by us for any reason other thancause or due to death or permanent and total disability, each of them shallreceive their respective future restricted stock award that has been awarded toeach of them prior to such date of termination of employment and all restrictionson such future restricted stock awards shall automatically lapse. If Mr.Abelman’s and Ms. Azzara’s employment shall terminate for any other reason,each future restricted stock award or portion thereof still subject torestriction shall be forfeited.

The employment agreementsprovide for indemnification of Messrs. Jarrell and Abelman, and Ms. Azzara tothe extent provided for in our Charter and Bylaws.

*Change in ControlArrangements*

On January 5, 2005, afterconsultation with an independent compensation firm, and upon the recommendationof the Compensation and Stock Option Committee, the Board of Directors approveda form of Change in Control Agreement to be entered into between us and itsNamed Executive Officers (Barry S. Blattman, Mark R. Jarrell, Cynthia O.Azzara, Stephen M. Abelman and Daniel P. Warcholak). The form of Agreementprovides for the accelerated vesting of Restricted Stock awards, as provided inthe 2001 Stock Incentive Plan, as amended and certain previously granted awardsto the Named Executive Officers upon a “change in control” of the Company (asdefined in the agreement) and for certain 

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paymentsto a Named Executive Officer upon the termination of such officer’s employmentby us without “cause” or by such officer for “good reason” following a “changein control” of the Company, all such terms as defined in the agreement. Suchpayments would be $2,500,000, $2,500,000, $1,000,000, $1,000,000 and $800,000for Mr. Blattman, Mr. Jarrell, Ms. Azzara, Mr. Abelman and Mr. Warcholak, respectively.

**Director Compensation**

Effective as of October 1,2004, our non-employee directors receive (i) an annual fee of $20,000 payablequarterly in arrears, (ii) $1,500 for Board and committee meetings held inperson or by telephone, (iii) an annual grant of $25,000 in restricted stockwhich vests in three equal annual installments and (iv) reimbursement fortravel and other expenses incurred in connection with their duties as ourdirectors. In addition, the chairman of the Audit Committee receives an additionalannual fee of $5,000, payable quarterly in arrears, and other committeechairman receive an additional annual fee of $2,500, payable quarterly inarrears. Upon initial election or appointment to the Board, a new non-employeedirector will be granted $25,000 in restricted stock which vests in three equalannual installments. Directors who are also employees receive no additionalcompensation for their services as directors.

**CompensationCommittee Interlocks and Insider Participation**

During 2004, theCompensation and Stock Option Committee of the Board was comprised of John R.Moody, Glenn J. Rufrano and Robert E. Woods. During 2004, we had no executiveofficer serve on the board of directors or compensation committee of any otherentity that had one or more executive officers serving as a member of our Boardor Compensation and Stock Option Committee.

**Reportof the Compensation and Stock Option Committee**

The Compensation and Stock Option Committee (the“Compensation Committee”) is composed entirely of non-management, independentdirectors. The Compensation Committee reviews the compensation program for theCEO and certain other members of senior management (the “Executive Officers”),including the executive officers listed on the Summary Compensation Table (the“Named Executive Officers”). The Compensation Committee determines the CEO’scompensation and recommends to the full Board the compensation for theExecutive Officers. The objectives of our compensation program are to attract,retain and reward experienced, highly motivated executive officers needed toachieve our business objectives, to link executive compensation to improvementsin our performance and increases in stockholder value, and to align thefinancial interests of executive officers with those of stockholders byproviding equity-based, long term incentives. For 2004, the CompensationCommittee retained an independent consulting firm to assist the Committee infulfilling its responsibilities.

The Compensation Committee has reviewed all componentsof the CEO’s and the Named Executive Officers’ compensation, including salary,bonus and long-term equity-based incentive awards, and all accumulated stockoption and restricted stock awards. The CEO and the Named Executive Officersreceive no other perquisites or personal benefits other than certain insuranceand other employee benefits available to all of our full-time employees.

The Compensation Committee first met during 2004 toreview the goals of the CEO and Named Executive Officers. During subsequentmeetings, achievement of these goals was evaluated at both an individual andCompany performance level. The Compensation Committee considered thesignificant accomplishments of the Named Executive Officers during 2004including, among others, their individual contribution in transactions thatresulted in eliminating a significant portion of our recourse debt, decreasinginterest expenses related to the refinancing of insured mortgage portfolios,arranging new financing facilities to provide us additional flexibility andlower costs, obtaining a corporate credit rating from S&P to providegreater capital raising capabilities, significantly reducing assets in specialservicing, 

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decreasing corporategeneral and administrative expenses and increasing adjusted book value perdiluted common share and total liquidity. Based on this review and certaininformation provided by the independent consultant, including a peer groupcomparison of compensation practices, the Compensation Committee finds theCEO’s and Named Executive Officers’ compensation to be reasonable and notexcessive.

The three primary components of the CEO’s and NamedExecutive Officers’ compensation are base salary, annual bonus and long-termequity-based incentive awards.

*Base Salaries.  *We determinethe base salary level of each of our Named Executive Officers by evaluating theresponsibilities of the position held and the experience of the individual, andby reference to the competitive marketplace for executive talent. TheCompensation Committee strives to set base salaries at competitive levelsrelative to the base salaries paid to executive officers with comparablequalifications, experience and responsibilities at comparable public REITS.While employment agreements with certain of our Named Executive Officers do notpermit the base salaries of such executive officers to be reduced during theterms of the agreements, the Compensation Committee will consider from time totime whether an increase in such Named Executive Officer’s base salary ismerited, taking into account the performance of the Company and of the NamedExecutive Officer, new responsibilities, increases in pay levels at comparablepublic REITS, and other matters deemed appropriate. For 2004, the CompensationCommittee set Mr. Blattman’s base compensation at $750,000. Mr. Jarrellreceived a base salary of $400,000 and Mr. Abelman and Ms. Azzara each receiveda base salary of $300,000 equal to the minimum amounts as specified in theirrespective employment agreements. Mr. Warcholak’s base salary was set at$300,000 in 2004 by our President and Chief Operating Officer under delegatedauthority from our Board of Directors.

*Bonuses.  *Bonuses are basedon, among other things, the individual Named Executive Officer’s performance andcontributions to the Company. The Compensation Committee recommended, and theBoard approved, cash bonus payments for 2004 of $200,000 to Mr. Jarrell, and$100,000 to each of Mr. Abelman and Ms. Azzara, each equal to the minimumamounts as specified in their respective employment agreements. TheCompensation Committee recommended, and the Board approved, a cash bonuspayment for his performance in 2004 of $25,000 to Mr. Warcholak.

*Long-Term Equity-Based Incentive Awards.  *TheCompensation Committee believes that long-term incentive awards align thefinancial interests of Named Executive Officers with those of stockholders. Atyear end, we granted restricted stock awards to each of Messrs. Jarrell,Abelman and Warcholak, and Ms. Azzara, as an employment incentive afterreviewing our performance and the contributions of each Named ExecutiveOfficer, respectively, in 2004. In considering long-term incentive awards, wealso took into account total compensation to be paid to the Named ExecutiveOfficer, including base salary, bonus and long-term compensation. Mr. Jarrellreceived a restricted stock award valued at $250,000 at December 31, 2004. Mr.Abelman and Ms. Azzara each received a restricted stock award valued at$150,000 and Mr. Warcholak received a restricted stock award valued at$75,000 at December 31, 2004. The Compensation Committee did not grant stockoptions to the Named Executive Officers in 2004.

*Chief Executive Officer Compensation.  *TheCompensation Committee reviewed the goals set forth by Mr. Blattman and hisachievements including the design and execution of our $260 million refinancingtransaction with Deutsche Bank, the receipt of a $500 million warehouse linecommitment from Deutsche Bank to support new loan originations, execution of a$100 million interest rate swap which significantly reduced our cost oflong-term non-recourse debt and establishment of important new institutionalinvestor relationships in 2004. The Compensation Committee recognized that Mr.Blattman’s role in these important accomplishments of the Company during 2004evidenced strong leadership and innovation on the part of the CEO.

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The Compensation Committee set the compensation forMr. Blattman’s services as CEO at $750,000 for 2004. Such amount was paid toBREF Partners, the managing member of the general partner of BREF One, uponrecommendation of the Compensation Committee and approval of the disinterestedmembers of our Board. BREF One is one of our significant stockholders and Mr.Blattman is the managing member of BREF Partners, the managing member of BREFOne’s general partner. The Compensation Committee did not award or pay a bonusin respect of Mr. Blattman’s performance in 2004.

*Section 162(m) Policy.  *Section162(m) of the Internal Revenue Code generally disallows a tax deduction topublic corporations for non-performance-based compensation over $1 million paidfor any fiscal year to each of the individuals who were, at the end of thefiscal year, the corporation’s chief executive officer and the four other mosthighly compensated executive officers. We believe that the cash bonuses paid toNamed Executive Officers will be fully deductible under Section 162(m).Restricted stock that vests over time is not considered “performance-based”compensation under Section 162(m), so compensation realized upon the vesting ofrestricted stock awarded to the individual Named Executive Officers covered bySection 162(m) will not be deductible by us. In addition, we offer a deferredcompensation plan that allows compensation deferred under such plan to beexempt from the limit on tax deductibility.

Any salary or other annualcompensation paid or imputed to the individual Named Executive Officers coveredby Section 162(m) that causes non-performance-based compensation to exceed the$1 million limit will not be deductible by us. While the Compensation Committeedesigns certain components of executive compensation to preserve income taxdeductibility, it believes that it is not in the stockholders’ interest torestrict the Committee’s discretion and flexibility in developing appropriatecompensation programs and establishing compensation levels and, in someinstances, the Committee may approve compensation that is not fully deductible.As a result of the vesting of a portion of a previous restricted stock award,and salary and bonus compensation paid to Mr. Jarrell, compensation income in2004 to such individual is expected to be subject to Section 162(m)limitations.

Compensation and StockOption Committee:

John S. Moody, ChairmanGlenn J. RufranoRobert E. Woods

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**Performance Graph**

The following performance graph compares thecumulative total stockholder return on the Common Stock with the cumulativetotal stockholder return of the companies comprising (i) the S&P 500Index and (ii) the NAREIT Mortgage Index, an industry index provided bythe National Association of Real Estate Investment Trusts. The PerformanceGraph assumes an initial investment of $100 on December 31, 1998, and thereinvestment of all dividends paid thereafter with respect to such $100investment, in each of (i) the Common Stock, (ii) the stockcomprising the S&P 500 Index, and (iii) the stock comprising theNAREIT Mortgage Index.
|                        | ** ** | ** 12/31/1999 ** | ** ** | ** 12/31/2000 ** | ** ** | ** 12/31/2001 ** | ** ** | ** 12/31/2002 ** | ** ** | ** 12/31/2003 ** | ** ** | ** 12/31/2004 ** | ** ** |
|------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| CRIIMI MAE             |       |                       |       |                       |       |                       | -51.40     | %                          |       |                       | -42.26     | %                          |       |   | 152.85 | % |   |   | 2.36 | % |   |   | 54.18 | % |   |
|                        |       |                       | $          | 100.00                     |       |                       |       | $                          | 48.60      |                       |       |                       | $          | 28.06 |   |   |   | $ | 70.96 |   |   |   | $ | 72.63 |   |   |   | $ | 111.99 |   |   |
| S&P 500 Index      |       |                       |       |                       |       |                       | -9.13      | %                          |       |                       | -11.83     | %                          |       |   | -22.10 | % |   |   | 28.68 | % |   |   | 10.85 | % |   |
|                   |       |                       | $          | 100.00                     |       |                       |       | $                          | 90.87      |                       |       |                       | $          | 80.12 |   |   |   | $ | 62.42 |   |   |   | $ | 80.32 |   |   |   | $ | 89.03 |   |   |
| NAREIT Mortgage Index* |       |                       |       |                       |       |                       | 15.96      | %                          |       |                       | 77.34      | %                          |       |   | 31.08 | % |   |   | 57.39 | % |   |   | 18.43 | % |   |
|                        |       |                       | $          | 100.00                     |       |                       |       | $                          | 115.96     |                       |       |                       | $          | 205.65 |   |   |   | $ | 269.56 |   |   |   | $ | 424.26 |   |   |   | $ | 502.46 |   |   |

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*                    The NAREITMortgage Index includes all mortgage REITs listed on the New York StockExchange, the American Stock Exchange or the NASDAQ National Market System.During 2004, 33 REITs were included in the NAREIT Mortgage Index. We willprovide to any stockholder upon request the names of the companies whose stockcomprise the NAREIT Mortgage Index.

All share and per share information in this AnnualReport has been retroactively adjusted to reflect a one-for-ten reverse stocksplit effected on October 17, 2001.

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**ITEM 12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

**SecurityOwnership of Certain Beneficial Owners and Management**

The following table sets forth certain informationregarding the beneficial ownership of our Common Stock as of February 28,2005 by (i) each person known by us to be the beneficial owner of morethan 5% of our Common Stock, (ii) each of our directors and nominee fordirectors, (iii) each Named Executive Officer, and (iv) all of ourdirectors and executive officers as a group. Unless otherwise indicated, eachstockholder has sole voting and investment power with respect to the sharesbeneficially owned.
| Name                                                                                      | ** ** | ** ** | ** ** | **Shares of Common  Stock Owned** | ** ** | **Shares which may be  acquired within 60 days** | ** ** | **Percent of Common  Stock Outstanding** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Barry S. Blattman                                                                         |       |       | 1,549,452  | (1)                                              |       |                                                                           | 336,835    | (1)                                                     |       |   | 9.6 | % |   |
| Jeffrey M.  Blidner                                                                       |       |       | 1,549,452  | (2)(12)                                          |       |                                                                           | 339,335    | (2)                                                     |       |   | 9.6 | % |   |
| Joshua B. Gillon                                                                          |       |       | 0          | (12)                                             |       |                                                                           | 4,000      |                                                    |       |   | * |   |   |
| Arthur N. Haut                                                                            |       |       | 13,682     |                                             |       |                                                                           | 2,500      |                                                    |       |   | * |   |   |
| Robert J. Merrick                                                                         |       |       | 9,520      |                                             |       |                                                                           | 4,336      |                                                    |       |   | * |   |   |
| John S. Moody                                                                             |       |       | 24,684     |                                             |       |                                                                           | 0          |                                                    |       |   | * |   |   |
| Bruce K. Robertson                                                                        |       |       | 1,549,452  | (3)(12)                                          |       |                                                                           | 336,835    | (3)                                                     |       |   | 9.6 | % |   |
| Glenn J. Rufrano                                                                          |       |       | 0          | (12)                                             |       |                                                                           | 0          |                                                    |       |   | * |   |   |
| Robert E. Woods                                                                           |       |       | 8,682      | (12)                                             |       |                                                                           | 8,249      |                                                    |       |   | * |   |   |
| Mark R. Jarrell                                                                           |       |       | 60,377     | (4)                                              |       |                                                                           | 0          |                                                    |       |   | * |   |   |
| Cynthia O. Azzara                                                                         |       |       | 43,348     | (5)                                              |       |                                                                           | 104,972    |                                                    |       |   | * |   |   |
| Stephen M.  Abelman                                                                       |       |       | 20,898     | (6)                                              |       |                                                                           | 0          |                                                    |       |   | * |   |   |
| Daniel P. Warcholak                                                                       |       |       | 5,170      | (7)                                              |       |                                                                           | 26,126     |                                                    |       |   | * |   |   |
| Wells Fargo & Company, Parent Holding  Company for Wells Capital Management Inc. |       |       | 1,839,120  | (8)                                              |       |                                                                           |       |                                                    |       |   | 11.8 | % |   |
| 420  Montgomery Street

San  Francisco, CA 94104                                          |       |       |       |                                             |       |                                                                           |       |                                                    |       |   |   |   |   |
| BREF One, LLC—Series A                                                          |       |       | 1,549,452  | (9)                                              |       |                                                                           |       |                                                    |       |   | 9.6 | % |   |
| One Liberty Plaza

New York, NY  10006                                                    |       |       |       |                                             |       |                                                                           |       |                                                    |       |   |   |   |   |
| Private Management Group, Inc.                                                       |       |       | 1,274,810  | (10)                                             |       |                                                                           |       |                                                    |       |   | 8.2 | % |   |
| 20 Corporate  Park, Suite 400

Irvine, CA 92606                                      |       |       |       |                                             |       |                                                                           |       |                                                    |       |   |   |   |   |
| Third Avenue Management LLC                                                               |       |       | 944,969    | (11)                                             |       |                                                                           |       |                                                    |       |   | 6.1 | % |   |
| 20 Corporate Park,  Suite 400

Irvine, CA 92606                                      |       |       |       |                                             |       |                                                                           |       |                                                    |       |   |   |   |   |
| All Directors and  Executive Officers as a Group (13 persons)                             |       |       | 1,398,978  |                                             |       |                                                                           | 489,518    |                                                    |       |   | 11.8 | % |   |

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*                    Less than 1%.

(1)          Mr. Blattman ownsno shares of record. Includes 1,212,617 shares held of record by BREF One, LLC—Series A,(BREF One), and 336,835 shares purchasable under a warrant held by BREF One. Asthe managing member of the limited liability company that wholly owns themanager of BREF One, Mr. Blattman may be deemed to have sole voting anddispositive power with respect to the shares and thus may be deemed thebeneficial owner of the shares. Mr. Blattman disclaims beneficial 

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ownership of these sharesexcept with respect to the portion of these shares that is proportionate to Mr. Blattman’slimited partnership interest in BREF One. As of February 28, 2005, Mr. Blattmanheld a 0.1786% limited partnership interest in BREF One.

(2)          Mr. Blidner owns noshares of record. Includes 1,212,617 shares held of record by BREF One and336,835 shares purchasable under a warrant held by BREF One. As a managingpartner of Brascan Corporation and the Vice Chairman of Brascan FinancialCorporation, a wholly owned subsidiary of Brascan Corporation, indirect ownersof an approximately 35.7% limited partnership interest in BREF One, Mr. Blidnermay be deemed to be the beneficial owner of the shares. Mr. Blidnerdisclaims beneficial ownership of these shares**.**

(3)          Mr. Robertson ownsno shares of record. Includes 1,212,617 shares held of record by BREF One and336,835 shares purchasable under a warrant held by BREF One. As a managingpartner of Brascan Corporation and Brascan Financial Corporation, a whollyowned subsidiary of Brascan Corporation, indirect owners of an approximately35.7% limited partnership interest in BREF One, Mr. Robertson may bedeemed to be the beneficial owner of the shares. Mr. Robertson disclaimsbeneficial ownership of these shares**.**

(4)          Includes 15,528 sharesof restricted stock awarded on January 2, 2005 for which restrictionslapse on one-third of the shares on each of January 2, 2006, January 2,2007 and January 2, 2008 provided that Mr. Jarrell is still employedby us on such dates.

(5)          Includes 493 shares heldindirectly in the CRIIMI MAE Management, Inc. Retirement Plan. Alsoincludes 13,055 shares awarded on October 3, 2003 for which restrictionslapsed on one-third of the shares on December 31, 2004 and restrictionswill lapse on one-third of the shares on each of December 31, 2005 and December 31,2006 provided that Ms. Azzara is still employed by us on such dates; and9,317 shares of restricted stock awarded on January 2, 2005 for whichrestrictions lapse on one-third of the shares on each of January 2, 2006, January 2,2007 and January 2, 2008 provided that Ms. Azzara is still employedby us on such dates.

(6)          Includes 493 shares heldindirectly in the CRIIMI MAE Management, Inc. Retirement Plan. Includes12,500 shares of restricted stock awarded on November 6, 2003 for whichrestrictions lapsed on one-third of the shares on December 31, 2004 andrestrictions will lapse on one-third of the shares on each of December 31,2005 and December 31, 2006 provided that Mr. Abelman is still employedby us on such dates; and 9,317 shares of restricted stock awarded on January 2,2005 for which restrictions lapse on one-third of the shares on each of January 2,2006, January 2, 2007 and January 2, 2008 provided that Mr. Abelmanis still employed by us on such dates.

(7)          Includes 493 shares heldindirectly in the CRIIMI MAE Management, Inc. Retirement Plan; and 4,658shares of restricted stock awarded on January 2, 2005 for whichrestrictions lapse on one-third of the shares on each of January 2, 2006, January 2,2007 and January 2, 2008 provided that Mr. Warcholak is stillemployed by us on such dates.

(8)          Based on a Schedule 13Gfiled for the period ended December 31, 2004 by Wells Fargo &Company as the parent holding company for Wells Capital Management, Inc.,an investment advisor, reporting beneficial ownership of 1,839,120 shares forwhich they hold sole voting and investment power for 1,776,820 shares.

(9)          Includes 336,835 sharespurchasable under a warrant.

(10)   Based on a Schedule 13G filed forthe period ended December 31, 2004 by Private Management Group, Inc.,an investment advisor, reporting beneficial ownership of 1,274,810 shares forwhich they hold sole voting and investment power.

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(11)   Based on a Schedule 13F filedon January 10, 2005 by Third Avenue Management LLC, an investment advisor,reporting beneficial ownership of 944,969 shares for which they hold solevoting and investment power.

(12)   Inaddition to the share ownership indicated above, certain directors have electedto defer under our Deferred Compensation Plan all or a portion of their annualcash retainer, meeting fees, compensation and restricted stock, as applicable,in the form of restricted stock units. The following directors elected toreceive restricted stock units under the Deferred Compensation Plan:
| **Name**            | ** ** | ** ** | ** ** | **Number of Restricted Stock Units** | ** ** |
|---------------------|------------|------------|------------|----------------------------------------------------------|------------|
| Jeffrey M.  Blidner |       |       | 4,179      |                                                     |       |
| Joshua B. Gillon    |       |       | 3,682      |                                                     |       |
| Bruce K.  Robertson |       |       | 4,273      |                                                     |       |
| Glenn J. Rufrano    |       |       | 4,738      |                                                     |       |
| Robert E.Woods      |       |       | 3,532      |                                                     |       |

 

**EquityCompensation Plan Information**

We maintain the 2001 Stock Incentive Plan, as amended(the “Amended 2001 Stock Plan”), the Second Amended and Restated Stock OptionPlan for Key Employees (the “Employee Stock Option Plan”) and the 1996 NonEmployee Director Stock Plan (the “Director Stock Plan”).

Thefollowing table gives information about equity awards under the referencedplans as of December 31, 2004.
| **Plan Category**                                            | ** ** | ** ** | ** ** | **Number of Securities to be  Issued upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights(1)** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation Plans** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders      |       |       | 643,962    | (2)                                                                                                                                                  |       |                                                                                                           | $          | 41.61                                                                                                                                       |       |   |   | 569,348 | (3) |   |
| Equity  compensation plans not approved by security holders  |       |       | 2,144      | (4)                                                                                                                                                  |       |                                                                                                           | 14.68      |                                                                                                                                        |       |   | 57,856 |   |   |
| Total                                                             |       |       | 646,106    |                                                                                                                                                 |       |                                                                                                           | $          | 41.61                                                                                                                                       |       |   |   | 627,204 |   |   |

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(1)          Shares issuable pursuantto outstanding awards of restricted stock units under the Amended 2001 StockPlan and the Deferred Compensation Plan are not included in the calculation ofweighted-average exercise price, as there is no exercise price for theseshares.

(2)          Includes an aggregate10,495 shares distributable under restricted stock unit awards granted underthe 2001 Stock Incentive Plan.

(3)          Includes 486,476 sharesavailable for issuance under the 2001 Stock Incentive Plan and 82,872 sharesavailable for issuance under the Director Stock Plan.

(4)          Includes 2,144 sharesdistributable under restricted stock unit awards granted under the DeferredCompensation Plan.

See Note 13 “Stock Based Compensation” to ourfinancial statements for the year ended December 31, 2004 included in thisAnnual Report for a description of our equity compensation plans.

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**ITEM 13.**             CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

**Relationships with BREF One**

Pursuant to an Assignment and Assumption Agreement,dated as of November 17, 2004 (the “Assignment”), BREF One, LLC, Series A(“BREF One”), a Delaware limited liability company controlled by Brascan RealEstate Financial Partners LLC (“BREF Partners”) acquired from Brascan RealEstate Finance Fund I, L.P. (“BREF Fund”) in a private transaction (i) 1,212,617shares of our Common Stock, (ii) a warrant to purchase up to 336,835additional shares of Common Stock for a purchase price of $11.50 per share,expiring on January 23, 2010 (the “Warrant”) and (iii) $30,000,000aggregate principal amount of our 15% Senior Subordinated Notes Due 2006 (the “SubordinatedNotes”). BREF Investments had acquired the shares of Common Stock, Warrant andthe Subordinated Notes from us as part of our recapitalization in January 2003pursuant to the terms of an Investment Agreement, dated as of January 23,2003, as amended (the “Investment Agreement”) between us and Brascan RealEstate Financial Investments LLC (“BREF Investments”). Pursuant to the terms ofthe Assignment, BREF One assumed the rights and obligations of BREF Investmentsunder the Investment Agreement, including the right to receive a quarterly feeof $434,000 through January 26, 2006 and the right to cause up to twonominees of BREF One to serve on our Board.

Pursuant to the Assignment, BREF One also assumed fromBREF Fund certain rights and obligations under the Registration RightsAgreement and the Non-Competition Agreement, each entered into between us andBREF Fund. Under the Registration Rights Agreement, as assigned, we have agreedto indemnify BREF One and its affiliates against certain liabilities inconnection with the registration of any of the shares of Common Stock or sharesacquired upon exercise of the Warrant. Under the Non-Competition Agreement, asassigned, BREF One (and its controlled affiliates) will not directly orindirectly compete with us prior to January 23, 2006 in certain specifiedareas of business. These specified areas of business (“Company Business”) areconsistent with those that we are permitted to conduct under the SeniorSubordinated Secured Note Agreement relating to the Subordinated Notes acquiredby BREF Fund and assigned to BREF One and are generally described as (a) theacquisition, ownership and management of non-investment grade securitiessecured by pools of commercial and/or multifamily mortgage loans originated inanticipation of rated “conduit” securitizations, (b) the origination orpurchase of commercial and/or multifamily mortgage loans in anticipation ofpooling such loans for rated “conduit” securitization transactions, and theorigination or purchase of certain mezzanine loans in connection with suchmortgage loans, (c) the servicing of commercial and/or multifamily loans,and (d) the provision of commercial and/or multifamily mortgage loan duediligence services to third parties. Notwithstanding the agreement not to competein these areas of business, BREF One, or a controlled affiliate of BREF One,may (v) sponsor collateral bond or loan obligations (“CBOs”), (w) includenon-investment grade CMBS in such CBOs (and may purchase or acquire them forsuch inclusion), (x) own less than 10% of any class of stock of a publiccompany engaged, directly or indirectly, in Company Business, (y) own lessthan 10% in value of any instrument of indebtedness of a public companyengaged, directly or indirectly, in Company Business, and (z) own anentity that engages, directly or indirectly, in Company Business if suchCompany Business accounts for less than 10% of such entity’s consolidatedannual revenues.

During 2004, we paid affiliates of BREF One $44,374 inreimbursement for travel, telephone and related expenses incurred by employeesof these affiliates in connection with services provided for us. Thereimbursement of such expenses to affiliates of BREF One was approved by theAudit Committee.

BREF One or affiliates of BREF One may engage, fromtime to time, in joint ventures, with us. Our servicing subsidiary, CRIIMI MAEServices Limited Partnership (“CMSLP”), in its capacity as special servicer forseveral commercial mortgage securitization trusts (“Trusts”), may retainaffiliates of BREF One to perform advisory services with respect to speciallyserviced commercial mortgage loans or real estate assets in such Trusts.

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BREF Partners, an affiliate of BREF One, LLC,Series A, and an affiliate of our Chairman and Chief Executive Officer, BarryBlattman, has submitted to the Company a nonbinding indication of interest toacquire 100% of the outstanding common stock of the Company. Mr. Blattmanis the managing member of the limited liability company that wholly owns themanager of BREF One.

Consistent with ourpolicy, all future non-material transactions between us and related partieswill be approved by the Audit Committee and all material transactions betweenus and related parties will be approved by a majority of the Board’sdisinterested directors and will be on terms no less favorable than those whichcould have been obtained from unrelated third parties.

**ITEM 14**            PRINCIPAL ACCOUNTANTFEES AND SERVICES

**Pre-approvalPolicies and Procedures**

The Audit Committee has adopted a policy that requiresadvance approval of all audit, audit related, tax services, and other servicesperformed by the independent auditor. The Audit Committee has delegated to theChair of the Audit Committee authority to approve permitted services providedthat the Chair reports any decisions to the Audit Committee at its nextscheduled meeting.

