CRIIMI MAE INC, 10-Q, 1999-11-15

CRIIMI MAE INC
10-Q, 1999-11-15
REAL ESTATE INVESTMENT TRUSTS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 1999

Commission file number 1-10360

CRIIMI MAE INC.

(Exact name of registrant as specified in its charter)

Maryland		52-1622022
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or organization)

11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)

Securities Registered Pursuant to 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		New York Stock Exchange, Inc.
Preferred Stock

Securities Registered Pursuant to Section 12(g) of the Act:

None

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding as of November 10, 1999
Common Stock, $.01 par value		53,553,161

CRIIMI MAE INC.
Quarterly Report on Form 10-Q

		Page

PART I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets—as of September 30, 1999 (unaudited) and December 31, 1998	3
	Consolidated Statements of Income and Comprehensive Income—for the three and nine months ended September 30, 1999 and 1998 (unaudited)	4
	Consolidated Statements of Changes in Shareholders' Equity—for the nine months ended September 30, 1999 (unaudited)	5
	Consolidated Statements of Cash Flows—for the nine months ended September 30, 1999 and 1998 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	70
Item 2A.	Quantitative and Qualitative Disclosures about Market Risk	84
PART II.	Other Information
Item 1.	Legal Proceedings	85
Item 2.	Changes in Securities	85
Item 3.	Defaults Upon Senior Securities	85
Item 4.	Submission of Matters to a Vote of Security Holders	85
Item 5.	Other Information	85
Item 6.	Exhibits and Reports on Form 8-K	85
Signature		87

PART I

ITEM 1. FINANCIAL STATEMENTS

CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS

	September 30, 1999			December 31, 1998
	(Unaudited)

Assets:
Mortgage Assets:
Subordinated CMBS, at fair value	$	1,216,002,889		$	1,274,185,678
Insured Mortgage Securities, at fair value		410,356,899			488,095,221
Investment in originated loans, at amortized cost		481,499,820			499,076,030
Equity Investments		37,418,966			42,868,469
Receivables		60,550,714			46,992,337
Other assets		53,825,407			62,520,146
Cash and cash equivalents		87,493,835			24,180,072

Total assets	$	2,347,148,530		$	2,437,917,953

Liabilities:
Liabilities Not Subject to Chapter 11 proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS	$	277,609,817		$	117,831,435
Collateralized mortgage obligations - Insured mortgage securities		386,779,739			456,101,720
Collateralized mortgage obligations - Originated loans		389,391,837			386,752,951
Payables and accrued expenses		29,697,934			17,124,124
Liabilities Subject to Chapter 11 proceedings:
Secured:
Variable rate secured borrowings-CMBS		758,773,098			932,236,674
Other financing facilities		3,050,000			3,050,000
Payables and accrued expenses		21,346,742			13,690,004
Unsecured:
Senior unsecured notes		100,000,000			100,000,000
Other financing facilities		89,749,522			89,749,522
Payables and accrued expenses		32,201,577			13,504,618

Total liabilities		2,088,600,266			2,130,041,048

Shareholders' equity:
Convertible preferred stock, $.01 par; 25,000,000 shares authorized; 1,796,982 and 1,816,982 shares issued and outstanding, respectively		17,970			18,170
Common stock, $.01 par; 120,000,000 shares authorized; 53,553,161 and 52,898,100 shares issued and outstanding, respectively		535,532			528,981
Accumulated Other Comprehensive Income		(320,074,998	)		(251,255,309	)
Preferred Stock Dividend to be distributed		16,065,641			—
Additional paid-in capital		542,520,196			558,585,063
Shareholders' undistributed net income		19,483,923			—

Total shareholders' equity		258,548,264			307,876,905

Total liabilities and shareholders' equity	$	2,347,148,530		$	2,437,917,953

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

CRIIMI MAE INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

AND COMPREHENSIVE LOSS

(Unaudited)

	For the three months ended September 30,						For the nine months ended September 30,
	1999			1998			1999			1998

Interest Income:
Subordinated CMBS	$	38,786,620		$	38,880,750		$	115,690,376		$	105,319,710
Insured Mortgage Securities		8,034,760			10,662,386			25,424,098			33,528,290
Originated Loans		8,615,000			8,869,367			26,103,642			11,619,062

Total interest income		55,436,380			58,412,503			167,218,116			150,467,062

Interest and related expenses:
Fixed-rate collateralized bond obligations-CMBS		6,301,697			2,206,724			15,750,983			7,375,905
Fixed-rate collateralized mortgage obligations -insured securities		7,813,936			9,892,249			24,523,097			30,546,774
Fixed-rate collateralized mortgage obligations-originated loans		7,059,676			6,369,272			20,309,804			8,367,438
Fixed-rate senior unsecured notes		2,281,251			2,429,137			6,843,753			7,260,484
Variable-rate secured borrowings-CMBS		12,659,064			17,778,579			39,026,518			43,637,039
Other financing facilities		1,767,577			998,342			5,166,265			1,941,800

Total interest expense		37,883,201			39,674,303			111,620,420			99,129,440

Net interest margin		17,553,179			18,738,200			55,597,696			51,337,622

Gain on sale of CMBS		—			(340,281	)		—			28,800,408
Equity in earnings (losses) from investments		260,199			(57,546	)		(1,225,417	)		2,187,150
Other income		448,941			1,060,595			1,872,481			3,872,576
Net gains on mortgage security dispositions		265,789			966,654			1,851,601			920,820
Gain on originated loan dispositions		74,616			—			234,826			—
General and administrative expenses		(2,702,353	)		(4,636,806	)		(8,953,507	)		(10,667,797	)
Amortization of assets acquired in the Merger		(719,394	)		(719,394	)		(2,158,182	)		(2,158,182	)
Unrealized loss on reverse repurchase obligation		—			(4,091,346	)		—			(4,091,346	)
Loss on warehouse obligation		(1,074,505	)		(17,630,390	)		(8,000,000	)		(17,630,390	)
Reorganization Items		(4,606,002	)		—			(15,552,783	)		—

		(8,052,709	)		(25,448,514	)		(31,930,981	)		1,233,239

Minority interest in net loss (income) of consolidated Subsidiary		—			1,312			—			(40,052	)
Net income (loss) before dividends accrued or paid on preferred shares		9,500,470			(6,709,002	)		23,666,715			52,530,809
Dividends accrued or paid on preferred shares		(1,400,297	)		(1,942,377	)		(4,182,792	)		(5,499,881	)

Net income (loss) available to common shareholders	$	8,100,173		$	(8,651,379	)	$	19,483,923		$	47,030,928

Net income (loss) available to common shareholders per common share:
Basic	$	0.15		$	(0.18	)	$	0.37		$	1.02

Diluted	$	0.14		$	(0.18	)	$	0.33		$	.98

Shares used in computing basic earnings per share, exclusive of shares held in treasury		53,553,161			48,298,007			53,373,719			46,178,885

Comprehensive Income
Net income (loss) before dividends paid or accrued on preferred shares	$	9,500,470		$	(6,709,002	)	$	23,666,715		$	52,530,809
Other Comprehensive Loss		(30,533,704	)		(195,219,228	)		(68,819,689	)		(78,350,599	)

Comprehensive Loss	$	(21,033,234	)	$	(201,928,230	)	$	(45,152,974	)	$	(25,819,790	)

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

CRIIMI MAE INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the nine months ended September 30, 1999
(Unaudited)

	Preferred Stock Par Value			Common Stock Par Value		Accumulated Other Comprehensive Income			Additional Paid-in Capital			Shareholders' Undistributed Net Income			Preferred Stock Dividend to be Distributed		Total Shareholders' Equity

Balance, December 31, 1998	$	18,170		$	528,981	$	(251,255,309	)	$	558,585,063		$	—		$	—	$	307,876,905
Net income		—			—		—			—			23,666,715			—		23,666,715
Dividends accrued on preferred shares		—			—		—			—			(4,182,792	)		—		(4,182,792	)
Dividends paid on common shares		—			—		—			—			—			—		—
Conversion of preferred shares into common shares		(200	)		6,531		—			(6,331	)		—			—		—
Shares granted		—			20		—			7,105			—			—		7,125
Adjustment to unrealized losses on investments		—			—		(68,819,689	)		—			—			—		(68,819,689	)
Preferred Stock dividend to be distributed		—			—		—			(16,065,641	)		—			16,065,641		—

Balance, September 30, 1999	$	17,970		$	535,532	$	(320,074,998	)	$	542,520,196		$	19,483,923		$	16,065,641	$	258,548,264

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

CRIIMI MAE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the nine months ended September 30,
	1999			1998

Cash flows from operating activities:
Net Income	$	23,666,715		$	52,530,809
Adjustments to reconcile net income to net cash provided by operating activities:
Cash gain on sale of CMBS		—			(28,800,408	)
Amortization of discount and deferred financing costs on debt		6,677,758			4,325,388
Amortization of assets acquired in the Merger		2,158,182			2,158,182
Other amortization and depreciation		1,002,218			1,023,116
Discount amortization on mortgage assets		(629,716	)		(938,928	)
Net gains on mortgage security dispositions		(1,851,601	)		(920,820	)
Gains on originated loan disposition		(234,826	)		—
Equity in losses/ (earnings) from investments		1,225,417			(2,187,150	)
Loss on warehouse obligation		8,000,000			17,630,390
Unrealized loss on reverse repurchase obligation		—			4,091,346
Change in reorganization items accrual		13,913,036			—
Minority interests in earnings of consolidated subsidiary		—			40,052
Changes in assets and liabilities:
Increase in receivables and other assets		(17,509,076	)		(34,165,258	)
Increase in payables and accrued expenses		20,831,678			6,539,666

Net cash provided by operating activities		57,249,785			21,326,385

Cash flows from investing activities:
Proceeds from sale of collateralized bond obligation		—			334,919,531
Purchase of originated loans		—			(495,825,576	)
Proceeds from mortgage securities dispositions		66,414,460			104,613,568
Proceeds from originated loan dispositions		10,631,987			—
Purchase of Subordinated CMBS		—			(852,560,342	)
Funding of loan origination reserve		—			(75,433,979	)
Return of loan origination reserve from securitization		—			71,877,560
Payment of deferred costs		—			(9,180,193	)
Receipt of principal payments		9,598,489			11,097,801
Distributions received from AIM Investments		4,224,086			4,733,115
Distributions received from CMSLP		—			3,114,000
Servicing rights acquired and contributed to Services Partnership		—			(3,880,235	)
Collateral calls on repurchase obligation		—			(3,383,221	)

Net cash provided by (used in) investing activities		90,869,022			(909,907,971	)

Cash flows from financing activities:
Proceeds from sale of CMO bonds		—			390,068,687
Proceeds from debt issuances		158,509,205			1,998,430,321
Principal payments on securitized mortgage debt obligations		(87,161,205	)		(420,721,921	)
Principal payments on secured borrowings and other debt facilities		(156,153,044	)		(1,145,730,722	)
Increase in deferred financing costs		—			(8,705,623	)
Dividends (including return of capital) accrued or paid to shareholders, including minority interests		—			(60,499,169	)
Proceeds from issuance of convertible preferred stock		—			25,000,000
Proceeds from the issuance of common stock		—			110,709,941

Net cash (used in) provided by financing activities		(84,805,044	)		888,551,514

Net increase in cash and cash equivalents		63,313,763			(30,072	)
Cash and cash equivalents, beginning of the period		24,180,072			2,108,794

Cash and cash equivalents, end of the period	$	87,493,835		$	2,078,722

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

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

General

CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless the context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully integrated commercial mortgage company structured as a self-administered real estate investment trust ("REIT"). On October 5, 1998 (the "Petition Date"), CRIIMI MAE (unconsolidated) and two of its consolidated operating subsidiaries, CRIIMI MAE Management, Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P. ("Holdings II" and, together with CRIIMI MAE and CM Management, the "Debtors") filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland, Southern Division in Greenbelt, Maryland (the "Bankruptcy Court"). These related cases are being jointly administered under the caption "In re CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.

Prior to the Petition Date, CRIIMI MAE's primary activities included (i) acquiring non-investment grade securities (rated below BBB-) or unrated securities backed by pools of mortgage loans on multifamily, retail and other commercial real estate ("Subordinated CMBS"), (ii) originating and underwriting commercial mortgage loans, (iii) securitizing pools of commercial mortgage loans and resecuritizing pools of Subordinated CMBS, and (iv) through the Company's servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"), performing servicing functions with respect to the mortgage loans underlying the Company's Subordinated CMBS. Since filing for Chapter 11 protection, CRIIMI MAE has suspended its Subordinated CMBS acquisition, origination and securitization programs. The Company continues to hold a substantial portfolio of Subordinated CMBS and other mortgage and mortgage related assets and, through CMSLP, to act as a servicer for its own as well as third party securitized commercial mortgage loan pools.

The Company's business is subject to a number of risks and uncertainties including, but not limited to: (1) the effect of the Chapter 11 filing and substantial doubt as to the Company's ability to continue as a going concern; (2) risk of loss of REIT status; (3) Taxable Mortgage Pool risk; (4) substantial leverage; (5) inherent risks in owning Subordinated CMBS; (6) the limited protection provided by certain hedging transactions; (7) risk of foreclosure on CMBS assets; (8) limited liquidity of the CMBS market; (9) pending litigation; (10) risk of being deemed an Investment Company; (11) possible adverse effects of an economic recession on losses and defaults; and (12) information technology risks associated with the Year 2000.

In addition to the two operating subsidiaries which filed for Chapter 11 protection with the Company, the Company owns 100% of multiple financing and operating subsidiaries as well as various interests in other entities (including CMSLP) which either own or service mortgage and mortgage-related assets (the "Non-Debtor Affiliates"). See Note 3. None of the Non-Debtor Affiliates has filed for bankruptcy protection.

CRIIMI MAE is working diligently toward reemerging as a successfully reorganized Company. On September 9, 1999, the Company entered into a Stock Purchase Agreement ("the Apollo Purchase Agreement") with an affiliate of Apollo Real Estate Advisors IV, L.P. ("Apollo") to purchase a minimum of $50 million, of shares of a new series of senior convertible preferred stock which would represent a portion of aggregate recapitalization financing of approximately $910 million. Closing of the sale of the new senior preferred stock is subject of a number of conditions. The remainder of the recapitalization financing is expected to consist of approximately $445 million of debt financing, substantially all of which would come from certain existing debtholders, and $415 million of additional proceeds, substantially all of which would result from the sale of selected commercial mortgage-backed securities. There can be no assurance that the Company will be able to close the sale of the new senior preferred stock, obtain the necessary debt financing or sell the selected commercial mortgage-backed securities to a party or parties for the necessary proceeds or that if such recapitalization financing is obtained and finalized, it will take the forms described above.

The Debtors filed their Joint Plan of Reorganization (the "Plan") with the Bankruptcy Court on September 22, 1999. Prior to that date, on September 20, 1999, the Bankruptcy Court entered an order providing, among other matters, that any party in interest may file a plan of reorganization after October 16, 1999. To the Company's knowledge, no other party in interest has filed a plan of reorganization. There can be no assurance that no alternative plan of reorganization will be filed.

On November 1, 1999, the Bankruptcy Court approved motions filed by CRIIMI MAE with the support of the Official Committee of Unsecured Creditors and the Official Committee of Equity Securities Holders ("the Committees in the CRIIMI MAE Case") to postpone a hearing on the pending motion to approve the bidding protection provisions in the Apollo Purchase Agreement and the Adequate Protection Order (as defined in Note 16) and the date to file the Debtor's Disclosure Statement. At the November 1st hearing the Bankruptcy Court was advised of active discussions among the Company, Apollo and the Committees in the CRIIMI MAE Case to fashion an amended plan of reorganization that can be supported by such parties. The Court approved at that hearing the immediate payment of $400,000 to Apollo for reimbursement of expenses incurred with respect to the Apollo Purchase Agreement, continuing negotiations, due diligence and related matters. On November 5, 1999, the Bankruptcy Court entered an order setting December 6, 1999 as the hearing date for the pending motion to approve (i) the balance of the bidding protection provisions in the Apollo Purchase Agreement and (ii) the Adequate Protection Order. The order also provided that the Debtor's proposed Joint Disclosure Statement must be filed on or prior to December 6, 1999. See Note 16 for a general discussion of the bankruptcy process.

While in bankruptcy, the Company has streamlined its operations. The Company significantly reduced the number of employees in its originations and underwriting operations in October 1998, but has retained a significant number of key employees in each of these operational areas. In connection with these reductions, the Company closed its five regional loan origination and underwriting offices, retaining only a core presence in Rockville, Boston, Houston, Chicago and San Francisco.

Although the Company has significantly reduced its work force, the Company recognizes that retention of its executive management and other remaining employees is essential to the efficient operation of its business and to its reorganization efforts. Accordingly, the Company has, with Bankruptcy Court approval, adopted an employee retention plan. See Note 14.

The Company's independent public accountants have issued a report on the Company's 1998 financial statements expressing substantial doubt about the Company's ability to continue as a going concern. In addition, the Company has been advised by its independent public accountants that, if the reorganization plan is not approved by the Bankruptcy Court prior to the completion of their audit of the Company's financial statements for the year ended December 31, 1999, the auditors' report on those financial statements will be modified to express substantial doubt about the Company's ability to continue as a going concern.

The Company was incorporated in Delaware in 1989 under the name CRI Insured Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured changed its name to CRIIMI MAE Inc. and reincorporated in Maryland. In June 1995, certain mortgage businesses affiliated with C.R.I., Inc. were merged into CRIIMI MAE (the "Merger"). The Company is not a government sponsored entity or in any way affiliated with the United States government or any United States government agency.