**Fees Paid to Ernst & Young LLP**

**Thefollowing table shows fees for professional services provided by ourindependent auditor, Ernst & Young LLP, for the fiscal years ended December 31,2004 and December 31, 2003.**
| ** **            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Audit Fees(1)         |       | $        | 1,303,407  |     | $          | 1,030,851 |   |
| Other Fees(2)         |       |     |       |     |       |
| Audit Related Fees(3) |       | 36,989   |       | 228,313  |       |
| Tax Related Fees      |       | 319,737  |       | 580,315  |       |
| Other                 |       | 0        |       | 0        |       |
|                       |            |          |            |          |            |  |  |

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(1)          Audit Fees for 2004 and2003 consisted of the audit of our consolidated financial statements, quarterlyreviews of our financial statements, required statutory subsidiary audits, thereview of our registration statements, Section 404 attest services, andthe issuance of comfort letters and consents.

(2)          The Audit Committee hasconsidered whether the provision of these services is compatible withmaintaining the principal accountant’s independence and has approved Ernst &Young LLP providing these services to us. Tax Related Fees include taxcompliance, tax advice and tax planning, as well as assistance withtransactional tax issues.

(3)          Audit Related Feesincludes benefit plan audit, assistance in documenting internal controlpolicies and procedures over financial reporting, attestation procedures inconnection with the redemption of our Series A and Series B SeniorSecured Notes, and consultation on certain audit related matters.

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**PART IV**

**ITEM 15.**   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Listof documents filed as part of this report:

1.                 ConsolidatedFinancial Statements and Management’s Report on Internal Control Over FinancialReporting
| Description                                                                                                                                          | ** ** | ** ** | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Management’s  Report on Internal Control Over Financial Reporting                                                                               |       | F-1        |       |
| Reports  of Independent Registered Public Accounting Firm on Internal Control Over  Financial Reporting                                              |       | F-2        |       |
| Reports  of Independent Registered Public Accounting Firm                                                                                            |       | F-3        |       |
| Consolidated Balance Sheets  as of December 31, 2004 and 2003                                                                                   |       | F-4        |       |
| Consolidated  Statements of Income for the years ended December 31, 2004, 2003 and  2002                                                        |       | F-5        |       |
| Consolidated  Statements of Changes in Shareholders’ Equity and Comprehensive Income for  the years ended December 31, 2004, 2003 and 2002 |       | F-6        |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and  2002                                                    |       | F-7        |       |
| Notes to  Consolidated Financial Statements                                                                                                          |       | F-8        |       |

 

All other financialstatements and financial statement schedules have been omitted since therequired information is included in the financial statements or the notesthereto, or is not applicable or required.
| Exhibit Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | **Description** | ** ** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|
| 2.1                 |       | Third Amended Joint Plan  of Reorganization as confirmed by the United States Bankruptcy Court for the  District of Maryland, Greenbelt Division on November 22, 2000  (incorporated by reference to Exhibit 2.1 to Current Report on  Form 8-K filed with the SEC on December 28, 2000).                                                                                                                                                                                                                                     |
| 3.1                 |       | Articles Supplementary  reclassifying and designating 586,354 authorized but unissued shares of Series F  Redeemable Cumulative Dividend Preferred Stock and 1,244,656 authorized but  unissued shares of Series G Redeemable Cumulative Dividend Preferred  Stock as authorized but unissued preferred stock filed with the Maryland  State Department of Assessments and Taxation on May 5, 2004  (incorporated by reference to Exhibit 3 to Quarterly Report on  Form 10-Q for the quarter ended June 30, 2004). |
| 3.2                 |       | Articles Supplementary  reclassifying and designating 203,000 authorized but unissued shares of  Series E Cumulative Convertible Preferred Stock as authorized but  unissued preferred stock, filed with the Maryland State Department of  Assessments and Taxation on January 9, 2004 (incorporated by reference  to Exhibit 3.6 to Form S-3 filed with the SEC on  January 27, 2004).                                                                                                                                  |
| 3.3                 |       | Articles of Amendment,  filed with the Maryland State Department of Assessments and Taxation on  May 15, 2002 (incorporated by reference to Exhibit 3 to Current  Report on Form 8-K filed with the SEC on May 16, 2002).                                                                                                                                                                                                                                                                                                     |
| 3.4                 |       | Articles Supplementary  for Series H Junior Preferred Stock, filed with the Maryland State  Department of Assessments and Taxation on January 30, 2002 (incorporated  by reference to Exhibit 3.2 to Form S-8 filed with the SEC on  June 13, 2002).                                                                                                                                                                                                                                                                     |

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| 3.5 |   | Articles of Amendment to  CRIIMI MAE Inc. Charter, filed with the Maryland State Department of  Assessments and Taxation on October 12, 2001 (incorporated by reference  to Exhibit 3.1 to Form S-8 filed with the SEC on  June 13, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.6 |   | Articles of Amendment to  Exhibit B of the Articles of Amendment and Restatement of CRIIMI MAE  Inc. which pertains to the preferences, conversion and other rights, voting  powers, restrictions and limitations as to dividends, qualifications and  terms and conditions of redemption of the Series E Cumulative Convertible  Preferred Stock (incorporated by reference to Exhibit 3 to the Quarterly  Report on Form 10-Q for the quarter ended September 30,  2001).                                                                                                                                                                                                                                                                                                                                     |
| 3.7 |   | Articles of Amendment  and Restatement of CRIIMI MAE Inc., including Exhibit  A, Exhibit B,  Exhibit C and Exhibit D thereto pertaining to the  preferences, conversion and other rights, voting powers, restrictions and  limitations as to dividends, qualifications and terms and conditions of  redemption of the Series B Cumulative Convertible Preferred Stock,  Series E Cumulative Convertible Preferred Stock, the Series F  Redeemable Cumulative Dividend Preferred Stock and the Series G  Redeemable Cumulative Dividend Preferred Stock, respectively, filed with the  Maryland State Department of Assessments and Taxation on April 17, 2001  (incorporated by reference to Exhibit 3.1 to Current Report on  Form 8-K filed with the SEC on June 1, 2001). |
| 3.8 |   | Second Amended and  Restated Bylaws of CRIIMI MAE Inc., as amended on January 14, 2004,  (incorporated by reference to Exhibit 3.7 to Annual Report on  Form 10-K for the year ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1 |   | Warrant to Purchase  Common Stock of CRIIMI MAE Inc., dated as of January 23, 2003 (as  assigned to BREF One, LLC, Series A) (incorporated by reference to  Exhibit 4.3 to Current Report on Form 8-K filed with the SEC  on January 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2 |   | Senior Subordinated  Secured Note Agreement, dated as of January 14, 2003 by and between  CRIIMI MAE Inc. and Brascan Real Estate Finance Fund I, L.P. (as assigned to  BREF One, LLC, Series A) (incorporated by reference to Exhibit 4.1  to Current Report on Form 8-K filed with the SEC on  January 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3 |   | Registration Rights  Agreement, dated as of January 14, 2003, between CRIIMI MAE Inc. and  Brascan Real Estate Finance Fund, L.P. (as assigned to BREF One, LLC,  Series A) (incorporated by reference to Exhibit 4 (d) to  Annual Report on Form 10-K for the year ended December 31,  2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.4 |   | Third Amendment to  Rights Agreement, dated as of January 3, 2003 between CRIIMI MAE Inc.  and Registrar and Transfer Company, as Rights Agent (incorporated by  reference to the Company’s Form 8-A/A filed with the SEC on  January 3, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.5 |   | Second Amendment to  Rights Agreement, dated as of November 14, 2002 between CRIIMI MAE Inc.  and Registrar and Transfer Company, as Rights Agent (incorporated by  reference to Exhibit 4.2 to the Company’s Form 8-A/A filed on  November 15, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.6 |   | Amended and Restated  First Amendment to Rights Agreement, dated as of June 10, 2002 between  CRIIMI MAE Inc. and Registrar and Transfer Company, as Rights Agent  (incorporated by reference to Exhibit 4.1 to Current Report on  Form 8-A/A filed with the SEC on June 13, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

71

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| 4.7   |   | Rights Agreement, dated  as of January 23, 2002 between CRIIMI MAE Inc. and Registrar and  Transfer Company, as Rights Agent (the “Rights Agreement”). The Rights  Agreement includes, as Exhibit A, the form of Articles Supplementary to  the Articles of Incorporation of the Company setting forth the terms of the  Series H Preferred Stock, as Exhibit B, the form of Rights  Certificate and, as Exhibit C, the form of Summary of Rights to Purchase  Preferred Shares (incorporated by reference to Exhibit 4 to Current  Report on Form 8-K filed on January 25, 2002). |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  |   | Master Repurchase  Agreement, dated as of June 30, 2004, by and between CRIIMI Financing  Co., Inc. and Deutsche Bank AG, Cayman Islands Branch (incorporated by  reference to Exhibit 10.3 to Quarterly Report on Form 10-Q  for the quarter ended June 30, 2004).                                                                                                                                                                                                                                                                                                                                         |
| 10.2  |   | Master Repurchase  Agreement, executed on August 28, 2003 to be effective as of  June 26, 2003, by and between Bear Stearns & Co. Inc., as Agent  for Bear, Stearns International Limited and CRIIMI MAE Asset Acquisition  Corp. (incorporated by reference to Exhibit 10.5 to Current Report on  Form 8-K filed with the SEC on September 5, 2003).                                                                                                                                                                                                                                              |
| 10.3  |   | Annex I to Master  Repurchase Agreement, executed on August 28, 2003 to be effective as of  June 26, 2003, by and between Bear, Stearns & Co. Inc., as  Agent for Bear, Stearns International Limited and CRIIMI MAE Asset  Acquisition Corp. (incorporated by reference to Exhibit 10.6 to Current  Report on Form 8-K filed with the SEC on September 5, 2003).                                                                                                                                                                                                                                  |
| 10.4  |   | ISDA Master Agreement,  dated as of August 6, 2004, between Deutsche Bank AG New York and CRIIMI  Financing Co., Inc. (incorporated by reference to Exhibit 10.1 to  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004).                                                                                                                                                                                                                                                                                                                                                              |
| 10.5  |   | Schedule to the ISDA  Master Agreement dated as of August 6, 2004, between Deutsche Bank AG  and CRIIMI Financing Co., Inc. (incorporated by reference to  Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter  ended September 30, 2004).                                                                                                                                                                                                                                                                                                                                                        |
| 10.6  |   | ISDA Credit Support  Annex dated as of August 6, 2004, between Deutsche Bank AG and CRIIMI  Financing Co., Inc. (incorporated by reference to Exhibit 10.4 to  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                    |
| 10.7  |   | Master Netting Agreement  dated as of August 6, 2004, between and among Deutsche Bank AG and  CRIIMI Financing Co., Inc. (incorporated by reference to Exhibit 10.4  to Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004).                                                                                                                                                                                                                                                                                                                                                           |
| 10.8  |   | Guarantee, dated as of  June 30, 2004, by CRIIMI MAE Inc. for the benefit of Deutsche Bank, AG,  Cayman Islands Branch (incorporated by reference to Exhibit 10.2 to  Quarterly Report on Form 10-Q for the quarter ended June 30,  2004).                                                                                                                                                                                                                                                                                                                                                                       |
| 10.9  |   | Guarantee, dated as of  January 14, 2003, by CRIIMI MAE Inc. in favor of Bear, Stearns  International Limited (incorporated by reference to Exhibit 10.5 to  Current Report on Form 8-K filed with the SEC on January 30,  2003).                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10 |   | Investment Agreement  dated as of November 14, 2002 between CRIIMI MAE Inc. and Brascan Real  Estate Financial Investments LLC (as assigned to BREF One, LLC,  Series A) (incorporated by reference to Exhibit 10.2 to Current  Report on Form 8-K filed with the SEC on December 4, 2002).                                                                                                                                                                                                                                                                                                                 |

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| 10.11 |   | Amendment No. 1 to  Investment Agreement dated as of December 2, 2002 to the Investment  Agreement between CRIIMI MAE Inc. and Brascan Real Estate Financial  Investments LLC (as assigned to BREF One, LLC, Series A) (incorporated  by reference to Exhibit 10.1 to Current Report on Form 8-K  filed with the SEC on December 4, 2004).                  |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12 |   | Amendment No. 2 to  Investment Agreement, dated as of January 13, 2003, by and between  CRIIMI MAE Inc. and Brascan Real Estate Financial Investments LLC (as  assigned to BREF One, LLC, Series A) (incorporated by reference to  Exhibit 10.2 to Current Report on Form 8-K filed with the SEC  on January 30, 2003).                                     |
| 10.13 |   | Exhibit D  (Form of Non-Competition Agreement) to the Investment Agreement dated as  of November 14, 2002 between CRIIMI MAE Inc. and Brascan Real Estate  Financial Investments LLC (as assigned to BREF One, LLC, Series A)  (incorporated by reference to Exhibit 10.5 to Quarterly Report on  Form 10-Q for the quarter ended September 30, 2002). |
| 10.14 |   | Company Pledge  Agreement, dated as of January 14, 2003, by and between CRIIMI MAE Inc.  and Brascan Real Estate Finance Fund I, L.P. (as assigned to BREF One, LLC,  Series A) (incorporated by reference to Exhibit 10.3 to Current  Report on Form 8-K filed with the SEC on January 30, 2003).                                                               |
| 10.15 |   | Newco Member Pledge  Agreement, dated as of January 14, 2003, by and between CRIIMI Newco  Member, Inc. and Brascan Real Estate Finance Fund I, L.P. (incorporated  by reference to Exhibit 10.4 to Current Report on Form 8-K  filed with the SEC on January 30, 2003).                                                                                         |
| 10.16 |   | Trust Agreement, dated  as of June 30, 2004, between CRIIMI MAE Class D Depositor LLC  (Depositor) and La Salle Bank National Association (Trustee) (incorporated by  reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q  for the quarter ended June 30, 2004).                                                                                      |
| 10.17 |   | Deposit Trust Agreement  dated as of May 8, 1998 between CRIIMI MAE CMBS Corp. and Wilmington  Trust Company, as Owner Trustee (incorporated by reference to  Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter  ended March 31, 2003).                                                                                                                   |
| 10.18 |   | Terms Indenture  Agreement dated May 8, 1998 between CRIIMI MAE Commercial Mortgage Trust  and the trustee (incorporated by reference to Exhibit 10(s) to  Annual Report on Form 10-K for the year ended December 31,  2001).                                                                                                                                    |
| 10.19 |   | Standard Indenture  Provisions dated as of May 8, 1998 related to Terms Indenture Agreement  dated May 8, 1998 between CRIIMI MAE Commercial Mortgage Trust and the  trustee (incorporated by reference to Exhibit 10(t) to Annual  Report on Form 10-K for the year ended December 31, 2001).                                                              |
| 10.20 |   | Deposit Trust Agreement  dated as of December 20, 1996 between CRIIMI MAE QRS1, Inc. and  Wilmington Trust Company, as Owner Trustee (incorporated by reference to  Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter  ended March 31, 2003).                                                                                                        |
| 10.21 |   | Indenture Agreement  dated December 20, 1996 between CRIIMI MAE QRS 1, Inc. and the  trustee (incorporated by reference to Exhibit 4(sss) to Annual Report on  Form 10-K for the year ended December 31, 1996).                                                                                                                                                  |
| 10.22 |   | Registrant’s 2001 Stock  Incentive Plan (incorporated by reference to Annex B to Definitive Proxy  Statement filed with the SEC on August 16, 2001).                                                                                                                                                                                                                            |

73

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| 10.23 |   | Registrant’s Second  Amended and Restated Stock Option Plan for Key Employees (incorporated by  reference herein to Exhibit G to Exhibit 99.6 to the Current Report  on Form 8-K filed with the SEC on September 22, 2000).                                                |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24 |   | Dividend Reinvestment  and Stock Purchase Plan between CRIIMI MAE Inc. and shareholders  (incorporated by reference from the registration statement on Form S-3A  filed with the SEC on December 9, 1997).                                                                                |
| 10.25 |   | Change in Control  Agreement, dated as of February 1, 2005, by and among CRIIMI MAE Inc.,  CRIIMI MAE Management, Inc. and Barry S. Blattman (filed herewith).                                                                                                                            |
| 10.26 |   | Change in Control  Agreement, dated as of February 1, 2005, by and among CRIIMI MAE Inc.,  CRIIMI MAE Management, Inc. and Mark R. Jarrell (filed herewith).                                                                                                                              |
| 10.27 |   | Change in Control  Agreement, dated as of February 1, 2005, by and among CRIIMI MAE Inc.,  CRIIMI MAE Management, Inc. and Stephen M. Abelman (filed herewith).                                                                                                                           |
| 10.28 |   | Change in Control  Agreement, dated as of February 1, 2005, by and among CRIIMI MAE Inc.,  CRIIMI MAE Management, Inc. and Cynthia O. Azzara (filed herewith).                                                                                                                            |
| 10.29 |   | Change in Control  Agreement, dated as of February 1, 2005, by and among CRIIMI MAE Inc.,  CRIIMI MAE Management, Inc. and Daniel P. Warcholak (filed herewith).                                                                                                                          |
| 10.30 |   | Restricted Stock Award  Agreement, dated as of November 6, 2003, by and between CRIIMI MAE Inc.  and Stephen M. Abelman (incorporated by reference to Exhibit 10.12 to  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003).                               |
| 10.31 |   | Employment Offer Letter,  dated as of October 29, 2003, by and among Stephen M. Abelman, CRIIMI  MAE Inc. and CRIIMI MAE Services Limited Partnership (incorporated by  reference to Exhibit 10.11 to Quarterly Report on Form 10-Q  for the quarter ended September 30, 2003). |
| 10.32 |   | Restricted Stock Award  Agreement, dated as of October 3, 2003, by and between CRIIMI MAE Inc.  and Cynthia O. Azzara (incorporated by reference to Exhibit 10.9 to  Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003).                                  |
| 10.33 |   | Employment Offer Letter,  dated as of August 26, 2003, by and among Cynthia O. Azzara, CRIIMI MAE  Inc. and CRIIMI MAE Management, Inc. (incorporated by reference to  Exhibit 10.4 to Current Report on Form 8-K filed with the SEC  on September 5, 2003).               |
| 10.34 |   | Employment Offer Letter  Agreement, dated as of August 11, 2003 and effective a of  September 15, 2003, between CRIIMI MAE Inc. and Mark R. Jarrell  (incorporated by reference to Exhibit 10.10 to Quarterly Report on  Form 10-Q for the quarter ended June 30, 2003).   |
| 10.35 |   | CRIIMI MAE Inc. Deferred  Compensation Plan (incorporated by reference to Exhibit 4 to Form S-8  filed with the SEC on October 1, 2004).                                                                                                                                             |
| 10.36 |   | Form of Restricted Stock  Unit Award Agreement for Executive Officers, by and between CRIIMI MAE Inc.  and Executive Officers (incorporated by reference to Exhibit 9.1 to Current  Report on Form 8-K filed with the SEC on October 15, 2004).                                                     |
| 10.37 |   | Form of Restricted Stock  Unit Award Agreement for Directors, by and between CRIIMI MAE Inc. and  Directors (incorporated by reference to Exhibit 9.2 to Current Report on Form  8-K filed with the SEC on October 15, 2004).                                                                       |

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| 10.38 |   | Form of Restricted Stock  Award Agreement for Executive Officers, by and between CRIIMI MAE Inc. and  Executive Officers (incorporated by reference to Exhibit 9.3 to Current Report  on Form 8-K filed with the SEC on October 15, 2004).                                         |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.39 |   | Form of Restricted Stock  Award Agreement for Directors, by and between CRIIMI MAE Inc. and Directors  (incorporated by reference to Exhibit 9.4 to Current Report on Form 8-K filed  with the SEC on October 15, 2004).                                                           |
| 10.40 |   | Form of CRIIMI MAE Inc.  Incentive Stock Option Agreement for Executive Officers, by and between  CRIIMI MAE Inc. and Executive Officers (incorporated by reference to Exhibit  9.5 to Current Report on Form 8-K filed with the SEC on October 15, 2004).                         |
| 10.41 |   | Form of CRIIMI MAE Inc.  Incentive Stock Option Agreement for Non-Named Executive Officers, by and  between CRIIMI MAE Inc. and Non-Named Executive Officers (incorporated by  reference to Exhibit 9.6 to Current Report on Form 8-K filed with the SEC on October  15, 2004).    |
| 10.42 |   | Form of CRIIMI MAE Inc.  Nonqualified Stock Option Agreement for Executive Officers, by and between  CRIIMI MAE Inc. and Executive Officers (incorporated by reference to Exhibit  9.7 to Current Report on Form 8-K filed with the SEC on October 15,  2004).                |
| 10.43 |   | Form of CRIIMI MAE Inc.  Nonqualified Stock Option Agreement for Non-Named Executive Officers, by and  between CRIIMI MAE Inc. and Non-Named Executive Officers (incorporated by  reference to Exhibit 9.8 to Current Report on Form 8-K filed with the SEC on October  15, 2004). |
| 10.44 |   | First Amendment to  CRIIMI MAE Inc. Deferred Compensation Plan (filed herewith).                                                                                                                                                                                                   |
| 21.1  |   | Subsidiaries of CRIIMI  MAE Inc. (filed herewith).                                                                                                                                                                                                                                 |
| 23.1  |   | Consent of  Ernst & Young LLP (filed herewith).                                                                                                                                                                                                                           |
| 23.2  |   | Consent of Ernst &  Young LLP (filed herewith).                                                                                                                                                                                                                                |
| 31.1  |   | Certification of Chief  Executive Officer pursuant to Exchange Act Rule 13a-14(a) (filed  herewith).                                                                                                                                                                     |
| 31.2  |   | Certification of Chief  Financial Officer pursuant to Exchange Act Rule 13a-14(a) (filed  herewith).                                                                                                                                                                     |
| 32.1  |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (furnished herewith).                                                                                                                                                    |
| 32.2  |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (furnished herewith).                                                                                                                                                    |
| 99.1  |   | Special Serviced Loan  Report relating to specially serviced loans underlying the Company’s CMBS as  of December 31, 2004 (filed herewith).                                                                                                                              |

 

75

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized.
|                    |   | CRIIMI MAE INC.                                   |
|--------------------|--------|---------------------------------------------------|
| March 8, 2005 |   | /s/ BARRY S. BLATTMAN                             |
| DATE               |   | Barry S. Blattman                                 |
|               |   | Chairman of the Board and Chief Executive Officer |

 

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Barry S. Blattman, hisattorney-in-fact, each with the power of substitution for him in any and allcapacities, to sign any amendments to this Annual Report on Form 10-Kand to file the same with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each said attorney-in-fact, or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:
| March 8, 2005 |   | /s/ BARRY S.  BLATTMAN                                                                                         |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------|
| DATE               |   | Barry S. Blattman                                                                                              |
|               |   | Chairman of the Board and Chief Executive Officer  (Principal Executive Officer)                               |
| March 8, 2005 |   | /s/ CYNTHIA O. AZZARA                                                                                          |
| DATE               |   | Cynthia O. Azzara                                                                                              |
|               |   | Executive Vice President, Chief Financial Officer  and Treasurer  (Principal Financial and Accounting Officer) |
| March 8, 2005 |   | /s/ JEFFREY M. BLIDNER                                                                                         |
| DATE               |   | Jeffrey M. Blidner                                                                                             |
|               |   | Director                                                                                                       |
| March 8, 2005 |   | /s/ JOSHUA B. GILLON                                                                                           |
| DATE               |   | Joshua B. Gillon                                                                                               |
|               |   | Director                                                                                                       |
| March 8, 2005 |   | /s/ ARTHUR N. HAUT                                                                                             |
| DATE               |   | Arthur N. Haut                                                                                                 |
|               |   | Director                                                                                                       |
| March 8, 2005 |   | /s/ ROBERT J. MERRICK                                                                                          |
| DATE               |   | Robert J. Merrick                                                                                              |
|               |   | Director                                                                                                       |

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| March 8, 2005 |   | /s/ JOHN S. MOODY      |
|--------------------|--------|------------------------|
| DATE               |   | John S. Moody          |
|               |   | Director               |
| March 8, 2005 |   | /s/ BRUCE K. ROBERTSON |
| DATE               |   | Bruce K. Robertson     |
|               |   | Director               |
| March 8, 2005 |   | /s/ GLENN J. RUFRANO   |
| DATE               |   | Glenn J. Rufrano       |
|               |   | Director               |
| March 8, 2005 |   | /s/ ROBERT E. WOODS    |
| DATE               |   | Robert E. Woods        |
|               |   | Director               |

 

77

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**CRIIMI MAE Inc.Management’s Report onInternal Control over Financial Reporting**

Management ofCRIIMI MAE Inc. (together with its consolidated subsidiaries, We or CRIIMIMAE), is responsible for establishing and maintaining adequate internal controlover financial reporting as defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. Our internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Ourinternal control over financial reporting includes those policies andprocedures that:

           (i)  pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of CRIIMI MAE;

         (ii)  provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts andexpenditures of CRIIMI MAE are being made only in accordance with authorizationof management and directors of CRIIMI MAE; and

        (iii)  provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Management assessed the effectiveness of our internalcontrol over financial reporting as of December 31, 2004. In making thisassessment, management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in InternalControl-Integrated Framework. Based on our assessment and those criteria,management believes that we maintained effective internal control overfinancial reporting as of December 31, 2004.

Our independent auditorshave issued an attestation report on our assessment of our internal controlover financial reporting. The report is included herein.

CRIIMI MAE Inc.

F-1

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**Reportof Independent Registered Public Accounting Firm on Internal Control OverFinancial Reporting**

The Board of Directors and Shareholders of CRIIMI MAE Inc.

We have audited management’s assessment, included inthe accompanying report on internal control over financial reporting, thatCRIIMI MAE Inc. (“CRIIMI MAE”) maintained effective internal control overfinancial reporting as of December 31, 2004, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). CRIIMI MAE’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that CRIIMIMAE Inc. maintained effective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on the COSO criteria. Also,in our opinion, CRIIMI MAE Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2004, basedon****the COSO criteria**.**

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of CRIIMI MAE Inc. as ofDecember 31, 2004 and 2003, and the related consolidated statements ofincome, changes in shareholders’ equity and cash flows for each of the threeyears in the period ended December 31, 2004 and our report dated March 2,2005 expressed an unqualified opinion thereon.

Ernst & Young LLPMcLean, VirginiaMarch 2, 2005

F-2

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and Shareholders of CRIIMI MAEInc.

We have audited the accompanying consolidated balancesheets of CRIIMI MAE Inc. (“CRIIMI MAE”) as of December 31, 2004 and 2003,and the related consolidated statements of income, changes in shareholders’equity and cash flows for each of the three years in the period ended December 31,2004. These financial statements are the responsibility of CRIIMI MAE’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialposition of CRIIMI MAE Inc. at December 31, 2004 and 2003, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2004, in conformity with U.S.generally accepted accounting principles.

As discussed in Note 2 to the consolidated financialstatements, CRIIMI MAE changed its method of accounting for preferred stockissuance costs in 2003.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of CRIIMI MAE’s internal control overfinancial reporting as of December 31, 2004, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 2,2005 expressed an unqualified opinion thereon.

Ernst &Young LLPMcLean, VirginiaMarch 2, 2005

F-3

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**CRIIMIMAE INC.**

**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                                      | ** ** | **December 31,** | ** **    | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2004**              | ** **    | **2003**              | ** ** |
| Assets                                                                                                                          |       |                  |          |                  |       |
| Mortgage assets, at fair  value:                                                                                                |       |                  |          |                  |       |
| CMBS pledged to secure recourse debt                                                                                            |       | $                     | 131,569,364   |                  | $          | 511,681,345 |   |
| CMBS                                                                                                                            |       | 203,334,606           |          | —                |       |
| CMBS pledged to secure non-recourse debt                                                                                        |       | 625,752,451           |          | 325,321,411           |       |
| Insured mortgage securities pledged to secure  recourse debt                                                                    |       | —                |          | 25,120,897            |       |
| Insured mortgage securities pledged to secure  non-recourse debt                                                                |       | 37,783,332            |          | 122,376,761           |       |
| Other MBS                                                                                                                       |       | 4,058,748             |          | 3,900,132             |       |
| Receivables and other assets                                                                                                    |       | 26,367,375            |          | 59,112,241            |       |
| Cash and cash equivalents                                                                                                       |       | 41,073,516            |          | 21,698,957            |       |
| Total assets                                                                                                                    |       | $                     | 1,069,939,392 |                  | $          | 1,069,211,744 |   |
| Liabilities and Shareholders’ Equity                                                                                       |       |                  |          |                  |       |
| Liabilities:                                                                                                                    |       |                  |          |                  |       |
| Recourse debt:                                                                                                                  |       |                  |          |                  |       |
| Secured by pledge of CMBS                                                                                                       |       | $                     | 42,415,000    |                  | $          | 296,250,000 |   |
| Senior subordinated secured note                                                                                                |       | 31,266,667            |          | 31,266,667            |       |
| Secured by pledge of insured mortgage securities                                                                                |       | —                |          | 22,526,000            |       |
| Non-Recourse  debt:                                                                                                             |       |                  |          |                  |       |
| Secured by pledge of CMBS                                                                                                       |       | 526,838,642           |          | 288,979,376           |       |
| Secured by pledge of insured mortgage securities                                                                                |       | 29,484,665            |          | 119,237,756           |       |
| Secured by REO asset                                                                                                            |       | —                |          | 7,332,404             |       |
| Payables and accrued expenses                                                                                                   |       | 11,876,858            |          | 11,839,761            |       |
| Total liabilities                                                                                                               |       | 641,881,832           |          | 777,431,964           |       |
| Commitments and  contingencies:                                                                                                 |       |                  |          |                  |       |
| Shareholders’ equity:                                                                                                      |       |                  |          |                  |       |
| Preferred stock, $0.01 par; 75,000,000 shares  authorized; 2,178,982 and 3,424,992 shares issued and outstanding,  respectively |       | 21,790                |          | 34,250                |       |
| Common stock, $0.01 par; 300,000,000 shares authorized;  15,546,667 and 15,384,648 shares issued and outstanding, respectively  |       | 155,467               |          | 153,846               |       |
| Accumulated other comprehensive income                                                                                          |       | 213,471,845           |          | 91,582,756            |       |
| Deferred compensation                                                                                                           |       | (412,362              | )             | (766,093              | )          |
| Warrants outstanding                                                                                                            |       | 2,564,729             |          | 2,564,729             |       |
| Additional paid-in capital                                                                                                      |       | 630,687,207           |          | 633,348,675           |       |
| Accumulated deficit                                                                                                             |       | (418,431,116          | )             | (435,138,383          | )          |
| Total  shareholders’ equity                                                                                                |       | 428,057,560           |          | 291,779,780           |       |
| Total liabilities and  shareholders’ equity                                                                                |       | $                     | 1,069,939,392 |                  | $          | 1,069,211,744 |   |

 

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

F-4

----

**CRIIMI MAE INC.CONSOLIDATED STATEMENTS OFINCOME**
| ** **                                                                    | ** ** | **For the years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Interest income:                                                              |       |                                                          |       |   |   |   |   |
| CMBS:                                                                         |       |                                                          |       |   |   |   |   |
| CMBS pledged to  secure recourse debt                                         |       | $                                                             | 38,255,988 |   | $ | 62,588,506 |   | $ | 74,576,975 |   |
| CMBS                                                                          |       | 14,647,864                                                    |       | — |   | — |   |
| CMBS pledged to  secure non-recourse debt                                     |       | 37,539,937                                                    |       | 26,292,699 |   | 26,037,116 |   |
| Insured mortgage  securities                                                  |       | 5,154,131                                                     |       | 15,533,660 |   | 23,845,841 |   |
| Total interest  income                                                        |       | 95,597,920                                                    |       | 104,414,865 |   | 124,459,932 |   |
| Interest expense:                                                             |       |                                                          |       |   |   |   |   |
| Recourse debt                                                                 |       | 12,957,834                                                    |       | 24,077,670 |   | 40,471,019 |   |
| Non-recourse debt                                                             |       | 39,090,981                                                    |       | 45,649,691 |   | 52,041,054 |   |
| Other                                                                         |       | 110,060                                                       |       | 1,072,315 |   | 1,231,332 |   |
| Total interest  expense                                                       |       | 52,158,875                                                    |       | 70,799,676 |   | 93,743,405 |   |
| Net interest  margin                                                          |       | 43,439,045                                                    |       | 33,615,189 |   | 30,716,527 |   |
| Fee/other income:                                                             |       |                                                          |       |   |   |   |   |
| Servicing revenue                                                             |       | 9,643,409                                                     |       | 9,483,196 |   | 10,985,770 |   |
| Other income                                                                  |       | 2,284,814                                                     |       | 1,459,165 |   | 2,604,151 |   |
| Total fee/other  income                                                       |       | 11,928,223                                                    |       | 10,942,361 |   | 13,589,921 |   |
| Operating expenses:                                                           |       |                                                          |       |   |   |   |   |
| General and  administrative expenses                                          |       | 10,361,537                                                    |       | 11,985,927 |   | 10,618,303 |   |
| Equity  compensation expense                                                  |       | 649,250                                                       |       | 204,311 |   | 110,154 |   |
| Depreciation and  amortization                                                |       | 390,934                                                       |       | 567,629 |   | 1,095,861 |   |
| Servicing general  and administrative expenses                                |       | 8,032,555                                                     |       | 9,316,810 |   | 9,043,183 |   |
| Servicing  amortization, depreciation, and impairment expenses                |       | 867,737                                                       |       | 1,811,028 |   | 2,173,137 |   |
| Income tax expense  (benefit)                                                 |       | 3,016                                                         |       | (602,577 | ) | 460,288 |   |
| BREF maintenance  fee                                                         |       | 1,736,000                                                     |       | 1,663,667 |   | — |   |
| Total operating  expenses                                                     |       | 22,041,029                                                    |       | 24,946,795 |   | 23,500,926 |   |
| Other:                                                                        |       |                                                          |       |   |   |   |   |
| Net losses on  insured mortgage security dispositions                         |       | (949,956                                                      | )          | (645,169 | ) | (995,412 | ) |
| Net (loss) gain on  extinguishment of debt                                    |       | (3,418,175                                                    | )          | 6,672,872 |   | — |   |
| Impairment of REO  asset                                                      |       | (2,608,740                                                    | )          | — |   | — |   |
| Impairment of CMBS                                                            |       | (15,718,406                                                   | )          | (14,738,431 | ) | (70,225,506 | ) |
| Impairment of mezzanine  loan                                                 |       | (526,865                                                      | )          | — |   | — |   |
| Net gains (losses)  on derivatives                                            |       | 13,411,507                                                    |       | (1,949,439 | ) | — |   |
| Lease termination  and recapitalization expenses                              |       | (636,651                                                      | )          | (3,196,603 | ) | (1,048,559 | ) |
| Executive contract  termination costs                                         |       | —                                                        |       | (2,852,915 | ) | — |   |
| Servicing gain on  sale of servicing rights                                   |       | —                                                        |       | — |   | 4,864,274 |   |
| Servicing (loss)  gain on sale of investment-grade CMBS                       |       | —                                                        |       | (5,672 | ) | 241,160 |   |
| Total other                                                                   |       | (10,447,286                                                   | )          | (16,715,357 | ) | (67,164,043 | ) |
| Net income (loss)  before cumulative effect of change in accounting principle |       | 22,878,953                                                    |       | 2,895,398 |   | (46,358,521 | ) |
| Cumulative effect  of adoption of SFAS 142                                    |       | —                                                        |       | — |   | (9,766,502 | ) |
| Net income (loss)  before dividends paid or accrued on preferred shares       |       | 22,878,953                                                    |       | 2,895,398 |   | (56,125,023 | ) |
| Dividends paid or  accrued on preferred shares                                |       | (6,171,686                                                    | )          | (7,006,696 | ) | (9,337,018 | ) |
| Net income (loss)  to common shareholders                                     |       | $                                                             | 16,707,267 |   | $ | (4,111,298 | ) | $ | (65,462,041 | ) |
| Earnings (loss) per  common share:                                            |       |                                                          |       |   |   |   |   |
| Basic—before  cumulative effect of change in accounting principle        |       | $                                                             | 1.08       |   | $ | (0.27 | ) | $ | (4.06 | ) |
| Diluted—before  cumulative effect of change in accounting principle      |       | $                                                             | 1.06       |   | $ | (0.27 | ) | $ | (4.06 | ) |
| Basic—after  cumulative effect of change in accounting principle         |       | $                                                             | 1.08       |   | $ | (0.27 | ) | $ | (4.77 | ) |
| Diluted—after  cumulative effect of change in accounting principle       |       | $                                                             | 1.06       |   | $ | (0.27 | ) | $ | (4.77 | ) |
| Shares used in  computing basic earnings (loss) per share                     |       | 15,428,304                                                    |       | 15,149,303 |   | 13,710,914 |   |
| Shares used in  computing diluted earnings (loss) per share                   |       | 15,739,428                                                    |       | 15,149,303 |   | 13,710,914 |   |

 

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

F-5

----

 

**CRIIMIMAE INC. CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITYFor the years ended December 31, 2004, 2003 and 2002**
| ** **                                                                                     | ** ** | **Preferred  Stock**                 | ** **    | **Common  Stock**                    | ** ** | **Accumulated  Other  Comprehensive** | ** **     | **Deferred**     | ** ** | **Warrants**    | ** **              | **Additional  Paid-in** | ** ** | **Accumulated** | ** **                                                                            | **Total     Shareholders’** | ** ** | **Comprehensive  Income** | ** **                                                                |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------|---------------|--------------------------------------|------------|---------------------------------------|----------------|------------------|------------|-----------------|-------------------------|-------------------------|------------|-----------------|---------------------------------------------------------------------------------------|-------------------------------------------------|------------|---------------------------|---------------------------------------------------------------------------|
| ** **                                                                                     | ** ** | **   Par Value** | ** **    | **   Par Value** | ** ** | **Income**                            | ** **     | **Compensation** | ** ** | **Outstanding** | ** **              | **Capital**             | ** ** | **Deficit**     | ** **                                                                            | ** Equity**                                | ** ** | **(Loss)**                | ** **                                                                |
| **Balance  at December 31, 2001**                                                    |       |                                 | $ 35,980 |                                 |       |                                  | $ 129,373 |             |       |            | $  (6,443,598 | )                       |       |            | $             — |                                            |       |                      | $           — |   |   | $ 632,887,967 |   | $ (365,565,044 | ) |   | $ 261,044,678 |   |   |   |   |   |   |
| Net loss before  dividends paid or accrued on preferred shares                                 |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | (56,125,023 | ) |   | (56,125,023 | ) |   |   | $ (56,125,023 | ) |   |
| Other comprehensive income:                                                                    |       |                                 |          |                                 |       |                                  |           |             |       |            |                    |                    |       |            |                                                                                  |                                            |       |                      |                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustment to  unrealized gains and losses on mortgage assets                        |       |                                 | —        |                                 |       |                                  | —         |             |       |            | 109,170,220             |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | 109,170,220 |   |   |   | 109,170,220 |   |   |
| Adjustment to  unrealized losses on interest rate caps                                    |       |                                 | —        |                                 |       |                                  | —         |             |       |            | (604,565                | )                       |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | (604,565 | ) |   |   | (604,565 | ) |   |
| Comprehensive  income                                                                          |       |                                 |          |                                 |       |                                  |           |             |       |            |                    |                    |       |            |                                                                                  |                                            |       |                      |                                                                      |   |   |   |   |   |   |   |   |   |   |   | $ 52,440,632 |   |   |
| Dividends accrued  or paid on preferred shares                                                 |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | (9,337,018 | ) |   | (9,337,018 | ) |   |   |   |   |   |
| Common shares  issued related to preferred stock dividends                                |       |                                 | —        |                                 |       |                                  | 9,664          |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | 3,435,128 |   | — |   |   | 3,444,792 |   |   |   |   |   |   |
| Common shares  issued                                                                          |       |                                 | —        |                                 |       |                                  | 89             |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | 43,341 |   | — |   |   | 43,430 |   |   |   |   |   |   |
| Restricted stock  issued                                                                       |       |                                 | —        |                                 |       |                                  | 325            |             |       |            | —                  |                    |       |            | (129,675                                                                              | )                                               |       |                      | —                                                                    |   |   | 129,350 |   | — |   |   | — |   |   |   |   |   |   |
| Amortization of  deferred compensation                                                         |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | 110,154                                                                               |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | 110,154 |   |   |   |   |   |   |
| Redemption of  Series E Preferred Stock                                                   |       |                                 | (1,730        | )                                    |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | (16,083,848 | ) | — |   |   | (16,085,578 | ) |   |   |   |   |   |
| **Balance  at December 31, 2002**                                                    |       |                                 | 34,250        |                                 |       |                                  | 139,451        |             |       |            | 102,122,057             |                    |       |            | (19,521                                                                               | )                                               |       |                      | —                                                                    |   |   | 620,411,938 |   | (431,027,085 | ) |   | 291,661,090 |   |   |   |   |   |   |
| Net income before  dividends paid or accrued on preferred shares                          |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | 2,895,398 |   |   | 2,895,398 |   |   |   | $   2,895,398 |   |   |
| Other comprehensive  income:                                                                   |       |                                 |          |                                 |       |                                  |           |             |       |            |                    |                    |       |            |                                                                                  |                                            |       |                      |                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustment to  unrealized gains and losses on mortgage assets                        |       |                                 | —        |                                 |       |                                  | —         |             |       |            | (16,252,696             | )                       |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | (16,252,696 | ) |   |   | (16,252,696 | ) |   |
| Adjustment to  unrealized gains and losses on derivative financial instruments       |       |                                 | —        |                                 |       |                                  | —         |             |       |            | 5,713,395               |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | 5,713,395 |   |   |   | 5,713,395 |   |   |
| Comprehensive loss                                                                             |       |                                 |          |                                 |       |                                  |           |             |       |            |                    |                    |       |            |                                                                                  |                                            |       |                      |                                                                      |   |   |   |   |   |   |   |   |   |   |   | $  (7,643,903 | ) |   |
| Dividends paid on  preferred shares                                                       |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | (7,006,696 | ) |   | (7,006,696 | ) |   |   |   |   |   |
| Common shares  issued                                                                          |       |                                 | —        |                                 |       |                                  | 13,742         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | 14,196,162 |   | — |   |   | 14,209,904 |   |   |   |   |   |   |
| Restricted stock  issued                                                                       |       |                                 | —        |                                 |       |                                  | 966            |             |       |            | —                  |                    |       |            | (1,088,169                                                                            | )                                               |       |                      | —                                                                    |   |   | 1,087,203 |   | — |   |   | — |   |   |   |   |   |   |
| Amortization of  deferred compensation                                                         |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | 204,312                                                                               |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | 204,312 |   |   |   |   |   |   |
| Accelerated  vesting of stock options                                                     |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | 547,600 |   | — |   |   | 547,600 |   |   |   |   |   |   |
| Shares repurchased  or  forfeited                                                              |       |                                 | —        |                                 |       |                                  | (313           | )                |       |            | —                  |                    |       |            | 137,285                                                                               |                                            |       |                      | —                                                                    |   |   | (329,499 | ) | — |   |   | (192,527 | ) |   |   |   |   |   |
| Warrants issued                                                                                |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | 2,564,729                                                                 |   |   | (2,564,729 | ) | — |   |   | — |   |   |   |   |   |   |
| **Balance  at December 31,  2003**                                                        |       |                                 | 34,250        |                                 |       |                                  | 153,846        |             |       |            | 91,582,756              |                    |       |            | (766,093                                                                              | )                                               |       |                      | 2,564,729                                                                 |   |   | 633,348,675 |   | (435,138,383 | ) |   | 291,779,780 |   |   |   |   |   |   |
| Net income before  dividends paid on preferred shares                                |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | 22,878,953 |   |   | 22,878,953 |   |   |   | $ 22,878,953 |   |   |
| Adjustment to  unrealized gains and losses on mortgage assets                        |       |                                 | —        |                                 |       |                                  | —         |             |       |            | 126,614,716             |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | 126,614,716 |   |   |   | 126,614,716 |   |   |
| Adjustment to  unrealized gains and losses on derivative financial  instruments |       |                                 | —        |                                 |       |                                  | —         |             |       |            | (4,725,627              | )                       |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | (4,725,627 | ) |   |   | (4,725,627 | ) |   |
| Comprehensive  income                                                                          |       |                                 |          |                                 |       |                                  |           |             |       |            |                    |                    |       |            |                                                                                  |                                            |       |                      |                                                                      |   |   |   |   |   |   |   |   |   |   |   | $ 144,768,042 |   |   |
| Dividends paid on  preferred shares                                                            |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | — |   | (6,171,686 | ) |   | (6,171,686 | ) |   |   |   |   |   |
| Redemption of  preferred  stock                                                                |       |                                 | (18,310       | )                                    |       |                                  | —         |             |       |            |                    |                    |       |            |                                                                                  |                                            |       |                      |                                                                      |   |   | (18,291,790 | ) | — |   |   | (18,310,100 | ) |   |   |   |   |   |
| Common shares  issued                                                                          |       |                                 | —        |                                 |       |                                  | 1,831          |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | 1,083,330 |   | — |   |   | 1,085,161 |   |   |   |   |   |   |
| Restricted stock  issued                                                                       |       |                                 | —        |                                 |       |                                  | 62             |             |       |            | —                  |                    |       |            | (90,826                                                                               | )                                               |       |                      | —                                                                    |   |   | 90,764 |   | — |   |   | — |   |   |   |   |   |   |
| RSUs issued                                                                                    |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | (154,068                                                                              | )                                               |       |                      | —                                                                    |   |   | 154,068 |   | — |   |   | — |   |   |   |   |   |   |
| Preferred shares  issued, net of offering costs                                           |       |                                 | 5,850         |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | 14,621,446 |   | — |   |   | 14,627,296 |   |   |   |   |   |   |
| Amortization of  equity compensation                                                           |       |                                 | —        |                                 |       |                                  | —         |             |       |            | —                  |                    |       |            | 598,625                                                                               |                                            |       |                      | —                                                                    |   |   | — |   | — |   |   | 598,625 |   |   |   |   |   |   |
| Common shares  repurchased or forfeited                                              |       |                                 | —        |                                 |       |                                  | (272           | )                |       |            | —                  |                    |       |            | —                                                                                |                                            |       |                      | —                                                                    |   |   | (319,286 | ) | — |   |   | (319,558 | ) |   |   |   |   |   |
| **Balance  at December 31,  2004**                                                        |       |                                 | $ 21,790 |                                 |       |                                  | $ 155,467 |             |       |            | $ 213,471,845      |                    |       |            | $  (412,362                                                                 | )                                               |       |                      | $ 2,564,729                                                          |   |   | $ 630,687,207 |   | $ (418,431,116 | ) |   | $ 428,057,560 |   |   |   |   |   |   |

 

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

F-6

----

**CRIIMI MAE INC.CONSOLIDATED STATEMENTS OFCASH FLOWS**
| ** **                                                                                                                               | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows from operating  activities:                                                                                                   |       |                                                          |       |   |   |   |   |
| Net income (loss) before dividends paid or accrued on  preferred shares                                                                  |       | $                                                             | 22,878,953 |   | $ | 2,895,398 |   | $ | (56,125,023 | ) |
| Adjustments to reconcile net income before dividends  paid or accrued on preferred shares to net cash provided by operating  activities: |       |                                                          |       |   |   |   |   |
| Loss (gain) on extinguishment of debt                                                                                                    |       | 3,418,175                                                     |       | (7,122,818 | ) | — |   |
| Amortization of discount and deferred financing costs  on debt                                                                           |       | 6,399,193                                                     |       | 10,751,564 |   | 7,581,595 |   |
| Accretion on mortgage assets, net                                                                                                        |       | (10,671,126                                                   | )          | (10,939,596 | ) | (11,310,220 | ) |
| Accrual of extension fees related to Exit Debt                                                                                           |       | —                                                        |       | 336,921 |   | 4,308,290 |   |
| Depreciation and other amortization                                                                                                      |       | 1,296,171                                                     |       | 2,378,657 |   | 3,268,998 |   |
| Net losses on insured mortgage security dispositions                                                                                     |       | 949,956                                                       |       | 645,169 |   | 995,412 |   |
| Equity in earnings from investments                                                                                                      |       | (480,846                                                      | )          | (141,732 | ) | 41,882 |   |
| Recapitalization expenses (non-cash portion)                                                                                             |       | 182,990                                                       |       | 1,127,225 |   | — |   |
| Amortization of equity compensation                                                                                                      |       | 649,250                                                       |       | 204,312 |   | 110,154 |   |
| Impairment of mezzanine loan and REO asset                                                                                               |       | 3,135,605                                                     |       | — |   | — |   |
| Impairment of CMBS                                                                                                                       |       | 15,718,406                                                    |       | 14,738,431 |   | 70,225,506 |   |
| Net losses (gains) on derivatives                                                                                                        |       | (15,683,199                                                   | )          | 1,949,439 |   | — |   |
| Hedging expense                                                                                                                          |       | —                                                        |       | 999,544 |   | 1,101,746 |   |
| Interest accreted to debt                                                                                                                |       | —                                                        |       | 1,266,667 |   | 4,553,940 |   |
| Cumulative effect of adoption of SFAS 142                                                                                                |       | —                                                        |       | — |   | 9,766,502 |   |
| (Loss) gain on sale of servicing rights and  investment-grade CMBS                                                                       |       | —                                                        |       | 5,672 |   | (5,105,434 | ) |
| Changes in assets and liabilities:                                                                                                       |       |                                                          |       |   |   |   |   |
| Decrease (increase) in receivables and other assets                                                                                      |       | 1,359,892                                                     |       | (3,911,875 | ) | 3,644,981 |   |
| Decrease in payables and accrued expenses                                                                                                |       | (281,336                                                      | )          | (3,664,999 | ) | (9,726,730 | ) |
| Decrease in restricted cash and cash equivalents                                                                                         |       | —                                                        |       | 7,961,575 |   | 30,252,702 |   |
| (Purchases) sales of other MBS, net                                                                                                      |       | (65,102                                                       | )          | 1,314,484 |   | 3,288,094 |   |
| Net cash provided by operating activities                                                                                                |       | 28,806,982                                                    |       | 20,794,038 |   | 56,872,395 |   |
| Cash flows from investing  activities:                                                                                                   |       |                                                          |       |   |   |   |   |
| Proceeds from mortgage security prepayments and  dispositions                                                                            |       | 115,470,957                                                   |       | 123,416,778 |   | 73,070,231 |   |
| Proceeds from prepayment of mezzanine loan                                                                                               |       | 2,237,062                                                     |       | 1,696,749 |   | — |   |
| Proceeds from sale of partnership interest                                                                                               |       | 485,919                                                       |       | — |   | — |   |
| Proceeds from liquidation of derivatives                                                                                                 |       | 15,150,000                                                    |       | — |   | — |   |
| Distributions from AIM Limited Partnerships                                                                                              |       | 3,704,461                                                     |       | 3,336,528 |   | 2,662,014 |   |
| Receipt of principal payments from insured mortgage  securities                                                                          |       | 935,993                                                       |       | 2,884,415 |   | 3,823,603 |   |
| Principal payments on CMBS                                                                                                               |       | —                                                        |       | 3,247,664 |   |   |   |
| Proceeds from sale of servicing rights by CMSLP                                                                                          |       | —                                                        |       | — |   | 8,810,923 |   |
| Cash (paid) received in excess of income recognized  on CMBS                                                                             |       | (324,654                                                      | )          | 3,323,182 |   | 2,919,904 |   |
| Purchases of investment-grade CMBS by CMSLP                                                                                              |       | —                                                        |       | — |   | (10,108,652 | ) |
| Proceeds from sales of investment-grade CMBS by CMSLP                                                                                    |       | —                                                        |       | 3,316,508 |   | 5,659,875 |   |
| Purchase of CMBS                                                                                                                         |       | (1,647,978                                                    | )          | — |   | — |   |
| Net cash provided by investing activities                                                                                                |       | 136,011,760                                                   |       | 141,221,824 |   | 86,837,898 |   |
| Cash flows from financing  activities:                                                                                                   |       |                                                          |       |   |   |   |   |
| Principal payments on recourse debt                                                                                                      |       | (339,296,000                                                  | )          | (379,702,338 | ) | (36,239,032 | ) |
| Principal payments on non-recourse debt                                                                                                  |       | (147,619,660                                                  | )          | (137,820,471 | ) | (76,828,305 | ) |
| Proceeds from issuance of recourse debt                                                                                                  |       | 62,935,000                                                    |       | 352,526,000 |   | — |   |
| Proceeds from issuance of non-recourse debt                                                                                              |       | 289,817,385                                                   |       | — |   | — |   |
| Payment of debt issuance costs                                                                                                           |       | (1,141,395                                                    | )          | (6,402,445 | ) | — |   |
| Payment of debt extinguishment fee                                                                                                       |       | (1,000,000                                                    | )          | — |   | — |   |
| Payment of dividends on preferred shares                                                                                                 |       | (6,171,686                                                    | )          | (12,186,376 | ) | — |   |
| Proceeds from the issuance of common stock, net                                                                                          |       | 1,034,535                                                     |       | 14,209,904 |   | 43,431 |   |
| Redemption of preferred stock                                                                                                            |       | (18,310,100                                                   | )          | — |   | (18,733,912 | ) |
| Proceeds from the issuance of preferred stock, net                                                                                       |       | 14,627,296                                                    |       | — |   | — |   |
| Common stock repurchased                                                                                                                 |       | (319,558                                                      | )          | (192,527 | ) | — |   |
| Net cash used in financing activities                                                                                                    |       | (145,444,183                                                  | )          | (169,568,253 | ) | (131,757,818 | ) |
| Net increase (decrease) in cash and cash equivalents                                                                                     |       | 19,374,559                                                    |       | (7,552,391 | ) | 11,952,475 |   |
| Cash and cash equivalents, beginning of year                                                                                             |       | 21,698,957                                                    |       | 29,251,348 |   | 17,298,873 |   |
| Cash and cash equivalents, end of year                                                                                                   |       | $                                                             | 41,073,516 |   | $ | 21,698,957 |   | $ | 29,251,348 |   |

 

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

F-7

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**CRIIMI MAE INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**1.   ORGANIZATION**

**General**

CRIIMI MAE Inc. (together with its consolidatedsubsidiaries, We or CRIIMI MAE) is a commercial mortgage company structured asa self-administered real estate investment trust (or REIT). We currently ownand manage a significant portfolio of commercial mortgage-related assets. Historically,we have focused primarily on acquiring high-yielding, non-investment grade(rated below BBB- or unrated) commercial mortgage-backed securities(subordinated CMBS). We commenced operations in 1989, are incorporated inMaryland, and are not a government sponsored entity or in any way affiliatedwith the United States government or any United States government agency. Ourcommon stock is traded on the New York Stock Exchange under the symbol “CMM”. OurSeries B Preferred Stock is traded on the New York Stock Exchange underthe symbol “CMMPRB”.

Our existing businessconsists of investments in subordinated CMBS backed by pools of commercialmortgage loans on multifamily, retail, hotel, and other commercial real estate(core assets) and investments in government-insured mortgage-backed securitiesand a limited number of other assets (non-core assets). We also are a trader inCMBS, residential mortgage-backed securities, agency debt securities and otherfixed income securities.

**REITStatus/Net Operating Loss for Tax Purposes**

***REIT Status***.   Wehave elected to qualify as a REIT for tax purposes under sections 856-860of the Internal Revenue Code. We are required to meet income, asset, ownershipand distribution tests to maintain our REIT status. Although there can be noassurance, we believe that we have satisfied the REIT requirements for allyears through and including 2004. There can also be no assurance that we willmaintain our REIT status for 2005 or subsequent years. If we fail to maintainour REIT status for any taxable year, we will be taxed as a regular domesticcorporation subject to federal and state income tax in the year ofdisqualification and for at least the four subsequent years. Depending on theamount of any such federal and state income tax, we may have insufficient fundsto pay any such tax and also may be unable to comply with some or all of ourobligations, including our recourse debt.

***Net Operating Loss for TaxPurposes/Trader Election.  ***For tax purposes, we haveelected to be classified as a trader in securities. We trade in both short andlonger duration fixed income securities, including CMBS, residentialmortgage-backed securities and agency debt securities (such securities tradedand all other securities of the type described constituting the “Trading Assets”to the extent owned by us or any qualified REIT subsidiary, meaning generallyany wholly owned subsidiary that is not a taxable REIT subsidiary). SuchTrading Assets are classified as Other MBS on our consolidated balance sheet.

As a result of our election in 2000 to be taxed as atrader, we recognized a mark-to-market tax loss on our Trading Assets on January 1,2000 of approximately $478 million (the January 2000 Loss). Such loss wasrecognized evenly for tax purposes over four years beginning with the year 2000and ending in 2003. Such loss was ordinary, which allowed us to offset ourordinary income.