Effect of Chapter 11 Filing on REIT Status and Other Tax Matters

REIT Status. CRIIMI MAE is required to meet income, asset, ownership and distribution tests to maintain its REIT status. The Company has satisfied the REIT requirements for all years through, and including, 1998. However, due to the uncertainty resulting from its Chapter 11 filing, there can be no assurance that CRIIMI MAE will retain its REIT status for 1999 or subsequent years. If the Company fails to retain its REIT status for any taxable year, it will be taxed as a regular domestic corporation subject to federal and state income tax in the year of disqualification and for at least the four subsequent years.

The Company's 1999 Taxable Income. As a REIT, CRIIMI MAE is generally required to distribute at least 95% of its "REIT taxable income" to its shareholders each tax year. For purposes of this requirement, REIT taxable income excludes certain excess noncash income such as original issue discount ("OID"). In determining its federal income tax liability, CRIIMI MAE, as a result of its REIT status, is entitled to deduct from its taxable income dividends paid to its shareholders. Accordingly, to the extent the Company distributes its net income to shareholders, it effectively reduces taxable income, on a dollar-for-dollar basis, and eliminates the "double taxation" that normally occurs when a corporation earns income and distributes that income to shareholders in the form of dividends. The Company, however, still must pay corporate level tax on any 1999 taxable income not distributed to shareholders. Unlike the 95% distribution requirement, the calculation of the Company's federal income tax liability does not exclude excess noncash income such as OID. Should CRIIMI MAE terminate or fail to maintain its REIT status during the year ended December 31, 1999, the tax liability on the taxable income for the nine months ended September 30, 1999 of approximately $13.7 million would be approximately $5.5 million.

In determining the Company's taxable income for 1999, distributions declared by the Company on or before September 15, 2000 and actually paid by the Company on or before December 31, 2000 will be considered as dividends paid for the 1999 year. The Company anticipates distributing a substantial portion of its 1999 taxable income in the form of non-cash taxable dividends. There can be no assurance that the Company will be able to make distributions with respect to its 1999 taxable income.

1999 Excise Tax Liability. Apart from the requirement that the Company distribute at least 95% of its REIT taxable income to maintain REIT status, CRIIMI MAE is also required each calendar year to distribute an amount at least equal to the sum of 85% of its "REIT ordinary income" and 95% of its "REIT capital gain income" to avoid incurring a nondeductible excise tax. Unlike the 95% distribution requirement, the 85% distribution requirement is not reduced by excess noncash income items such as OID. In addition, in determining the Company's excise tax liability, only dividends actually paid in 1999 will reduce the amount of income subject to this excise tax. The Company has accrued $475,000 for the excise tax payable for 1999 in anticipation that 1999 taxable income will not be distributed to shareholders until 2000. The accrual was calculated based on the taxable income for the first nine months of 1999. Additional excise tax will be accrued in the fourth quarter related to fourth quarter taxable income.

The Company's 1998 Taxable Income. On September 14, 1999, the Company declared a dividend payable to common shareholders of approximately 1.61 million shares of a new series of junior preferred stock with a face value of $10 per share (see Note 12). The purpose of the dividend was to distribute approximately $15.7 million in undistributed 1998 taxable income. To the extent that it is determined that such amount is not distributed, the Company would bear a corporate level income tax on the undistributed amount. There can be no assurance that all of the Company's tax liability will be eliminated by payment of such junior preferred stock dividend. The Company paid the junior preferred stock dividend on November 5, 1999. The junior preferred stock dividend will be taxable to common shareholder recipients.

Taxable Mortgage Pool Risks. An entity that constitutes a "taxable mortgage pool" as defined in the Tax Code ("TMP") is treated 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 of the assets must consist of debt obligations and a majority of those debt obligations must consist of mortgages; (ii) the entity must have more than one class of debt securities outstanding with separate maturities and (iii) the payments on the debt securities must bear a relationship to the payments received from the mortgages. The Company currently owns all of the equity interests in three trusts that constitute TMPs (CBO-1, CBO-2 and CMO-IV, collectively the "Trusts"). See Notes 5 and 6 for descriptions of CBO-1, CBO-2 and CMO-IV. The statutory provisions and regulations governing the tax treatment of TMPs (the "TMP Rules") provide an exemption for TMPs that constitute "qualified REIT subsidiaries" (that is, entities whose equity interests are wholly owned by a REIT). As a result of this exemption and the fact that the Company owns all of the equity interests in each Trust, the Trusts currently are not required to pay a separate corporate level tax on income they derive from their underlying mortgage assets.

The Company also owns certain securities structured as bonds (the "Bonds") issued by each of the Trusts. Certain of the Bonds owned by the Company serve as collateral (the "Pledged Bonds") for short-term, variable-rate borrowings used by the Company to finance their initial purchase. If the creditors holding the Pledged Bonds were to seize or sell this collateral and the Pledged Bonds were deemed to constitute equity interests (rather than debt) in the Trusts, then the Trusts would no longer qualify for the exemption under the TMP Rules provided for qualified REIT subsidiaries. The Trusts would then be required to pay a corporate level federal income tax. As a result, available funds from the underlying mortgage assets that would ordinarily be used by the Trusts to make payments on certain securities issued by the Trust (including the equity interests and the Pledged Bonds) would instead be applied to tax payments. Since the equity interests and Bonds owned by the Company are the most subordinated securities and, therefore, would absorb payment shortfalls first, the loss of the exemption under the TMP rules could have a material adverse effect on their value and the payments received thereon.

In addition to causing the loss of the exemption under the TMP Rules, a seizure or sale of the Pledged Bonds and a characterization of them as equity for tax purposes could also jeopardize the Company's REIT status if the value of the remaining ownership interests in any Trust held by the Company (i) exceeded 5% of the total value of the Company's assets or (ii) constituted more than 10% of the Trust's voting interests.

2. INVESTMENT COMPANY ACT OF 1940

Under the Investment Company Act of 1940, as amended (the "Investment Company Act"), an investment company is required to register with the SEC and is subject to extensive restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. However, as described below, companies that are primarily engaged in the business of acquiring mortgages and other liens on and interests in real estate ("Qualifying Interests") are excluded from the requirement of the Investment Company Act.

To qualify for the Investment Company Act exclusion, CRIIMI MAE, among other things, must maintain at least 55% of its assets in Qualifying Interests (the "55% Requirement") and is also required to maintain an additional 25% in Qualifying Interests or other real estate-related assets ("Other Real Estate Interests" and such requirement, the "25% Requirement"). According to current SEC staff interpretations, CRIIMI MAE believes that its government insured mortgage securities and originated loans constitute Qualifying Interests. In accordance with current SEC staff interpretations, the Company believes that all of its Subordinated CMBS constitute Other Real Estate Interests and that certain of its Subordinated CMBS also constitute Qualifying Interests. On certain of the Company's Subordinated CMBS, the Company, along with other rights, has the unilateral right to direct foreclosure with respect to the underlying mortgage loans. Based on such rights and its economic interest in the underlying mortgage loans, the Company believes that the related Subordinated CMBS constitute Qualifying Interests. As of September 30, 1999, the Company believes that it was in compliance with both the 55% Requirement and the 25% Requirement.

If the SEC or its staff were to take a different position with respect to whether such Subordinated CMBS constitute Qualifying Interests, the Company could, among other things, be required either (i) to change the manner in which it conducts its operations to avoid being required to register as an investment company or (ii) to register as an investment company, either of which could have a material adverse effect on the Company. If the Company were required to change the manner in which it conducts its business, it would likely have to dispose of a significant portion of its Subordinated CMBS or acquire significant additional assets that are Qualifying Interests. Alternatively, if the Company were required to register as an investment company, it expects that its operating expenses would significantly increase and that the Company would have to reduce significantly its indebtedness, which could also require it to sell a significant portion of its assets. No assurances can be given that any such dispositions or acquisitions of assets, or deleveraging, could be accomplished on favorable terms.

Further, if the Company were deemed an unregistered investment company, the Company could be subject to monetary penalties and injunctive relief. The Company would be unable to enforce contracts with third parties and third parties could seek to obtain rescission of transactions undertaken during the period the Company was deemed an unregistered investment company. In addition, as a result of the Company's Chapter 11 filing, the Company is limited in possible actions it may take in response to any need to modify its business plan in order to register as an investment company, or avoid the need to register. Certain dispositions or acquisitions of assets would require Bankruptcy Court approval. Also, any forced sale of assets that occurs after the bankruptcy stay is lifted would change the Company's asset mix, potentially resulting in the need to register as an investment company under the Investment Company Act or take further steps to change the asset mix. Any such results would be likely to have a material adverse effect on the Company.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

In management's opinion, the accompanying unaudited consolidated financial statements of CRIIMI MAE, CM Management, Holdings II, CRIIMI MAE Financial Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE Financial Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE CMBS Corp., CRIIMI MAE Holding Inc., CRIIMI MAE Holdings L.P., and CRIIMI, Inc., contain all adjustments (consisting of only normal recurring adjustments and consolidating adjustments) necessary to present fairly the consolidated balance sheets as of September 30, 1999 and December 31, 1998, the consolidated results of its operations for the three and nine months ended September 30, 1999 and 1998 and its cash flows for the nine months ended September 30, 1999 and 1998.

These unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. While management believes that the disclosures presented are adequate to make the information not misleading, it is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in CRIIMI MAE's Annual Report filed on Form 10-K for the year ended December 31, 1998.

Method of Accounting

The consolidated financial statements of CRIIMI MAE are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the consolidated financial statements for the three and nine months ended September 30, 1998 have been reclassified to conform to the 1999 presentation.

Bankruptcy Accounting

Entering a reorganization, although a significant event, does not ordinarily affect or change the application of GAAP followed by a company. The accompanying financial statements have been prepared assuming that CRIIMI MAE will continue as a going concern in accordance with SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). As such, asset and liability carrying amounts do not purport to represent realizable or settlement values as contemplated by the Bankruptcy Code.

Liabilities Subject to Chapter 11 Proceedings

Liabilities subject to Chapter 11 proceedings, including claims that become known after the petition date, are reported at their expected allowed claim amount in accordance with SFAS No. 5, "Accounting for Contingencies". To the extent that the amounts of claims change as a result of actions in the bankruptcy case or other factors, the recorded amount of liabilities subject to Chapter 11 proceeding will be adjusted. The gain or loss resulting from the entries to record the adjustment will be recorded as a reorganization item.

Reorganization Items

Reorganization items are items of income and expense that are realized or incurred by CRIIMI MAE because it is in reorganization. These include, but are not limited to the following:

•: Short-term interest income that would not have been earned but for the Bankruptcy.
•: Professional fees and similar types of expenditures directly relating to the Chapter 11 proceeding.
•: Employee Retention Program costs and severance payments.
•: Loss accruals or realized gains or losses resulting from activities of the reorganization process.

For the three and nine months ended September 30, 1999, reorganization items were $4.6 million and $15.6 million. The components of these totals are as follows:

Reorganization Items	Three months ended September 30, 1999			Nine months ended September 30, 1999

Short-term interest income	$	(852,600	)	$	(1,322,000	)
Professional fees		2,896,771			13,010,926
Employee Retention Program accrued costs		426,353			1,171,855
Excise Tax		475,000			475,000
Other		1,660,478			2,217,002

Total	$	4,606,002		$	15,552,783

Condensed Financial Statements

In accordance with SOP 90-7, the three debtor entities, CRIIMI MAE, CM Management and Holdings II, are required to present condensed financial statements for the three and nine months ended September 30, 1999. (See Note 18).

Cash and Cash Equivalents

Cash and cash equivalents consist of U.S. Government and agency securities, certificates of deposit, time deposits and commercial paper with original maturities of three months or less.

Transfer of Financial Assets

The Company transfers assets (mortgages and mortgage securities) in securitization transactions where the transferred assets become the sole source of repayment for newly issued debt. When both legal and control rights to a financial asset are transferred, the transfer is treated as a sale. Transfers are assessed on an individual component basis. In a securitization, the cost basis of the original assets transferred is allocated to each of the new financial components based upon the relative fair value of the new financial components. For components where sale treatment is achieved, a gain or loss is recognized for the difference between that component's allocated cost basis and fair value. For components where sale treatment is not achieved, an asset is recorded representing the allocated cost basis of the new financial components retained and the related incurrence of debt is also recorded. In transactions where none of the components are sold, the Company recognizes the incurrence of debt and the character of the collateralizing assets remains unchanged.

Income Recognition and Carrying Basis

Subordinated CMBS

On May 8, 1998, CRIIMI MAE consummated a transaction which resulted in the sale of a portion of its Subordinated CMBS portfolio (see Note 5). As a result of the CBO-2 transaction and in accordance with GAAP, effective in the second quarter of 1998, the Company no longer classifies CMBS securities as Held to Maturity, but instead classifies CMBS as Available for Sale. CRIIMI MAE carries its Subordinated CMBS at fair market value where changes in fair value are recorded as a component of shareholders' equity (see Note 5). Prior to mid-1998, such securities were carried at their amortized cost basis as the Company had the ability and intent to hold these securities to maturity.

CRIIMI MAE recognizes income from Subordinated CMBS using the effective interest method, applying the anticipated yield over the projected life of the investment. Changes in anticipated yields are generally due to revisions in estimates of future credit losses, actual losses incurred, revisions in estimates of future prepayments and actual prepayments received. Changes in anticipated yield resulting from prepayments are recognized through a cumulative catch-up adjustment at the date of the change which reflects the change in income of the security from the date of purchase through the date of change in anticipated yield. The new yield is then used for income recognition for the remaining life of the investment. Changes in anticipated yield resulting from reduced estimates of losses are recognized on a prospective basis.

Investment in Originated Loans

This portfolio consists of commercial loans originated and securitized by CRIIMI MAE in CMO-IV. The origination fee income, application fee income and costs associated with originating the loans were deferred ("deferred loan costs") and the net amount was added to the basis of the loans on the balance sheet upon acquisition. Income is recognized using the effective interest method and consists of mortgage income from the loans and amortization of deferred loan costs. Expenses of this portfolio consist of interest expense, discount amortization on the bonds sold and amortization of costs incurred in connection with the securitization. CRIIMI MAE has the intent to hold these loans for the foreseeable future and therefore the originated loans are classified as Held for Investment and recorded at amortized cost on the balance sheet.

Insured Mortgage Securities

CRIIMI MAE's consolidated investment in mortgage securities consists of participation certificates evidencing a 100% undivided beneficial interest in Government Insured Multifamily Mortgages issued or sold pursuant to programs of the Federal Housing Administration ("FHA") ("FHA-Insured Certificates") and mortgage-backed securities guaranteed by the Government National Mortgage Association ("GNMA") ("GNMA Mortgage-Backed Securities"). Payment of principal and interest on FHA-Insured Loans is insured by the U.S. Department of Housing and Urban Development (HUD) pursuant to Title 2 of the National Housing Act. Payment of principal and interest on GNMA Mortgage-Backed Securities is guaranteed by GNMA pursuant to Title 3 of the National Housing Act.

As a result of the CBO-2 transaction involving the sale of a portion of its Subordinated CMBS portfolio (see Note 5), the Company, in accordance with GAAP, no longer classifies its insured mortgage securities as Held to Maturity. The Company's mortgage securities are now classified as Available for Sale. As a result, the Company now carries its mortgage securities at fair value where changes in fair value are recorded as a component of shareholders' equity. Prior to this time, the securities were carried at their amortized cost basis as the Company had the ability and intent to hold these securities to maturity.

The difference between the cost and the unpaid principal balance at the time of purchase is carried as a discount or premium and amortized over the remaining contractual life of the mortgage using the effective interest method. The effective interest method provides for income based on a constant yield over the term of the mortgage.

Mortgage income consists of amortization of the discount plus the stated mortgage interest payments received or accrued less amortization of the premium.

Equity Investments

CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the general partnership interests in American Insured Mortgage Investors L.P, American Insured Mortgage Investors L.P.—Series 85, American Insured Mortgage Investors L.P.—Series 86 and American Insured Mortgage Investors L.P.—Series 88 (the "AIM Funds"). The AIM Funds own mortgage assets which are substantially similar to Insured Mortgage Securities owned by CRIIMI MAE. CRIIMI, Inc. receives the general partner's share of income, loss and distributions (which ranges among the AIM Funds from 2.9% to 4.9%) from each of the AIM Funds. In addition, CRIIMI MAE and CM Management each own 50% of the limited partnership that owns a 20% limited partnership interest in the adviser to the AIM Funds. CRIIMI MAE is utilizing the equity method of accounting for its investment in the AIM Funds and the advisory partnership, AIM Acquisition Partners, L.P., which provides for recording CRIIMI MAE's share of net earnings or losses in the AIM Funds and AIM Acquisition Partners, L.P reduced by distributions from the limited partnerships and adjusted for purchase accounting amortization.

CRIIMI MAE accounts for its investment in CRIIMI MAE Services, Inc. ("Services, Inc.") under the equity method because it does not own the voting common stock of Services, Inc. As of September 30, 1999, Services, Inc. holds a 27% general partner interest in CMSLP.

As of September 30, 1999, CRIIMI MAE, through CM Management, held a 73% limited partnership interest in CMSLP. CRIIMI MAE's limited partner investment in CMSLP is accounted for under the equity method as CRIIMI MAE does not control CMSLP. However, because it owns 73% of the partnership and because it has certain rights described below, it follows the equity method of accounting. As a limited partner, CRIIMI MAE is entitled to all of the rights and benefits of being a limited partner including the right to receive income and cash distributions in accordance with its limited partner interest. In addition, CRIIMI MAE has the right to approve the sale of the principal assets of CMSLP. Services, Inc. is the general partner of CMSLP and manages the day to day affairs of CMSLP.

Impairment

Subordinated CMBS

CRIIMI MAE assesses each Subordinated CMBS for other than temporary impairment when the fair market value of the asset declines below amortized cost and when one of the following conditions also exists: 1) fair value has been below amortized cost for a significant period of time and CRIIMI MAE concludes that it no longer has the intent and ability to hold the security for the period that fair value is expected to be below amortized cost through the period of time CRIIMI MAE expects the value to recover to amortized cost or 2) the credit quality of its Subordinated CMBS is declining and the Company determines that the current estimate of expected future credit losses exceeds credit losses as originally projected. The amount of impairment loss is measured by comparing the fair value, based on available market information, of a Subordinated CMBS to its current amortized cost basis, the difference is recognized as a loss in the income statement.