We generated net taxable income (net operating loss)of approximately $10.3 million and ($84.0) million during the years ended December 31,2004 and 2003, respectively. We utilized a portion of our net operating loss(NOL) carryforward to reduce our 2004 taxable income to common shareholders tozero and, accordingly, our REIT distribution requirement was eliminated for2004. As of December 31, 2004, 

F-8

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**CRIIMI MAE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

our accumulated and unusednet operating loss (or NOL) was $297.5 million. Any accumulated and unused netoperating losses, subject to certain limitations, generally may be carriedforward for up to 20 years to offset taxable income until fully utilized.Accumulated and unused net operating losses cannot be carried back because weare a REIT.

There can be no assurance that our position withrespect to our election as a trader in securities will not be challenged by theInternal Revenue Service (IRS) and, if challenged, will be defendedsuccessfully by us. As such, there is a risk that the January 2000 Losswill be limited or disallowed, resulting in higher tax basis income and acorresponding increase in REIT distribution requirements. It is possible thatthe amount of any under-distribution for a taxable year could be corrected witha “deficiency dividend” as defined in Section 860 of the Internal RevenueCode; however, interest may also be due to the IRS on the amount of thisunder-distribution.

If we are required to make taxable incomedistributions to our shareholders to satisfy required REIT distributions, allor a substantial portion of these distributions, if any, may be in the form ofnon-cash dividends. There can be no assurance that such non-cash dividendswould satisfy the REIT distribution requirements and, as such, we could loseour REIT status or may not be able to satisfy some or all of our contractualobligations.

Our future use of NOLs fortax purposes could be substantially limited in the event of an “ownershipchange” as defined under Section 382 of the Internal Revenue Code. As aresult of these limitations imposed by Section 382 of the Internal RevenueCode, in the event of an ownership change, our ability to use our NOLcarryforwards in future years may be limited and, to the extent the NOLcarryforwards cannot be fully utilized under these limitations within thecarryforward periods, the NOL carryforwards would expire unutilized. Accordingly,after any ownership change, our ability to use our NOLs to reduce or offsettaxable income would be substantially limited or not available under Section 382.In general, a company reaches the “ownership change” threshold if the “5% shareholders”increase their aggregate ownership interest in the company over a three-yeartesting period by more than 50 percentage points. The ownership interest ismeasured in terms of total market value of the company’s capital stock. If an “ownershipchange” occurs under Section 382 of the Internal Revenue Code, ourprospective use of our accumulated and unused NOL will be limited. We are notaware of any other acquisition of shares of our capital stock that has createdan “ownership change” under Section 382. We have adopted a shareholderrights plan and amended our charter to minimize the chance of an ownershipchange within the meaning of Section 382 of the Internal Revenue Code;however there can be no assurance that an ownership change will not occur.

**Investment Company Act**

Under the Investment Company Act of 1940, as amended,an investment company is required to register with the Securities and ExchangeCommission (SEC) and is subject to extensive restrictive and potentiallyadverse regulation relating to, among other things, operating methods,management, capital structure, dividends and transactions with affiliates. However,as described below, companies primarily engaged in the business of acquiringmortgages and other liens on and interests in real estate (QualifyingInterests) are excluded from the requirements of the Investment Company Act.

To qualify for theInvestment Company Act exclusion, we, among other things, must maintain atleast 55% of our assets in Qualifying Interests (the 55% Requirement) and arealso required to maintain an additional 25% in Qualifying Interests or otherreal estate-related assets (Other Real Estate Interests and 

F-9

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**CRIIMI MAE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

suchrequirement, the 25% Requirement). According to the most recent SEC staffinterpretations, we believe that all of our government-insured mortgagesecurities constitute Qualifying Interests. In accordance with the most recentSEC staff interpretations, we believe that all of our subordinated CMBSconstitute Other Real Estate Interests and that certain of our subordinatedCMBS also constitute Qualifying Interests. On certain of our subordinated CMBS,we, along with other rights, have the unilateral right to direct foreclosurewith respect to the underlying mortgage loans. Based on such rights and oureconomic interest in the underlying mortgage loans, we believe that the relatedsubordinated CMBS constitute Qualifying Interests. As of December 31,2004, we believe that we were in compliance with both the 55% Requirement andthe 25% Requirement. If the SEC or its staff were to take a different positionwith respect to whether such subordinated CMBS constitute Qualifying Interests,we could, among other things, be required either (i) to change the mannerin which we conduct our operations to avoid being required to register as aninvestment company or (ii) to register as an investment company, either ofwhich could have a material adverse effect on us.

**The Reorganization Plan**

On October 5, 1998, CRIIMI MAE Inc.(unconsolidated) and two operating subsidiaries, CRIIMI MAE Management, Inc.and CRIIMI MAE Holdings II, L.P., filed for relief under Chapter 11 of the U.S.Bankruptcy Code in the United States Bankruptcy Court for the District ofMaryland, Southern Division, in Greenbelt, Maryland. On November 22, 2000,the United States Bankruptcy Court for the District of Maryland, entered anorder confirming our reorganization plan, and we emerged from Chapter 11 on April 17,2001.

Our reorganization planprovided for the payment in full of all of our allowed claims primarily throughthe Chapter 11 reorganization (including proceeds from certain asset sales)totaling $847 million. Included in the Chapter 11 reorganization wasapproximately $262.4 million in Exit Debt provided by affiliates of MerrillLynch Mortgage Capital, Inc. (or Merrill Lynch) and German AmericanCapital Corporation (or GACC) through a variable-rate secured financingfacility (the Exit Variable-Rate Secured Borrowing), in the form of arepurchase transaction, and approximately $166.8 million in Exit Debt providedthrough two series of senior secured notes issued to some of our unsecuredcreditors. All rights and obligations of Merrill Lynch and GACC under the ExitVariable-Rate Secured Borrowing operative agreements were subsequently assignedto ORIX Capital Markets, LLC. The Exit Debt was directly or indirectly securedby substantially all of our assets, and virtually all of our cash flowsrelating to existing assets were used to satisfy principal, interest and feeobligations under the Exit Debt and to pay our general and administrative andother operating expenses. The terms of the Exit Debt significantly restrictedthe amount of cash dividends that could be paid to shareholders.  All Exit Debt was paid off in full inconnection with the January 2003 recapitalization. Under ourreorganization plan, the holders of our equity retained their shares of stock.

**2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Basis of Presentation**

Our consolidated financialstatements are prepared on the accrual basis of accounting in accordance  with accounting principles generally acceptedin the United States (or GAAP). All intercompany accounts and transactions havebeen eliminated in consolidation. The preparation of consolidated financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect 

F-10

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**CRIIMI MAE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

**Reclassifications**

Certain 2003 and 2002amounts have been reclassified to conform to the 2004 presentation.

**OtherCash and Cash Equivalents and Servicing Cash and Cash Equivalents**

Cash and cash equivalentsconsist of cash and money market accounts.

**Transfer of Financial Assets**

We have transferred assets(mortgages and mortgage securities) in securitization transactions where thetransferred assets become the sole source of repayment for newly issued debt. Thesetransfers of financial assets were accounted for in accordance with SFAS No. 125,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentof Liabilities,” and with its amendment SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities—aReplacement of FASB Statement No. 125.” The transfer is treated as a sale when both legal and control rights toa financial asset are transferred. Transfers are assessed on an individualcomponent basis. In a securitization, the cost basis of the original assetstransferred is allocated to each of the new financial components based upon therelative fair value of the new financial components. For components where saletreatment is achieved, a gain or loss is recognized for the difference betweenthat component’s allocated cost basis and fair value. For components where saletreatment is not achieved, an asset is recorded representing the allocated costbasis of the new financial components retained and the related incurrence ofdebt is also recorded. In transactions where none of the components are sold,we recognize the incurrence of debt and the character of the collateralizingassets remains unchanged.

**IncomeRecognition and Carrying Basis**

***CMBS***

We recognize income on ourCMBS in accordance with Emerging Issues Task Force (EITF) Issue No. 99-20,“Recognition of Interest Income and Impairment on Purchased and RetainedBeneficial Interests in Securitized Financial Assets”. Under EITF 99-20,we calculate a revised yield based on the current amortized cost of theinvestment and the revised future cash flows when there has been a change inestimated future cash flows from the cash flows previously projected (generallydue to credit losses and/or prepayment speeds). This revised yield is appliedprospectively to recognize interest income. We classify our CMBS as “availablefor sale” in accordance with Statement of Financial Standards (SFAS) No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” and carrythem at fair market value with temporary changes in fair value recorded as acomponent of shareholders’ equity.

***Insured Mortgage Securities***

Our insured mortgagesecurities are classified as “available for sale.”  As a result, we carry our insured mortgagesecurities at fair value and temporary changes in fair value are recorded as acomponent of shareholders’ equity. Insured mortgage securities income consistsof amortization of the discount or 

F-11

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**CRIIMI MAE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

premiumplus the stated mortgage interest payments received or accrued. The differencebetween the cost and the unpaid principal balance at the time of purchase iscarried as a discount or premium and amortized over the remaining contractuallife of the mortgage using the effective interest method. The effectiveinterest method provides a constant yield of income over the term of themortgage security.

**Impairment**

***CMBS***

We assess each CMBS forother than temporary impairment when the fair market value of the assetdeclines below amortized cost and when one of the following conditions alsoexists: (1) our revised projected cash flows related to the CMBS and theCMBS’s current cost basis result in a decrease in the yield compared to whatwas previously used to recognize income, or (2) fair value has been belowamortized cost for a significant period of time and we conclude that we nolonger have the ability or intent to hold the security for the period that fairvalue is expected to be below amortized cost through the period of time weexpect the value to recover to amortized cost. A decrease in yield would beprimarily a result of the credit quality of the security declining and adetermination that the current estimate of expected future credit lossesexceeds credit losses as originally projected or that expected credit losseswill occur sooner than originally projected. The amount of impairment loss ismeasured by comparing the fair value, based on available market information andcertain third party information and management’s estimates, of CMBS to itscurrent amortized cost basis; the difference is recognized as a loss in theconsolidated income statement. We assess current economic events and conditionsthat impact the value of our CMBS and the underlying real estate in makingjudgments as to whether or not other than temporary impairment has occurred. Duringthe years ended December 31, 2004, 2003 and 2002, we recognized impairmentcharges of $15.7 million, $14.7 million and $70.2 million on our CMBS,respectively. See Note 4 for further discussion of the impairment charges.

***Insured Mortgage Securities***

We assess each insuredmortgage security for other than temporary impairment when the fair marketvalue of the asset declines below amortized cost for a significant period oftime and we conclude that we no longer have the ability to hold the securitythrough the market downturn. The amount of impairment loss is measured bycomparing the fair value of an insured mortgage security to its currentamortized cost basis, with the difference recognized as a loss in theconsolidated statements of income.

***Real Estate Owned***

We reviewed our realestate owned (REO) for impairment whenever events or changes in circumstancesindicated that the cost basis of such assets may not be recoverable. If thecarrying value of the real estate owned was greater than the projectedundiscounted net cash flows from the real estate, an impairment loss wasrecognized. Impairment losses were calculated as the difference between thereal estate’s carrying value and its estimated fair value. During the year endedDecember 31, 2004, we recognized impairment charges of $2.6 millionrelated to a shopping center that we accounted for as REO. In October 2004,the shopping center was sold at foreclosure. See further discussion in Note 6.

**Receivables**

Receivables primarilyconsist of interest and principal receivables.

F-12

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**CRIIMI MAE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Other Assets**

Other assets primarilyinclude CRIIMI MAE Services Limited Partnership’s (CMSLP), a wholly-ownedsubsidiary, other assets (as discussed below), deferred financing costs,deferred costs, investment in mezzanine loans, and at December 31, 2003,the fair value of derivative financial instruments. Deferred financing costsare costs incurred in connection with the establishment of our financingfacilities and are amortized using the effective interest method over the termsof the borrowings.

**ServicingOther Assets and Servicing Liabilities**

At December 31,2004 and 2003, the following comprised servicing other assets and servicingliabilities:
| ** **                                             | ** ** | **2004**                | ** ** | **2003** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| Receivables and  other assets                          |       | $                       | 6,109      |     | $          | 3,293 |   |
| Investment in  interest-only certificates and CMBS     |       | 1,111                   |       | 1,579    |       |
| AIM Limited  Partnerships’ sub-advisory contracts |       | 50                      |       | 162      |       |
| Other, including  fixed assets                         | * *   | 848                     |       | 931      | * *   |
| Total servicing  other assets                          |       | $                       | 8,118      |     | $          | 5,965 |   |
| Accounts payable                                       |       | $                       | 991        |     | $          | 1,832 |   |

 

**ServicingRevenue and Servicing Amortization, Depreciation and Impairment**

Servicing revenuerepresents revenue earned by CMSLP, which primarily consists of mortgageservicing fees, assumption fees, other ancillary servicing fees, interestincome, and, to a lesser extent, sub-advisory fees from the AIM LimitedPartnerships as discussed in Note 15. Servicing amortization, depreciation andimpairment expenses include CMSLP’s amortization of sub-advisory fees,impairment on mortgage servicing rights, impairment on sub-advisory contractsand depreciation and amortization of fixed and other assets.

For the years ended December 31,2004, 2003 and 2002, the following comprised servicing revenue and servicingexpenses:
| ** **                                                                                                | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                | ** ** | **(in thousands)** | ** ** |
| Mortgage servicing fees                                                                                   |       | $                       | 4,298      |     | $          | 5,398    |       | $ | 5,463 |   |
| Assumption fees and  other servicing income                                                               |       | 5,045                   |       | 3,472    |       | 4,312    |       |
| Interest income                                                                                           |       | 214                     |       | 264      |       | 694      |       |
| AIM Limited  Partnerships’ sub-advisory fees                                                         |       | 86                      |       | 349      |       | 517      |       |
| Total servicing  revenue(1)                                                                               |       | $                       | 9,643      |     | $          | 9,483    |       | $ | 10,986 |   |
| Amortization of  sub-advisory fees and mortgage servicing rights                                          |       | $                       | 65         |     | $          | 405      |       | $ | 690 |   |
| Depreciation and  amortization of fixed and other assets                                                  |       | 670                     |       | 881      |       | 1,073    |       |
| Impairment on AIM  Limited Partnerships’ sub-advisory contracts, mortgage servicing rights and  CMBS |       | 133                     |       | 525      |       | 410      |       |
| Total servicing amortization, depreciation and  impairment                                                |       | $                       | 868        |     | $          | 1,811    |       | $ | 2,173 |   |

----

(1)          Excludes gain on salesof servicing rights and investment-grade CMBS of $5,000 and $241,000 for 2003and 2002, respectively.

F-13

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**CRIIMI MAE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Discounts on Debt**

Discounts incurred inconnection with the issuance of debt are amortized using the effective interestmethod over the projected term of the related debt and are included as a componentof interest expense. In addition, as discussed in Note 6, prior to January 2003there were significant extension fees payable accrued under the terms ofcertain debt. We had estimated the amounts of these extension fees and wereamortizing the fees using the effective interest method over the term of therelated debt. However, these accrued extension fees were reversed into incomein January 2003 (as they were no longer payable) due to the repayment ofsuch debt.

**DerivativeInstruments and Hedging Activities**

Derivative instruments arerecorded on the balance sheet as either an asset or liability measured at fairvalue. Changes in the derivative’s fair value are recognized currently inearnings unless specific hedge accounting criteria are met. If the derivativeis not designated as a hedge, changes in the fair value, as well as the impactof any cash payments made or received, are recognized in earnings. If thederivative is designated as a cash flow hedge, the effective portion of changesin fair value are recognized in other comprehensive income and are subsequentlyreclassified into earnings when the hedged item affects earnings. Anyineffective portion of such hedges are recognized in earnings immediately.

**Earnings Per Share**

Basic earnings per share(EPS) is computed by dividing net income, or loss, available to commonshareholders by the weighted average common shares outstanding during theperiod. Diluted EPS reflects the potential dilution that could occur if commonstock equivalents,  which could includestock options, warrants, unvested restricted stock, unvested restrictive stockunits (RSUs) and certain series of convertible preferred stock were exercisedor converted into common stock where such exercise or conversion would resultin a lower EPS amount. We present both basic and diluted EPS. See Note 12 for areconciliation of basic EPS to diluted EPS.

**Income Taxes**

We have elected to qualify as a REIT for tax purposesunder Sections 856-860 of the Internal Revenue Code for the 2004,  2003 and 2002 tax years. We are required tomeet income, asset, ownership and distribution tests to maintain our REITstatus for federal and state tax purposes. We will monitor and minimize thelevels of non-qualifying income in order to meet REIT qualification criteria. SeeNote 1 for additional discussion.

Excess inclusion income generally results from ourprior resecuritization of mortgage securities in our portfolio. A shareholder’sallocable share of excess inclusion represents the minimum taxable incomereportable by the shareholder for that year; it may not be offset by a NOL andmay represent unrelated business taxable income for some shareholders. Duringthe years ended December 31, 2004, 2003 and 2002, no excess inclusion wasdistributed.

F-14

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We, and two of our subsidiaries incorporated in 2001,jointly elected to treat such two subsidiaries as taxable REIT subsidiaries(TRS) effective January 1, 2001. These subsidiaries allow us to earnnon-qualifying REIT income while maintaining our REIT status. The partnershipinterests  of CMSLP are held by these twosubsidiaries. Our TRS are separate taxable entities that cannot use our NOLcarryforward to reduce their taxable income. Thus, we will recognize income taxexpense to the extent these subsidiaries are subject to income taxes.

**CashFlow**

Thefollowing is the supplemental cash flow information for the years 2004, 2003and 2002:
| ** **                                                | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                     | ** ** |
| Cash paid for  interest                                   |       | $                                           | 44,659     |   | $ | 61,378 |   | $ | 72,489 |   |
| Cash paid  (received) for income taxes, net of refunds    |       | (714                                        | )          | 264 |   | 947 |   |
| Non-cash investing and  financing activities:             |       |                                        |       |   |   |   |   |
| Restricted stock issued                                   |       | 91                                          |       | 1,088 |   | 130 |   |
| Restricted Stock  Units (RSUs)                            |       | 154                                         |       | — |   | — |   |
| Preferred stock  dividends paid in shares of common stock |       | —                                      |       | — |   | 3,445 |   |
|                                                           |            |                                             |            |  |  |  |  |  |  |  |

 

**Comprehensive Income**

Comprehensiveincome includes net earnings as currently reported (before dividends paid oraccrued on preferred shares) adjusted for other comprehensive income. Othercomprehensive income consists of (a) changes in unrealized gains andlosses related to our CMBS, insured mortgage securities and derivatives whichwere disposed of, liquidated or impaired during the period with the resultinggain or loss reflected in net earnings (reclassification adjustments), (b) thechange in the unrealized gain or loss related to those investments that werenot disposed of or impaired during the period, and (c) certain changes inthe fair value of our derivative financial instruments accounted for under SFASNo. 133. The table below details other comprehensive income for theperiods presented:
| ** **                                                                                                           | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2004**                                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                           | ** ** | **(in thousands)**                     | ** ** |
| Net income (loss)  before dividends paid or accrued on preferred shares                                         |       | $                                           | 22,879     |   | $ | 2,895 |   | $ | (56,125 | ) |
| Reclassification  adjustment for (gains) losses from dispositions included in net income                             |       | (91                                         | )          | (1,571 | ) | 1,830 |   |
| Reclassification  adjustment for impairment losses recognized on CMBS included in net income                         |       | —                                      |       | — |   | (407 | ) |
| Reclassification  adjustment for gains on liquidation of derivative                                                  |       | (4,726                                      | )          | — |   | — |   |
| Adjustments to  unrealized holding gains (losses) on CMBS and insured mortgage securities  arising during the period |       | 126,706                                     |       | (14,681 | ) | 107,747 |   |
| Adjustments to  unrealized gains (losses) on derivative financial instruments                                        |       | —                                      |       | 5,713 |   | (604 | ) |
| Comprehensive income  (loss)                                                                                         |       | $                                           | 144,768    |   | $ | (7,644 | ) | $ | 52,441 |   |

 

F-15

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Thefollowing table summarizes our accumulated other comprehensive income:
| ** **                                            | ** ** | **December 31,**   | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2004**                | ** ** | **2003**              | ** ** |
| ** **                                            | ** ** | **(in thousands)** | ** ** |
| Unrealized gains  on mortgage assets                  |       |                    | $          | 213,472               |       |   |   | $ | 86,857 |   |   |
| Unrealized gains on  derivative financial instruments |       |                    | —     |                  |       |   | 4,726 |   |   |
| Accumulated other  comprehensive income               |       |                    | $          | 213,472               |       |   |   | $ | 91,583 |   |   |

 

Weaccount for our stock-based compensation arrangements in accordance with theintrinsic value method as defined by Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees”. SFAS No. 148, “Accounting forStock-Based Compensation—Transitionand Disclosure”, which was effective January 1, 2003 for us, requirescertain disclosures related to our stock-based compensation arrangements. Thefollowing table presents the effect on net income and earnings per share if wehad applied the fair value recognition provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation”, to our stock-based compensation (in thousands,except per share amounts):
| ** **                                                                                           | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                           | ** ** | **(in thousands)** | ** ** |
| Net income (loss)  to common shareholders                                                            |       | $                       | 16,707     |     | $          | (4,111   | )          | $ | (65,462 | ) |
| Add: Stock-based  compensation expense included in reported net income (loss)                        |       | 649                     |       | 752      |       | 110      |       |
| Less: Stock-based  compensation expense determined under the fair value based method for all  awards |       | (861                    | )          | (1,182   | )          | (1,124   | )          |
| Pro forma net  income (loss) to common shareholders                                                  |       | $                       | 16,495     |     | $          | (4,541   | )          | $ | (66,476 | ) |
| Earnings (loss)  per share:                                                                          |       |                    |       |     |       |     |       |
| Basic—as reported                                                                               |       | $                       | 1.08       |     | $          | (0.27    | )          | $ | (4.77 | ) |
| Diluted—as reported                                                                             |       | $                       | 1.06       |     | $          | (0.27    | )          | $ | (4.77 | ) |
| Basic—pro forma                                                                                 |       | $                       | 1.07       |     | $          | (0.30    | )          | $ | (4.85 | ) |
| Diluted—pro forma                                                                               |       | $                       | 1.05       |     | $          | (0.30    | )          | $ | (4.85 | ) |

 

**Recent Accounting Pronouncements**

In January 2003, the FASB issued FASBInterpretation (or FIN) No. 46, “Consolidationof Variable Interest Entities”, an interpretation of Accounting ResearchBulletin No. 51, “ConsolidatedFinancial Statements.”  FIN No. 46explains how to identify variable interest entities and how an enterpriseassesses its interests in a variable interest entity to decide whether toconsolidate that entity. This Interpretation requires existing unconsolidatedvariable interest entities to be consolidated by their primary beneficiaries ifthe entities do not effectively disperse risks among parties involved. FIN No. 46is effective immediately for variable interest entities created after January 31,2003, and to variable interest entities in which an enterprise obtains aninterest after that date. According to FIN No. 46R issued in December 2003,the Interpretation applies at the end of the first reporting period endingafter March 15, 2004, to variable interest entities in which an enterpriseholds a variable interest that it acquired before February 1, 2003. Theadoption of FIN No. 46 had no effect on our financial position or resultsof operations.

On December 16, 2004,the FASB issued SFAS No. 123R, ‘‘Share-Based Payment’’, which is arevision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123Rrequires all share-based payments to employees, including grants of employeestock options, to be valued at fair value on the date of grant, and to beexpensed over the applicable vesting period. Pro forma disclosure of the incomestatement effects of share-based payments is no longer an alternative. SFAS No. 123Ris effective for all 

F-16

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stock-basedawards granted on or after July 1, 2005. In addition, companies must alsorecognize compensation expense related to any awards that are not fully vestedas of the effective date. Compensation expense for the unvested awards will bemeasured based on the fair value of the awards previously calculated indeveloping the pro forma disclosures in accordance with the provisions of SFAS No. 123R.SFAS No. 123R is effective for us on July 1, 2005. We have not yetdetermined the impact of SFAS No. 123R.

**Adjustmentfor Initial Preferred Stock Issuance Costs**

At the July 31, 2003 Emerging Issues Task Forcemeeting, the SEC Observer clarified the application of Topic D-42 related topreferred stock issuance costs. According to the clarification, all preferredstock issuance costs, regardless of where in the stockholders’ equity sectionthe costs were initially recorded, should be charged to income available tocommon shareholders for the purpose of calculating earnings per share at thetime the preferred stock is redeemed. The SEC Observer indicated that preferredstock issuance costs not previously charged to income available to commonshareholders should be reflected retroactively in the consolidated financialstatements for reporting periods ending after September 15, 2003 byrestating the consolidated financial statements of prior periods on an as filedbasis.

As theresult of this guidance, we charged to income available to common shareholdersapproximately $1.2 million in preferred stock offering costs during the yearended December 31, 2002 related to our Series E preferred stockredeemed in March 2002. The following is a summary of the effect of thischange in accounting principle on our Consolidated Statements of Income andConsolidated Statement of Changes in Shareholders’ Equity and ComprehensiveIncome during the year ended December 31, 2002:
| ** **                                                                         | ** ** | **As reported** | ** ** | **Adjustment** | ** ** | **Adjusted** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|----------------|------------|--------------|------------|
| Dividends paid or  accrued on preferred  shares                                    |       | $                    | (8,122,791 | )              | $          | (1,214,227   | )          | $ | (9,337,018 | ) |
| Net loss to  common shareholders                                                   |       | (64,247,814          | )          | (1,214,227     | )          | (65,462,041  | )          |
| Earnings (loss) per  common share:                                                 |       |                 |       |           |       |         |       |
| Basic and diluted—before cumulative effect of change  in accounting principle |       | (3.97                | )          | (0.09          | )          | (4.06        | )          |
| Basic and diluted—after cumulative effect of change  in accounting principle  |       | (4.69                | )          | (0.08          | )          | (4.77        | )          |
| Additional paid-in  capital                                                        |       | 619,197,711          |       | 1,214,227      |       | 620,411,938  |       |
| Accumulated deficit                                                                |       | (429,812,858         | )          | (1,214,227     | )          | (431,027,085 | )          |
|                                                                                    |            |                      |            |                |            |              |            |  |  |  |

 

All applicable 2002disclosures have been adjusted to reflect this change in accounting principle.

F-17

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**Changein Accounting Principle due to Adoption of SFAS No. 142**

In 2001, the FinancialAccounting Standards Board (or FASB) issued SFAS No. 142, “Goodwill andOther Intangible Assets.”  SFAS No. 142,among other things, prohibits the amortization of existing goodwill and certaintypes of other intangible assets and establishes a new method of testinggoodwill for impairment. Under SFAS No. 142, the method for testinggoodwill for impairment occurs at the reporting segment level (as defined inSFAS No. 142) and is performed using a fair value based approach. SFAS No. 142was effective on January 1, 2002. The transition provisions of SFAS No. 142required us to reclassify $8.4 million of intangible assets related to themerger in 1995, to goodwill. When combined with the current goodwill of $1.4million, this resulted in $9.8 million of goodwill on our books. Effective uponadoption on January 1, 2002, we wrote off this goodwill and recorded aresulting impairment charge of approximately $9.8 million for this change inaccounting principle. The goodwill relates to the Portfolio Investment segment(as defined in Note 18). The fair value of the segment was determined using amarket capitalization approach and the impairment was primarily a result of thesignificant decrease in our common stock price since our merger in 1995. Thischange in accounting principle reduces our annual amortization expense byapproximately $2.8 million through June 2005.

**3.   FAIRVALUE OF FINANCIAL INSTRUMENTS**

Thefollowing estimated fair values of our consolidated financial instruments arepresented in accordance with GAAP, which define fair value as the amount atwhich a financial instrument could be exchanged in a current transactionbetween willing parties, in other than a forced sale or liquidation. Thesevalues do not represent our liquidation value or the value of the securitiesunder a portfolio liquidation.
| ** **                                       | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **Amortized Cost**                         | ** ** | **Fair Value**                             | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
| ** **                                       | ** ** | **(in thousands)**                         | ** ** |
| ASSETS:                                          |       |                                            |       |                                            |       |   |   |   |   |
| CMBS(1)                                          |       | $                                               | 747,222    |                                            | $          | 960,656 |   | $ | 750,287 |   | $ | 837,002 |   |
| Insured mortgage  securities(1)                  |       | 37,766                                          |       | 37,783                                          |       | 147,342 |   | 147,498 |   |
| Other MBS(1)                                     |       | 4,161                                           |       | 4,059                                           |       | 3,994 |   | 3,900 |   |
| Receivables and  other assets                    |       | See footnote                                    | (2)        | See footnote                                    | (2)        | See footnote | (2) | See footnote | (2) |
| Cash and cash  equivalents                       |       | 41,074                                          |       | 41,074                                          |       | 21,699 |   | 21,699 |   |
| Derivative net  asset(1)                         |       | —                                          |       | —                                          |       | 38 |   | 3,438 |   |
| LIABILITIES:                                     |       |                                            |       |                                            |       |   |   |   |   |
| Recourse debt:                                   |       |                                            |       |                                            |       |   |   |   |   |
| Secured by pledge of CMBS                        |       | 42,415                                          |       | 42,415                                          |       | 296,250 |   | 296,250 |   |
| Senior subordinated secured note                 |       | 31,267                                          |       | 33,831                                          |       | 31,267 |   | 33,950 |   |
| Secured by insured mortgage securities           |       | —                                          |       | —                                          |       | 22,526 |   | 22,526 |   |
| Non-Recourse Debt:                               |       |                                            |       |                                            |       |   |   |   |   |
| Secured by pledge of CMBS                        |       | 526,839                                         |       | 625,752                                         |       | 288,979 |   | 325,321 |   |
| Secured by pledge of insured mortgage securities |       | 29,485                                          |       | 29,485                                          |       | 119,238 |   | 122,791 |   |
| Secured by REO Asset                             |       | —                                          |       | —                                          |       | 7,332 |   | 7,364 |   |
| Derivative net  liability(1)                     |       | —                                          |       | 689                                             |       | — |   | — |   |
|                                                  |            |                                                 |            |                                                 |            |  |  |  |  |  |  |  |  |

----

(1)          Recorded at fair valuein the accompanying consolidated balance sheets.

(2)          CMSLP owned CMBS andinterest-only strips with an aggregate amortized cost basis of approximately$1.1 million and $1.5 million and a fair value of approximately $1.1 millionand $1.6 

F-18

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million as of December 31,2004 and December 31, 2003, respectively. The cost basis of all otherreceivables and other assets approximates fair value.

The following methods andassumptions were used to estimate the fair value of each class of financialinstruments:

**CMBS**

Our determination of fair values for our CMBSportfolio is a subjective process. The process begins with the compilation andevaluation of pricing information (such as spreads to U.S. Treasury securitiesor yields) that, in our view, is commensurate with the market’s perception ofvalue and risk of our assets and comparable assets. We use a variety of sourcesto compile such pricing information including: (i) recent offerings and/or secondary trades of comparable CMBS(i.e., securities comparable to our CMBS or to the CMBS (or collateral)underlying our CMBS issued in connection with CBO-1 and CBO-2), (ii) communicationswith dealers, lenders, and active CMBS investors and/or advisors regarding thepricing and valuation of our securities and comparable securities, (iii) institutionallyavailable research reports, (iv) analyses prepared by the nationallyrecognized rating organizations responsible for the initial rating assessmentand on-going surveillance of such CMBS, and (v) other qualitative and quantitativefactors that may impact the value of the CMBS such as the market’s perceptionof the issuers of the CMBS and the credit fundamentals of the commercialproperties securing each pool of underlying commercial mortgage loans. We makefurther adjustments to such pricing information based on our specific knowledgeof our CMBS, including cash flow and characteristics of the particular CMBS,and the impact of relevant events, which is then used to determine the fairvalue of our CMBS using a discounted cash flow approach. Expected future grosscash flows are discounted at assumed market yields for our CMBS rated AAAthrough generally B+, depending on the rating. The fair value for those CMBS,or portion thereof, expected to incur principal losses and interest shortfalls(i.e., generally B–rated bonds through our unrated/issuer’s equity) based on our overall expectedloss estimate are valued using a discounted cash flow approach applied to lossadjusted cash flows and a yield to maturity that, in our view, is commensuratewith the market’s perception of the value and risk of comparable securities. Suchanticipated principal losses and interest shortfalls, as well as the timing andamount of potential recoveries of such shortfalls, are critical estimates andhave been taken into consideration in the calculation of fair values and yieldsto maturity used to recognize interest income. We have disclosed the range ofdiscount rates by rating category used in determining the fair values as of December 31,2004 in Note 4.

The liquidity of thesubordinated CMBS market has historically been limited. Additionally, duringadverse market conditions, the liquidity of such market has been severelylimited. For this reason, among others, management’s estimate of the fair valueof our CMBS could vary significantly from the value that could be realized in acurrent transaction or under certain market conditions.

**OtherMBS**

The fair value of theOther MBS is an estimate based on the indicative market price from publiclyavailable pricing services, as well as management estimates.

**Insured Mortgage Securities**

We calculated theestimated fair value of the insured mortgage securities portfolio, usingdiscounted cash flow and other methodologies and assumptions that, in our view,are commensurate with market practice. Among other factors, we examined thetype and strength of mortgage prepayment lockout provisions within the contextof the current interest rate environment in determining the most appropriatevaluation approach. We used a variety of sources to determine elements of fairvalue including discount 

F-19

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andcredit spreads published in institutionally available research reports,communications and discussions with other market professionals, and informationobtained from participation in recent transactions.

**Cash and Cash Equivalents**

The carrying amountapproximates fair value because of the short maturity of these instruments.

**Debt**

The carrying amount of ourvariable rate debt approximates fair value because the current rate on the debtresets monthly based on market rates. The fair value of our non-recourse debtsecured by pledge of CMBS is estimated using a discounted cash flow methodologysimilar for CMBS described above. The discount rate used to estimate the fairvalue of the BREF Debt was determined after considering the BREF Debt’srelative position in our capital structure in relation to our other capital aswell as other features of the instrument. The fair value of the non-recoursedebt secured by the REO asset was estimated based on the fair value of theunderlying asset at December 31, 2003.

**Derivative Net Asset (Liability)**

The fair value of ourinterest rate swaps is the estimated amount that we would have realized if wewould have terminated the agreements as of December 31, 2004 and December 31,2003, taking into account current interest rates, information obtained from thecounterparties, and the current creditworthiness of the counterparties.

**4.   CMBS**

As of December 31,2004, our assets include CMBS with an aggregate face amount of approximately$1.4 billion rated from AAA to D and unrated. Certain of the CMBS assets relateto securitization transactions in which we did not surrender control of theassets and thus the assets and the associated non-recourse debt are reflectedin the consolidated balance sheet. Accordingly, the interest income from suchassets and interest expense from the associated non-recourse debt are alsoreflected in the consolidated statements of income. However, cash flows fromsuch assets are all required to service the debt and therefore we currentlyreceive no cash flows from those assets.  Substantially all of our CMBS portfoliorepresents investments in securities issued in connection with CRIIMI MAE Trust1 Series 1996-C1 (or CBO-1) and CRIIMI MAE Commercial Mortgage Trust Series 1998-C1(or CBO-2). The following is a summary of our CMBS as of December 31,2004:
| ** **                                | ** ** | **Fair Value**    | ** ** | **Amortized Cost** | ** ** | **% of Total   Fair   Value of   CMBS** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **(in millions)** | ** ** | ** **              | ** ** |
| CMBS Pledged to  Secure Non-Recourse Debt |       |                   | $          | 625.8                   |       |                                                                  |       | $ | 479.6 |   |   |   | 65 | % |   |
| Retained CMBS  Portfolio                  |       |                   | 334.9      |                    |       |                                                                  | 267.6      |   |   |   | 35 | % |   |
| Total CMBS  Portfolio                     |       |                   | $          | 960.7                   |       |                                                                  |       | $ | 747.2 |   |   |   | 100 | % |   |

 

F-20

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Theaggregate investment by the Standard & Poor’s Rating Services(S&P) rating of the CMBS is as follows:
| **Security** Rating                                  | ** ** | ** **             | ** ** | **Face Amount  as of   12/31/04** | ** ** | **Weighted  Average  Pay  Rate as of   12/31/04** | ** ** | **Loss Adjusted  Weighted  Average  Life as of  12/31/04(1)** | ** ** | **Fair Value as  of   12/31/04(7)** | ** ** | **Discount Rate  or  Range of   Discount   Rates Used to  Calculate Fair   Value  as of 12/31/04** | ** ** | **Amortized  Cost as of   12/31/04(5)(6)** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                | ** ** | **(in millions)** | ** ** | ** **                                       | ** ** | ** **                                                       | ** ** | **(in millions)**                                                       | ** ** | ** **                                         | ** ** | **(in millions)**                                                                                                                               | ** ** |
| ***CMBS Pledged To Secure Non-Recourse Debt***            |       |                   |       |                                             |       |                                                             |       |                                                                         |       |                                               |       |                                                                                                                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| AAA(3)                                                    |       |                   | $          | 325.2                                            |       |                                                             |       | 7.0                                                                          | %          |                                               |       | 6  years                                                                                                                                             |       |                                                      |       | $ | 352.7 |   |   |   | 3.8  - 5.5 | % |   |   | $ | 290.8 |   |   |
| BBB–(4)                                              |       |                   | 260.0      |                                             |       |                                                             | 7.0        | %                                                                            |       |                                               | 9  years   |                                                                                                                                                 |       |                                                      | 273.1      |   |   |   | 6.1  - 6.4 | % |   |   | 188.8 |   |   |
| Total CMBS Pledged to Secure  Non-Recourse Debt |       |                   | 585.2      |                                             |       |                                                             | 7.0        | %                                                                            |       |                                               | 8  years   |                                                                                                                                                 |       |                                                      | 625.8      |   |   |   |   |   |   |   | 479.6 |   |   |
| ***Retained CMBS Portfolio***                             |       |                   |       |                                             |       |                                                             |       |                                                                         |       |                                               |       |                                                                                                                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| *CMBS  Pledged to Secure Recourse Debt*                   |       |                   |       |                                             |       |                                                             |       |                                                                         |       |                                               |       |                                                                                                                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| BBB–(4)                                              |       |                   | 59.0       |                                             |       |                                                             | 7.0        | %                                                                            |       |                                               | 9  years   |                                                                                                                                                 |       |                                                      | 62.0       |   |   |   | 6.1  - 6.4 | % |   |   | 42.8 |   |   |
| BB+                                                       |       |                   | 70.9       |                                             |       |                                                             | 7.0        | %                                                                            |       |                                               | 12  years  |                                                                                                                                                 |       |                                                      | 68.0       |   |   |   | 7.6 | % |   |   | 48.3 |   |   |
| B–                                                   |       |                   | 2.5        |                                             |       |                                                             | 6.8        | %                                                                            |       |                                               | 9  years   |                                                                                                                                                 |       |                                                      | 1.6        |   |   |   | 15.1 | % |   |   | 1.6 |   |   |
|                                                      |       |                   | 132.4      |                                             |       |                                                             |       |                                                                         |       |                                               |       |                                                                                                                                                 |       |                                                      | 131.6      |   |   |   |   |   |   |   | 92.7 |   |   |
| *CMBS*                                                    |       |                   |       |                                             |       |                                                             |       |                                                                         |       |                                               |       |                                                                                                                                                 |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| BB                                                        |       |                   | 35.5       |                                             |       |                                                             | 7.0        | %                                                                            |       |                                               | 12  years  |                                                                                                                                                 |       |                                                      | 31.0       |   |   |   | 8.9 | % |   |   | 21.6 |   |   |
| B+                                                        |       |                   | 88.6       |                                             |       |                                                             | 7.0        | %                                                                            |       |                                               | 14  years  |                                                                                                                                                 |       |                                                      | 56.4       |   |   |   | 13.5 | % |   |   | 47.8 |   |   |
| B–(2)                                                |       |                   | 189.2      |                                             |       |                                                             | 8.9        | %                                                                            |       |                                               | 20  years  |                                                                                                                                                 |       |                                                      | 86.3       |   |   |   | 15.0  - 15.8 | %(8) |   |   | 78.4 |   |   |
| CCC(2)                                                    |       |                   | 70.9       |                                             |       |                                                             | 0.0        | %                                                                            |       |                                               | —     |                                                                                                                                                 |       |                                                      | —     |   |   |   | — |   |   |   | — |   |   |
| D(2)(9)                                                   |       |                   | 106.3      |                                             |       |                                                             | N/M        |                                                                         |       |                                               | 23  years  |                                                                                                                                                 |       |                                                      | 14.2       |   |   |   | 15.0 | %(8) |   |   | 13.3 |   |   |
| Unrated/Issuer’s Equity(2)                           |       |                   | 142.1      |                                             |       |                                                             | N/M        |                                                                         |       |                                               | 0.9  year  |                                                                                                                                                 |       |                                                      | 15.4       |   |   |   | 15.0 | %(8) |   |   | 13.8 |   |   |
|                                                      |       |                   | 632.6      |                                             |       |                                                             |       |                                                                         |       |                                               |       |                                                                                                                                                 |       |                                                      | 203.3      |   |   |   |   |   |   |   | 174.9 |   |   |
| Total Retained CMBS  Portfolio                       |       |                   | 765.0      |                                             |       |                                                             | 4.5        | %(2)                                                                         |       |                                               | 14  years  |                                                                                                                                                 |       |                                                      | 334.9      |   |   |   |   |   |   |   | 267.6 |   |   |
| Total CMBS                                                |       |                   | $          | 1,350.2                                          |       |                                                             |       | 5.6                                                                          | %          |                                               |       | 10 years                                                                                                                                             |       |                                                      |       | $ | 960.7 |   |   |   |   |   |   |   | $ | 747.2 |   |   |

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(1)             The loss adjusted weighted average lifewas weighted using fair values as of December 31, 2004 and represents theweighted average expected life of the CMBS based on our current estimate offuture losses.

(2)             These CMBS experience interest shortfalls when theweighted average net coupon rate on the underlying CMBS is less than theweighted average stated coupon payments on our Retained CMBS Portfolio. Suchinterest shortfalls will continue to accumulate until they are repaid througheither excess interest and/or recoveries on the underlying CMBS or are-characterization of principal cash flows, in which case they may be realizedas a loss of principal on the Retained CMBS Portfolio. Such anticipated losses,including shortfalls, have been taken into consideration in the calculations offair market values and yields to maturity used to recognize interest income asof December 31, 2004. The weighted average pay rate as ofDecember 31, 2004 reflects an annualization of cash received as of yearend based on the face amount outstanding. This weighted average pay rate willlikely change on a periodic basis due to the volatility of interest cash flows,certain reasons of which are described herein. The unrated/issuer’s equity CMBSfrom CBO-1 and CBO-2 currently do not have a stated coupon rate since thesesecurities are only entitled to the residual cash flow payments, if any,remaining after paying the securities with a higher payment priority. As aresult, effective coupon rates on these securities are highly sensitive to themonthly cash flow payments received from the underlying CMBS that represent thecollateral for CBO-1 and CBO-2. Additionally, certain weighted average payrates are not meaningful (N/M) due to the infrequent, volatile cash flowsassociated with such bonds.

(3)             In connection with CBO-2, $328.4 million (currently AAArated) face amount of CMBS were sold with call options and $345 million(currently AAA rated) face amount were sold without call options. Since we retainedcall options on certain sold CMBS, we did not surrender control of these CMBSpursuant to applicable accounting requirements, and thus these CMBS areaccounted for as a financing and are reflected as “CMBS Pledged to SecureNon-Recourse Debt” 

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on the consolidated balancesheet. See Note 6 to the consolidated financial statements for a discussion ofthe non-recourse debt issued in connection with this securitizationtransaction.

(4)             On June 30 2004, we issued a senior interestcertificate with a face amount of $260.0 million in our $319.0 million(currently BBB– rated) CMBS and retained an option torepurchase the senior interest certificate, after five years, at a fixed spreadover applicable swap rates. Since we retained a repurchase option, we did notsurrender control of these CMBS pursuant to the requirements of SFASNo. 140, and thus these CMBS and the associated non-recourse debt arereflected on the consolidated balance sheet. For presentation purposes, approximately81.5% of the (currently BBB– rated) CMBS asset-related information isreflected in “CMBS Pledged to Secure Non-Recourse Debt” and the remaining 18.5%of the (currently BBB– rated) asset-related information isreflected in “Retained CMBS Portfolio — CMBS Pledged to Secure RecourseDebt”.  See Note 6 to our notes toconsolidated financial statements for a discussion of the non-recourse debtissued in connection with this securitization transaction.

(5)             Amortized cost reflects approximately $15.7 million ofimpairment charges related to our CMBS, which was recognized during 2004. Theseimpairment charges are in addition to the cumulative impairment charges ofapproximately $263.1 million that were recognized through December 31,2003.

(6)             See Note 8 to our notes to consolidated financialstatements for information regarding certain tax information related to ourCMBS.

(7)             As of December 31, 2004, the aggregate fair valuesof the CBO-1, CBO-2, Nomura and MSC 1997-WF1 bonds were approximately $13.8million, $939.2 million, $6.1 million and $1.6 million, respectively.

(8)             As a result of the estimated loss of principal on theseCMBS, or a portion thereof, the fair values and discount rates of these CMBSare based on a loss adjusted yield to maturity. The fair values of the B–, CCC, D rated and the unrated/issuer’sequity were derived primarily from interest cash flow and/or recoveries ofprior interest shortfalls anticipated to be received since our current lossexpectation assumes that the full principal amount of these securities will notbe recovered. See also “Advance Limitations, Appraisal Reductions and Losses onCMBS” below.

(9)             Although the principal balance of the Drated bond in CBO-2 is expected to be outstanding for approximately 23 years,it is not anticipated that any principal will be collected. Cash receipts fromthis bond are not received on a regular basis and, when and if received, areexpected to be only in the form of recoveries of prior interest shortfalls tothe extent interest shortfalls are claimed by any CBO-2 CMBS or other REMIChigher in priority.

**Mortgage Loan Pool**

Wehave $13.2 billion and $15.3 billion of seasoned commercial mortgage loansunderlying our CMBS portfolio as of December 31, 2004 and 2003,respectively.  As of December 31,2004, the commercial mortgage loans are secured by properties of the types andin the geographic locations identified below:
| **Property Type** | ** ** | ** ** | ** ** | **12/31/04   Percentage(1)** | ** ** |
|------------------------|------------|------------|------------|-----------------------------------|------------|
| Retail                 |       |       | 30         | %                                 |       |
| Multifamily            |       |       | 25         | %                                 |       |
| Hotel                  |       |       | 16         | %                                 |       |
| Office                 |       |       | 14         | %                                 |       |
| Other                  |       |       | 15         | %                                 |       |
| Total                  |       |       | 100        | %                                 |       |

 

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| **Geographic Location** | ** ** | ** ** | ** ** | **12/31/04   Percentage(1)** | ** ** |
|------------------------------|------------|------------|------------|-----------------------------------|------------|
| California                   |       |       | 16         | %                                 |       |
| Texas                        |       |       | 12         | %                                 |       |
| Florida                      |       |       | 7          | %                                 |       |
| Pennsylvania                 |       |       | 6          | %                                 |       |
| Other(2)                     |       |       | 59         | %                                 |       |
| Total                        |       |       | 100        | %                                 |       |

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(1)          Based on a percentage ofthe total unpaid principal balance of the underlying loans.

(2)          Noother individual state makes up more than 5% of the total.

**Specially ServicedMortgage Loans**

Our servicing subsidiary, CMSLP, performs specialservicing on substantially all of the loans underlying our CMBS portfolio. Aspecial servicer typically provides asset management and resolution serviceswith respect to nonperforming or underperforming loans within a pool ofmortgage loans. When serving as special servicer of a mortgage loan pool, CMSLPhas the authority, subject to certain restrictions in the applicable CMBSpooling and servicing documents, to deal directly with any borrower that failsto perform under certain terms of its mortgage loan, including the failure tomake payments, and to manage any loan workouts and foreclosures. As specialservicer, CMSLP earns fee income on services provided in connection with anyloan servicing function transferred to it from the master servicer. The actionsundertaken by CMSLP with respect to each loan are governed by the servicingstandard and the pooling and servicing agreement (PSA) for each pool whichgenerally requires CMSLP to operate in the best interest of all of thecertificateholders which may not necessarily be in the best interest of CRIIMIMAE. Because CRIIMI MAE owns the first loss, unrated or lowest rated bond ofvirtually all of the CMBS transactions underlying our CMBS, CRIIMI MAE retainscertain additional rights with respect to each specially serviced loan whichrights are also set forth in the applicable PSA. As discussed below, althoughCMSLP is not currently the special servicer on a group of healthcare and seniorhousing mortgage loans, such loans have been included in the total speciallyserviced loans as of December 31, 2004 due to the anticipated transfer ofspecial servicing rights and obligations related to such loans.

As of December 31,2004 and December 31, 2003, specially serviced mortgage loans included inthe commercial mortgage loans described above are as follows:
| ** **                                                 | ** ** | **12/31/04**           | ** ** | **12/31/03** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|--------------|------------|
| ** **                                                 | ** ** | **(in millions)** | ** ** |
| Specially  serviced loans due to monetary default(1)(2)(3) |       | $                      | 779.1      |         | $          | 963.8 |   |
| Specially  serviced loans due to covenant default/other(3) |       | 41.4                   |       | 58.2         |       |
| Total specially  serviced loans                            |       | $                      | 820.5      |         | $          | 1,022.0 |   |
| Percentage of total  mortgage loans                        |       | 6.2                    | %          | 6.7          | %          |

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(1)          Includes $208.6 millionand $163.8 million, respectively, of real estate owned by the underlyingsecuritization trusts. See the table below regarding property typeconcentrations for further information on real estate owned by underlyingtrusts. Also includes loans transferred into special servicing for “imminentdefault” but where monetary default may not yet actually have occurred.

(2)          As discussed below, wecontinue to classify the $135.1 million in Shilo Inn loans as speciallyserviced.

(3)          As of December 31,2004, our ownership interest in one of our CMBS transactions underlying CBO-2includes CMBS in which our exposure to losses arising from certain healthcareand senior housing mortgage loans is limited to the extent of losses in excessof other subordinated CMBS (referred to 

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herein as the SubordinatedHealthcare/Senior-Housing CMBS). These Subordinated Healthcare/Senior HousingCMBS are not owned by us and are subordinate to our CMBS in this transaction. Asa result, the value of our CMBS will be affected if interest shortfalls and/orrealized losses on such healthcare and senior housing mortgage loans are inexcess of the principal balance of such Subordinated Healthcare/Senior-HousingCMBS. We currently estimate that the interest shortfalls and/or realized losseson such healthcare and senior housing mortgage loans will exceed theoutstanding principal balance of Subordinated Healthcare/Senior Housing CMBS.The principal balance of the Subordinated Healthcare/Senior Housing CMBS as of December 31,2004 is approximately $3.4 million. As of December 31, 2004, thescheduled principal balance of healthcare and senior housing mortgage loansunderlying the Subordinated Healthcare/Senior Housing CMBS that are included inour total specially serviced loan balance is approximately $72.0 million, $53.1million of which is included in monetary default and $18.9 million of which isincluded in covenant default.

Thespecially serviced mortgage loans as of December 31, 2004 were secured byproperties of the types and located in the states identified below:
| **Property Type** | ** ** | ** ** | ** ** | **$ (in millions)** | ** ** | **Percentage** | ** ** |
|------------------------|------------|------------|------------|-------------------------------|------------|----------------|------------|
| Hotel                  |       |       | $          | 375.7                         | (1)(2)     |           |       | 46 | % |   |
| Retail                 |       |       | 145.3      | (1)                           |       |           | 18         | % |   |
| Healthcare             |       |       | 141.2      |                          |       |           | 17         | % |   |
| Multifamily            |       |       | 81.0       |                          |       |           | 10         | % |   |
| Office                 |       |       | 52.1       |                          |       |           | 6          | % |   |
| Industrial             |       |       | 20.4       |                          |       |           | 2          | % |   |
| Other                  |       |       | 4.8        |                          |       |           | 1          | % |   |
| Total                  |       |       | $          | 820.5                         |       |           |       | 100 | % |   |

 
| **Geographic Location** | ** ** | ** ** | ** ** | **$ (in millions)** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|------------|------------|-------------------------------|------------|----------------|------------|
| Florida                      |       |       | $          | 132.6                         |       |           |       | 16 | % |   |
| Texas                        |       |       | 85.5       |                          |       |           | 10         | % |   |
| Oregon                       |       |       | 80.1       |                          |       |           | 10         | % |   |
| North Carolina               |       |       | 47.2       |                          |       |           | 6          | % |   |
| California                   |       |       | 44.5       |                          |       |           | 5          | % |   |
| Other                        |       |       | 430.6      |                          |       |           | 53         | % |   |
| Total                        |       |       | $          | 820.5                         |       |           |       | 100 | % |   |

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(1)          Approximately $97.6million and $46.1 million, respectively, of these loans in special servicingare real estate owned by the underlying securitization trusts.

(2)          See below for adiscussion related to the Shilo Inn loans.

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Thefollowing table provides a summary of the change in the balance of speciallyserviced loans from December 31, 2003 to December 31, 2004:
| ** **                                          | ** ** | **(in millions)** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|
| Specially  Serviced Loans at December 31, 2003 |       |                   | $          | 1,022.0 |   |   |
| Transfers out of special servicing                  |       |                   | (543.1     | ) |   |
| Transfers in due to monetary default(1)             |       |                   | 216.9      |   |   |
| Transfers in due to covenant default and other(1)   |       |                   | 120.2      |   |   |
| Other(2)                                            |       |                   | 20.5       |   |   |
| Loan amortization(3)                                |       |                   | (16.0      | ) |   |
| Specially Serviced Loans  at December 31, 2004 |       |                   | $          | 820.5 |   |   |

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(1)          Although CMSLP is notcurrently the special servicer on a group of healthcare and senior housingmortgage loans, such loans have been included in the total specially servicedloans as of December 31, 2004 due to the anticipated transfer of specialservicing rights and obligations related to such loans. Accordingly, transfersin due to monetary default and transfers in due to covenant default and otherinclude $53.1 million and $18.9 million, respectively, for the year ended December 31,2004.

(2)          Represents theadjustment of the underlying trusts for the aggregate amount of the Shilo Inn’sadvance notes created as a result of the amendment of each trust’s respectivePSA.

(3)          Represents the reductionof the scheduled principal balances due to borrower payments or, in the case ofloans in monetary default, advances made by master servicers.

As of December 31, 2004, the most significantborrowing relationship with respect to unpaid principal balance in ourspecially serviced portfolio, the Shilo Inn loans, consisted of 23 loanstotaling an aggregate principal balance of $135.1 million spread across threeCMBS transactions and secured by 23 hotel properties in the West and PacificNorthwestern states. The special purpose borrowing entities had filed forbankruptcy protection in February 2002 and CMSLP, as special servicer forthe related securitization trusts, entered into comprehensive loanmodifications in March 2003. In April 2004, the related PSAs wereamended to clarify the manner by which the master servicers could recoup theiroutstanding liquidity and property protection advances. All outstanding masterservicer advances have since been repaid.

In September 2004, after the bankruptcy court haddisallowed approximately $1.6 million of the securitization trusts’ request forreimbursement of legal and other professional fees and expenses and theoutstanding principal balance of the loans were adjusted pro-rata as of September 30,2004. Although the borrowers have made monthly principal and interest paymentsunder the loan modifications through March 2005, we continue to classifythe Shilo Inn loans as specially serviced loans due to the fact that theborrowers have continued to indicate to us that, based on the operations of theproperties, they may not have the wherewithal to continue making their mortgageloan payments. We are exploring alternatives to fully resolve these speciallyserviced loans in the best interests of the securitization trusts’certificateholders, including a possible sale of one or more of these mortgageloans.

Distributions on ourRetained CMBS Portfolio, and the related fair value of the Retained CMBSPortfolio, will continue to be impacted by, among other things, the borrowers’performance under the terms of the modified loans.

**AdvanceLimitations, Appraisal Reductions and Losses on CMBS**

We experience shortfalls in expected cash flow on ourCMBS prior to the recognition of a realized loss primarily due to servicing advancelimitations resulting from appraisal reductions and/or advance limitationsspecific to certain trusts. An appraisal reduction event can result in reducedmaster servicer principal and interest advances based on the amount by whichthe sum of the unpaid principal balance of 

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the loan, accumulatedprincipal and interest advances and other expenses exceeds 90% (in most cases)of the newly appraised value of the property underlying the mortgage loan. Asthe holder of the lowest rated and first loss bonds, our bonds are the first toexperience interest shortfalls as a result of the reduced advancing requirement.In general, the master servicer can advance up to a maximum of the differencebetween 90% of the property’s appraised value and the sum of accumulatedprincipal and interest advances and expenses. The ultimate disposition orwork-out of the mortgage loan may result in a higher or lower realized loss onour Retained CMBS Portfolio than the calculated appraisal reduction amount. Totalappraisal reductions as of December 31, 2004 for the CMBS transactions inwhich we retain an ownership interest were approximately $40.1 million, $145.6million and $8.9 million for CBO-1, CBO-2 and Nomura, respectively, for a totalof $194.6 million.