The Company assesses current economic events and conditions that impact the value of its Subordinated CMBS and the underlying real estate in making judgments as to whether or not other than temporary impairment has occurred. The Company did not recognize any impairment for the nine months ended September 30, 1999 and 1998, respectively. The Company's plan of reorganization and the Apollo Purchase Agreement contemplate the sale of selected Subordinated CMBS. There can be no assurance that all or any portion of these assets will ultimately be sold or when any such sale or sales will occur. Furthermore, the plan of reorganization may be amended based upon current discussions among the Company, Apollo and the Committees or for other reasons. Additionally, a plan of reorganization must ultimately be confirmed by the Bankruptcy Court. The Company expects to record other than temporary impairment on these securities once it is determined that these assets are to be sold and when approval by the Bankruptcy Court is obtained for the sale of such assets.

Investment in Originated Loans

CRIIMI MAE recognizes impairment on the originated loans when it is probable that CRIIMI MAE will not be able to collect all amounts due according to the contractual terms of the loan agreement. CRIIMI MAE measures impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Insured Mortgage Securities

CRIIMI MAE assesses each Insured Mortgage Security for other than temporary impairment when the fair market value of the asset declines below amortized cost for a significant period of time and CRIIMI MAE concludes that it no longer has the ability to hold the security through the market downturn. The amount of impairment loss is measured by comparing the fair value of an Insured Mortgage Security to its current carrying amount, the difference is recognized as a loss in the income statement.

Equity Investments

Impairment is recognized on CRIIMI MAE's investments accounted for under the equity method if a decline in the market value of the investment below its carrying basis is judged to be "other than temporary". In this case an unrealized loss is recognized as the difference between the fair value and carrying amount.

Receivables

Receivables primarily consist of interest and principal receivables on the Company's Subordinated CMBS, Insured Mortgage Securities and Originated Loan portfolios. In addition, prepayments in the Insured Mortgage Securities and Originated Loan portfolios that have not yet been received by CRIIMI MAE are included.

Other Assets

Other Assets primarily include Merger assets and related costs, deferred financing costs, deferred costs, investment in mezzanine loans and a deposit account, as further discussed below. Additionally included in Other Assets is Real Estate Owned (REO) property acquired through foreclosure. In June 1997, CRIIMI MAE acquired a real estate property in a foreclosure sale from a CMBS trust. CMSLP also serves as the special servicer and CRIIMI MAE owns a portion of the subordinated tranches in the same trust. As of September 30, 1999, CRIIMI MAE's book basis in REO property totaled approximately $3.9 million. Currently, negotiations to sell the property to a third party are taking place. REO property acquired through foreclosure is recorded at fair value on the date of foreclosure. Such assets will be evaluated for impairment by the Company when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. At such time, if the expected future undiscounted cash flows from the property are less than the cost basis, the assets will be marked down to fair value. Costs relating to development and improvement of property are capitalized, provided that the resulting carrying value does not exceed fair value. Costs relating to holding the assets are expensed.

The Merger assets acquired and costs incurred in connection with the Merger were recorded using the purchase method of accounting. The amounts allocated to the assets acquired were based on management's estimate of their fair values, with the excess of purchase price over fair value allocated to goodwill. The AIM Funds' subadvisory contracts and the mortgage servicing contracts transferred to CMSLP are amortized using the effective interest method over 10 years. This amortization is reflected through CRIIMI MAE's equity in earnings from investments. The remaining assets acquired by CRIIMI MAE, including goodwill, are amortized using the straight-line method over 10 years.

Deferred costs are costs incurred in connection with the establishment of CRIIMI MAE's financing facilities and are amortized using the effective interest method over the terms of the borrowings. Also included in deferred costs are mortgage selection fees, which were paid to the Adviser or were paid to the former general partners or adviser to the predecessor entities of CRI Liquidating (collectively, the "CRIIMI Funds"). These deferred costs are being amortized using the effective interest method on a specific mortgage basis from the date of the acquisition of the related mortgage over the term of the mortgage from CRIIMI MAE. Upon disposition of a mortgage, the related unamortized fee is treated as part of the mortgage asset carrying value in order to measure the gain or loss on the disposition. As a result of the Chapter 11 filing, CRIIMI MAE, in December 1998, wrote off all deferred costs in connection with its financing facilities that are subject to the Chapter 11 filing.

Costs incurred in connection with the loan origination programs are netted against any origination fees received and the net amount is deferred and will be recognized using the effective interest method over the expected life of the loans upon securitization. These costs include a one-time fee to the financial institution and direct costs of originating the loans for the program. All net deferred costs are written off if the Company and the financial institution decide to sell the loans in the warehouse program. In addition, the Company is required to fund a portion of each originated loan equal to the estimated subordination reserve for the securitization of the loans originated through its loan origination programs. This subordination reserve is held as a deposit at the financing institution and is reflected in Other Assets. Due to the financial institution taking title to the loans during the warehousing period and bearing substantive risk for the investment portion of each loan, the originated loans are not recorded on the Company's balance sheet during the warehouse period. As a result of the Chapter 11 filing, CRIIMI MAE wrote off all capitalized costs in connection with its warehouse programs in December 1998 In addition, since all of the Citibank warehoused loans were sold in the third quarter of 1999, the reserve account was zero at September 30, 1999.

Discount on Securitized Mortgage Obligation Issuances

Discounts incurred in connection with the issuance of debt are amortized using the effective interest method over the projected term of the related debt, which is based on management's estimate of prepayments on the underlying collateral and are included as a component of interest expense.

Interest Rate Protection Agreements

CRIIMI MAE acquires interest rate protection agreements to reduce its exposure to interest rate risk. The costs of such agreements which qualify for hedge accounting are included in other assets and are amortized over the interest rate agreement term. To qualify for hedge accounting, the interest rate protection agreement must meet two criteria: (i) the debt to be hedged exposes CRIIMI MAE to interest rate risk and (ii) the interest rate protection agreement reduces CRIIMI MAE's exposure to interest rate risk. In the event that interest rate protection agreements are terminated, the associated gain or loss is deferred over the remaining term of the agreement, provided that the underlying hedged asset or liability still exists. Amounts to be paid or received under interest rate protection agreements are accrued currently and are netted with interest expense for financial statement presentation purposes. Additionally, in the event that interest rate protection agreements do not qualify as hedges, such agreements are reclassified as investments, accounted for at fair value with any gain or loss included as a component of income.

Per Share Amounts

Basic earnings per share amounts for the three and nine months ended September 30, 1999 and 1998 represent net income available to common shareholders divided by the weighted average common shares outstanding during each quarter. Diluted earnings per share amounts for the three and nine months ended September 30, 1999 and 1998 represent basic earnings per share adjusted for dilutive common stock equivalents which for CRIIMI MAE include stock options and certain series of preferred stock. See Note 13 for a reconciliation of basic earnings per share to diluted earnings per share.

Consolidated Statements of Cash Flows

Cash payments made for interest for the nine months ended September 30, 1999 and 1998, were $85,788,961, and $87,556,423, respectively.

Comprehensive Income

Comprehensive income is the change in shareholders' equity during a period from transactions from nonowner sources. For CRIIMI MAE, this includes net income before dividends paid or accrued on preferred shares adjusted for unrealized gains and losses related to CRIIMI MAE's "Available for Sale" Subordinated CMBS and mortgage securities carried at fair value. Net unrealized gains and losses are reported in the shareholders' equity section of the balance sheet.

New Accounting Statements

During 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments and for Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and reporting standards for derivative investments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for the changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. FAS 133 is effective for the Company beginning January 1, 2001. The Company is evaluating the eventual impact of FAS 133 on its financial statements.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values of CRIIMI MAE's consolidated financial instruments are presented in accordance with GAAP, which define fair value as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, in other than a forced sale or liquidation. These values do not represent the liquidation value of the Company or the value of the securities under a portfolio liquidation.

	As of September 30, 1999				As of December 31, 1998
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

ASSETS:
Subordinated CMBS	$	1,530,581,692	$	1,216,002,889	$	1,529,898,540	$	1,274,185,678
Insured Mortgage Securities		415,853,094		410,356,899		483,637,668		488,095,221
Originated loans		481,499,820		442,827,059		499,076,030		480,485,570
Cash and cash equivalents		87,493,835		87,493,835		24,180,072		24,180,072
Accrued interest and principal receivable		60,550,714		60,550,714		46,992,337		46,992,337
Interest rate protection agreements		1,471,968		946,292		2,531,371		992,516
LIABILITIES:
Liabilities not Subject to Chapter 11 proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS	$	277,609,817	$	253,768,555	$	117,831,435	$	105,799,081
Collateralized insured mortgage securities obligations		386,779,739		397,150,233		456,101,720		486,179,236
Collateralized mortgage obligations-originated loans		389,391,837		368,684,096		386,752,951		381,481,150
Liabilities Subject to Chapter 11 proceedings:
Variable rate secured borrowings-CMBS		758,773,098		N/A		932,236,674		N/A
Senior unsecured notes		100,000,000		84,000,000		100,000,000		62,000,000
Other financing facilities		92,799,522		N/A		92,799,522		N/A

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Subordinated CMBS

For periods prior to the year ended December 31, 1998, the estimated fair market value of the Company's portfolio of Subordinated CMBS was based upon quotes obtained from, in most cases, the lender to which the security was pledged. The lender also quoted the related unrated bonds even though the bonds did not serve as collateral for CRIIMI MAE's obligations. The Company obtained "ask" quotes as compared to "bid" quotes because it is the owner of the securities. Due to the Chapter 11 filing, the Company's lenders were not willing to provide fair value quotes for the CMBS portfolio as of September 30, 1999 and December 31, 1998. As a result, the Company calculated the estimated fair market value of its Subordinated CMBS portfolio as of September 30, 1999 and December 31, 1998. The Company used a discounted cash flow methodology to estimate the fair value of its Subordinated CMBS portfolio. The projected cash flows used by the Company were the same collateral cash flows used to calculate the anticipated weighted average unleveraged yield to maturity. See Note 5. The cash flows were then discounted using a discount rate that, in the Company's view, was commensurate with the market's perception of risk and value. The Company used a variety of sources to determine its discount rate including: (i) institutionally-available research reports, and (ii) communications with dealers and active Subordinated CMBS investors regarding the valuation of comparable securities. Since the Company calculated the estimated fair market value of its Subordinated CMBS portfolio as of September 30, 1999 and December 31, 1998, it has disclosed in Note 5 the range of discount rates by rating category used in determining these fair market values.

During the nine months ended September 30, 1999, the required weighted average spread above treasury rates was substantially unchanged on a total portfolio basis. However, treasury rates increased significantly from December 31, 1998 which, when combined with the required spreads, resulted in an aggregate $58.9 million decrease in the value of the Company's portfolio of CMBS from December 31, 1998 through September 30, 1999. For the period from September 30, 1999 to November 12, 1999 treasury rates have increased. If treasury rates increase and/or spreads widen from the September 30, 1999 levels, the value of the Company's portfolio of securities would decrease.

Insured Mortgage Securities

The fair value of the insured mortgage securities is based on quoted market prices from an investment banking institution which trades these instruments as part of its day-to-day activities.

During the nine months ended September 30, 1999, the required weighted average spread above treasury rates for these securities was substantially unchanged on a total portfolio basis. However, treasury rates increased significantly from December 31, 1998 which, when combined with the required spreads, resulted in an aggregate $9.9 million decrease in the value of the Company's portfolio of FHA's and GNMA's from December 31, 1998 to September 30, 1999. For the period from September 30, 1999 to November 12, 1999 treasury rates have increased. If treasury rates increase and/or spreads widen from the September 30, 1999 levels, the value of the Company's portfolio of securities would decrease.

Originated Loans

Due to the Chapter 11 filing, the Company's lenders were not willing to provide fair value quotes for the portfolio. As a result, the Company calculated the estimated fair market value of its Originated Loan portfolio. The Company utilized the same discounted cash flow methodology used in determining the fair value of its Subordinated CMBS portfolio and further used cash flows projected at prepayment speeds of 0% to 14% depending upon the call protection of the loan. These cash flows were then discounted using a weighted average discount rate of approximately 9% and 8% for September 30, 1999 and December 31, 1998, respectively, which the Company believes was commensurate with the market's perception of risk and value.

Cash and Cash Equivalents, Accrued Interest and Principal Receivable

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

Obligations Under Financing Facilities

The fair value of the securitized mortgage obligations are calculated using a discounted cash flow methodology. The fair value of the unsecured notes was calculated using a quoted market price from Bloomberg. Management has determined that fair value of the variable-rate secured borrowings-CMBS and other financing facilities is not practicable to measure because there is no quoted market price available and the facilities are in default and have been the subject of dispute as discussed in Note 9. See Note 9 for a detailed discussion of these facilities and the terms of the facilities.

Interest Rate Protection Agreements

The fair value of interest rate protection agreements (used to hedge CRIIMI MAE's variable-rate debt) is the estimated amount that CRIIMI MAE would receive to terminate the agreements as of September 30, 1999 and December 31, 1998, taking into account current interest rates and the current creditworthiness of the counterparties. The amount was determined based on a quote received from the counterparty to each agreement.

5. SUBORDINATED CMBS

During 1997, FAS 125 "Accounting for Transfers and Servicing of Financial Assets" became effective. This statement significantly changed the accounting treatment for transfers of financial assets. FAS 125 changed accounting standards to require transfers of assets to be accounted for on a component basis instead of as an entire unit. Accordingly, in a securitization or resecuritization, components (securities) are treated as sales or retained interests based upon CRIIMI MAE's ability to control the component. Components where control is not retained are treated as sales and those where control is retained are treated as retained interests.

In May 1998, CRIIMI MAE completed its second resecuritization of CMBS assets ("CBO-2"), with a combined face value of approximately $1.8 billion involving 75 individual securities collateralized by 19 mortgage pools and three of the retained securities from CBO-1. CBO-2 involved CRIIMI MAE's private placement of securities with a face amount of $468 million. In CBO-2, CRIIMI MAE initially retained securities with a face amount of approximately $1.3 billion. Certain securities included call provisions to enable CRIIMI MAE to 1) call bonds if market conditions warrant, and 2) call bonds when it is no longer cost effective to service them. As a result, CBO-2 resulted in a sale of certain securities and the retention of new securities. In accordance with FAS 125, the assets collateralizing the resecuritization are "derecognized" and the combined amortized cost basis of the collateralizing assets was allocated to the new securities issued. CRIIMI MAE received $335 million for the $345 million face amount of investment grade securities sold without call provisions which had an allocated cost basis of $306 million, resulting in a gain of approximately $28.8 million. CRIIMI MAE recorded retained assets totaling $926 million representing the allocated amortized cost basis for the $123 million face amount of investment grade securities issued with call provisions and the $1.3 billion face amount of non-investment grade retained securities in CBO-2. CBO-2 generated $160 million of net borrowing capacity primarily as a result of a higher overall weighted average credit rating for its new securities as compared to the weighted average credit rating on the related CMBS collateral. The net excess borrowing capacity was used to obtain short-term, variable rate secured borrowings which were used to acquire additional Subordinated CMBS during the second quarter of 1998.

At September 30, 1999, CRIIMI MAE held the following securities with respect to its CMBS portfolio:

Pool (3)	Original Anticipated Unleveraged Yield to Maturity (1)		9/30/99 Anticipated Unleveraged Yield to Maturity (1)(2)

Retained Securities from CRIIMI 1996 C1 (CBO-1)	19.5	%	20.7	%(5)
DLJ Mortgage Acceptance Corp. Series 1997 CF2 Tranche B-30C	8.2	%	8.2	%
Nomura Asset Securities Corp. Series 1998-D6 Tranche B7	12.0	%	12.0	%
Retained Securities from CRIIMI 1998 C1 (CBO-2)	10.3	%	10.1	%(4)
Mortgage Capital Funding, Inc. Series 1998-MC1	8.9	%	9.0	%
Chase Commercial Mortgage Securities Series 1998-1	8.8	%	8.8	%
First Union/Lehman Brothers Series 1998 C2	8.9	%	9.0	%
Morgan Stanley Commercial Inc. Series 1998-WF2	8.5	%	8.6	%(4)
Mortgage Capital Funding, Inc. Series 1998-MC2	8.7	%	8.7	%
Weighted Average	9.7	%(3)	10.1	%(3)

(1): Represents the anticipated weighted average unleveraged yield over the expected average life of the Company's Subordinated CMBS portfolio as of the date of acquisition and September 30, 1999, respectively, based on management's estimate of the timing and amount of future credit losses and prepayments. As discussed in (4) below, these yields may decrease as a result of certain adversarial actions taken by the Company's lenders.
(2): Unless otherwise noted, changes in the September 30, 1999 anticipated yield to maturity from that originally anticipated are primarily the result of changes in prepayment assumptions relating to mortgage collateral.
(3): CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS pool of approximately $29.4 billion. Of the $29.4 billion of mortgage loans, approximately $260.6 million are being specially serviced as of November 1, 1999, of which approximately $121.1 million are being specially serviced due to payment default and the remainder are being specially serviced due to nonfinancial covenant default. CMSLP, to date has resolved and transferred out of special servicing approximately $422.3 million of the approximately $682.9 million that has been transferred into special servicing. Actual losses to date on mortgage loans underlying the CMBS transactions are lower than the Company's original loss estimates.
(4): On October 6, 1998, Morgan Stanley and Co. International Limited ("Morgan Stanley") advised CRIIMI MAE that it was exercising alleged ownership rights over certain classes of CMBS it held as collateral. In the first quarter of 1999, the Company agreed to cooperate in selling two classes of investment grade CMBS issued by CRIIMI MAE Commercial Mortgage Trust Series 1998-C1 (CBO-2 BBB Bonds) and to suspend litigation with Morgan Stanley with respect to these CMBS. On March 5, 1999, the CBO-2 BBB Bonds with $205.8 million face amount and with a coupon rate of 7% were sold in a transaction that is accounted for as a financing by the Company rather than a sale. Of the $159 million in proceeds, $141.2 million was used to repay amounts due under the agreement with Morgan Stanley, and $17.8 million was paid to CRIIMI MAE. CRIIMI MAE and Morgan Stanley also agreed to a standstill period, now extended through and including November 30, 1999, regarding seven classes of subordinated CMBS known as Morgan Stanley Capital I Inc. Series 1998-WF2 (the "Wells Fargo Bonds"). At the end of this standstill period, Morgan Stanley has until December 10, 1999 to respond to the Company's complaint and resume litigation with respect to the Wells Fargo Bonds, unless the standstill period is further extended by the parties or an agreement between the parties is reached.
(5): The increase in the anticipated yield resulted from the reallocation of CBO-1 asset basis in conjunction with the CBO-2 resecuritization.

The aggregate investment by the underlying rating of the Subordinated CMBS is as follows:

Security Rating	Face Amount as of 9/30/99 (in millions)		Weighted Average Pass- Through Rate	Weighted Average Life (2)	Fair Value as of 9/30/99 (in millions)(1)		Range of Discount Rates Used to Calculate Fair Value (1)	Amortized Cost as of 9/30/99 (in millions)		Amortized Cost as of 12/31/98 (in millions)

A (5)	$	62.6	7.0%	7 years	$	54.2	9.8%	$	57.3	$	57.0
BBB (5)		150.6	7.0%	12 years		116.8	10.4%		127.5		126.9
BBB-(5)		115.2	7.0%	13 years		82.8	11.3%		93.3		92.8
BB+		394.6	7.0%	13 years		260.9	10.6% - 12.9%		319.7		317.9
BB		278.2	6.9%	14 years		200.7	11.2% - 13.4%		261.2		259.1
BB-		89.1	6.8%	14 years		54.4	11.7% - 14.6%		73.0		72.6
B+		128.7	6.7%	16 years		65.9	13.0% - 15.9%		93.4		93.0
B		300.2	6.6%	16 years		151.3	14.0% - 16.3%		210.4		208.9
B-		198.7	6.7%	17 years		86.5	15.2% - 19.0%		107.6		106.7
CCC		92.0	6.8%	19 years		24.0	24.0% - 29.0%		36.1		36.0
Unrated (6)		477.4	6.2%	20 years		118.5	25.0% - 30.0%		151.0		159.0

Total (3)(4)	$	2,287.3	6.7%	16 years	$	1,216.0		$	1,530.5	$	1,529.9

(1): The estimated fair values of Subordinated CMBS represent the carrying value of these assets. Due to the Chapter 11 filing, the Company's lenders were not willing to provide fair value quotes for the portfolio as of September 30, 1999 and December 31, 1998. As a result, the Company calculated the estimated fair market value of its Subordinated CMBS portfolio as of September 30, 1999 and December 31, 1998. The Company used a discounted cash flow methodology to estimate the fair value of its Subordinated CMBS portfolio. The projected cash flows used by the Company were based upon the same collateral data used to calculate the anticipated weighted average yields to maturity. The cash flows were then discounted using a discount rate that, in the Company's view, was commensurate with the market's perception of risk and value. The Company used a variety of sources to determine its discount rate including: (i) institutionally-available research reports and communications with dealers and active Subordinated CMBS investors regarding the valuation of comparable securities. Since the Company calculated the estimated fair market value of its Subordinated CMBS portfolio as of September 30, 1999 and December 31, 1998, it has disclosed in the table the range of discount rates by rating category used in determining these fair market values.

The CMBS market was adversely affected by the turmoil which occurred in the capital markets commencing in late summer of 1998 that caused spreads between CMBS yields and the yields on U.S. Treasury securities with comparable weighted average lives to widen, resulting in a decrease in the value of CMBS. As a result, the creation of new CMBS and the trading of existing CMBS came to a near standstill. In late November 1998, buying and trading activity in the CMBS market began to recover, increasing liquidity in the CMBS market; however, these improvements mostly related to investment grade CMBS. New issuances of CMBS also returned in late November 1998 and have continued throughout 1999. The market for Subordinated CMBS issuances has, however, been slower to recover. It is difficult, if not impossible, to predict when or if the CMBS market and, in particular, the Subordinated CMBS market, will fully recover. Even if the market for Subordinated CMBS fully recovers, the liquidity of such market has historically been limited. Additionally, during adverse market conditions, the liquidity of such market has been severely limited. Therefore management's estimate of the value of its securities could vary significantly from the value that could be realized in a current transaction between a willing buyer and a willing seller in other than a forced sale or liquidation.

(2): Weighted average life represents the weighted average expected life of the Subordinated CMBS prior to consideration of losses, extensions or prepayments other than those factored in the assumed prepayment rate used at the time of acquisition.
(3): Refer to Note 8 for additional information regarding the total face amount and purchase price of Subordinated CMBS for tax purposes.
(4): Similar to the Company's other sponsored CMOs, CMO-IV, as described in Note 6, resulted in the creation of CMBS, of which the Company sold certain tranches. Since the Company retained call options on the sold bonds, the Company did not surrender control of the assets for purposes of FAS 125 and thus the entire transaction is accounted for as a financing and not as a sale. Since the transaction is recorded as a financing, the Subordinated CMBS are not reflected in the Company's Subordinated CMBS portfolio. Instead the mortgage assets are reflected in Investment in Originated Loans on the balance sheet.
(5): In connection with CBO-2, $62.6 million (A rated) and $60.0 million (BBB rated) face amount of investment grade securities were issued with call options and $345 million (A rated) face amount were issued without call options. Since the Company retained call options on certain sold bonds, the Company did not surrender control of those assets pursuant to the requirements of FAS 125 and thus these securities are accounted for as a financing and not a sale. Since the transaction is recorded as a partial financing and a partial sale, CRIIMI MAE has retained the securities with call options in its Subordinated CMBS portfolio reflected on its balance sheet. In connection with CBO-2, in May 1998 the Company initially retained $90.6 million (BBB rated) and $115.2 million (BBB- rated) face amount of securities, with the intention to sell the securities at a later date. Such sale occurred March 5, 1999. See below for further discussion.
(6): The unrated bond from CBO-1 experienced an approximately $737,000 principal write down due to a loss on the foreclosure of an underlying loan. Management believes that the current loss estimates used to recognize income related to this bond remain adequate to cover losses.

As of September 30, 1999 and December 31, 1998, the mortgage loans underlying CRIIMI MAE's Subordinated CMBS portfolio were secured by properties of the types and at the locations identified below:

Property Type	September 30, 1999 Percentage(1)	December 31, 1998 Percentage(1)	Geographic Location(2)	September 30, 1999 Percentage(1)	December 31, 1998 Percentage(1)

Multifamily	32%	31%	California	17%	16%
Retail	29%	28%	Texas	14%	12%
Office	12%	15%	Florida	8%	7%
Hotel	14%	13%	Other(3)	61%	65%
Other	13%	13%	Total	100%	100%

Total	100%	100%

(1): Based on a percentage of the total unpaid principal balance of the underlying loans.
(2): No significant concentration by region.
(3): No other individual state makes up more than 5% of the total.

The Subordinated CMBS tranches owned by CRIIMI MAE provide credit support to the more senior tranches of the related commercial mortgage securitizations. Cash flow from the underlying mortgages generally is allocated first to the senior tranches, with the most senior tranche having a priority right to cash flow. Then, any remaining cash flow is generally allocated among the other tranches in order of their relative seniority. To the extent there are defaults and unrecoverable losses on the underlying mortgages, resulting in reduced cash flows, the subordinate tranche will bear this loss first. To the extent there are losses in excess of the most subordinate tranche's stated right to principal and interest, then the remaining tranches will bear such losses in order of their relative subordination.

The accounting treatment under GAAP requires that the income on Subordinated CMBS be recorded based on the effective interest method using the anticipated yield over the expected life of these mortgage assets. This method can result in GAAP income recognition which is greater than or less than cash received. For the three and nine months ended September 30, 1999, the amount of income recognized in excess of cash received due to the effective interest rate method was approximately $393,000 and approximately $728,000, respectively. For the three and nine months ended September 30,1998, the amount of income recognized (less than) or in excess of cash due to the effective interest rate method was approximately $(494,000) and approximately $1.7 million, respectively.

Since the Petition Date, CRIIMI MAE and certain secured creditors have disagreed about the effect of the stay provisions of the Bankruptcy Code on such secured lenders and the subject assets. A summary of material litigation, and agreements that have been reached with certain creditors, is disclosed in Note 16 Litigation—Bankruptcy Related Litigation. In addition, the Company has been in discussions with certain other creditors not in litigation with the Company. See Note 16 Litigation—Arrangements with Other Creditors.

The Company agreed to cooperate in selling the CBO-2 BBB Bonds and suspend litigation with Morgan Stanley with respect to these CMBS. On March 5, 1999, Morgan Stanley sold the $205.8 million face amount of CMBS with a coupon of 7%. The proceeds of $159 million were used to pay off $141.2 million of the related short-term, variable-rate debt due Morgan Stanley and the remaining net proceeds of $17.8 million were remitted to CRIIMI MAE. CRIIMI MAE retained the right to call each CMBS when the outstanding principal balance amortizes to 15% of its original face balance. The 15% call option prevents CRIIMI MAE from surrendering control of the assets pursuant to the requirements of FAS 125 and thus the transaction is accounted for as a financing and not as a sale. This resulted in CRIIMI MAE recognizing a fixed-rate liability for these bonds in the amount of the gross proceeds, which was approximately $159 million.

CRIIMI MAE and Morgan Stanley also agreed to an extended standstill period through and including November 30, 1999 regarding seven classes of Subordinated CMBS known as Morgan Stanley Capital I, Inc. Series 1998-WF2. At the end of this standstill period, Morgan Stanley has until December 10, 1999 to respond to the Company's complaint and resume litigation with respect to such bonds, unless the standstill period is further extended by the parties or an agreement is reached between the parties.

The Company's CMBS portfolio currently generates monthly cash flow. As of September 30, 1999 and December 31, 1998, certain lenders have withheld payment to CRIIMI MAE of approximately $22.2 million and $8.3 million, respectively, with respect to its CMBS portfolio (excluding those securities that are match-funded). (Refer to Note 6 for payments due the Company in connection with CMO-IV). The realizeability of these receivables is uncertain and is dependent upon reaching successful agreements with the Company's lenders that do not result in the loss of any collateral. A loss could occur if the lender fails to remit interest payments to the Company. Furthermore, it is possible that CRIIMI MAE may have to record impairment losses as a result of future adverse actions taken against CRIIMI MAE by its lenders.

CMSLP did not file for protection under Chapter 11. However, because of the related party nature of its relationship with CRIIMI MAE, CMSLP has been under a high degree of scrutiny from servicing rating agencies. As a result of CRIIMI MAE's Chapter 11 filing, CMSLP was declared in default under certain credit agreements with First Union National Bank ("First Union"). In order to repay all such credit agreement obligations and to increase its liquidity, CMSLP arranged for ORIX Real Estate Capital Markets, LLC ("ORIX") formerly known as Banc One Mortgage Capital Markets, LLC to succeed it as master servicer on two commercial mortgage pools on October 30, 1998. In addition, in order to allay rating agency concerns stemming from CRIIMI MAE's Chapter 11 filing, in November 1998, CRIIMI MAE designated ORIX as special servicer on 33 separate CMBS securitizations totaling approximately $29 billion, subject to certain requirements contained in the respective servicing agreements. CMSLP will continue to perform special servicing as sub-servicer for ORIX on all but five of these securitizations. CRIIMI MAE remains the owner of the lowest rated tranche of the related Subordinated CMBS and, as such, retains rights pertaining to ownership, including the right to replace the special servicer. CMSLP lost the right to specially service the DLJ MAC 95 CF-2 securitization when the majority holder of the lowest rated tranches replaced CMSLP as special servicer.

6. LOAN ORIGINATION PROGRAM

Prior to the Petition Date, the Company originated mortgage loans principally through mortgage loan conduit programs with major financial institutions for the primary purpose of pooling such loans for securitization.

In June 1998, the Company securitized $496 million face amount of commercial mortgage loans (a majority of which were no lock) originated or acquired through the mortgage loan conduit program with Citicorp Real Estate, Inc., and through CRIIMI MAE CMBS Corp., issued Commercial Mortgage Loan Trust Certificates, Series 1998-1 ("CMO-IV"). The original basis of the loans on the balance sheet includes approximately $8 million of deferred loan and securitization costs that are amortized over the life of the securitization and recognized against income using the effective interest rate method.

Through this securitization, CRIIMI MAE sold $397 million face amount of fixed-rate investment grade securities (see also Note 9). CRIIMI MAE retained the remaining principal and interest cash flows from the mortgage loans that collateralize the securitization. CRIIMI MAE has call rights on each of the issued and sold securities and therefore has not surrendered control of the collateral, thus requiring the transaction to be accounted for as a financing of the mortgage loans collateralizing the investment grade CMBS sold in the securitization.

On April 5, 1999, the Company finalized an agreement by which, Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell two classes of investment grade CMBS from CMO-IV with a face amount of $45.9 million and an average coupon rate of 6.96% constituting a portion of the collateral security advances under financing agreements with Citicorp. CRIIMI MAE would retain the right to call each CMBS when the principal balance amortizes to 15% of its original face balance. The 15% call option would prevent CRIIMI MAE from surrendering control of the assets pursuant to the requirements of FAS 125 and thus the transaction would be accounted for as a financing and not a sale. A minimum sales price was established in order to sell the bonds. Gross proceeds from the sale would be used to pay off $39.6 million of secured debt, certain costs, and the remainder, if any, remitted to CRIIMI MAE. This would result in CRIIMI MAE recognizing fixed-rate debt for these bonds, when sold, in the amount of the gross proceeds received. In May 1999, the Company sold $20 million face amount of investment grade securities, with a coupon rate of 6.859% from CMO-IV in accordance with the agreement noted above. Accordingly, the proceeds from the sale of these CMBS securities were used to pay off a portion of the secured debt owed under the Citicorp financing agreements and the Company recognized fixed rate debt in the amount of gross proceeds received. The variable-rate secured borrowings associated with these investment grade securities were proportionally reduced (approximately $17 million) on the balance sheet to reflect the partial sale. The remaining $25.9 million face amount of the investment grade securities were sold on October 8, 1999 and therefore the transaction will be reflected in the fourth quarter as described above.

Although CMO-IV is accounted for as a financing, economically, the Company currently generates monthly cash flow from the subordinated CMBS tranches created in the transaction. As of September 30, 1999 and December 31, 1998, payments of approximately $10.5 million and $2.7 million, respectively, were withheld by certain lenders, with respect to certain tranches of CMO-IV.

As of September 30, 1999 and December 31, 1998, the originated loans were secured by properties of the types and at the locations identified below:

Property Type	September 30, 1999 Percentage(1)	December 31, 1998 Percentage(1)	Geographic Location(2)	September 30, 1999 Percentage(1)	December 31, 1998 Percentage(1)

Multifamily	38%	38%	Michigan	20%	20%
Hotel	26%	26%	Texas	8%	8%
Retail	20%	20%	Illinois	7%	7%
Office	11%	11%	California	6%	6%
Other	5%	5%	Maryland	6%	6%
Total	100%	100%	Connecticut	6%	6%

			Florida	5%	5%
			Other(3)	42%	42%
			Total	100%	100%

(1): Based on a percentage of the total unpaid principal balance of the underlying loans.
(2): No significant concentration by region.
(3): No other individual state makes up more than 5% of the total.

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Descriptions of the originated loans categorized by unpaid principal balances as of September 30, 1999, are as follows:

	As of September 30, 1999
Unpaid Principal Balance (2)	Number of Loans(3)		Face Value(1)(4)		Weighted Average Effective Interest Rate	Weighted Average Remaining Term

$ 0-$ 4.99 million	93		$	220,923,298	7.48%	8.9 years
$ 51$ 9.99 million	22			160,401,316	7.35%	9.2 years
$10-$14.99 million	6			76,187,675	7.15%	9.1 years
$15-$20 million	1			17,116,431	7.15%	10.2 years

	122	(5)	$	474,628,720	7.37%	9.0 years

(1): All originated loans are collateralized by first or second liens on multifamily, hotel, retail, office or other commercial properties. Approximately 79% of the loans originally included in the securitization are No-Lock loans.
(2): The carrying amount of the originated loans of $481,499,820 is comprised of $474,628,720 face amount of loans plus $6,871,100 of deferred loan costs.
(3): During the nine months ended September 30, 1999, there were four prepayments in CMO-IV. These prepayments generated net proceeds of approximately $10.6 million and resulted in a net financial statement gain of approximately $234,800, which is included in gain on originated loan dispositions on the accompanying consolidated statement of income for the nine months ended September 30, 1999. One prepayment was a partial prepayment involving one property of a multiple property loan.
(4): The fair value of the originated loans at September 30, 1999 was $442,827,059.
(5): Several loans in CMO-IV are collateralized by multiple properties. The table reflects actual number of loans.

Descriptions of the originated loans categorized by unpaid principal balances as of December 31, 1998, are as follows:

	As of December 31, 1998
Unpaid Principal Balance	Number of Loans (2)	Face Value(1)		Weighted Average Effective Interest Rate	Weighted Average Remaining Term

$ 0-$ 4.99 million	96	$	233,603,377	7.45%	9.6 years
$ 5-$ 9.99 million	22		163,154,496	7.35%	9.9 years
$10-$14.99 million	6		77,291,024	7.15%	9.9 years
$15-$20 million	1		17,242,738	7.15%	10.9 years

	125	$	491,291,635	7.38%	9.8 years

(1): The fair value of the originated loans at December 31, 1998 was $480,485,570.
(2): Several loans in CMO-IV are collateralized by multiple properties. The table reflects the actual number of loans.