CertainCMBS from the CBO-1, CBO-2 and Nomura transactions are expected to experienceprincipal write-downs over their expected lives. The following table summarizesthe actual realized losses on our CMBS through December 31, 2004(including realized mortgage loan losses expected to pass through to our CMBSduring the next month) and the expected future real estate losses underlyingour CMBS, including real estate losses which may be realized outside of ourCMBS ownership:
| ** **                                                                                              | ** ** | **CBO-1**               | ** ** | **CBO-2** | ** ** | **Nomura** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------|------------|------------|------------|-----------|------------|
| ** **                                                                                              | ** ** | **(in thousands)** | ** ** |
| Years 1999  through 2002 actual realized losses                                                         |       | $                       | 16,038     |      | $          | 34,597     |       | $         | 801        |   | $ | 51,436 |   |
| Year 2003 actual realized losses                                                                        |       | 11,796                  |       | 57,913    |       | 1,920      |       | 71,629    |       |
| Year 2004 actual realized losses                                                                        |       | 46,116                  |       | 72,689    |       | 13,961     |       | 132,766   |       |
| Cumulative actual realized losses through December 31, 2004                                        |       | 73,950                  |       | 165,199   |       | 16,682     |       | 255,831   |       |
| Expected loss estimates for the year 2005                                                               |       | 39,994                  |       | 192,366   |       | 11,653     |       | 244,013   |       |
| Expected loss estimates for the year 2006                                                               |       | 3,991                   |       | 35,919    |       | 6,534      |       | 46,444    |       |
| Expected loss estimates for the year 2007                                                               |       | 16,169                  |       | 12,062    |       | 4,611      |       | 32,842    |       |
| Expected loss estimates for the year 2008                                                               |       | 526                     |       | 3,683     |       | 2,571      |       | 6,780     |       |
| Expected loss estimates for the year 2009                                                               |       | 489                     |       | 5,953     |       | 2,094      |       | 8,536     |       |
| Expected loss estimates for the remaining life of CMBS                                                  |       | 1,561                   |       | 25,325    |       | 6,399      |       | 33,285    |       |
| Cumulative  expected loss estimates (including cumulative actual realized losses) through  life of CMBS |       | $                       | 136,680    |      | $          | 440,507    |       | $         | 50,544     |   | $ | 627,731 |   |

 

We increased our overall expected loss estimaterelated to our subordinated CMBS from approximately $503 million as of December 31,2002 to $581 million as of December 31, 2003 and then to $628 million asof December 31, 2004, with such total losses occurring or expected tooccur through the life of the CMBS portfolio. This revision to the overallexpected loss estimate includes changes in the anticipated timing of resolutionand disposition of certain specially serviced assets and the impact ofincreased projected losses due to lower internal estimates of values onproperties underlying certain mortgage loans. The primary reasons for lowerestimates of value in 2004 and 2003 include changes in the operatingperformance of certain properties and related markets and changes to workoutnegotiations and/or strategies. Additionally in 2003, the lower estimates ofvalue were also attributed to the softness in the economy and the lag typicallyassociated with real estate fundamentals, the continued slowdown in travel and,in some cases, over-supply of hotel properties, and a shift in retail activityin some markets. Additionally, our estimates of overall expected losses includeestimates of future loss exposure which relate in part to underlying mortgageloans which are performing today, but which we expect may default at some pointin the future, at which time we estimate that losses may occur. Such estimatesare subject to change as market conditions change. There can be no assurancethat our overall expected loss estimate of approximately $628 million, as of December 31,2004, will not be exceeded as a result of additional or existing adverse eventsor circumstances.

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During the years ended December 31,2004, 2003 and 2002 we determined that there had been an adverse change inexpected future cash flows for certain of our CMBS due primarily to the factorsmentioned above. As a result, we determined that these CMBS had been impairedunder EITF 99-20. We recorded other than temporary impairment charges on theseCMBS through the consolidated statements of income of $15.7 million, $14.7million and $70.2 million for the years ended December 31, 2004, 2003 and2002, respectively.

**Yield to Maturity**

Thefollowing table summarizes yield-to-maturity information relating to our CMBS:
| **Pool**                                  | ** ** | ** ** | ** ** | **Anticipated  Yield-to-Maturity  as of 1/1/04(1)** | ** ** | **Current  Anticipated  Yield-to-Maturity  as of 1/1/05(1)** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| CMBS Pledged to  Secure Non-Recourse Debt |       |       | 9.1        | %                                                             |       |                                                                   | 10.4       | %(2) |   |
| Retained CMBS  Portfolio                  |       |       | 13.6       | %                                                             |       |                                                                   | 15.8       | % |   |
| Weighted Average                          |       |       | 11.9       | %                                                             |       |                                                                   | 12.3       | % |   |

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(1)          Represents theanticipated weighted average yield, based on amortized cost, over the remainingexpected life of the CMBS based on our estimate of the timing and amount offuture credit losses and other significant items that are anticipated to affectfuture cash flows.

(2)          EffectiveJuly 1, 2004, CMBS Pledged to Secure Non-Recourse Debt includesapproximately 81.5% of our BBB- rated CMBS, as previously discussed.

**Determining FairValue of CMBS**

We use a discounted cashflow methodology for determining the fair value of our CMBS. See Note 3 for adiscussion of our fair value methodology.

*Key Assumptions inDetermining Fair Value*

The gross mortgageloan cash flows from each commercial mortgage loan pool and their correspondingdistribution to the CMBS may be affected by numerous assumptions and variablesincluding:

(i)             changesin the timing and/or amount of credit losses on the commercial mortgage loans(credit risk), which are a function of:

·       thepercentage of mortgage loans that experience a default either during themortgage term or at maturity (referred to in the industry as a defaultpercentage);

·       therecovery period represented by the time that elapses between the default of acommercial mortgage loan and the subsequent foreclosure and liquidation of thecorresponding real estate (a period of time referred to in the industry as alag); and,

·       the percentage of mortgageloan principal lost as a result of the deficiency in the value of the realestate liquidation proceeds resulting from the foreclosure and sale of thecommercial real estate (referred to in the industry as a loss severity);

(ii)    the discount rate used to derive fair value,which is comprised of the following:

·       abenchmark risk-free rate, calculated by using the current, “on-the-run” U.S.Treasury curve and interpolating a comparable risk-free rate based on theweighted-average life of each CMBS; plus,

·       acredit risk premium; plus,

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·       aliquidity premium; except,

·       for those CMBS or portionthereof expected to experience principal write-downs over their lives, we usean estimated discount rate that may or may not be based on U.S. Treasury ratesthat we believe approximates a market rate of return for similar securities.

(iii)  changes incash flows related to principal losses and interest shortfalls, as well as thetiming and amount of potential recoveries of such shortfalls, based on ouroverall expected loss estimate for our CMBS, the fair value of which isdetermined using a loss adjusted yield to maturity;

(iv)  the amountand timing of principal and interest advances made by the servicers fordistribution to the CMBS; and

(v)    theexpected performance of the properties during the specially serviced period.

*Sensitivities ofKey Assumptions*

Since we use a discountedcash flow methodology to derive the fair value of our CMBS, changes in thetiming and/or the amount of cash flows received from the underlying commercialmortgage loans, and their allocation to the CMBS, will directly impact thevalue of such securities. Accordingly, delays in the receipt of cash flowsand/or decreases in future cash flows resulting from higher than anticipatedcredit losses, among other things, will result in an overall decrease in thefair value of our CMBS. Furthermore, any increase/(decrease) in the requiredrate of return for CMBS will result in a corresponding (decrease)/increase inthe value of such securities. We have included the following narrative andnumerical disclosures to demonstrate the sensitivity of such changes to thefair value of our CMBS.

*Key AssumptionsResulting in an Adverse Impact to Fair Value*

Factors which couldadversely affect the valuation of our CMBS include: (i) the receipt offuture cash flows less than anticipated due to higher credit losses (i.e.,higher credit losses resulting from a larger percentage of loan defaults,and/or losses occurring greater or sooner than projected, and/or longer periodsof recovery between the date of default and liquidation (see also “KeyAssumptions in Determining Fair Values” and “Sensitivity of Fair Value toChanges in Credit Losses” below)), (ii) deteriorating credit which wouldcause assumed interest recoveries to be claimed by bonds higher in prioritythan ours, (iii) an increase in the required rate of return (see “Sensitivityof Fair Value to Changes in the Discount Rate” below) for CMBS, and/or (iv) thereceipt of cash flows later than anticipated (see “Sensitivity of Fair Value toExtension Risk” below).

**Sensitivity of FairValue to Changes in Credit Losses**

For purposes of this disclosure, we used a marketconvention for simulating the impact of increased credit losses on CMBS. Generally,the industry uses a combination of an assumed percentage of loan defaults(referred to in the industry as a Constant Default Rate or “CDR”), a lag periodand an assumed loss severity. For purposes of this disclosure, we assumed thefollowing loss scenarios, each of which was assumed to begin immediatelyfollowing December 31, 2004: (i) 3.0% per annum of the commercialmortgage loans were assumed to default and 30% of the then outstandingprincipal amount of the defaulted commercial mortgage loans were assumed to belost (referred to in the industry as a 3.0% CDR and 30% loss severity, andreferred to herein as the “3%/30% CDR Loss Scenario”), and (ii) 3.0% perannum of each commercial mortgage was assumed to default and 40% of the thenoutstanding principal amount of each commercial mortgage loan was assumed to belost (referred to in the industry as a 3.0% CDR and 40% loss severity, andreferred to herein as the “3%/40% CDR Loss Scenario”). The reduction in amountof cash flows resulting from the 3%/30% CDR Loss Scenario and the 3%/40% CDRLoss Scenario would result in a corresponding decline in the fair value of ourtotal CMBS portfolio by approximately $51.7 million (or 5.4%) and $113.7million (or 11.8%), respectively. The reduction in 

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amount of cash flowsresulting from the 3%/30% CDR Loss Scenario and the 3%/40% CDR Loss Scenariowould result in a corresponding decline in the fair value of our Retained CMBSPortfolio (portion BBB- through unrated/issuer’s equity) by approximately $51.0million (or 15.2%) and $112.7 million (or 33.7%), respectively.

The aggregate amount ofcredit losses assumed under the 3%/30% CDR Loss Scenario and the 3%/40% CDR LossScenario and the actual realized losses through December 31, 2004 totaledapproximately $710.4 million and $841.1 million, respectively. These amountsare in comparison to the aggregate amount of anticipated credit lossesestimated by us as of December 31, 2004 of approximately $628 million usedto calculate GAAP income yields. It should be noted that the amount and timingof the anticipated credit losses assumed by us related to the GAAP incomeyields are not directly comparable to those assumed under the 3%/30% CDR LossScenario and the 3%/40% CDR Loss Scenario.

**Sensitivity of FairValue to Changes in the Discount Rate**

The required rate of return used to determine the fairvalue of our CMBS is comprised of many variables, such as a risk-free rate, aliquidity premium and a credit risk premium. These variables are combined todetermine a total rate that, when used to discount the CMBS’s assumed stream offuture cash flows, results in a net present value of such cash flows. Thedetermination of such rate is dependent on many quantitative and qualitativefactors, such as, but not limited to, the market’s perception of the issuersand the credit fundamentals of the commercial real estate underlying each poolof commercial mortgage loans. For purposes of this disclosure, we assumed thatthe discount rate used to determine the fair value of our CMBS increased by 100basis points and 200 basis points. The increase in the discount rate by 100 and200 basis points, respectively, would result in a corresponding decline in thevalue of our total CMBS portfolio by approximately $51.0 million (or 5.3%) and$99.3 million (or 10.3%), respectively, and our Retained CMBS Portfolio byapproximately $17.9 million (or 5.3%) and $35.4 million (or 10.6%),respectively.

The sensitivities aboveare hypothetical and should be used with caution. As the figures indicate,changes in fair value based on variations in assumptions generally cannot beextrapolated because the relationship of the change in assumption to the changein fair value may not be linear. Also, the effect of a variation in aparticular assumption on the fair value of the retained interest is calculatedwithout changing any other assumption; in reality, changes in one factor mayresult in changes in another (for example, increases in market interest ratesmay result in lower prepayments and increased credit losses), which mightmagnify or counteract the sensitivities.

**Sensitivity of FairValue to Extension Risk**

For purposes of thisdisclosure, we assumed that the maturity date of each commercial mortgage loanunderlying the CMBS was extended for a period of 12 months and 24 months beyondthe contractual maturity date specified in each mortgage loan. The delay in thetiming and receipt of such cash flows for an extended period of time consistingof 12 months and 24 months, respectively, would result in a correspondingdecline in the value of our total CMBS portfolio by approximately $2.2 million(or 0.2%) and $4.9 million (or 0.4%), respectively, and our Retained CMBS Portfolioby approximately $3.5 million (or 0.8%) and $7.0 million (or 1.5%)respectively.

**Impact ofPrepayment Risk on Fair Value**

Our CMBS are purchased ata discount to their face amount due to their subordinated claim to principaland interest cash flows and priority of allocation of realized losses. As aresult of the discounted purchase price, the return of principal sooner thananticipated from prepayments, and/or in amounts greater than initially assumedwhen determining the discounted purchase price, would result in an increase 

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in thevalue of our Retained CMBS Portfolio. Such appreciation in value would resultfrom the higher subordination level of the CMBS transaction relative tocomparable CMBS and the potential for an upgrade in the ratings category of thesecurity and cash flows to us sooner than expected. Since the effects ofprepayments would enhance the value of our CMBS, other than if high-couponmortgage loans underlying our Retained CMBS Portfolio are prepaid thus reducingthe excess interest available to our CMBS, the effects of increased prepaymentswere excluded from the sensitivity analysis above.

**5.   INSUREDMORTGAGE SECURITIES**

We ownthe following insured mortgage securities. As of December 31, 2004, 100%of our insured mortgage securities were GNMA mortgage-backed securities.
| **Date**                            | ** ** | ** ** | ** ** | **Number of  Mortgage  Securities** | ** ** | **Fair Value   (in thousands)** | ** ** | **Amortized  Cost(5)  (in thousands)** | ** ** | **Weighted  Average  Effective  Interest  Rate(6)** | ** ** | **Weighted  Average   Remaining  Term(6)** | ** ** |
|-------------------------------------|------------|------------|------------|------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| December 31,  2004(1)(2)(3)(4) |       |       | 10         |                                     |       |                                           | $          | 37,783                                      |       |                                                |       | $                                               | 37,766     |   |   |   | 7.37 | % |   | 26 years |   |
| December 31, 2003              |       |       | 39         |                                     |       |                                           | $          | 147,498                                     |       |                                                |       | $                                               | 147,342    |   |   |   | 7.67 | % |   | 23 years |   |

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(1)          As discussed in Note 6,we repaid the remaining non-recourse debt secured by a pledge of insuredmortgage securities in the first half of 2004. The assets are now pledged tosecure amounts borrowed under the Deutsche Bank $95 million secured borrowingfacility.

(2)          During the first twomonths of 2005, three insured mortgages with an aggregate amortized cost of$21.0 million prepaid. The principal proceeds from these prepayments were usedto reduce non-recourse debt secured by the pledge on insured mortgagesecurities.

(3)          None of these mortgagesecurities are delinquent as of December 31, 2004.

(4)          As of December 31,2004 and 2003, the tax basis of these mortgage securities was approximately$37.8 million and $147.5 million, respectively.

(5)          All mortgages arecollateralized by first or second liens on residential apartment, retirementhome, nursing home or townhouse complexes which have diverse geographiclocations and at December 31, 2003 are FHA-insured certificates orGNMA mortgage-backed securities and at December 31, 2004 are GNMAmortgage-backed securities only.

(6)          Weighted averages werecomputed using total face amount of the mortgage securities. It is likely thatsome of the underlying mortgage loans will prepay. Weighted average lives areone year or less based on our review of remaining prepayment restrictions,lockouts, and prepayment assumptions.

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**6.   OBLIGATIONS UNDER FINANCING FACILITIES**

Thefollowing table summarizes our debt outstanding as of December 31, 2004and 2003.
| ** **                                           | ** ** | **December 31, 2004** | ** ** | ** **                                    | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **Ending Balance**         | ** ** | **Weighted Average  Effective  Rate(1)** | ** ** | **December 31,  2003  Ending Balance** | ** ** |
| ** **                                           | ** ** | **(in thousands)**         | ** ** | ** **                                    | ** ** | **(in thousands)** | ** ** |
| *Recourse  to CRIIMI MAE:*                           |       |                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Secured by pledge of CMBS                            |       |                            | $          | 42,415                                        | (2)        |   |   | 4.2 | % |   |   | $ | 296,250 |   |   |
| Senior subordinated secured note                     |       |                            | 31,267     |                                          |       |   | 16.2 | % |   |   | 31,267 |   |   |
| Secured by pledge of insured  mortgage securities(4) |       |                            | —     |                                          |       |   | — |   |   |   | 22,526 |   |   |
| Total recourse debt                                  |       |                            | 73,682     |                                          |       |   | 9.3 | % |   |   | 350,043 |   |   |
| *Non-Recourse to CRIIMI MAE:*                        |       |                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Secured by pledge of CMBS(3)                         |       |                            | 526,838    |                                          |       |   | 8.8 | % |   |   | 288,979 |   |   |
| Secured by pledge of insured mortgage securities(4)  |       |                            | 29,485     |                                          |       |   | 2.6 | % |   |   | 119,238 |   |   |
| Secured by REO asset(5)                              |       |                            | —     |                                          |       |   | — |   |   |   | 7,332 |   |   |
| Total non-recourse debt                              |       |                            | 556,323    |                                          |       |   | 8.5 | % |   |   | 415,549 |   |   |
| TOTAL DEBT                                           |       |                            | $          | 630,005                                       |       |   |   | 8.6 | % |   |   | $ | 765,592 |   |   |

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(1)          The weighted averageeffective interest rate as of December 31, 2004 includes the amortizationof deferred financing costs and amortization of the discount, if applicable.

(2)          CRIIMI MAE hasguaranteed 10%, or up to $4.2 million, of the outstanding debt.

(3)          As of December 31,2004 and 2003, the face amount of the debt was $585.2 million and $328.4million, respectively, with unamortized discount of $58.4 million and $39.5million, respectively. The fair value of the collateral securing such debt asof December 31, 2004 and 2003 was $625.8 million and $325.3 million,respectively.

(4)          As of December 31,2004, the fair value of the collateral securing such debt was $37.8 million and$147.5 million, respectively.

(5)          During October 2004,the underlying collateral was sold at a foreclosure sale and the debt wasextinguished.

Our debtmaturities as of December 31, 2004 are as follows (in thousands):
| 2005       |   | $       | 60,770  |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 47,692  |    |
| 2007       |   | 54,068  |    |
| 2008       |   | —  |    |
| 2009       |   | —  |    |
| Thereafter |   | 525,834 |    |
|       |   | $       | 688,364 | (a)    |

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(a)          Paymentsof principal on the securitized mortgage obligations are required to the extentmortgage principal is received on the related collateral. The projectedprincipal payments on the securitized mortgage obligations are based on thestated terms of the underlying mortgages.

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**RECOURSE DEBT**

**Secured by Pledge of CMBS**

***Deutsche Bank $95 Million Secured Borrowing Facility***

Deutsche Bank provided a $95 million secured borrowingfacility to one of our subsidiaries, in the form of a repurchase transaction,on June 30, 2004. We used $42 million of this facility towards therepayment of our Bear Stearns Debt. The $42 million advance, which is securedby two of our CMBS (the retained junior interest in our BBB- rated CMBS and ourBB+ rated CMBS) which have an aggregate fair value of $130.0 million as of December 31,2004, bears interest at a per annum rate equal to one-month LIBOR plus 1.25%,payable monthly. The resulting loan-to-value ratio was approximately 32% as of December 31,2004. Recourse is limited to 10% of the outstanding borrowing amount, or $4.2million, as of December 31, 2004. CRIIMI MAE Inc. has guaranteed allobligations under the debt. In June 2004, we paid Deutsche Bank $315,000,or 0.75% of the $42 million as a structuring fee. See “Non-Recourse DebtSecured by Pledge of Insured Mortgage Securities - Deutsche Bank $95 millionSecured Borrowing Facility” for a description of an additional $29 millionoutstanding under this facility as of December 31, 2004.

The Deutsche Bank debt matures in June 2007. Wemay extend the Deutsche Bank facility for one additional year if we are not indefault and pay an extension fee of 0.15% of the outstanding balance of theadvance secured by our CMBS. If we extend the term of our Deutsche Bankfacility, we will be required to retire 25% of the outstanding balance eachquarter during the remaining year of the term. The facility does not revolve.

The Deutsche Bank debt issubject to a number of terms, conditions and restrictions including, withoutlimitation, scheduled interest payments and restrictions and requirements withrespect to the collection and application of funds. If the outstanding loanamount under the Deutsche Bank debt related to these two CMBS exceeds 90% and85%, respectively, of the aggregate market value of such collateral securingthe Deutsche Bank debt, as determined by Deutsche Bank in its sole good faithdiscretion, then Deutsche Bank can require us to transfer cash, cashequivalents or securities so that the outstanding loan amount will be less thanor equal to 80% and 75%, respectively, of the aggregate market value of suchcollateral (including any additional collateral provided). Failure to meet anymargin call could result in an event of default which would enable DeutscheBank to exercise various rights and remedies including acceleration of thematurity date of the Deutsche Bank debt and the sale of the collateral.

***Bear Stearns $200 Million Secured Borrowing Facility***

We have a $200 millionsecured borrowing facility, in the form of a repurchase transaction, with BearStearns. As of December 31, 2004, the outstanding balance under thisfacility is $415,000, which bears interest at a rate of one-month LIBOR plus1.5%. The debt is collateralized by $2.5 million face amount ($1.6 million fairvalue as of December 31, 2004) of a B- rated CMBS that was purchased in April 2004.This facility may be used for the acquisition of CMBS and for financing certainother transactions involving securities. The securities to be transferred toBear Stearns in each transaction under this facility will be subject to theapproval of Bear Stearns in its sole discretion. The maturity date of eachtransaction will be determined at the time the transaction is closed and, ineach case will be on or before August 14, 2005. If the market value of thecollateral declines, we may be required to pay down the debt or post additionalcollateral. The financing available for subordinated CMBS purchased under thisfacility ranges from 80% to 15% of the market value of the CMBS. The applicablepercentage depends primarily upon the ratings category of the CMBS and, to alesser extent, upon the number of issuer trusts from which we have purchasedCMBS.  As to each CMBS transaction,accrued and unpaid interest will be payable monthly at an annual rate rangingfrom one-month LIBOR plus 0.8% to one-month LIBOR plus 2% and all unpaid 

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principaland accrued and unpaid interest will be payable at maturity. We have guaranteedthe obligations of our subsidiary, CRIIMI MAE Asset Acquisition Corp., underthis facility.

***Bear Stearns Debt***

A unit of Bear Stearnsprovided us with $300 million in secured financing, in the form of a repurchasetransaction, under the January 2003 recapitalization. The Bear StearnsDebt was repaid in full on June 30, 2004, bore interest at a per annumrate equal to one-month LIBOR plus 3%, that was payable monthly, and requiredquarterly principal payments of $1.25 million through January 2004 and$1.875 million per quarter effective January 23, 2004.

***SeniorSubordinated Secured Note***

***BREF Debt***

In connection with the January 2003recapitalization, Brascan Real Estate Finance Fund I L.P. (BREF Fund) purchased$30 million face amount of our subordinated debt (which debt was subsequentlyassigned to BREF One LLC, Series A (BREF One) in November 2004.)  The BREF Debt matures on January 13,2006 and bears interest at an annual rate of 15%. The interest on the BREF Debt is payable semi-annually and there are noprincipal payments until maturity. We have the right to defer two-thirdsof the interest on the BREF Debt during its term. On the June 15, 2003payment date, we deferred two-thirds of the interest or approximately $1.3million due on that date. This deferred interest was capitalized and treated asadditional principal due upon maturity. No subsequent interest payments havebeen deferred. The BREF Debt is secured by first liens on the equity interestsof two of our subsidiaries. Although these liens effectively provide BREF Onewith an indirect lien on substantially all of our Retained CMBS Portfolio andall of our insured mortgage securities, Deutsche Bank has first direct liens onour retained junior interest in our BBB- rated CMBS, our BB+ rated CMBS and ourinsured mortgage securities. Pursuant tothe Investment Agreement with BREF Investments (as assigned to BREF One), weare also obligated to pay BREF One a quarterly maintenance fee of $434,000through January 2006.

***NON-RECOURSEDEBT***

***Secured byPledge of CMBS***

In connection with our CBO-2 re-securitizationtransaction, we issued $328 million original face amount of non-recourse debt. Theoutstanding face amount and amortized cost of this debt was $325.2 million and$288.9 million, respectively, as of December 31, 2004.

On June 30,2004, we issued a senior interest certificate with a face amount of $260million in our $319 million (currently BBB- rated) CBO-2 bonds toDeutsche Bank Securities Inc. The issuance of the senior interest certificatewas priced to yield approximately 8.5% and netted proceeds of approximately$237 million, which were used towards repayment of the remaining balance of theBear Stearns Debt. We have the right, after five years, to repurchase thesenior interest certificate at a price calculated by using the then applicableinterest rate swap rate plus 1.65%. The outstanding face amount and amortizedcost of this debt was $260.0 million and $237.9 million, respectively, as of December 31,2004.

***Secured by Pledge of Insured Mortgage Securities***

***Deutsche Bank $95 MillionSecured Borrowing Facility***

As previously discussed, Deutsche Bank provided a $95million secured borrowing facility to us, in the form of a repurchasetransaction, on June 30, 2004. In addition to the $42 million advancedescribed above as recourse debt, we borrowed an additional $53 million of thisfacility on June 30, 2004 towards the repayment of amounts owing on ourBear Stearns $200 million secured borrowing facility. As of 

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December 31, 2004,the non-recourse amount outstanding was approximately $29.5 million, is securedby our insured mortgage securities, and bears interest at a per annum rateequal to one-month LIBOR plus 0.10%, payable monthly. See previous discussionof Deutsche Bank debt secured by CMBS for a summary of certain other terms andconditions related to this facility.

If the outstanding loanamount under the Deutsche Bank debt related to our insured mortgage securitiesexceeds 86.5% of the aggregate market value of such insured mortgage securitiessecuring such advance, as determined by Deutsche Bank in its sole good faithdiscretion, then Deutsche Bank can require us to transfer cash, cashequivalents or securities so that the outstanding loan amount will be less thanor equal to 86.5% of the aggregate market value of such collateral (includingany additional collateral provided).

***$500Million Warehouse Line Facility***

In June 2004, weobtained from Deutsche Bank a commitment to provide a $500 million non-recoursewarehouse line facility to provide financing for the origination or purchase ofperforming whole loans secured by first liens on commercial or multifamilyproperties. The warehouse facility is subject to completion of finaldocumentation. In general, under the terms of the warehouse facilitycommitment, we may borrow from Deutsche Bank amounts equal to 95% of the marketvalue, as determined by Deutsche Bank in its good faith business judgment, ofperforming whole loans secured by first liens on commercial or multifamilyproperties with loan-to-value ratios equal to 80% or less and debt servicecoverage ratios equal to 1.10 or more, in each case, as determined by DeutscheBank. The initial term of the warehouse facility is for 364 days, renewabledaily. We will pay Deutsche Bank interest on amounts advanced under thewarehouse facility on a monthly basis at an interest rate equal to one-monthLIBOR plus 0.75%. If amounts advanced with respect to any loan exceed theproduct of the market value of the loan and 98%, we will be required to postcash or other collateral acceptable to Deutsche Bank to reduce such a margindeficit. Upon closing of the final documentation of the warehouse facility, wewill pay Deutsche Bank a structuring fee equal to $1.25 million plus legal feesnot to exceed $50,000. Our use of the warehouse facility will be subject tocompliance with customary events of default under facilities of this type, butwe will not be required to maintain any financial covenants.

***Net (Loss) Gain on Extinguishment of Debt***

During the year ended December 31, 2004, werecognized a net loss on extinguishment of debt of approximately $3.4 million. Thisnet loss resulted from a $5.2 million loss on the extinguishment of debt due tothe write-off of unamortized discount and deferred financing costs related tothe extinguishment of the Bear Stearns Debt and certain non-recourse debtsecured by insured mortgage securities and termination fees related to the BearStearns Debt and a $1.8 million gain on the extinguishment of debt related tothe foreclosure sale of our REO asset, as discussed below.

Through a limited partnership (the borrower), forwhich another limited partnership that we controlled served as the managinggeneral partner, we owned a shopping center in Orlando, Florida which weaccounted for as real estate owned. The asset was subject to $8.6 million faceamount of non-recourse, first mortgage debt for which the borrower was theobligor. The debt was reflected as non-recourse debt secured by real estateowned (REO) asset on our consolidated balance sheets as of December 31,2003.  In March 2004,  we wrote down the value of the asset toestimated fair value and recorded a resulting impairment charge ofapproximately $2.6 million during the first quarter of 2004. Included in ourconsolidated statements of income for the year ended December 31, 2004,was the impairment charge of $2.6 million and other loss of approximately$(330,000) relating to this REO.  On October 5,2004, the shopping center was sold at foreclosure. At the date of sale, we hadapproximately $6.3 million in assets and approximately $8.1 million ofliabilities included in our consolidated balance sheet relating to thisproperty. As a result of the sale to satisfy the related first mortgagenon-recourse debt, we removed the 

F-34

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assets and liabilitiesrelating to the REO which resulted in a gain on extinguishment of debt ofapproximately $1.8 million.

During the year ended December 31, 2003, wereversed approximately $7.8 million of accrued extension fees related to thesecured debt incurred upon our emergence from Chapter 11 in April 2001since the debt was repaid and the extension fees were no longer payable. Thisreversal is reflected as a gain on extinguishment of debt in our consolidatedstatements of income. This reversal was partially offset by approximately$403,000 of breakage fee paid to a lender and legal fees of approximately$47,000, resulting in a net gain on extinguishment of debt of approximately$7.3 million.

Additionally, in December 2003,we repaid a funding note related to our non-recourse debt secured by insuredmortgage securities. In connection with the funding note repayment, werecognized a $665,000 loss on extinguishment of debt for the write-off ofunamortized bond discount and deferred financing fees.

**7.   DERIVATIVE FINANCIAL INSTRUMENTS**

In 2003, we entered into a total of three interestrate swaps to hedge the variability of the future interest payments on the thenanticipated collateralized debt obligation (CDO) attributable to future changesin interest rates.  Under these swaps, weagreed to pay Bear Stearns a weighted average fixed interest rate of 4.15% perannum in exchange for floating payments based on one-month LIBOR on the totalnotional amount of $100 million. These swaps were effective on October 15,2003. On November 15, 2003 we began making monthly payments to BearStearns equal to the difference between the weighted average swap rate of 4.15%per annum and the current one-month LIBOR rate on the notional amount of $100million. The interest rate swaps were originally designated to hedge futurefixed-rate interest payments on the then anticipated CDO. Through December 31,2003, these swaps were treated as cash flow hedges for GAAP. During the firstquarter of 2004, we started exploring other refinancing alternatives. As aresult, effective January 1, 2004, we began reflecting changes in the fairvalue of the swaps through earnings. Additionally, during the first quarter of2004, we reclassified $4.7 million in Accumulated Other Comprehensive Income toearnings as hedge ineffectiveness based on our reassessment of the probabilityof the CDO as originally specified and contemplated at the inception of theinterest rate swaps. Ineffectiveness and subsequent fair-value adjustments areincluded in net gains on derivatives in the accompanying consolidatedstatements of income.

On April 1, 2004, we entered into an additionalinterest rate swap in which we agreed to pay Bear Stearns a fixed interest rateof 4.21% per annum in exchange for floating payments based on one-month LIBORon a notional amount of $100 million.  The monthly interest payments commenced on May 15,2004. The swap was not designated as a hedging instrument, and as a result,changes in fair value, as well as the impact of any cash payments made orreceived, were recognized in current period earnings as net (losses) gain onderivatives. In connection with the refinancing of the Bear Stearns debt in June 2004,we liquidated this swap and the swaps that we entered into in 2003 generatingapproximately $15.2 million in proceeds.

F-35

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On August 6, 2004, weentered into an interest rate swap to manage the interest rate risk associatedwith our $42.4 million of recourse debt secured by pledge of CMBS.  Pursuant to this swap, we agreed to payDeutsche Bank a fixed interest rate of 4.70% per annum in exchange for floatingpayments based on one-month LIBOR on a notional amount of $40 million over a 10-yearterm.  The monthly interest paymentscommenced on September 7, 2004. The swap was not designated as a hedginginstrument, and as a result, changes in fair value, as well as the impact ofany cash payments made or received, were recognized in current period earningsas net (losses) gains on derivatives. In connection with this swap and pursuantto the interest rate swap documents and Master Netting Agreement with DeutscheBank, we have granted to Deutsche Bank a security interest in all of our right,title and interest in certain assets, and property (including our right to any “Excess”as defined in the Master Netting Agreement) related to the collateral securingthe Deutsche Bank debt secured by CMBS, to secure our obligations under theinterest rate swap documents and the Deutsche Bank debt secured by CMBS. Thissecurity interest constitutes additional collateral for the Deutsche Bank debtsecured by CMBS. Under the Master Netting Agreement, on any day on which wehave any obligation to deliver cash or additional eligible collateral undereither the interest rate swap or the Deutsche Bank debt, such obligation willbe deemed satisfied to the extent there exists an Excess under the DeutscheBank debt or an obligation for Deutsche Bank to deliver cash or eligiblecollateral to us under the interest rate swap. The fair value of this swap wasa liability of approximately $689,000 at December 31, 2004, and isincluded in payables and accrued expenses in our consolidated balance sheet.

As a result of the abovederivative transactions, we recognized approximately $13.4 million of net gainson derivatives during the year ended December 31, 2004 and approximately$(1.9) million of net losses on derivatives during the year ended December 31,2003.

**8.   INCOMETAXES**

**Differencesbetween financial statement net income and taxable income (loss)**

The differences betweenGAAP net income (loss) and taxable income (loss) are generally attributable todiffering treatment, including timing related thereto, of unrealized/realizedgains and losses associated with certain assets; the bases, income, impairment,and/or credit loss recognition related to certain assets, primarily our CMBS,and amortization of various costs. Additionally, differences between GAAP netincome (loss) and taxable income (loss) are attributable to differing treatmentof our non-recourse debt obligations and, in some cases, accounting forderivative instruments. The distinction between GAAP net income (loss) andtaxable income (loss) is important to our shareholders because dividends ordistributions, if any, are declared and paid on the basis of taxable income orloss. CRIIMI MAE Inc. does not pay Federal income taxes as long as we satisfythe requirements for exemption from taxation pursuant to the REIT requirementsof the Internal Revenue Code. We calculate our taxable income or loss as if wewere a regular domestic corporation. This taxable income or loss leveldetermines the amount of dividends, if any, we are required to distribute overtime in order to eliminate our tax liability pursuant to REIT requirements.

Asummary of our 2004, 2003 and 2002 estimated taxable income (net operatingloss) to common shareholders and the remaining NOL carryforward is as follows:
| ** **                                                                                                               | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                               | ** ** | **(in millions)** | ** ** |
| Taxable income to common  shareholders for the year prior to NOL carryforward and recognition of  January 2000 loss |       | $                      | 10.3       |     | $          | 35.7     |       | $ | 36.0 |   |
| LESS: Utilization of NOL  carryforward                                                                                   |       | (10.3                  | )          | —   |       | —   |       |
| LESS: January 2000  loss recognized                                                                                 |       | —                 |       | (119.7   | )          | (119.6   | )          |
| Taxable income (net  operating loss) to common shareholders for the year                                                 |       | $                      | —     |     | $          | (84.0    | )          | $ | (83.6 | ) |
| Accumulated NOL at  beginning of year                                                                                    |       | $                      | (307.8     | )        | $          | (223.8   | )          | $ | (140.2 | ) |
| NOL utilized (created)  during the year                                                                                  |       | 10.3                   |       | (84.0    | )          | (83.6    | )          |
| Accumulated NOL at end of year available for use in  future periods                                                      |       | $                      | (297.5     | )        | $          | (307.8   | )          | $ | (223.8 | ) |

 

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The NOL carryforward of $297.5 million at December 31,2004 can be carried forward to offset future taxable income until it is fullyutilized or it expires. If the carryforwards are not used, they will expirebetween the years 2021 and 2024.

Asdiscussed above, taxable income will generally differ from GAAP net incomeduring a given period, and such differences may be material. A summary ofsignificant items that give rise to differences in GAAP net income (loss) andtaxable net income (loss) is as follows: 
| ** **                            | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(in millions)** | ** ** |
| Included in  taxable income (loss):   |       |                   |       |     |       |     |       |
| Realized credit losses on CMBS        |       | $                      | 53.3       |     | $          | 24.8     |       | $ | 14.5 |   |
| Excluded from  taxable income (loss): |       |                   |       |     |       |     |       |
| Net gains (losses) on derivatives     |       | 13.4                   |       | (1.9     | )          | —   |       |
| Impairment on  CMBS                   |       | 15.7                   |       | 14.7     |       | 70.2     |       |
|                                       |            |                        |            |          |            |          |            |  |  |  |

 

The adjusted tax basis of theunderlying CMBS was approximately $1.1 billion and $1.2 billion as of December 31,2004 and 2003, respectively. For GAAP purposes, the amortized cost basis of ourCMBS was approximately $747.2 million and $750.3 million as of December 31,2004 and 2003, respectively. The tax and GAAP basis of the aggregate debtobligations related to the financings of our CMBS was approximately $967.2million and $600.5 million, respectively, at December 31, 2004 and $1.1billion and $639.0 million, respectively, at December 31, 2003.

**Tax Treatment of Dividends**

Forincome tax purposes, dividends paid to holders of Preferred Stock consist ofordinary income, capital gains, return of capital or a combination thereof. Forthe years ended December 31, 2004, 2003 and 2002, dividends paid per sharewere estimated to be taxable as follows:
| ** **        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------|------------|----------|------------|----------|------------|----------|------------|
| Ordinary income   |       | 100      | %          | —   | %          | —   | %          |
| Return of capital |       | —   | %          | 100      | %          | 100      | %          |
| Capital gains     |       | —   | %          | —   | %          | —   | %          |
|              |       | 100      | %          | 100      | %          | 100      | %          |

 

**Taxable REIT Subsidiaries**

Our TRSs are separate taxableentities that cannot use CRIIMI MAE Inc.’s net operating loss carryforward toreduce their taxable income. Thus, we will recognize income tax expense to theextent these subsidiaries are subject to income taxes. Our TRSs had taxableincome (loss), before NOL carrybacks, of $(1.7) million, $(2.6) million and$2.8 million in 2004, 2003 and 2002. At December 31, 2004 and 2003, ourTRSs had a net deferred tax asset of $1.8 million and $1.9 million,respectively. The primary components of the net deferred tax asset result fromnet operating loss and disallowed interest expense carryforward. Realization ofthis net deferred tax asset is not more likely than not and accordingly, a fullvaluation allowance has been established.

**9.   EXECUTIVECONTRACT TERMINATION COSTS**

In August 2003,the employment contracts for former executive officers David Iannarone andBrian Hanson, and our current Executive Vice President, Chief Financial Officerand Treasurer Cynthia Azzara expired and were not renewed. These contracts wereput into place in 2001 to ensure management continuity following our emergencefrom Chapter 11 proceedings and through our January 2003 

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recapitalization. In connection with the contractterminations, we recognized approximately $1.0 million of expenses for each of Mr. Iannaroneand Ms. Azzara and approximately $825,000 of expense related to severanceand related benefit payments for Mr. Hanson.

**10.   COMMON STOCK**

We have 300,000,000 authorized shares of $0.01 parvalue common stock.

Thefollowing table summarizes the common stock activity for 2004, 2003 and 2002:
| **Description**                       | ** ** | ** ** | ** ** | **Common Shares  Issued** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------|------------|
| Balance as of December 31, 2001  |       |       | 12,937,341 |                           |       |
| Dividends for preferred  stockholders |       |       | 966,327    |                           |       |
| Stock options exercised               |       |       | 8,900      |                           |       |
| Restricted stock granted              |       |       | 32,500     |                           |       |
| Balance as of December 31, 2002  |       |       | 13,945,068 |                           |       |
| Shares issued to BREF Fund            |       |       | 1,212,617  |                           |       |
| Stock options exercised               |       |       | 161,567    |                           |       |
| Restricted stock granted              |       |       | 96,631     |                           |       |
| Shares repurchased or  forfeited      |       |       | (31,235    | )                              |       |
| Balance as of December 31, 2003  |       |       | 15,384,648 |                           |       |
| Stock options exercised               |       |       | 173,680    |                           |       |
| Shares repurchased                    |       |       | (27,216    | )                              |       |
| 401(k) matching  contribution    |       |       | 9,368      |                           |       |
| Restricted stock granted              |       |       | 6,187      |                           |       |
| Balance  as of December 31, 2004 |       |       | 15,546,667 |                           |       |

 

In connection with the January 2003recapitalization, BREF Fund acquired 1,212,617 shares of our newly issuedcommon stock, or approximately 8% of our outstanding common stock after givingeffect to the share acquisition, at $11.50 per share, or approximately $13.9million (such securities were subsequently transferred to BREF One in November 2004).Additionally, in connection with the January 2003 recapitalization, BREFFund also received seven-year warrants to purchase up to 336,835 additionalshares of common stock at $11.50 per share (such warrants were subsequentlytransferred to BREF One.). The fair value of the warrants was calculated asapproximately $2.6 million using the Black-Scholes option pricing model. Theassumptions we used to value the warrants are consistent with the assumptionsused to value our stock options. The warrants are a component of equity.

**Shareholder Rights Plan**

In January 2002, our Board of Directors adopted aShareholder Rights Plan to preserve our net operating losses for tax purposes. Asdiscussed in Note 1, the future use of our net operating loss carryforwardcould be substantially limited in the event of an “ownership change” within themeaning of Section 382 of the Internal Revenue Code. The ShareholderRights Plan is designed to deter an “ownership change” within the meaning of Section 382of the Internal Revenue Code by discouraging any person or group from acquiringfive percent or more of our outstanding common shares.

Under the Shareholder Rights Plan, one right wasdistributed for each share of our common stock to shareholders of record as of February 4,2002. The rights trade with the underlying shares of our common stock. Therights will become exercisable if a person or group (or Acquiring Person)acquires beneficial ownership of 5% of our outstanding common stock orannounces a tender offer for 5% or more of the common stock. An AcquiringPerson also includes a person or group that held 5% or more of the common 

F-38

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stock as of January 23,2002, and that acquires additional common shares. An exception could be made ifthe transaction is approved by our board of directors.

If the rights become exercisable, each right willentitle its holder to purchase one one-thousandth of a share of a new series ofpreferred stock (the Series H Junior Preferred Stock) at an exercise priceof $23 per share. If a person or group becomes an Acquiring Person in atransaction that has not been approved by the board of directors, then eachright, other than those owned by the Acquiring Person, would entitle the holderto purchase $46.00 worth of our common stock for the $23.00 exercise price.

We generally will be entitled toredeem the rights at $0.001 per right. The rights will expire 10 yearsafter the date of issuance. However, the Board of Directors may amend theShareholder Rights Plan to provide that the rights will expire at an earlierdate.

In connection with BREFFund’s equity investment in January 2003, the definition of an AcquiringPerson in the Shareholder Rights Plan was amended to exclude BREF with respectto the equity purchased in the transaction.

**11.   PREFERRED STOCK**

As of December 31, 2004 and 2003, 75,000,000shares of preferred stock were authorized. As of December 31, 2004 and2003, 3,000,000 shares were designated as Series B Cumulative ConvertiblePreferred Stock and 45,000 shares were designated as Series H JuniorPreferred Stock.

As of December 31,2004, there were no accrued and unpaid dividends for any series of ourpreferred stock. On March 3, 2005, the Board of Directors declared cashdividends of $0.68 per share of Series B Preferred Stock, payable on March 31,2005 to shareholders of record on March 18, 2005.

**Series BCumulative Convertible Preferred Stock**

Holders of Series B Preferred Stock will beentitled to receive when and as declared by the Board of Directors out oflegally available assets, cumulative dividends payable quarterly in cash orcommon stock in an amount equal to the sum of (i) $0.68 per share perquarter plus (ii) the product of the excess over $3.00, if any, of thequarterly cash dividend declared and paid with respect to each share of commonstock times a conversion ratio of 0.4797 times one plus a conversion premium of3%, subject to adjustment upon the occurrence of certain events. Since the Series BPreferred Stock voted to accept the Chapter 11 reorganization plan, therelative rights and preferences of the Series B Preferred Stock wereamended to permit the payment of dividends in cash or common stock (or acombination thereof) at our election. The Series B Preferred Stock is (i) convertibleat the option of the holders and (ii) subject to redemption at our solediscretion after the tenth anniversary of issuance in August 2006. Eachshare of Series B Preferred Stock was originally convertible into 0.22844shares of common stock, subject to adjustment upon the occurrence of certainevents. Due to certain adjustment provisions in Exhibit A of our Articlesof Amendment and Restatement related to the Series B Preferred Stock, thepayment of dividends to holders of common stock in the form of preferred stockin 1999 and 2000, the payment of dividends on other series of preferred stockin shares of common stock during 2001 and 2002, and the reverse stock spliteffected in 2001, the Series B conversion price has been adjusted to0.4797 shares of common stock per share of Series B Preferred Stock as of December 31,2004. The liquidation preference and the redemption price on the Series BPreferred Stock is $25 per share.

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Holders of our Series BPreferred Stock shall have the right to approve (i) the Company’sauthorization or creation of, or increase in, the authorized or issued amountof any class or series of the Company’s capital stock ranking prior to, or onparity with, the Series B Preferred Stock with respect to payment ofdividends or distribution of assets upon liquidation, dissolution or windingup, (ii) the reclassification of any authorized capital stock into suchcapital stock having such ranking, or (iii) any amendment, alteration orrepeal of any provision of the Company’s Articles of Amendment and Restatement,including the Series B Preferred Stock Articles, whether by merger,consolidation or otherwise, so as to materially and adversely affect any right,preference, privilege or voting power of the Series B Preferred Stock. Inaddition, during any period in which dividends on the Series B PreferredStock are cumulatively in arrears for not less than six quarterly dividendpayments (whether or not consecutively), then holders of the Series BPreferred Stock shall have the exclusive right, voting separately as a singleclass, to elect two directors of the Company to fill two, newly createddirectorships. Such additional voting rights shall continue until such time asall dividends accumulated on the Series B Preferred Stock shall have beenpaid in full.

**Series H Junior Preferred Stock**

Shares of Series H Junior Preferred Stockpurchasable upon exercise of the Rights will not be redeemable. Each share of Series HJunior Preferred Stock will be entitled to a minimum preferential quarterlydividend payment of $10.00 per share but will be entitled to an aggregatedividend of 1,000 times the dividend declared per share of common stock. In theevent of liquidation, the holders of the Series H Junior Preferred Stockwill be entitled to a minimum preferential liquidation payment of $1,000 pershare but will be entitled to an aggregate payment of 1,000 times the paymentmade per share of common stock. Each share of Series H Preferred Stockwill have 1,000 votes, voting together with the shares of common stock. Finally,in the event of any merger, consolidation or other transaction in which sharesof common stock are exchanged, each share of Series H Junior PreferredStock will be entitled to receive 1,000 times the amount received per share ofcommon stock. These rights are protected by customary antidilution provisions. Asof December 31, 2004, there were no shares of Series H PreferredStock issued and outstanding.

Thefollowing table summarized the preferred stock activity for 2004, 2003 and2002:
| ** **                                          | ** ** | **Preferred Shares** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|
| **Description**                                     | ** ** | ** **                | ** ** | **Series B  Cumulative  Convertible  Preferred Stock** | ** ** | **Series E  Cumulative  Convertible  Preferred Stock** | ** ** | **Series F  Redeemable  Cumulative  Dividend  Preferred Stock** | ** ** | **Series G  Redeemable  Cumulative  Dividend  Preferred Stock** | ** ** |
| Balance as of  December 31, 2001               |       |                      | 1,593,982  |   |   |   | 173,000 |   |   |   | 586,354 |   |   |   | 1,244,656 |   |   |
| Redemption, March 21, 2002                     |       |                      | —     |   |   |   | (173,000 | ) |   |   | — |   |   |   | — |   |   |
| Balance as of December 31, 2002 and 2003  |       |                      | 1,593,982  |   |   |   | — |   |   |   | 586,354 |   |   |   | 1,244,656 |   |   |
| Issuance, March 23, 2004                       |       |                      | 585,000    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Redemption, April 28,  2004                    |       |                      | —     |   |   |   | — |   |   |   | (586,354 | ) |   |   | (1,244,656 | ) |   |
| Balance  as of December 31, 2004               |       |                      | 2,178,982  |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                                                     |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Thedividend paid on each class of Preferred Stock for 2004, 2003, and 2002follows:
| ** **                                                    | ** ** | **2004**   | ** ** | **2003**                   | ** ** | **2002**                    | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------------------------|------------|-----------------------------|------------|
| **Class of Preferred Stock**                   | ** ** | ** ** | ** ** | **Amount  per Share** | ** ** | **Total  Amount Paid** | ** ** | **Amount  per Share** | ** ** | **Total  Amount Paid** | ** ** | **Amount  Per Share** | ** ** | **Total  Amount Paid** | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | **(in thousands)**    | ** ** | ** **                  | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| Series B Cumulative Convertible Preferred Stock          |       |       | $          | 2.720                      |       |                        |       | $ | 5,529 |   |   |   | $ | 4.760 |   |   |   | $ | 7,587 |   |   | $ | 1.360 |   |   | $ | 2,167 | (1) |   |
| Series E Cumulative Convertible Preferred Stock          |       |       | —     |                       |       |                        | —     |   |   |   | — |   |   |   | — |   |   | 13.  020 |   |   | 2,252 | (2) |   |
| Series F Redeemable Cumulative Dividend Preferred Stock  |       |       | 0.300      |                       |       |                        | 176        |   |   |   | 2.100 |   |   |   | 1,231 |   |   | 0.600 |   |   | 352 | (1) |   |
| Series G  Redeemable Cumulative Dividend Preferred Stock |       |       | 0.375      |                       |       |                        | 467        |   |   |   | 2.625 |   |   |   | 3,267 |   |   | 0.750 |   |   | 933 | (1) |   |
|                                                               |            |            |            |                            |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Weissued 607,938, 97,824 and 260,565 shares of common stock in connection withthe payment of dividends to holders of Series B Preferred Stock, Series FPreferred Stock and Series G Preferred Stock, respectively. We determinedthe number of shares of common stock to issue by dividing the dollar amount ofthe dividend payable by the volume-weighted average of the sale prices of thecommon stock for the 10-trading day period commencing after the declarationdate.

(2)          InMarch 2002, we redeemed all 173,000 outstanding shares of the Series EPreferred Stock at the stated redemption price of $106 per share in cash plusaccrued and unpaid dividends through and including the date of redemption. Thetotal redemption price was $18,734,000 ($396,000 of which represented accruedand unpaid dividends for the period October 1, 2001 through March 21,2002). The $2,252,000 difference between the aggregate liquidation value,including the initial preferred stock issuance costs, and the redemption priceis reflected as a dividend on preferred stock during the year ended December 31,2002.

**12.   EARNINGS PER SHARE**

Thefollowing tables reconcile basic and diluted earnings per share for the yearsended December 31, 2004, 2003, and 2002.
| ** **                         | ** ** | **For the year ended December 31, 2004** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Income**                                                             | ** ** | **Weighted Average  Shares Outstanding** | ** ** | **Per Share  Amount** | ** ** |
| ** **                         | ** ** | **(in thousands)**                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Basic earning per share:*         |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Income to common shareholders      |       |                                                                   | $          | 16,707 |   |   |   | 15,428,304 |   |   |   | $ | 1.08 |   |   |
| Dilutive effect  of securities(1): |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                      |       |                                                                   | —     |   |   |   | 253,166 |   |   |   |   |   |   |
| Unvested restricted stock          |       |                                                                   | —     |   |   |   | 27,347 |   |   |   |   |   |   |
| Warrants                           |       |                                                                   | —     |   |   |   | 30,426 |   |   |   |   |   |   |
| Convertible Preferred Stock        |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| RSUs                               |       |                                                                   | —     |   |   |   | 185 |   |   |   |   |   |   |
| *Diluted earnings per share(1):*   |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Income to common  shareholders     |       |                                                                   | $          | 16,707 |   |   |   | 15,739,428 |   |   |   | $ | 1.06 |   |   |

 

F-41

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| ** **                         | ** ** | **For the year ended December 31, 2003** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Loss**                                                               | ** ** | **Weighted Average  Shares Outstanding** | ** ** | **Per Share  Amount** | ** ** |
| ** **                         | ** ** | **(in thousands)**                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Basic earnings per share:*        |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Loss to common shareholders        |       |                                                                   | $          | (4,111 | ) |   |   | 15,149,303 |   |   |   | $ | (0.27 | ) |   |
| Dilutive effect  of securities(1): |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                      |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| Unvested restricted stock          |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| Warrants                           |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| Convertible Preferred Stock        |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| *Diluted earnings per share(1):*   |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Loss to common  shareholders       |       |                                                                   | $          | (4,111 | ) |   |   | 15,149,303 |   |   |   | $ | (0.27 | ) |   |

 
| ** **                                                                                               | ** ** | **For the year ended December 31, 2002** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                                               | ** ** | **Loss**                                                               | ** ** | **Weighted Average  Shares Outstanding** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                                                                               | ** ** | **(in thousands)**                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Basic earnings per share:*                                                                              |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Net loss attributable to common shareholders before  cumulative effect of change in accounting principle |       |                                                                   | $          | (55,696 | ) |   |   | 13,710,914 |   |   |   | $ | (4.06 | ) |   |
| Cumulative effect of adoption of SFAS 142                                                                |       |                                                                   | (9,766     | ) |   |   | — |   |   |   | (0.71 | ) |   |
| Loss to common shareholders                                                                              |       |                                                                   | $          | (65,462 | ) |   |   | 13,710,914 |   |   |   | $ | (4.77 | ) |   |
| Dilutive effect  of securities(1):                                                                       |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                                            |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| Unvested restricted stock                                                                                |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| Convertible Preferred Stock                                                                              |       |                                                                   | —     |   |   |   | — |   |   |   |   |   |   |
| *Diluted earnings per share(1):*                                                                         |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Loss to common  shareholders                                                                             |       |                                                                   | $          | (65,462 | ) |   |   | 13,710,914 |   |   |   | $ | (4.77 | ) |   |

----

(1)          Commonstock options, unvested restricted stock, RSUs, common stock warrants, andconvertible preferred stock have been excluded from dilutive earnings per sharecomputations when such items are anti-dilutive.

**13.**   STOCKBASED COMPENSATION PLANS

We have four stock optionand/or award plans:  the DeferredCompensation Plan, the 2001 Stock Incentive Plan, the Second Amended andRestated Stock Option Plan for Key Employees and the 1996 Non-Employee DirectorStock Plan.

**Deferred Compensation Plan**

Effective October 1, 2004, our Board of Directorsapproved a Deferred Compensation Plan (the “Deferred Compensation Plan”). TheDeferred Compensation Plan permits non-employee directors and eligibleemployees to defer income taxation on restricted stock awards and cashcompensation by electing each year to defer, in full or in part, receipt of therestricted stock awards and cash compensation, and instead receive RestrictedStock Units (RSUs). Such RSUs would not be taxable to the non-employeedirectors or eligible employees until settled by issuance of the Company’scommon stock in a 1:1 ratio upon the termination of service or employment ofthe non-employee directors or eligible employees. We have reserved 60,000shares of common stock for future settlement of RSUs based on our estimate ofcompensation payable to our non-employee directors over the next two years. In September 2004,we filed with the SEC a registration statement to register these 60,000 sharesto be used for future issuance pursuant to the Deferred Compensation Plan.