At the time it filed for bankruptcy, the Company had a second mortgage loan conduit program with Citicorp Real Estate, Inc. (the "Citibank Program") and a loan conduit program with Prudential Securities Incorporated and Prudential Securities Credit Corporation (the "Prudential Program") (together the "Programs").

The agreements for both Programs provided that during the warehouse period, the respective financial institution would fund and originate in its name all mortgage loans under the Program, and CRIIMI MAE would deposit a portion of each loan amount in a reserve account. In both facilities, the respective financial institution is responsible for executing an interest rate hedging strategy.

The Citibank Program provided for CRIIMI MAE to pay to Citibank the face value of the loans originated through the Program, which were funded by Citibank and not otherwise securitized, plus or minus any hedging loss or gain on December 31, 1998. To secure this obligation, CRIIMI MAE was required to deposit a portion of the principal amount of each originated loan in a reserve account.

Under the Prudential Program, the Company had an option to pay to Prudential the face value plus or minus any hedging loss or gain, at the earlier of June 30, 1999, or the date by which a stated quantity of loans for securitization has been made. Under the Prudential Program, the Company was required to fund a reserve account, which was approximately $2 million. Since CRIIMI MAE was unable to exercise its option, the Company has forfeited the amount of the reserve account.

On October 5, 1998, Citibank sent the Company a letter alleging that the Company was in default under the Citibank Program and that it was terminating the Citibank Program. The Company and Citibank negotiated a Stipulation and Consent Order (the "Order"), entered by the Bankruptcy Court on April 5, 1999, regarding the Citibank Program. The Order provided that Citibank would, with CRIIMI MAE's cooperation, sell the loans originated under the Citibank Program provided that the sale results in CRIIMI MAE receiving minimum net proceeds of not less than $3.5 million, after satisfying certain amounts due to Citibank under the Citibank Program from the amount held in the reserve account. The minimum net proceeds provision could be waived by written agreement of the Company, the Official Committee of Unsecured Creditors in the Company's Chapter 11 case (the "Unsecured Committee") and the Official Committee of Equity Security Holders in the Company's Chapter 11 case (the "Equity Committee"). CRIIMI MAE is still in discussions with Prudential to sell the loan originated under the Prudential Program. There can be no assurance that an agreement will be reached with Prudential or, if reached, that such agreement would be approved by the Bankruptcy Court.

On August 5, 1999, all but three of the commercial loans originated under the Citibank Program in 1998, were sold for gross proceeds of approximately $308 million. The loans sold had an aggregate unpaid principal balance of $339 million. As a result of the valuation received in the sale, the Company recorded an additional $10.9 million unrealized loss in the second quarter bringing its unrealized losses through June 30, 1999 to $35.3 million. The unrealized losses recorded as of June 30, 1999 also included an estimate of losses (approximately $2 million) related to the three loans (unpaid principal balance of $32.7 million) not sold. On September 16, 1999, the remaining three loans were sold resulting in approximately $1.1 million in additional losses recognized in the third quarter of 1999 due to a decrease in the actual proceeds received as compared to the estimated proceeds anticipated at June 30, 1999. Therefore, the total realized loss for the transaction was approximately $36.3 million. Prior to the actual sale of these loans the Company had recorded its unrealized losses based on pricing data received from Citibank. In the case of each sale of the commercial loans, the minimum net proceeds provision was waived by agreement of the Company, the Unsecured Committee and the Equity Committee. For income tax purposes, the entire loss of $36.3 million was recorded as a realized loss on the loan sale dates in the third quarter of 1999. (See also Footnote 8 regarding the impact of this transaction on tax basis income).

7. INSURED MORTGAGE SECURITIES

CRIIMI MAE's consolidated portfolio of mortgage securities is comprised of FHA-Insured Certificates and GNMA Mortgage-Backed Securities. Additionally, mortgage securities include Federal Home Loan Mortgage Corporation (Freddie Mac) participation certificates which are collateralized by GNMA Mortgage-Backed Securities, as discussed below. As of September 30, 1999, approximately 15% of CRIIMI MAE's investment in mortgage securities were FHA-Insured Certificates and 85% were GNMA Mortgage-Backed Securities (including certificates which collateralize Freddie Mac participation certificates). FHA-Insured Certificates and GNMA Mortgage-Backed Securities are collectively referred to herein as "mortgage securities."

CRIIMI MAE owns the following mortgages directly or indirectly through its wholly-owned subsidiaries:

	As of September 30, 1999
	Number of Mortgage Securities	Fair Value(1)		Amortized Cost		Weighted Average Effective Interest Rate		Weighted Average Remaining Term

CRIIMI MAE	1	$	5,384,050	$	5,436,285	8.00%		35 years
CRIIMI MAE Financial Corporation(2)	36		125,760,742		126,897,710	8.40%		29 years
CRIIMI MAE Financial Corporation II(2)	52		216,576,818		220,420,229	7.21%		27 years
CRIIMI MAE Financial Corporation III(2)	23		62,635,289		63,098,870	7.85%		29 years

	112	$	410,356,899	$	415,853,094	7.68%	(3)	28 years	(3)

	As of December 31, 1998
	Number of Mortgage Securities	Fair Value(1)		Amortized Cost		Weighted Average Effective Interest Rate		Weighted Average Remaining Term

CRIIMI MAE	1	$	5,511,707	$	5,455,114	8.00%		36 years
CRIIMI MAE Financial Corporation	40		161,382,142		158,832,182	8.26%		30 years
CRIIMI MAE Financial Corporation II	55		232,560,966		231,973,794	7.18%		28 years
CRIIMI MAE Financial Corporation III	27		88,640,406		87,376,578	8.00%		30 years

	123	$	488,095,221	$	483,637,668	7.69%	(3)	29 years	(3)

(1): See Note 4 for discussion of fair value methodology.
(2): During the nine months ended September 30, 1999, there were 11 prepayments of mortgage securities held by CRIIMI MAE's financing subsidiaries. These prepayments generated net proceeds of approximately $66.4 million and resulted in net financial statement gains of approximately $1.9 million, which are included in gains on mortgage securities dispositions on the accompanying consolidated statement of income for the nine months ended September 30, 1999.
(3): Weighted Average was computed using total amortized cost of the mortgage securities.

As a result of the CBO-2 transaction (see Note 5), the Company, in accordance with GAAP, no longer classifies its mortgage securities as Held to Maturity. The Company's mortgage securities are now classified as Available for Sale. As a result, the Company now carries its mortgage securities at fair value. The difference between the amortized cost and the fair value of mortgage assets recorded at fair value represents the net unrealized gains on those mortgage securities, which is reported as a separate component of shareholders' equity as of September 30, 1999 and December 31, 1998.

8. RECONCILIATION OF FINANCIAL STATEMENT NET (LOSS) INCOME TO TAX BASIS INCOME

Reconciliations of the financial statement net (loss) income to the tax basis income for the three and nine months ended September 30, 1999 and 1998, are as follows:

	For the three months ended September 30,						For the nine months ended September 30,
	1999			1998			1999			1998

Consolidated financial statement
Net income (loss)	$	9,500,470		$	(6,709,002	)	$	23,666,715		$	52,530,809
Gain on sale of collateralized bond obligation		—			340,281			—			(28,800,408	)
Reamortization of Subordinated CMBS		13,546,678			13,515,127			42,115,397			24,831,302
Interest expense adjustments for collateralized bond obligation		(8,784,667	)		(8,873,340	)		(26,275,845	)		(13,901,373	)
Amortization and other interest expense adjustments		241,245			(451,070	)		(1,651,960	)		(1,281,602	)
Equity in earnings from investments		524,199			1,662,382			2,280,462			5,085,122
Net gains on mortgage security dispositions		52,999			255,850			434,730			465,832
Gain on originated loan disposition		39,927			—			157,453			—
Amortization of assets acquired in the Merger		719,394			719,394			2,158,182			2,158,182
Unrealized loss on reverse repurchase obligation		—			4,091,346			—			4,091,346
Loss on warehouse obligation (1)		(35,253,668	)		17,630,390			(28,328,173	)		17,630,390
Loss on property foreclosure		(319,104	)		—			(319,104	)		—
Reorganization items		3,364,103			—			3,660,299			—
Capital gain on installment note		—			(331,831	)		—			—
Other		(17,494	)		(6,209	)		(49,529	)		(33,351	)

Tax basis (loss) income	$	(16,385,918	)	$	21,843,318		$	17,848,627		$	62,776,249

Dividends accrued or paid on preferred shares		(1,400,298	)		(1,942,377	)		(4,182,792	)		(5,499,881	)

Tax basis (loss) income available to common Shareholders	$	(17,786,216	)	$	19,900,941		$	13,665,835		$	57,276,368

Tax basis (loss) income per share	$	(0.33	)	$	0.41		$	0.26		$	1.22

Tax basis shares outstanding		53,553,161			48,504,819			53,553,161			46,919,645

(1): The Company recorded a realized tax loss in the third quarter of approximately $36.3 million related to the sale of the loans in its Citibank Program (See note 6).

Differences between financial statement net income and the tax basis income available to common shareholders principally relate to differences in the methods of accounting for Subordinated CMBS (see also Note 5), timing and/or deductibility of estimated reorganization costs, loss on warehouse obligation, amortization of certain deferred costs and amortization of the assets acquired in the merger of the CRI Mortgage Businesses.

The entire CBO-2 transaction was accounted for as a financing for tax purposes. As such, the Company will recognize income for tax purposes from the entire group of mortgage securitization pools (35 total) with an aggregate face amount of $2.8 billion and purchase price of $2.0 billion and receive a deduction for the interest expense on the outstanding debt.

9. OBLIGATIONS UNDER FINANCING FACILITIES

Default Declarations

As a result of the bankruptcy petition filed on October 5, 1998, certain lenders have declared defaults or otherwise taken action against the Company with respect to a number of CRIIMI MAE's financing facilities. See Note 16 for a discussion of material litigation between the Company and various creditors and agreements the Company has reached with certain of these creditors.

The following table summarizes CRIIMI MAE's debt outstanding as of September 30, 1999 and December 31, 1998:

			Nine months ended September 30, 1999					Year ended December 31, 1998
Type of Debt	Balance at Quarter End		Eff. Rate at Qtr. End	Average Balance		Average Eff. Rate	Stated Maturity Date (9)	Balance at Year End			Eff. Rate at Year End	Average Balance		Average Eff. Rate
Securitized Mortgage Obligations:
FHLMC Funding Note (1)	$	209,683,585	7.4%	$	213,051,505	7.4%	Sept 2031	$	220,822,380		7.4%	$	229,137,117	7.4%
FNMA Funding Note (2)		60,933,619	7.4%		67,172,867	7.4%	March 2035		84,750,764		7.3%		119,316,182	7.3%
CMO (3)		116,162,535	7.4%		132,695,122	7.4%	Jan 2033		150,528,576		7.4%		166,408,357	7.4%
CMO-Loan Originations (6)		389,391,837	6.5%		386,471,882	6.5%	Oct 2001- May 2008		386,752,951		6.5%		222,114,163	6.5%
Subordinated CMBS (7)		277,609,817	8.8%		225,493,360	8.5%	Nov 2006- Nov 2012		117,831,435(4	)	7.7%		122,861,289	7.6%
Variable-Rate Secured borrowings - Subordinated CMBS (8)		758,773,098	6.6%		794,646,142	6.2%	April 1999- Sept 2000		932,236,674		7.2%		802,562,377	6.8%
Bank term loans		3,050,000	6.8%		3,050,000	6.6%	Dec 1998		3,050,000(5	)	1.8%		3,000,238	3.9%
Working capital line of credit		40,000,000	7.1%		40,000,000	6.9%	Dec 1998		40,000,000		7.2%		21,918,727	7.3%
Bridge Loan		49,749,522	7.6%		49,749,522	7.3%	Feb 1999		49,749,522		7.8%		19,765,489	7.7%
Senior unsecured notes		100,000,000	9.1%		100,000,000	9.1%	Dec 2002		100,000,000		9.1%		99,902,312	9.1%

Total	$	2,005,354,013						$	2,085,722,302

(1): As of September 30, 1999 and December 31, 1998, the face amount of the note was $217,512,170 and $229,005,558, respectively, with unamortized discount of $7,828,585 and $8,183,178, respectively. During the nine months ended September 30, 1999 and 1998, discount amortization of $354,593 and $301,903, respectively, was recorded as interest expense.
(2): As of September 30, 1999 and December 31, 1998, the face amount of the note was $62,513,445 and $86,620,792, respectively, with unamortized discount of $1,579,826 and $1,870,028, respectively. During the nine months ended September 30, 1999 and 1998, discount amortization of $290,202 and $287,288 respectively, was recorded as interest expense.
(3): As of September 30, 1999 and December 31, 1998, the face amount of the note was $119,832,817 and $154,840,829, respectively, with unamortized discount of $3,670,282 and $4,312,253, respectively. During the nine months ended September 30, 1999 and 1998, discount amortization of $641,971 and $321,231, respectively, was recorded as interest expense.
(4): Balance represents face amount of notes, as the issuance did not include any bond discount.
(5): The effective interest rate as of December 31, 1998 includes the impact of a rate reduction agreement which was in place from July 1995 through December 31, 1998, providing for a reduction in the rate on a portion of the loans based on balances maintained at the bank. The effective interest rate as of September 30, 1999 does not include the impact of the rate reduction agreement due to the Company's Chapter 11 filing.
(6): As of September 30, 1999 and December 31, 1998, the face amount of the debt was $396,200,449 and $392,752,908 with unamortized discount of $6,808,613 and $5,999,957, respectively. During the nine months ended September 30, 1999 and 1998, discount amortization of $1,060,484 and $334,505, respectively, was recorded in interest expense.
(7): As of September 30, 1999 and December 31, 1998, the face amount of the debt was $328,446,000 and $122,612,000 with an unamortized discount of $50,836,183 and $4,780,565, respectively. During the nine months ended September 30, 1999 and 1998, discount amortization of $1,269,175 and $96,396, respectively, was recorded in interest expense.

Collateralized Bond Obligations—CMBS

In May 1998, CRIIMI MAE, through its wholly-owned subsidiary CRIIMI MAE CMBS Corp., issued an aggregate of $468 million of longer-term, fixed-rate investment grade debt securities to reduce an equivalent amount of short-term, variable rate secured borrowings used to initially fund CMBS acquisitions. The transaction was structured with a total of $468 million in investment grade securities of which $345 million were non-callable securities and $123 million were callable securities.

FAS 125 provides guidance as to whether a transfer of financial assets, such as in a securitization, will qualify for sales treatment or secured borrowing treatment. This distinction is made by concluding as to whether a transferor relinquishes control over the transferred assets. If the transferor is considered to no longer control the assets, the securities receive sales treatment which calls for the de-recognition of all assets surrendered and liabilities settled, the recognition of all assets received and liabilities incurred and the recognition of a gain or loss through earnings. If the transferor maintains control over the transferred assets, the assets remain on the balance sheet and a corresponding amount of debt is recognized for all securities not held by the transferor. The determination of control is made on a security by security basis.

As a result of this transaction, control was retained over $123 million of the securities because CRIIMI MAE has the right to call the securities. The $345 million of non-callable investment grade securities were treated as a sale, the corresponding assets and debt were de-recognized from the balance sheet and a gain of $28.8 million was recognized through earnings. The $123 million of callable investment grade securities and the corresponding amount of debt are recorded on the balance sheet.

On March 5, 1999, the CBO-2 BBB Bonds with $205.8 million face amount and a coupon rate of 7% were sold in a transaction accounted for as a financing by the Company rather than a sale. Of the $159 million of net sale proceeds, $141.2 million was used to repay variable-rate secured borrowings under the agreement with Morgan Stanley and $17.8 million was remitted to CRIIMI MAE. This resulted in CRIIMI MAE recognizing a fixed-rate liability for these bonds in the amount of gross proceeds.

Collateralized Mortgage Obligations—Originated Loans

In the June 1998 CMO-IV transaction, through the securitization of $496 million of originated or acquired commercial mortgage loans, CRIIMI MAE sold $397 million face amount of fixed-rate investment grade debt securities. CRIIMI MAE retained call options on all of the securities such that control was not relinquished. Therefore, the mortgage loans remain on CRIIMI MAE's balance sheet as assets for accounting purposes, along with the related debt for all securities sold by CRIIMI MAE.

The securities were issued at a discount of approximately $6.6 million. Such discount, as well as approximately $6.7 million of deferred costs and securitization transaction costs are amortized on a level yield basis over the expected life of the related security. The securities not sold to third parties were partially financed with secured borrowings. The lending agreements are secured by certain of the CMO—IV securities retained by CRIIMI MAE with an aggregate fair value of approximately $67.4 million as of September 30, 1999.

On April 5, 1999, the Company finalized an agreement by which, Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell two classes of investment grade CMBS from CMO-IV (face amount of $45.9 million) constituting a portion of the collateral security advances under the Citicorp financing agreement. This transaction would be accounted for as a financing and not a sale (See Note 6). This would result in the Company recognizing a fixed-rate liability for these bonds, when sold, in the amount of gross proceeds. In May 1999, the Company sold approximately $20 million face amount of investment grade securities, with a coupon rate of 6.859% from CMO-IV in accordance with the agreement. The variable-rate secured borrowings associated with these investment grade securities were proportionally reduced (approximately $17 million) on the balance sheet to reflect the partial sale. The remaining $25.9 million face amount of the investment grade securities were sold on October 8, 1999 and therefore the transaction will be reflected in the fourth quarter as described above.

Variable Rate Secured Borrowings—CMBS

As previously discussed, when CRIIMI MAE purchased Subordinated CMBS, it initially financed (generally through secured borrowings) a portion of the purchase price of the Subordinated CMBS. These secured borrowings were either provided by the issuer of the CMBS pool or through master secured borrowing agreements, as discussed below. As of September 30, 1999, the secured borrowings on Subordinated CMBS have interest rates that are generally based on the one-month London Interbank Offered Rate (LIBOR), plus a spread ranging from 0.5% to 1.5%. Due to the Chapter 11 filing and the automatic stay provisions granted under the Bankruptcy Code, the actual maturity date is undeterminable for facilities that have expired or will expire in 1999 per the stated maturities.

As discussed above, on March 5, 1999, the CBO-2 BBB Bonds were sold in a transaction that was accounted for a financing rather than a sale. Of the $159.0 million of net sale proceeds, $141.2 million was used to repay variable rate secured borrowings.

As discussed above, in May 1999, a portion of the CMO-IV CMBS were sold in a transaction that was accounted for as a financing rather than a sale. The variable-rate secured borrowings were proportionally reduced on the balance sheet to reflect the partial sale. The remaining portion of the bonds were sold on October 8, 1999 and therefore, the remainder of the variable-rate secured borrowings will be paid down in the fourth quarter of 1999.

The secured borrowing agreements are secured by certain rated CMBS security tranches with an aggregate fair value of approximately $814 million as of September 30, 1999 and $1.1 billion as of December 31, 1998. CRIIMI MAE's short-term variable rate financing facilities require that the value of the collateral securing the facilities meet a minimum loan-to-value ratio. If the value of the collateral is perceived such that the minimum loan-to-value ratio is not met, then the lender may require the Company to post cash or additional collateral with sufficient value to cure the perceived value deficiency. At September 30, 1999, CRIIMI MAE had secured borrowing agreements with German American Capital Corporation, Lehman ALI, Inc. First Union National Bank of North Carolina, Morgan Stanley, Merrill Lynch and Citicorp Securities, Inc. ("Citicorp"). These secured borrowing agreements qualify as financings under FAS 125 because CRIIMI MAE is required to purchase the same securities collateralizing the borrowing before their maturity. Citicorp and Morgan Stanley have each taken the position that CMBS that were pledged to them by the Company were instead sold to them by the Company because the transactions between the parties were documented using Bond Market Association Master Repurchase Agreement forms. The Company disputes the positions of both Citicorp and Morgan Stanley and has filed two complaints contesting their claims of ownership. If, however, Citicorp and Morgan Stanley prevail, the portfolio value of the Company's owned securities would decrease by the amount of bonds that are deemed to have been sold to Citicorp or Morgan Stanley and the corresponding obligations would also decrease. (See Note 16).

Senior Unsecured Notes

In November 1997, CRIIMI MAE issued senior unsecured notes ("Notes") due on December 1, 2002 in an aggregate principal amount of $100 million. The Notes are effectively subordinated to the claims of any secured lender to the extent of the value of the collateral securing such indebtedness. Interest on the Notes is payable semi-annually in arrears on June 1 and December 1, commencing June 1, 1998 at a fixed annual rate of 9.125%. The Notes are redeemable at any time, in whole or in part, at the option of CRIIMI MAE.

The Indenture contains certain covenants which, among other things, restricted the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends, or make distributions in respect of the Company's or such subsidiaries' capital stock, make other restricted payments, enter into transactions with affiliates or related persons, or consolidate, merge or sell all or substantially all of their assets. These covenants were subject to exceptions and qualifications.

Under the terms of the Indenture, the Company could not incur additional indebtedness (except for Permitted Debt, which included secured borrowings, working capital lines of credit, and borrowings under facilities in place as of November 21, 1997), unless at the time of such incurrence either (a) the ratio of Adjusted Earnings Available for Fixed Charges to Adjusted Fixed Charges giving proforma effect for the new borrowings is greater than 1.75 to 1.0 or (b) the Adjusted Debt to Capital Ratio on a proforma basis after giving effect to the incurrence of the new debt is less than 2.0 to 1.0.

Bank Term Loans

In connection with the Merger, CM Management assumed certain debt of certain mortgage businesses affiliated with C.R.I., Inc. in the principal amount of $9.1 million (the "Bank Term Loan"). The Bank Term Loan is secured by certain cash flows generated by CRIIMI MAE's direct and indirect interests in the AIM Funds and is guaranteed by CRIIMI MAE. The loan required quarterly principal payments of $650,000 and matured on December 31, 1998. The amount outstanding as of September 30, 1999 and December 31, 1998 was $1.3 million. Interest on the loan is based on CRIIMI MAE's choice of one, two or three-month LIBOR, plus a spread of 1.25%.

In addition, in connection with the Real Estate Owned Property, a wholly-owned subsidiary has a loan secured by the Real Estate Owned Property and guaranteed by CRIIMI MAE. The loan requires monthly interest payments and a balloon principal payment at maturity. The loan was made January 22, 1998 and matured on August 1, 1999. The Company received a default notice on August 3, 1999 from Citicorp. The amount outstanding as of September 30, 1999 and December 31, 1998 was $1.75 million. Interest on the loan is based on LIBOR, plus a spread of 1.5%. Currently, negotiations to sell the property to a third party are taking place. Amounts received by any such sale will be used to pay off the outstanding loan balance and the remaining proceeds will be retained by the Company.

Working Capital Line of Credit

In late 1996, CRIIMI MAE entered into an unsecured working capital line of credit provided by two lenders which provided for up to $40 million in borrowings. The credit facility matured on December 31, 1998. Outstanding borrowings under this line of credit are based on interest at one-month LIBOR, plus a spread of 1.75%. As of September 30, 1999 and December 31, 1998, $40 million in borrowings were outstanding under this facility.

Bridge Loan

In August 1998, CRIIMI MAE entered into a bridge loan for $50 million provided by a lender. The total unpaid principal balance and accrued interest was due in February 1999. Outstanding borrowings under this facility are based on interest at one-month LIBOR, plus a spread of 2.25%. As of September 30, 1999 and December 31, 1998, approximately $50 million in borrowings was outstanding under this loan.

Other Debt Related Information

Changes in interest rates have no impact on the cost of funds or the collateral requirements on CRIIMI MAE's fixed-rate debt, which approximates 58% of CRIIMI MAE's consolidated debt as of September 30, 1999. Fluctuations in interest rates will continue to impact the value of CRIIMI MAE's mortgage assets which are not match-funded and could impact potential returns to shareholders through increased cost of funds on the variable-rate debt in place. CRIIMI MAE has a series of interest rate cap agreements in place in order to partially limit the adverse effects of rising interest rates on the remaining variable-rate debt. When CRIIMI MAE's interest rate cap agreements expire, CRIIMI MAE will have interest rate risk to the extent interest rates increase on any variable-rate borrowings unless the caps are replaced or other steps are taken to mitigate this risk. Furthermore, CRIIMI MAE has interest rate risk to the extent that the LIBOR interest rate increases between the current rate and the cap rate. However, CRIIMI MAE's investment policy requires that at least 75% of variable-rate debt be hedged. As of September 30, 1999, 91% of CRIIMI MAE's variable-rate debt is hedged.

For the nine months ended September 30, 1999, CRIIMI MAE's weighted average cost of borrowing, including amortization of discounts and deferred financing fees of approximately $6.7 million, was approximately 7.39%. As of September 30, 1999, CRIIMI MAE's debt-to-equity ratio was approximately 7.7 to 1.0 and CRIIMI MAE's non-match-funded debt-to-equity ratio was approximately 3.7 to 1.0. Under certain of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as defined, may not exceed 5.0 to 1.0, among other requirements.

10. INTEREST RATE PROTECTION AGREEMENTS

CRIIMI MAE has entered into interest rate protection agreements to partially limit the adverse effects of rising interest rates on its variable-rate borrowings. Interest rate caps ("caps"), as shown below, provide protection to CRIIMI MAE to the extent interest rates, based on a readily determinable interest rate index, increase above the stated interest rate cap, in which case, CRIIMI MAE will receive payments based on the difference between the index and the cap. All of the caps qualify for hedge accounting treatment. The related cost, as well as gains or losses on terminated positions, are deferred as a component of the related debt. At September 30, 1999, CRIIMI MAE held caps with a notional amount of $775 million to hedge $775 million of the Company's variable rate debt.

Notional Amount			Effective Date	Maturity Date (2)	Cap (2)		Index

$	100,000,000		April 8, 1997	April 10, 2000	6.6875	%	1M LIBOR
	100,000,000		September 22, 1997	September 22, 2000	6.6563	%	1M LIBOR
	100,000,000		December 7, 1997	November 7, 2000	6.6563	%	1M LIBOR
	50,000,000		December 23, 1997	December 23, 2000	6.9688	%	1M LIBOR
	100,000,000		March 11, 1998	March 10, 2001	6.6875	%	1M LIBOR
	100,000,000		March 31, 1998	March 31, 2001	6.6875	%	1M LIBOR
	100,000,000		June 4, 1998	June 4, 2001	6.6563	%	1M LIBOR
	100,000,000		June 26, 1998	June 26, 2001	6.6563	%	1M LIBOR
	25,000,000		September 6, 1998	August 6, 2001	6.6523	%	1M LIBOR

$	775,000,000	(1)

(1): CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI MAE's variable-rate borrowing costs.
(2): The weighted average strike price is approximately 6.7% and the weighted average remaining term for these interest rate cap agreements is approximately 1.3 years.

CRIIMI MAE is exposed to credit loss in the event of non-performance by the counterparties to the interest rate protection agreements should interest rates exceed the caps. However, management does not anticipate non-performance by any of the counterparties. All of the counterparties have long-term debt ratings of A+ or above by Standard and Poor's and A1 or above by Moody's. Although none of CRIIMI MAE's caps are exchange-traded, there are a number of financial institutions which enter into these types of transactions as part of their day-to-day activities.

11. COMMON STOCK

Stock Purchase Plan

In December 1997, CRIIMI MAE registered with the Securities and Exchange Commission up to 3 million shares of CRIIMI MAE common stock ("Common Shares") in connection with a then new Dividend Reinvestment and Stock Purchase Plan (the "DRSPP"). Subsequently, in May 1998, the shareholders approved the issuance of up to 4.7 million common shares in connection with the DRSPP. The DRSPP allows investors the opportunity to purchase additional CRIIMI MAE Common Shares through the reinvestment of CRIIMI MAE's dividends, optional cash payments and initial cash investments.

In October 1998, due to the filing under Chapter 11, the Company suspended the initial cash investment and optional cash payment features of the DRSPP until further notice.

Dividends

During the pendency of the bankruptcy proceedings, the Company is prohibited from paying cash dividends without first obtaining Bankruptcy Court approval. (See Note 1-Effect of Chapter 11 Filing on REIT Status and other Tax Matters).

12. PREFERRED STOCK

CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of preferred stock, of which 150,000 shares have been designated as Series A Cumulative Convertible Preferred Shares, 3,000,000 shares have been designated as Series B Cumulative Convertible Preferred Shares, 300,000 shares have been designated as Series C Cumulative Convertible Preferred Shares, 300,000 shares have been designated as Series D Cumulative Convertible Preferred Shares and 1,610,000 shares have been designated as Series F Redeemable Cumulative Dividend Preferred Stock as of September 30, 1999.

Series B Cumulative Convertible Preferred Stock

In August 1996, CRIIMI MAE completed a public offering of 2,415,000 shares of Series B Cumulative Convertible Preferred Shares, with a par value of $0.01 per share (the "Series B Preferred Shares"), at an aggregate offering price of $60,375,000. The Series B Preferred Shares pay a dividend in an amount equal to the sum of (i) $0.68 per share per quarter plus (ii) the product of the excess over $0.30, if any, of the quarterly cash dividend declared and paid with respect to each share of common stock times a conversion ratio of 2.2844 times one plus a conversion premium of 3%, subject to adjustment upon the occurrence of certain events. The Series B Preferred Shares are (i) convertible at the option of the holders and (ii) subject to redemption at CRIIMI MAE's sole discretion after the tenth anniversary of issuance. Each Series B Preferred Share is convertible into 2.2844 shares of common stock, subject to adjustment upon the occurrence of certain events. The liquidation preference and the redemption price on the Series B Preferred Shares equals $25 per share, together with accrued but unpaid dividends. There were 1,593,982 Series B Preferred Shares outstanding as of September 30, 1999. Dividends accrued on Series B Preferred Shares totaled $4,335,631 as of September 30, 1999 (of which, $3,251,723 was accrued for the first three quarters of 1999 and $1,083,908 was accrued for the fourth quarter of 1998, but not paid to date as a result of the Chapter 11 filing).

Series C Cumulative Convertible Preferred Stock

In March 1997, CRIIMI MAE entered into an agreement with an institutional investor pursuant to which the Company has the right to sell, and such investor is obligated to purchase, up to 300,000 shares of Series C Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred Shares"), through June 1998 at a price of $100 per share. The Series C Cumulative Convertible Preferred stock pays a dividend at an annual rate equal to the sum of (i) 75 basis points plus (ii) LIBOR as of the second LIBOR Market Day preceding the commencement of the calendar quarter which includes such quarterly dividend payment. The Series C Preferred Shares are convertible into shares of common stock at the option of the holders and is subject to redemption by CRIIMI MAE. The outstanding Series C Preferred Shares are subject to mandatory conversion into common shares on February 23, 2000. Each Series C Preferred Share is convertible into common shares based on the following formula: the numerator is $100 and the denominator is a closing trade price within the conversion period on the average of the closing trade price or the applicable twenty-one day period immediately preceding the date of delivery, whichever is mutually acceptable. The liquidation preference and redemption price on the Series C Preferred Shares equals $100 and $106, respectively, per share plus an amount equal to all dividends accrued and unpaid thereon. On September 23, 1997, 150,000 shares were issued under this agreement, resulting in net proceeds of approximately $15 million. On February 23, 1998, another 150,000 Series C Preferred Shares were issued under this agreement, resulting in net proceeds of approximately $15 million. These proceeds were used to fund purchases of Subordinated CMBS. During the nine months ended September 30, 1999, 20,000 Series C Preferred Shares were converted into 653,061 common shares, resulting in 103,000 Series C Preferred Shares outstanding at September 30, 1999. Dividends accrued on Series C Preferred Shares as of September 30, 1999 totaled $743,353 (of which $484,214 was accrued for the first three quarters of 1999 and $259,139 for the fourth quarter of 1998, but not paid to date as a result of the Chapter 11 filing).

Series D Cumulative Convertible Preferred Stock

In July 1998, CRIIMI MAE entered into an agreement with an institutional investor pursuant to which the Company had the right to sell, and such investor was obligated to purchase, up to 300,000 shares of Cumulative Convertible Preferred Stock par value $.01 per share (the "Series D Preferred Shares") at price of $100 per share. The Series D Cumulative Convertible Preferred Stock pays a dividend at an annual rate equal to the sum of (i) 75 basis points plus (ii) LIBOR as of the second LIBOR Market Day preceding the commencement of the calendar quarter which includes such quarterly dividend payment. The Series D Preferred Shares are convertible into shares of common stock at the option of the holders and is subject to redemption by CRIIMI MAE. The outstanding Series D Preferred Shares are subject to mandatory conversion into common shares on July 31, 2000. Each Series D Preferred Share is convertible into common shares based on the following formula: the numerator is $100 and the denominator is a closing trade price within the conversion period on the average of the closing trade price or the applicable twenty-one day period immediately preceding the date of delivery, whichever is mutually acceptable. The liquidation preference and redemption price on the Series D Preferred Shares equals $100 and $106, respectively, per share plus an amount equal to all dividends accrued and unpaid thereon. On July 31, 1998, 100,000 Series D Preferred Shares were issued under this agreement, resulting in net proceeds of approximately $10 million. There were no shares converted to common shares during the first three quarters of 1999, resulting in 100,000 shares outstanding at September 30, 1999. Dividends accrued on Series D Preferred Shares totaled $601,787 as of September 30, 1999 (of which, $446,856 was accrued for the first three quarters of 1999 and $154,931 for the fourth quarter of 1998, but not paid to date as a result of the Chapter 11 filing).

Series F Redeemable Cumulative Dividend Preferred Stock

On September 14, 1999, the Company declared a dividend for common shareholders of record as of October 20, 1999, which was paid on November 5, 1999 in shares of Series F Redeemable Cumulative Dividend Preferred Stock (convertible during the period of ten (10) Business Days after the fifth Business Day after the Initial Issue Date and during the period of ten (10) Business Days ending ninety (90) calendar days after the Initial Issue Date or the first Business Day thereafter) ("Series F Preferred Shares"). The Series F Preferred Shares were approved for listing on the New York Stock Exchange and trades with the symbol CMM-PrF, with a par value of $.01 and a face value of $10.

Holders of record of each share of CRIIMI MAE common stock who maintained ownership of their common stock through November 5, 1999, received 3/100ths of a share of the new Series F Preferred Shares (i.e., three shares of Series F Preferred Shares for every 100 shares of common stock held). Series F Preferred Shares were issued in whole shares, with shareholders receiving cash from the Company's agent for their fractional share interests at a price equal to the average sales price of all aggregated fractional shares sold by the Company's agent, less transaction costs. The Series F Preferred Shares are convertible into shares of common stock during two 10-business day conversion periods. The first conversion period will be from November 15, 1999 through November 30, 1999, and the second conversion period will be from January 21, 2000 through February 3, 2000. Conversions will be based on the volume-weighted average of the sale prices of the common stock for the 10-trading days prior to the date converted, subject to a floor of 50% of the volume-weighted average of the sale prices of the common stock on November 5, 1999. Holders of Series F Preferred Shares will have no right to convert their Series F Preferred Shares into common stock after February 3, 2000.