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Generally, a participantin the Plan that elects to defer a restricted stock award shall receive creditas of the grant date of the restricted stock award, in his account with a numberof RSUs equal to the number of shares of restricted stock otherwise due thatparticipant. Any RSU credited to a participant account as a result of thedeferral of a restricted stock award will be subject to the same vestingrequirements that the restricted stock grant contained. A participant in thePlan that elects to defer cash compensation shall receive a credit in hisaccount with the number of RSUs equal to the amount of such deferred cashcompensation divided by the fair value of a share of CRIIMI MAE common stock onthe last business day of the quarter in which the deferral is effective. Furthermore,RSUs credited to a participant’s account will be credited with “dividendequivalents” in an amount equal to the amount the participant would have receivedas dividends, if the RSUs were actual shares of CRIIMI MAE common stock held bythe participant. Such dividend equivalents will be converted into additionalRSUs based on the value of CRIIMI MAE common stock as of the last business dayof the quarter in which the dividend is credited. If the RSUs are issued as theresult of a deferral of a restricted stock award, the dividend equivalents willbe subject to the same vesting schedule as the RSUs. While RSUs will bedeemed invested in CRIIMI MAE common stock, participants in the Plan will haveno rights as stockholders to vote or dispose of the RSUs until actual stock isdistributed to the participant. Restricted stock awards deferred into RSUs areissued under our 2001 Stock Incentive Plan, as amended. Shares issuable inrespect of cash compensation deferred into RSUs are issued pursuant to theDeferred Compensation Plan.

**2001 Stock Incentive Plan**

Under the 2001 StockIncentive Plan, a maximum of 1,235,000 shares are available for grant pursuantto stock awards and stock options. As of December 31, 2004, options topurchase 635,000 shares have been granted to employees and directors. Inaddition, restricted stock awards of 135,318 shares had been granted toemployees and directors as of December 31, 2004. Under the 2001 StockIncentive Plan, options granted must have an option price of not less than fairmarket value of a share of common stock on the date of grant. The vestingschedule varies by grant. No option or award of stock may be granted under the2001 Stock Incentive Plan after July 1, 2011.

**SecondAmended and Restated Stock Option Plan for Key Employees**

Under the Key Employee Plan, a maximum of 450,000shares were available for grant pursuant to stock options. Options may nolonger be granted under the Key Employee Plan. As of December 31, 2004,net options to purchase 352,879 shares had been granted to employees. Under theKey Employee Plan, options granted after July 28, 1995 have an optionprice of not less than fair market value of a share of common stock on the dateof grant and expire after eight years.

**1996Non-Employee Director Stock Plan**

In September 2001,the Board amended the compensation to be provided to the unaffiliated directors.In connection with the approval of such amended compensation package, theannual grant of shares and options and the right to elect to receive shares oroptions in lieu of the directors’ annual retainer under the Director Stock Planwere suspended indefinitely effective the first business day of January 2002.Under the Director Plan, a maximum of 87,313 shares were available for grantpursuant to stock awards and stock options. As of December 31, 2004,options to purchase 2,040 shares had been granted to directors. These optionshave an exercise price equal to the market price of a share of common stock onthe date of grant, vested on the date of grant, and expire after ten years.

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**Summaryof Stock Based Compensation Activity**

***Stock Options***

Asummary of stock options outstanding as of December 31, 2004, 2003 and2002, and changes during the years then ended is presented in the table below:
| ** **                           | ** ** | **2001 Stock Plan** | ** ** | **Key Employee Plan** | ** ** | **1996 Directors’ Plan** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **Stock  Options**            | ** ** | **Weighted  Average  Price**    | ** ** | **Stock  Options**                      | ** ** | **Weighted  Average  Price** | ** ** | **Stock  Options** | ** ** | **Weighted  Average  Price** | ** ** |
| Balance, January 1, 2002        |       | 285,000                       |       |                            | $          | 2.78                                    |       |   | 434,867 |   |   | $ | 72.94 |   |   |   | 2,040 |   |   |   | $ | 75.49 |   |   |
| Granted                              |       | 317,000                       |       |                            | 6.77       |                                    |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercised                            |       | (2,500                        | )          |                            | 2.78       |                                    |       | (6,400 | ) |   | 5.70 |   |   |   | — |   |   |   | — |   |   |
| Forfeited                            |       | (8,000                        | )          |                            | 2.78       |                                    |       | (16,889 | ) |   | 45.65 |   |   |   | — |   |   |   | — |   |   |
| Balance, December 31, 2002      |       | 591,500                       |       |                            | 4.92       |                                    |       | 411,578 |   |   | 74.61 |   |   |   | 2,040 |   |   |   | 75.49 |   |   |
| Granted                              |       | 28,000                        |       |                            | 9.35       |                                    |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercised                            |       | (135,767                      | )          |                            | 4.39       |                                    |       | (25,800 | ) |   | 5.70 |   |   |   | — |   |   |   | — |   |   |
| Forfeited                            |       | (8,234                        | )          |                            | 7.41       |                                    |       | (37,301 | ) |   | 74.55 |   |   |   | — |   |   |   | — |   |   |
| Balance, December 31, 2003      |       | 475,499                       |       |                            | 5.29       |                                    |       | 348,477 |   |   | 79.72 |   |   |   | 2,040 |   |   |   | 75.49 |   |   |
| Granted                              |       | 5,000                         |       |                            | 14.79      |                                    |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercised                            |       | (150,983                      | )          |                            | 5.48       |                                    |       | (22,697 | ) |   | 6.01 |   |   |   | — |   |   |   | — |   |   |
| Forfeited                            |       | (3,000                        | )          |                            | 9.35       |                                    |       | (44,092 | ) |   | 71.96 |   |   |   | — |   |   |   | — |   |   |
| Balance, December 31, 2004      |       | 326,516                       |       |                            | $          | 5.31                                    |       |   | 281,688 |   |   | $ | 86.88 |   |   |   | 2,040 |   |   |   | $ | 75.49 |   |   |
| Exercisable, December 31, 2002  |       | 295,493                       |       |                            | $          | 4.23                                    |       |   | 407,413 |   |   | $ | 75.27 |   |   |   | 2,040 |   |   |   | $ | 75.49 |   |   |
| Exercisable, December 31, 2003  |       | 397,060                       |       |                            | $          | 4.91                                    |       |   | 348,477 |   |   | $ | 79.72 |   |   |   | 2,040 |   |   |   | $ | 75.49 |   |   |
| Exercisable,  December 31, 2004 |       | 323,516                       |       |                            | $          | 5.27                                    |       |   | 281,688 |   |   | $ | 86.88 |   |   |   | 2,040 |   |   |   | $ | 75.49 |   |   |

 

Thefollowing table summarizes information about stock options outstanding at December 31,2004:
| ** **               | ** ** | ** ** | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** ** | ** ** | **Weighted**                 | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** ** | ** ** | **Average**                  | ** ** | **Average**                  | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**        | ** ** | **Number** | ** ** | **Remaining**                | ** ** | **Exercise**                 | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise prices** | ** ** | ** ** | ** ** | **outstanding**              | ** ** | **Contractual Life**    | ** ** | **Price** | ** ** | **exercisable** | ** ** | **Price** | ** ** |
| $2.78 - $15.93           |       |       | 430,173    |                         |       |                         | 6.3 years  |   |   | $ | 5.66 |   |   | 427,173 |   |   | $ | 5.64 |   |
| $15.94 - $31.87          |       |       | 34,969     |                         |       |                         | 2.2 years  |   |   | 31.25 |   |   | 34,969 |   |   | 31.25 |   |
| $31.88 - $47.81          |       |       | 348        |                         |       |                         | 4.0 years  |   |   | 35.63 |   |   | 348 |   |   | 35.63 |   |
| $47.82 - $111.56         |       |       | 348        |                         |       |                         | 1.5 years  |   |   | 108.75 |   |   | 348 |   |   | 108.75 |   |
| $111.57 - $127.50        |       |       | 2,094      |                         |       |                         | 0.3 years  |   |   | 127.50 |   |   | 2,094 |   |   | 127.50 |   |
| $127.51 - $159.38        |       |       | 142,312    |                         |       |                         | 0.9 years  |   |   | 158.20 |   |   | 142,312 |   |   | 158.20 |   |
| $2.78 - $159.38          |       |       | 610,244    |                         |       |                         | 4.8 years  |   |   | $ | 43.20 |   |   | 607,244 |   |   | $ | 43.36 |   |
|                          |            |            |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theweighted average fair value of the options granted was $6.26, $6.23, and $4.74during 2004, 2003 and 2002, respectively. The fair value of the 2004, 2003 and2002 option grants was estimated on the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions:
| ** **               | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|
| Risk-free  interest rate |       | 3.14%      |       | 2.65%      |       | 4.23%      |       |
| Expected life            |       | 3.93 years |       | 4.64 years |       | 4.73 years |       |
| Expected  volatility     |       | 50.75%     |       | 85.8%      |       | 89.2%      |       |
| Dividend yield           |       | —%    |       | —%    |       | —%    |       |

 

F-44

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***Other***

In addition to the stock option grants included in thetable above, 6,187 shares and 96,631 shares of restricted stock were awarded tocertain employees under the 2001 Stock Incentive Plan during the years ended December 31,2004 and 2003, respectively. The weighted average price of our common stock was$14.68 and $10.96 at the award dates in 2004 and 2003, respectively. There are23,224 unvested restricted shares and 69,071 unvested restricted shares as of December 31,2004 and 2003, respectively. The fair value of the restricted stock at date ofgrant is recognized as deferred compensation expense using the straight-linemethod over the vesting period,  which isgenerally three years.

We also issued 10,495shares of restricted stock from our 2001 Stock Incentive Plan that we deferredinto RSUs during the year ended December 31, 2004. All 10,495 RSUs areunvested as of December 31, 2004. Our RSUs will generally vest over threeyears.

**14.**   401(k) PLAN

Our 401(k) retirementinvestment plan is open to all of our regular employees who are at least 21years of age. The employees may elect voluntary pre-tax wage deferrals rangingfrom 0% to 100% of eligible compensation for the year up to $13,000 annuallyfor the 2004 plan year. Plan participants who reached the age of 50 during the2004 plan year were eligible to defer an additional $3,000 during the year.  Each year, at management’s discretion, we maymatch employees’ contribution up to 50% of the employees’ contribution up to amaximum of 5% of each participant’s eligible compensation. From January 1,2003 through June 30, 2003, we contributed 50% of the employee’scontribution up to a maximum of 5% of each participant’s eligible compensationduring the year up to a maximum compensation permitted by the IRS (such maximumcompensation was $200,000 during 2003), which vested over five years. In 2004,we began matching 50% of the employees’ quarterly contribution in shares ofCRIIMI MAE common stock up to a maximum of 5% of each participant’s eligiblecompensation during the year up to a maximum compensation permitted by the IRS(such maximum compensation was $205,000 during 2004), which vests over fiveyears. Total 401(k) contribution expense for the years ended December 31,2004, 2003 and 2002 was approximately $140,000, $119,000, and $234,000,respectively, and is reflected in general and administrative expense.

F-45

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**15.**   TRANSACTIONS WITH RELATED PARTIES

Thefollowing is a summary of the related party transactions which occurred duringthe years ended December 31, 2004, 2003 and 2002.
| ** **                                                                             | ** ** | **For the years ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**                                   | ** ** |
| *Amounts paid or accrued to BREF  and affiliates*(1)                                   |       |                                                      |       |   |   |   |   |
| Compensation for  services of CEO(2)(3)                                                |       | $                                                         | 750        |   | $ | 1,000 |   | $ | — |   |
| Interest expense  on BREF Debt                                                         |       | 4,690                                                     |       | 4,440 |   | — |   |
| BREF maintenance  fee                                                                  |       | 1,736                                                     |       | 1,664 |   | — |   |
| Origination fee  and reimbursement of recapitalization expenses                        |       | —                                                    |       | 1,200 |   | — |   |
| Expense  reimbursements to affiliates of BREF One and employees of these affiliates(3) |       | 44                                                        |       | 33 |   | — |   |
| Total                                                                                  |       | $                                                         | 7,220      |   | $ | 8,337 |   | $ | — |   |
| *Amounts  received or accrued from the AIM Limited Partnerships*(4)                    |       |                                                      |       |   |   |   |   |
| Income/gain(5)                                                                         |       | $                                                         | 480        |   | $ | 378 |   | $ | 544 |   |
| Return of  capital(6)                                                                  |       | 1,804                                                     |       | 2,324 |   | 2,245 |   |
| Liquidation  proceeds(7)                                                               |       | 1,420                                                     |       | — |   | — |   |
| Expense  reimbursement from AIM Limited Partnership(6)                                 |       | 176                                                       |       | 248 |   | 204 |   |
| Total                                                                                  |       | $                                                         | 3,880      |   | $ | 2,950 |   | $ | 2,993 |   |
| Amounts received or  accrued from AIM Acquisition Limited Partnership(5)               |       | $                                                         | 41         |   | $ | 157 |   | $ | 233 |   |

----

(1)          Asdiscussed in Note 10, we issued seven-year warrants to BREF Fund assubsequently assigned to BREF One to purchase up to 336,835 shares of ourcommon stock at $11.50 per share in connection with the January 2003recapitalization. There are also other existing and potential relationships,transactions and agreements with BREF One relating to the composition of ourBoard of Directors, additional subordinated debt financing, non-competition andother matters.

(2)          Barry Blattman, ourChairman and CEO, is affiliated with BREF One. We paid Brascan Real EstateFinancial Partners, LLC (BREF Partners), an affiliate of BREF One for Mr. Blattman’sservices as Chairman and CEO during 2004.

(3)          Included in general andadministrative expenses on the accompanying consolidated statements of income.

(4)          The AIM LimitedPartnerships are limited partnerships that hold insured mortgages and whosegeneral partner is one of our subsidiaries. Such AIM Limited Partnerships havebeen accounted for under the equity method. In February 2004, three of thefour AIM Limited Partnerships were liquidated.

(5)          Included in other incomeon the accompanying consolidated statements of income.

(6)          Included as a reductionof equity investments included in receivables and other assets on theaccompanying consolidated balance sheets.

(7)          Wereceived approximately $1.8 million of liquidation proceeds related to ourgeneral partner interests in the three liquidated AIM Limited Partnerships, ofwhich $1.4 million reduced our basis to zero and approximately $395,000 wasincluded in income/gain received from these AIM Limited Partnerships.

F-46

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**16.**   COMMITMENTSAND CONTINGENCIES

**Litigation—BankruptcyProceedings**

On the October 5,1998 petition date, CRIIMI MAE Inc., CRIIMI MAE Management, Inc. andCRIIMI MAE Holdings II, L.P. filed voluntary petitions for relief under Chapter11 of the Bankruptcy Code in the Bankruptcy Court. On November 22, 2000,the Bankruptcy Court entered an order confirming the reorganization plan beforeit. We emerged from Chapter 11 on April 17, 2001, at which date allmaterial litigation matters existing subsequent to the petition date had beensettled or resolved except for certain litigation with First Union NationalBank which was resolved in February 2002.

**Litigation—Other**

In the course of ournormal business activities, various lawsuits, claims and proceedings have beenor may be instituted or asserted against us. Based on currently availablefacts, we believe that the disposition of matters pending or asserted will nothave a material adverse effect on our consolidated financial position, resultsof operations or liquidity.

**Operating Leases**

Welease office space and certain equipment under operating leases having aninitial or remaining noncancelable lease terms in excess of one year. Rentexpense, net of sub-lease rent, was $1.6 million, $1.7 million and $1.4 millionfor 2004, 2003 and 2002, respectively. Future minimum lease payments andsub-lease rents are as follows:
| ** ** | ** ** | **Minimum  Lease Payments** | ** ** | **Sub-Lease  Rents** | ** ** | **Net Lease  Payments** | ** ** |
|------------|------------|----------------------------------|------------|----------------------|------------|------------------------------|------------|
| ** ** | ** ** | **(in thousands)**          | ** ** |
| 2005       |       |                             | $          | 1,313                |       |                         |       | $ | 251 |   |   |   | $ | 1,062 |   |   |
| 2006       |       |                             | 1,330      |                 |       |                         | 271        |   |   |   | 1,058 |   |   |
| 2007       |       |                             | 1,295      |                 |       |                         | 284        |   |   |   | 1,011 |   |   |
|       |       |                             | $          | 3,938                |       |                         |       | $ | 806 |   |   |   | $ | 3,131 |   |   |

 

**Lease Terminationand Recapitalization Expenses**

We consolidated our office space in connection withour January 2003 recapitalization and, as a result, we recordedapproximately $580,000 of expense for vacant office space during 2003. During2004, we reassessed the accrual and recorded an additional $183,000 of expense.Additionally, during 2004 we paid $454,000 of lease termination fees and brokerfees to exit certain office space not included in the 2003 recapitalizationplan. The accrual for the vacant space is $507,000 and $580,000 in December 31,2004 and 2003, respectively. These expenses are reflected as lease terminationand recapitalization expense in our consolidated statements of income.

In connection with the January 2003recapitalization, we amended the employment contracts of our former Chairman,William B. Dockser, and former President, H. William Willoughby, to provide fortheir termination on January 23, 2003. During  2003, we recognized approximately $2.6million of expenses related to severance and related benefit payments, andaccelerated vesting of certain outstanding stock options held by Messrs. Dockserand Willoughby. These expenses are reflected as lease termination andrecapitalization expense in our consolidated statements of income.

F-47

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**17.**   SUMMARY OF QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)

Thefollowing is a summary of unaudited quarterly results of operations for theyears ended December 31, 2004 and 2003:
| ** **                                | ** ** | **2004**                | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **First Quarter**  | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Interest Income                           |       |                    | $          | 24,310 |   |   |   | $ | 24,906 |   |   |   | $ | 23,288 |   |   |   | $ | 23,094 |   |   |
| Net income (loss) to common shareholders  |       |                    | 2,471      |   |   |   | 18,083 |   |   |   | (9,286 | ) |   |   | 5,439 |   |   |
| Basic earnings (loss) per common share    |       |                    | 0.16       |   |   |   | 1.17 |   |   |   | (0.60 | ) |   |   | 0.35 |   |   |
| Diluted  earnings (loss) per common share |       |                    | 0.16       |   |   |   | 1.15 |   |   |   | (0.60 | ) |   |   | 0.34 |   |   |

 
| ** **                                | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|
| Interest Income                           |       |     | $          | 26,724 |   |   |   | $ | 26,384 |   |   |   | $ | 25,608 |   |   |   | $ | 25,694 |   |   |
| Net income (loss) to common shareholders  |       |     | 4,263      |   |   |   | (3,581 | ) |   |   | (7,375 | ) |   |   | 2,582 |   |   |
| Basic earnings (loss) per common share    |       |     | 0.28       |   |   |   | (0.24 | ) |   |   | (0.49 | ) |   |   | 0.17 |   |   |
| Diluted  earnings (loss) per common share |       |     | 0.28       |   |   |   | (0.24 | ) |   |   | (0.49 | ) |   |   | 0.17 |   |   |

 

**18.**   SEGMENTREPORTING

Management currently assesses our performance andallocates capital principally on the basis of two lines of business: portfolioinvestment and mortgage servicing. These two lines of business are managedseparately as they provide different sources and types of revenues.

Portfolio investment primarily includes (i) CMBS,(ii) investments in government insured mortgage securities, (iii) investmentsin mezzanine loans and (iv) cash and liquid assets. Our income from thissegment is primarily generated from our Retained CMBS Portfolio.

Mortgage servicing, which consists of all theoperations of CMSLP, primarily includes performing servicing functions withrespect to the mortgage loans underlying our CMBS. CMSLP’s principal focus isthe special servicing of the non-performing mortgage loans underlying our CMBSportfolio. For these services, CMSLP earns fee income which relates to eitherroutine monthly services, non-monthly periodic services or event-triggeredservices. In acting as a servicer, CMSLP also earns other income whichincludes, among other things, assumption fees and modification fees. Overheadexpenses, such as administrative expenses, are allocated either directly toeach business line or through estimates based on factors such as number ofpersonnel or square footage of office space.

F-48

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Thefollowing tables detail the financial performance of these operating segmentsfor the years ended December 31, 2004, 2003 and 2002.
| ** **                                                | ** ** | **As of and for the year ended December 31, 2004** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** | **Elimination of** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Portfolio**                                                                                   | ** ** | **Mortgage** | ** ** | **Intercompany** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Investment**                                                                                  | ** ** | **Servicing** | ** ** | **Transactions** | ** ** | **Consolidated** | ** ** |
| ** **                                                | ** ** | **(in thousands)**                                                                         | ** ** |
| Interest income                                           |       | $                                                                                               | 95,598     |   | $ | — |   |   | $ | — |   |   | $ | 95,598 |   |
| Interest expense                                          |       | (52,159                                                                                         | )          | — |   |   | — |   |   | (52,159 | ) |
| Net interest margin                                       |       | 43,439                                                                                          |       | — |   |   | — |   |   | 43,439 |   |
| Fee/other income                                          |       | 2,285                                                                                           |       | 9,643 |   |   | — |   |   | 11,928 |   |
| General and  administrative expenses                      |       | (9,647                                                                                          | )          | — |   |   | (715 | ) |   | (10,362 | ) |
| Equity  compensation expense                              |       | (649                                                                                            | )          | — |   |   | — |   |   | (649 | ) |
| Depreciation and  amortization                            |       | (391                                                                                            | )          | — |   |   | — |   |   | (391 | ) |
| Servicing general  and administrative expenses            |       | —                                                                                          |       | (8,747 | ) |   | 715 |   |   | (8,032 | ) |
| Servicing  amortization, depreciation and impairment      |       | —                                                                                          |       | (868 | ) |   | — |   |   | (868 | ) |
| Income tax  (expense) benefit                             |       | (3                                                                                              | )          | — |   |   | — |   |   | (3 | ) |
| BREF maintenance  fee                                     |       | (1,736                                                                                          | )          | — |   |   | — |   |   | (1,736 | ) |
| Net losses on  insured mortgage security dispositions     |       | (950                                                                                            | )          | — |   |   | — |   |   | (950 | ) |
| Net loss on  extinguishment of debt                       |       | (3,418                                                                                          | )          | — |   |   | — |   |   | (3,418 | ) |
| Impairment of REO  asset                                  |       | (2,609                                                                                          | )          | — |   |   | — |   |   | (2,609 | ) |
| Impairment of  CMBS                                       |       | (15,718                                                                                         | )          | — |   |   | — |   |   | (15,718 | ) |
| Impairment of  mezzanine loan                             |       | (527                                                                                            | )          | — |   |   | — |   |   | (527 | ) |
| Net gains on  derivatives                                 |       | 13,412                                                                                          |       | — |   |   | — |   |   | 13,412 |   |
| Lease termination  and recapitalization expenses          |       | (637                                                                                            | )          | — |   |   | — |   |   | (637 | ) |
|                                                      |       | (20,588                                                                                         | )          | 28 |   |   | — |   |   | (20,560 | ) |
| Net income (loss)  before changes in accounting principle |       | $                                                                                               | 22,851     |   | $ | 28 |   |   | $ | — |   |   | $ | 22,879 |   |
| Total assets                                              |       | $                                                                                               | 1,060,571  |   | $ | 9,368 |   |   | $ | — |   |   | $ | 1,069,939 |   |

 

F-49

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| ** **                                                 | ** ** | **As of and for the year ended December 31, 2003** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** | **Elimination of** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Portfolio**                                                                                   | ** ** | **Mortgage** | ** ** | **Intercompany** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Investment**                                                                                  | ** ** | **Servicing** | ** ** | **Transactions** | ** ** | **Consolidated** | ** ** |
| ** **                                                 | ** ** | **(in thousands)**                                                                         | ** ** |
| Interest income                                            |       | $                                                                                               | 104,415    |   | $ | — |   |   | $ | — |   |   | $ | 104,415 |   |
| Interest expense                                           |       | (70,803                                                                                         | )          | — |   |   | 3 |   |   | (70,800 | ) |
| Net interest margin                                        |       | 33,612                                                                                          |       | — |   |   | 3 |   |   | 33,615 |   |
| Fee/other income                                           |       | 1,459                                                                                           |       | 9,486 |   |   | (3 | ) |   | 10,942 |   |
| General and  administrative expenses                       |       | (10,902                                                                                         | )          | — |   |   | (1,084 | ) |   | (11,986 | ) |
| Equity  compensation expense                               |       | (204                                                                                            | )          | — |   |   | — |   |   | (204 | ) |
| Depreciation and  amortization                             |       | (568                                                                                            | )          | — |   |   | — |   |   | (568 | ) |
| Servicing general  and administrative expenses             |       | —                                                                                          |       | (10,401 | ) |   | 1,084 |   |   | (9,317 | ) |
| Servicing  amortization, depreciation and impairment  |       | —                                                                                          |       | (1,811 | ) |   | — |   |   | (1,811 | ) |
| Income tax  (expense) benefit                              |       | —                                                                                          |       | 602 |   |   | — |   |   | 602 |   |
| BREF maintenance  fee                                      |       | (1,664                                                                                          | )          | — |   |   | — |   |   | (1,664 | ) |
| Net (losses) on  insured mortgage security dispositions    |       | (645                                                                                            | )          | — |   |   | — |   |   | (645 | ) |
| Net gain on  extinguishment debt                           |       | 6,673                                                                                           |       | — |   |   | — |   |   | 6,673 |   |
| Impairment of  CMBS                                        |       | (14,738                                                                                         | )          | — |   |   | — |   |   | (14,738 | ) |
| Net loss on  derivatives                                   |       | (1,949                                                                                          | )          | — |   |   | — |   |   | (1,949 | ) |
| Lease termination  and recapitalization expenses           |       | (3,197                                                                                          | )          | — |   |   | — |   |   | (3,197 | ) |
| Executive  contract termination costs                      |       | (2,028                                                                                          | )          | (825 | ) |   | — |   |   | (2,853 | ) |
| Servicing loss on  scale of investment grade CMBS          |       | —                                                                                          |       | (5 | ) |   | — |   |   | (5 | ) |
|                                                       |       | (27,763                                                                                         | )          | (2,954 | ) |   | (3 | ) |   | (30,720 | ) |
| Net income (loss)  before changes in accounting principle  |       | $                                                                                               | 5,849      |   | $ | (2,954 | ) |   | $ | — |   |   | $ | 2,895 |   |
| Total assets                                               |       | $                                                                                               | 1,058,971  |   | $ | 10,241 |   |   | $ | — |   |   | $ | 1,069,212 |   |

 

F-50

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| ** **                                                    | ** ** | **As of and for the year ended December 31, 2002** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** | **Elimination of** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Portfolio**                                                                                   | ** ** | **Mortgage** | ** ** | **Intercompany** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Investment**                                                                                  | ** ** | **Servicing** | ** ** | **Transactions** | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**                                                                         | ** ** |
| Interest income                                               |       | $                                                                                               | 124,460    |   | $ | — |   |   | $ | — |   |   | $ | 124,460 |   |
| Interest expense                                              |       | (93,766                                                                                         | )          | — |   |   | 22 |   |   | (93,744 | ) |
| Net interest margin                                           |       | 30,694                                                                                          |       | — |   |   | 22 |   |   | 30,716 |   |
| Fee/other income                                              |       | 2,604                                                                                           |       | 11,571 |   |   | (585 | ) |   | 13,590 |   |
| General and  administrative expenses                          |       | (10,714                                                                                         | )          | — |   |   | 96 |   |   | (10,618 | ) |
| Equity  compensation expense                                  |       | (110                                                                                            | )          | — |   |   | — |   |   | (110 | ) |
| Depreciation and  amortization                                |       | (1,096                                                                                          | )          | — |   |   | — |   |   | (1,096 | ) |
| Servicing general  and administrative expenses                |       | —                                                                                          |       | (9,510 | ) |   | 467 |   |   | (9,043 | ) |
| Servicing  amortization, depreciation and impairment     |       | —                                                                                          |       | (2,173 | ) |   | — |   |   | (2,173 | ) |
| Income tax  (expense) benefit                                 |       | 327                                                                                             |       | (787 | ) |   | — |   |   | (460 | ) |
| Net (losses) on  insured mortgage security dispositions  |       | (995                                                                                            | )          | — |   |   | — |   |   | (995 | ) |
| Impairment of  CMBS                                           |       | (70,225                                                                                         | )          | — |   |   | — |   |   | (70,225 | ) |
| Lease termination  and recapitalization expenses              |       | (1,049                                                                                          | )          | — |   |   | — |   |   | (1,049 | ) |
| Servicing gain on  sale of servicing rights                   |       | —                                                                                          |       | 4,864 |   |   | — |   |   | 4,864 |   |
| Servicing gain on  sale of investment grade CMBS              |       | —                                                                                          |       | 241 |   |   | — |   |   | 241 |   |
|                                                          |       | (81,258                                                                                         | )          | 4,206 |   |   | (22 | ) |   | (77,074 | ) |
| Net income (loss)  before changes in accounting principle     |       | $                                                                                               | (50,564    | ) | $ | 4,206 |   |   | $ | — |   |   | $ | (46,358 | ) |
| Total assets                                                  |       | $                                                                                               | 1,214,742  |   | $ | 26,813 |   |   | $ | (470 | ) |   | $ | 1,241,085 |   |

 

F-51

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