The Series F Preferred Shares provide for cash dividends at an annual fixed rate of 12%. The first dividend will be paid no earlier than the end of the calendar quarter in which a plan of reorganization for the Company becomes effective, and no more than quarterly thereafter. Series F Preferred Shares are redeemable at the Company's option after November 5, 2000 at a price of $10.00 per share plus accrued and unpaid dividends. In addition, the liquidation value of Series F Preferred Shares is $10 per share (and holders are entitled to accrued and unpaid dividends). As of September 30, 1999, the declaration of the Series F dividend was approximately 1.61 million shares or approximately $16.1 million (based on the face value of $10). This is reflected as a reclassification in the equity section of the September 30, 1999 balance sheet from Additional Paid in Capital to Stock Dividend to be Distributed. On November 5, 1999, the date of payment, the Series F will be reflected as contributed capital on the balance sheet.

13. EARNINGS PER SHARE

The following table reconciles basic and diluted earnings per share under FAS 128 for the three and nine months ended September 30, 1999 and 1998.

	For the three months ended September 30, 1999					For the three months ended September 30, 1998
	Income		Shares	Income Per Share Amount		Income			Shares	Income Per Share Amount

Basic EPS
Net (loss) Income Available to Common Shareholders	$	8,100,173	53,553,161	$	0.15	$	(8,651,379	)	48,298,007	$	(0.18	)
Effect of Dilutive Securities(1)
Net effect of assumed exercise of stock options		—	—				—		—
Convertible Preferred Stock (2) (3) (4)		316,390	8,206,649				—		—

Diluted EPS
Income (Loss) available to Common Shareholders and assumed conversions	$	8,416,563	61,759,810	$	0.14	$	(8,651,379	)	48,298,007	$	(0.18	)

	For the nine months ended September 30, 1999					For the nine months ended September 30, 1998
	Income		Shares	Income Per Share Amount		Income		Shares	Income Per Share Amount

Basic EPS
Net Income Available to Common Shareholders	$	19,483,923	53,373,719	$	0.37	$	47,030,928	46,178,885	$	1.02
Effect of Dilutive Securities
Net effect of assumed exercise of stock options		—	—				—	870,767
Convertible Preferred Stock(2)(3)(4)		931,070	7,797,570				1,155,023	2,064,193

Diluted EPS
Income available to Common Shareholders and assumed conversions	$	20,414,993	61,171,289	$	0.33	$	48,185,951	49,113,845	$	0.98

(1): SFAS 128 states that no common stock equivalents should be considered in the calculation of diluted EPS in a period that there is a net loss.
(2): 1,593,982 and 1,629,582 shares of Series B Preferred Shares were outstanding at September 30, 1999 and 1998, respectively. The common stock equivalents for these shares were not included in the calculation of diluted EPS because the effect would be anti-dilutive.
(3): Common stock equivalents are computed using the average common stock price. For the three and nine months ended September 30, 1999, the average common stock prices were $2.47 and $2.67 per share, respectively. For 1998, the average common stock prices were $13.21 and $14.55 per share for the three and nine months ended September 30, 1998, respectively.
(4): The Series F Preferred Stock issued November 5, 1999 is not included in the above calculations as it was issued subsequent to September 30, 1999. However, the Series F Preferred Stock, based on current market conditions, would be dilutive in such calculations.

14. EMPLOYEE RETENTION PLAN

On December 18, 1998, the Company obtained Bankruptcy Court approval to adopt and implement an employee retention program ("the Employee Retention Plan") with respect to all employees of the Company other than certain key executives. On February 28, 1999, the Company received Bankruptcy Court approval authorizing it to extend the Employee Retention Plan to the key executives initially excluded, including modifying existing employment agreements and entering into new employment agreements with such key executives. The Employee Retention Plan provides for retention payments aggregating up to approximately $3.5 million, including payments to certain executives. Retention payments are payable semiannually over a two-year period. The first retention payment vested on April 5, 1999 and was paid on April 15, 1999. The second retention payment vested on October 5, 1999 and was paid on October 15, 1999. The entire unpaid portion of the retention payments will become immediately due and payable (i) upon the effective date of a plan of reorganization for the Company and, with respect to certain key executives, court approval or (ii) upon termination without cause. William B. Dockser, Chairman of the Board of the Company, and H. William Willoughby, President, are not currently entitled to receive any retention payments. Subject to the terms of their respective employment agreements, certain key executives will be entitled to severance benefits if they resign or their employment is terminated following a change of control. The other employees will be entitled to severance benefits if they are terminated without cause subsequent to a change of control of the Company and CM Management. In addition, options granted by the Company after October 5, 1998 will, subject to Bankruptcy Court approval, become exercisable upon a change of control.

In addition, in March 1999, the Company granted 520,750 options to purchase shares at a price of $3.125 to eligible employees. Such options vest annually over a three year period.

15. TRANSACTIONS WITH RELATED PARTIES

Below is a summary of the related party transactions which occurred during the three and nine months ended September 30, 1999 and 1998. These items are described further in the text which follows:

	For the three months ended September 30,				For the nine months ended September 30,
	1999		1998		1999		1998

Amounts received or accrued from related parties:
CRIIMI, Inc.
Income(2)	$	230,284	$	303,523	$	712,576	$	979,677
Return of Capital(6)		—		981,028		3,165,772		3,322,092

Total	$	230,284	$	1,284,551	$	3,878,348	$	4,301,769

CRI/AIM Investment Limited Partnership (2)	$	110,068	$	122,632	$	345,737	$	431,347

CRIIMI MAE Services Limited Partnership (8)	$	—	$	—	$	—	$	3,114,000

Expense reimbursements to CRIIMI Management:
AIM Funds and CRI Liquidating (1)(4)	$	11,173	$	55,313	$	133,519	$	179,765
CMSLP (1)		126,564		—		669,844		—

Total	$	137,737	$	55,313	$	803,363	$	179,765

Payments to CRI:
Expense reimbursement—CRIIMI MAE(1)(3)	$	42,323	$	101,572	$	139,699	$	259,859

Capital Hotel Group(5)	$	18,173	$	17,563	$	47,072	$	42,860

Other(7)	$	—	$	—	$	—	$	—

(1): Included in general and administrative expenses on the accompanying consolidated statements of income.
(2): Included as equity in earnings from investments on the accompanying consolidated statements of income.
(3): Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to C.R.I., Inc. as reimbursement for expenses incurred by the Adviser on behalf of CRIIMI MAE. In connection with the Merger, on June 30, 1995, CRIIMI MAE was no longer required to reimburse the Adviser, as these expenses are now directly incurred by CRIIMI MAE. However, pursuant to an agreement between CRIIMI MAE and C.R.I., Inc. (the "CRI Administrative Services Agreement"), C.R.I., Inc. provides CRIIMI MAE with certain administrative and office facility services and other services, at cost, with respect to certain aspects of CRIIMI MAE's business. CRIIMI MAE uses the services provided under the C.R.I., Inc. Administrative Services Agreement to the extent such services are not performed by CM Management or provided by another service provider. The CRI Administrative Services Agreement is terminable on 30 days notice at any time by CRIIMI MAE.
(4): Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to C.R.I., Inc. as reimbursement for expenses incurred by the Adviser on behalf of CRI Liquidating and the AIM Funds. The transaction in which CRIIMI MAE became a self-administered REIT had no impact on CRI Liquidating's or the AIM Funds' financial statements except that the expense reimbursements previously paid to C.R.I., Inc. are, effective June 30, 1995, paid to CM Management.
(5): Included as a reduction of net income earned from Real Estate Owned property which is included in other investment income on the accompanying consolidated statements of income.
(6): Included as a reduction of equity investments on the accompanying consolidated balance sheets.
(7): The Principals have certain management interests and equity investments in two borrowers whose mortgage loans have an aggregate balance of approximately $22 million which were included in CMO—IV. These two mortgage loans were originated and underwritten by Citicorp Real Estate, Inc. and were made to CRI Hotel Income Partners, L.P. (the "CRI Hotel Loan") and Arboretum Village, L.P. (the "Arboretum Village Loan"). The Principals are the Chairman and President, respectively, of, and holders of a 100% equity interest in C.R.I., Inc., which is the general partner of CRICO Hotel Associates I, L.P., the general partner of CRI Hotel Income Partners, L.P. C.R.I., Inc. is also the managing general partner of Capital Realty Investors III Limited Partnership which is a limited partner in Arboretum Villages, L.P. The Principals are also the Chairman and President, respectively and holders of a 100% equity interest in C.R.H.C. Incorporated which is the general partner of Arboretum Villages, L.P.
(8): This is a distribution included in the balance sheet as a decrease in the investment in CMSLP.

16. LITIGATION

Bankruptcy Proceedings

On the Petition Date, the Debtors each filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These cases are being jointly administered for procedural purposes. None of the cases has been substantively consolidated. Under the Bankruptcy Code, the Debtors are authorized to manage their respective affairs and operate their businesses as debtors-in-possession while they attempt to confirm and consummate their Joint Plan of Reorganization that will restructure their financial affairs and allow them to emerge from bankruptcy. As a debtor-in-possession under the Bankruptcy Code, no Debtor may engage in any transaction outside the ordinary course of business without the approval of the Bankruptcy Court. The following discussion describes certain aspects of the Chapter 11 cases of the Debtors (the "Chapter 11 Cases"), but it is not intended to be a complete summary.

Pursuant to the Bankruptcy Code, the commencement of the Chapter 11 Cases created an automatic stay, applicable generally to creditors and other parties in interest, but subject to certain limited exceptions, of: (i) the commencement or continuation of judicial, administrative or other actions or proceedings against the Debtors that were or could have been commenced prior to the commencement of the Chapter 11 Cases; (ii) the enforcement against the Debtors or their property of any judgments obtained prior to the commencement of the Chapter 11 Cases; (iii) the taking of any action to obtain possession of property of the Debtors or to exercise control over such property; (iv) the creation, perfection or enforcement of any lien against the property of the bankruptcy estates of the Debtors; (v) any act to create, perfect or enforce against the property of the Debtors any lien that secures a claim that arose prior to the commencement of the Chapter 11 Cases; (vi) the taking of any action to collect, assess or recover claims against the Debtors that arose before the commencement of the Chapter 11 Cases; (vii) the set-off of any debt owing to the Debtors that arose prior to the commencement of the Chapter 11 Cases against any claim against the Debtors; or (viii) the commencement or continuation of a proceeding before the United States Tax Court concerning the Debtors. Any entity may apply to the Bankruptcy Court, upon appropriate showing of cause, for relief from the automatic stay.

As noted above, the Debtors are authorized to manage their respective properties and operate their respective businesses pursuant to the Bankruptcy Code. During the course of the Chapter 11 Cases, the Debtors will be subject to the jurisdiction and supervision of the Bankruptcy Court. The United States Trustee has appointed (i) an official committee of Unsecured Creditors in the CRIIMI MAE Chapter 11 case, (ii) an official committee of Unsecured Creditors in the Management Chapter 11 case and (iii) an official committee of Equity Security Holders in the CRIIMI MAE Chapter 11 case (collectively, the "Committees"). The Committees are expected to participate in the formulation of the plans of reorganization for the respective Debtors. The Debtors are required to pay certain expenses of the Committees, including professional fees, to the extent allowed by the Bankruptcy Court.

Under the Bankruptcy Code, for 120 days following the Petition Date, only the debtor-in-possession has the right to propose and file a plan of reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan of reorganization during this exclusivity period, no other party may file a plan of reorganization until 180 days following the Petition Date, during which period the debtor-in-possession has the exclusive right to solicit acceptances of the plan. If a debtor-in-possession fails to file a plan during the exclusivity period or such additional exclusivity period as may be ordered by the Bankruptcy Court or, after such plan has been filed, fails to obtain acceptance of such plan from impaired classes of creditors and equity security holders during the exclusive solicitation period, any party in interest, including a creditors' committee, an equity security holders' committee, a creditor or an equity security holder may file a plan of reorganization for such debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the exclusivity period, if not previously terminated, would terminate.

The Debtors' initial exclusivity period to file a plan of reorganization ended on February 2, 1999. The Bankruptcy Court extended this period through August 2, 1999 and again through September 10, 1999. The Debtors sought a third extension of exclusivity through November 10, 1999 and on September 20, 1999, the Bankruptcy Court entered an order (i) extending the Debtors' right to file a plan of reorganization through October 16, 1999, (ii) providing the Unsecured Creditors' Committee and the Equity Security Holders' Committee the right to jointly file a plan of reorganization through October 16, 1999 and (iii) providing that any party in interest may file a plan of reorganization after October 16, 1999. The Debtors filed a Joint Plan of Reorganization on September 22, 1999 and pursuant to a Bankruptcy Court order entered on November 5, 1999 must file their proposed Joint Disclosure Statement on or prior to December 6, 1999. To the Company's knowledge, no other party in interest has filed a plan of reorganization. There can be no assurance that no alternative plan of reorganization will be filed.

After a Joint Disclosure Statement has been filed and approved by the Bankruptcy Court, after notice and a hearing, it will be sent, together with the Plan, to members of all classes of impaired creditors and equity security holders for acceptance or rejection. Following acceptance or rejection of any plan by impaired classes of creditors and equity security holders, the Bankruptcy Court, after notice and a hearing, will consider whether to confirm the plan. To confirm a plan, the Bankruptcy Court is required to find among other things: (i) with respect to each class of impaired creditors and equity security holders, that each holder of a claim or interest of such class either (A) will, pursuant to the plan, receive or retain property of a value as of the effective date of the plan, that is at least as much as such holder would have received in a liquidation on such date of the Debtors or (B) has accepted the plan, (ii) with respect to each class of claims or equity security holders, that such class has accepted the plan or is not impaired under the plan, and (iii) confirmation of the plan is not likely to be followed by the liquidation or need for further financial reorganization of the Debtors or any successor unless such liquidation or reorganization is proposed in the plan.

If any impaired class of creditors or equity security holders does not accept a plan, the proponent of the plan may invoke the so-called "cramdown" provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan, notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity security holders, if certain requirements of the Bankruptcy Code are met. These requirements include: (i) the plan does not discriminate unfairly and (ii) the plan is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. As used in the Bankruptcy Code, the phrases "discriminate" and "fair and equitable" have narrow and specific meanings and their use herein is qualified in its entirety by reference to the Bankruptcy Code.

Bankruptcy Related Litigation

The following is a summary of material litigation matters between the Company and certain of its secured creditors since the Petition Date. The Company has reached agreement with certain of these creditors, as set forth in greater specificity below.

Merrill Lynch

As of the Petition Date, the Company owed Merrill Lynch approximately $274.8 million with respect to advances to the Company under an assignment agreement pursuant to which the Company pledged Subordinated CMBS. Borrowings under this assignment agreement are secured by a first priority security interest in certain CMBS issued by CBO-2, together with all proceeds, distributions and amounts realized therefrom (the "Distributions") (the CMBS pledged to Merrill Lynch and the Distributions are hereafter referred to collectively as the "Merrill Collateral").

On October 16, 1998, Merrill Lynch filed a motion with the Bankruptcy Court for relief from the automatic stay or, in the alternative, for entry of an order directing the Company to provide adequate protection for its interest in the Merrill Collateral. On October 21, 1998, the Company filed a complaint against Merrill Lynch for turnover of Distributions remitted to Merrill Lynch on October 2, 1998 by LaSalle National Bank, as well as other relief.

On December 4, 1998, the Bankruptcy Court approved a consent order entered into between the Company and Merrill Lynch. Among other things, pursuant to the consent order, the pending litigation with Merrill Lynch was dismissed without prejudice. The consent order also preserved the portfolio of CMBS pledged as collateral to Merrill Lynch and provided for the Company to receive distributions of 50 percent of the monthly cash flow from those CMBS net of interest payable to Merrill Lynch (the "Company's Distribution Share"). The 50 percent of distributions received by Merrill Lynch is to be applied to reduce principal. Such arrangement will remain in effect until the earlier of a further order of the Bankruptcy Court affecting the arrangement or the effective date of a plan of reorganization of the Company.

On September 7, 1999, the Company filed a Motion to Approve Stipulation and Consent Order Providing for Adequate Protection. On or about September 27, 1999, the Unsecured Committee and the Equity Committee filed a joint objection to the motion. The Company's answer was due October 25, 1999. If the Bankruptcy Court approves the Stipulation and Consent Order Providing Adequate Protection (the "Adequate Protection Order"), a segregated interest bearing debtor-in-possession account will be created (the "Cash Collateral Account") into which the Company's Distribution Share will be deposited during the months of January through March 2000. The Adequate Protection Order provides Merrill Lynch with a first priority lien on the Cash Collateral Account and further provides to the extent Merrill has an allowed unsecured claim against the Company, such claim shall be an allowed administrative expense claim pursuant to Section 507 (b) of the Bankruptcy Code. Subject to certain material adverse changes defined in the Adequate Protection Order, Merrill Lynch has agreed not to seek further adequate protection or relief from the Automatic Stay before March 31, 2000.

Morgan Stanley

As of the Petition Date, the Company owed Morgan Stanley approximately $182.4 million with respect to advances to the Company under an agreement pursuant to which the Company pledged CMBS. The borrowings under this agreement were secured by certain CMBS, including (i) CRIIMI MAE Commercial Mortgage Trust, Series 1998-C1, Class B and C Certificates (collectively or any portion thereof, the "CBO-2 BBB Bonds") and (ii) Morgan Stanley Capital I Inc., Series 1998-W2, Class F, G, H, J, K, L and M Certificates (collectively or any portion thereof, the "Wells Fargo Bonds" and, together with the CBO-2 BBB Bonds, the "Morgan Collateral").

On October 6, 1998, Morgan Stanley advised the Company that it was exercising alleged ownership rights over the Morgan Collateral. On October 20, 1998, the Company filed an adversary proceeding against Morgan Stanley alleging, among other things, that Morgan Stanley violated the automatic stay and seeking turnover of the Morgan Collateral.

On January 12, 1999, the Company and Morgan Stanley agreed upon and filed with the Bankruptcy Court a stipulation and consent order, which was approved by the Bankruptcy Court and entered on January 26, 1999. The consent order provided, among other things, for the following: (i) an agreed sale procedure for the CBO-2 BBB Bonds during a specified sale period; (ii) the payment of a portion of the sale proceeds of the CBO-2 BBB Bonds to the Company; (iii) a standstill period relating to the Wells Fargo Bonds through March 31, 1999 unless otherwise extended by the Company and Morgan Stanley, during which time Morgan Stanley may not sell, pledge, encumber or otherwise transfer the Wells Fargo Bonds and (iv) the postponement of the litigation with Morgan Stanley while the parties seek a permanent resolution of their disputes. On March 5, 1999, the CBO-2 BBB Bonds were sold. Of the $159 million in net sale proceeds, $141.2 million was used to repay the Company's borrowings under the agreement with Morgan Stanley, and $17.8 million was remitted to CRIIMI MAE. As a result of the transaction, CRIIMI MAE's litigation against Morgan Stanley has been resolved with respect to the CBO-2 BBB Bonds to the satisfaction of both parties. The Company and Morgan Stanley have agreed to extend the standstill period with respect to the Wells Fargo Bonds through and including November 30, 1999. At the end of this standstill period, Morgan Stanley has until December 10, 1999 to respond to the Company's complaint and resume litigation with respect to the Wells Fargo Bonds, unless the standstill period is further extended by the parties or an agreement between the parties is reached.

Citicorp and Citibank

In addition to the Citibank Program pursuant to which the Company originated loans, as previously discussed, the Company also has a financing arrangement with Citicorp pursuant to which the Company pledged CMBS.

On October 13, 1998, Citicorp demanded from Norwest Bank Minnesota, N.A. ("Norwest") the immediate transfer of certain CMBS (the "Retained Bonds") issued pursuant to CMO-IV. Norwest served as indenture trustee. The Retained Bonds are collateral for amounts advanced to the Company by Citicorp under the financing arrangement. As of the Petition Date, the Company owed Citicorp $79.1 million under the facility.

On October 15, 1998, the Company filed an emergency motion to enforce the automatic stay against Norwest and Citicorp. Pursuant to an Order dated October 23, 1998, the Bankruptcy Court prohibited Citicorp from selling the Retained Bonds without further order of the Bankruptcy Court. On October 23, 1998, Citicorp requested an emergency hearing regarding the October 23 Order, and on November 2, 1998, the Company filed a complaint against Citicorp seeking, among other things, a declaratory judgment as to whether the automatic stay applies to actions taken by Citicorp with respect to the Retained Bonds.

On March 11, 1999, the Company finalized agreements with Citicorp and Citibank, pursuant to which the parties agreed to adjourn the pending litigation for a four month period. The agreements with Citicorp and Citibank were approved by the Bankruptcy Court through stipulations and consent orders entered on April 5, 1999. One of the agreements also provided that Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell two classes of investment grade CMBS from CMO-IV constituting a portion of the collateral securing advances under the Citicorp financing arrangement. In May 1999, Salomon Smith Barney sold $20 million of the CMO-IV securities held by Holdings II. This sale reduced the amounts owed from Holdings II to Citicorp by approximately $17 million. The remaining CMO-IV securities were sold on October 8, 1999. In addition, Citibank, in cooperation with CRIIMI MAE, agreed to sell commercial mortgages originated last year under the Citibank Program, provided that the sale resulted in CRIIMI MAE receiving minimum net proceeds of not less than $3.5 million, after satisfying certain amounts due to Citibank, from the amount held in the reserve account. The minimum net proceeds provision could be waived by agreement of the Company, the Unsecured Committee and the Equity Committee. On August 5, 1999, all but three of the commercial loans originated last year under the Citibank Agreement in 1998, with an aggregate unpaid principal balance of approximately $339 million, were sold for gross proceeds of approximately $308 million. On September 16, 1999, Citibank sold the remaining three loans, with an aggregate unpaid principal balance of approximately $32.7 million, for gross proceeds of approximately $27.2 million. In the case of each sale of the commercial loans, the minimum net proceeds provision was waived by agreement of the Company, the Unsecured Committee and the Equity Committee. On July 7, 1999 and again on September 10, 1999, the Bankruptcy Court agreed to a request by CRIIMI MAE, Citibank and the Unsecured Committee to further postpone the trial which has not been rescheduled.

A related interpleader action between Norwest, the Company and Citicorp, which was initiated on October 20, 1998 by Norwest to determine whether the Company or Citicorp is the rightful owner of funds that were to have been paid by Norwest, as indenture trustee, remains pending before the Bankruptcy Court. During the pendency of this matter, certain payments on the retained bonds are held in an account controlled by the Bankruptcy Court. No trial date has been set for this matter.

First Union

First Union National Bank ("First Union"), a creditor of both the Company and CM Management, is asserting substantial secured and unsecured claims. On or about March 23, 1999, First Union filed in each of the Company's and CM Management's Chapter 11 cases a motion for relief from the automatic stay pursuant to section 362(d) of the United States Bankruptcy Code. On or about March 26, 1999, First Union requested that the Court dismiss without prejudice both motions. On April 20, 1999, First Union refiled its motions for relief from the Automatic Stay. The hearing was originally scheduled for May 14, 1999, but has been adjourned by consent.

On or about July 1, 1999, the Company entered into an agreement with First Union resolving its motion for relief from the automatic stay and authorizing use of First Union's cash collateral. The agreement provides for the following:

(i): First Union has a valid, perfected, first priority security interest in certain assignment securities and the assignment securities income constitutes First Union's cash collateral;
(ii): First Union shall receive adequate protection payments of post-petition interest at the non-default contract rate plus payments to be applied to principal equal to 50% of the difference between the assignment income and the Company's non-default contract interest obligation. First Union has the option of using a portion of the assignment income earmarked for principal to purchase a hedging program;
(iii): The Company shall be entitled to use the assignment income not paid to First Union in the ordinary course of its business subject to certain limitations; and
(iv): First Union shall not seek relief from the automatic stay in the Company's chapter 11 case to foreclose upon the assignment securities and/or the assignment income and none of the Company, the Company's Committees or First Union shall seek modification of the adequate protection arrangements set forth in the agreement for a period commencing upon which the Bankruptcy Court approves the agreement and terminating on December 31, 1999, subject to certain exceptions.

The agreement was approved and entered by the Bankruptcy Court on August 5, 1999. The Company's Creditors Committee has consented to the agreement with First Union.

In addition, on or about July 1, 1999, CM Management and First Union entered into an agreement resolving its motion for relief from the automatic stay. On July 1, 1999, CM Management filed a motion for approval of the agreement resolving First Union's motion for relief from the automatic stay. Based upon an objection filed by the CM Management's Unsecured Creditors Committee the parties are discussing a possible modification to the agreement and continue to negotiate accordingly. On October 22, 1999, to provide the parties with more time to negotiate a modification to the agreement, CM Management, with the consent of First Union and CM Management's Unsecured Creditors Committee, advised the Bankruptcy Court that it would be withdrawing the motion for approval of the agreement, without prejudice to CM Management's right to re-file once an agreement has been reached with First Union and CM Management's Unsecured Creditors Committee.

Arrangements with Other Creditors

In addition to the foregoing, the Company has had discussions with other secured creditors against whom the Company was not engaged in litigation. One such creditor is German American Capital Corporation ("GACC"). On February 3, 1999, the Bankruptcy Court approved an Amended Consent Order between the Company and GACC that provides for the following: (a) acknowledgement that GACC has a valid perfected security interest in its collateral; (b) authority for GACC to hedge its loan, subject to a hedge cost cap; and (c) as adequate protection, sharing of cash collateral on a ⁵⁰/50 basis, after payment of interest expense, with the percentage received by GACC to be applied to reduce principal and pay certain hedge costs, if any. In addition, the Company is prohibited from using GACC's cash collateral for certain purposes, including loan originations and Subordinated CMBS acquisitions. The Amended Consent Order expired April 28, 1999. The Company and GACC agreed to extend the Amended Consent Order until August 2, 1999, and a stipulation to that effect was signed by the Company and GACC and approved by the Court on May 11,1999. The Company and GAAC had negotiated a further extension of the stipulation through September 10, 1999, which extension has now expired. On September 9, 1999, GAAC contacted the Company and requested similar provisions afforded to Merrill Lynch in its most recent stipulation. See "Legal Proceedings—Bankruptcy Related Litigation—Merrill Lynch."

Shareholder Litigation

The Company is aware that certain plaintiffs filed 20 separate class action civil lawsuits (the "Complaints") in the United States District Court for the District of Maryland (the "District Court") against certain officers and directors of the Company between October 7, 1998 and November 30, 1998. On March 9, 1999, the District Court ordered the consolidation of the Complaints into a single action entitled "In Re CRIIMI MAE, Inc. Securities Litigation." On April 23, 1999, a group of thirteen putative members of the class of individuals who allegedly suffered damages during the class period between February 20, 1998 and October 5, 1998 (collectively, the "Plaintiffs") filed an Amended and Consolidated class action Complaint alleging violations of federal securities laws (the "Consolidated Amended Complaint"). The Consolidated Amended Complaint names as defendants William B. Dockser, as Chairman of the Board of Directors of CRIIMI MAE, H. William Willoughby as a member of the Board of Directors and/or an officer of CRIIMI MAE, and Cynthia O. Azzara as an officer of CRIIMI MAE (collectively, the "Defendants"). Although CRIIMI MAE and CM Management have not been named as defendants, both companies are subject to indemnity obligations to the Defendants under the provisions of their respective constituent documents, the Defendants' employment contracts and applicable state law. CRIIMI MAE has directors and officers liability insurance policies that have a combined coverage limit of $20 million.

The Consolidated Amended Complaint alleges generally that the Defendants violated Section 10(b) of the Securities and Exchange Act of 1934 as amended (the "Exchange Act") by, among other things, making false statements of material fact and failing to disclose certain material facts concerning, among other things, CRIIMI MAE's business strategy and its ability to meet collateral calls from lenders. The Consolidated Amended Complaint also generally alleges that the Defendants violated Section 20(a) of the Exchange Act because each Defendant was allegedly a "controlling person" as that term is defined under Section 20(a).

The relief sought in the Consolidated Amended Complaint includes all or substantially all of the following: (i) certification of a class under Rule 23 of the Federal Rules of Civil Procedure; (ii) certification of the Plaintiffs as class representatives and as lead plaintiffs and their counsel as lead counsel; (iii) award of monetary damages, including compensatory and rescissionary damages and interest thereon; (iv) a judgment awarding the Plaintiffs and the Class their counsel fees, experts' fee and other costs of suit; (v) award to the Plaintiffs such other relief as the District Court deems just and proper or as the District Court otherwise requires; and (vi) trial by jury.

On July 9, 1999, the Defendants filed a Motion to Dismiss, with prejudice, the Consolidated Amended Complaint. The Defendants filed the motion under Rule 12(b)(6) of the Federal Rules of Civil Procedure on the grounds that the Plaintiffs have failed to plead sufficient facts with the requisite particularity to establish a claim for securities fraud under the Reform Act.

On September 13, 1999, the Court denied Plaintiffs' motions for appointment of lead plaintiffs and for approval of selection counsel. The Court also ordered Plaintiffs' counsel to provide notice of the putative claims to institutional investors identified by Defendants. Finally, the Court ordered that Plaintiffs nominate no more than three persons to serve as lead plaintiffs, and that any potential lead plaintiff nominate only one attorney or law firm to serve as lead counsel.

The Plaintiffs filed their Opposition to Defendants' Motion to Dismiss on September 24, 1999. CRIIMI MAE cannot predict with any degree of certainty the ultimate outcome of such litigation.

Other Litigation

The Company is aware that an alleged shareholder, on behalf of himself and all others similarly situated, who purchased common stock in a registered common stock offering made by the Company in January 1998, filed a class action lawsuit against Prudential Securities Incorporated ("Prudential") and the Company's independent public accountants (the "Recupito Complaint") in the United States District Court for the District of Maryland. Neither the Company nor any officer or director of the Company was named as a defendant in this lawsuit.

The Recupito Complaint alleges generally that the registration statement dated October 21, 1997, including a prospectus dated January 20, 1998 and supplemented on January 23, 1998, contained materially false and misleading statements about the Company and its condition.

The Company may be subject to potential exposure to Prudential under contractual provisions and both defendants under applicable law. Prudential may assert that it is entitled to indemnification from the Company based upon an indemnification provision contained in the underwriting agreement entered into with the Company in connection with the common stock offering. Certain courts have held and it is the position of the Securities and Exchange Commission that indemnification for liabilities arising under the Securities Act of 1933 is against public policy and unenforceable.

The Company cannot predict with any certainty the ultimate outcome of such litigation or its potential exposure to one or both of the defendants.

Claims

Over 850 claims with a face amount of nearly $2.5 billion have been filed in these Chapter 11 cases, including $344 million in unsecured claims and approximately $2.2 billion in secured claims. Many of these claims are duplicate claims filed by the same creditor in each of the three cases. This amount is far in excess of the approximately $1.18 billion in liabilities identified by the Debtors, in their schedules, which were filed with the Bankruptcy Court on November 20, 1998. The Debtors have undertaken extensive efforts to cleanse the claims pool. In addition to analyzing the claims, the Debtor's counsel has opened discussions with various creditors regarding the withdrawal of certain claims and in some cases, has objected to claims. The discussions with various creditors have resulted in withdrawal or commitments to withdrawal approximately $1.4 billion in claims.

17. SEGMENT REPORTING

During 1997, FASB issued SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards for the way that public business enterprises report information about operating segments and related disclosures about products and services, geographical areas and major customers.

Management assesses Company performance and allocates capital principally on the basis of two lines of business: portfolio investment and mortgage servicing. These two lines of business are managed separately as they provide different sources and types of revenues for the Company.

Portfolio investment primarily includes (i) acquiring non-investment grade subordinated securities (rated below BBB-) or unrated securities backed by pools of mortgage loans on multifamily, retail and other commercial real estate ("Subordinated CMBS"), (ii) originating and underwriting commercial mortgage loans, (iii) securitizing pools of commercial mortgage loans and resecuritizing pools of Subordinated CMBS. The Company's income is primarily generated from these investments.

Mortgage servicing, which consists of all the operations of CMSLP, includes performing servicing functions with respect to the Company's mortgage loans and the mortgage loans underlying the Company's Subordinated CMBS. CMSLP performs a variety of servicing including special, master, direct and loan management as well as advisory services. For these services, CMSLP earns a servicing fee which is calculated as a percentage of the principal amount of the servicing portfolio typically paid when the related service is rendered. These services may include either routine monthly services, non-monthly periodic services or event-triggered services. In acting as a servicer, CMSLP also earns interest income on the investment of escrows held on behalf of borrowers and other income which includes, among other things, assumption fees and modification fees. CMSLP is an unconsolidated affiliate of CRIIMI MAE. The results of its operations are reported in the Company's income statement in equity in earnings from investments.

Revenues, expenses and assets are accounted for in accordance with the accounting policies set forth in Note 3, "Summary of Significant Accounting Policies." Overhead expenses, such as administrative expenses, are allocated either directly to each business line or through estimates based on factors such as number of personnel or square footage of office space.

The following table details the Company's financial performance by these two lines of business for the three and nine months ended September 30, 1999, and 1998. The basis of accounting used in the table is GAAP.

	For the three months ended September 30, 1999
	Portfolio Investment			Mortgage Servicing			Elimination(1)			Consolidated

Interest Income—Subordinated CMBS	$	38,786,620			—		$	—		$	38,786,620
Interest Income-Insured Mortgage Securities		8,034,760			—			—			8,034,760
Interest Income-Originated Loans		8,615,000			—			—			8,615,000
Interest Income-Other		—			1,111,227			(1,111,227	)		—
Servicing Income		—			1,579,832			(1,579,832	)		—
Gain on mortgage security dispositions		265,789			—			—			265,789
Gain on originated loan disposition		74,616			—			—			74,616
Other income		688,648			941,732			(921,240	)		709,140

Total Revenue		56,465,433			3,632,791			(3,612,299	)		56,485,925

General and Administrative		(2,702,353	)		(2,996,223	)		2,996,223			(2,702,353	)
Interest Expense		(37,883,201	)		(54,952	)		54,952			(37,883,201	)
Other expenses		(719,394	)		(602,528	)		602,528			(719,394	)
Loss on warehouse obligation		(1,074,505	)		—			—			(1,074,505	)
Reorganization Items		(4,606,002	)		—			—			(4,606,002	)

Total Expenses		(46,985,455	)		(3,653,703	)		3,653,703			(46,985,455	)

Net income (loss)		9,479,978			(20,912	)		41,404			9,500,470

Preferred dividends accrued		(1,400,297	)		—			—			(1,400,297	)

Net income (loss) available to common Shareholders	$	8,079,681		$	(20,912	)	$	41,404		$	8,100,173

Total Assets	$	2,325,312,299		$	24,622,189		$	(2,785,958	)	$	2,347,148,530

	For the three months ended September 30, 1998
	Portfolio Investment			Mortgage Servicing			Elimination(1)			Consolidated

Interest Income—Subordinated CMBS	$	38,880,750		$	—		$	—		$	38,880,750
Interest Income-Insured Mortgage Securities		10,662,386			—			—			10,662,386
Interest Income—Originated Loans		8,869,367			—			—			8,869,367
Interest Income-Other		—			1,621,694			(1,621,694	)		—
Servicing Income		—			1,981,490			(1,981,490	)		—
Gain(Loss) on mortgage security dispositions		966,654			—			—			966,654
Gain on sale of CMBS		(340,281	)		—			—			(340,281	)
Other income		1,371,257			492,762			(860,970	)		1,003,049

Total Revenue		60,410,133			4,095,946			(4,464,154	)		60,041,925

General and Administrative		(4,636,806	)		(2,449,440	)		2,449,440			(4,636,806	)
Interest Expense		(39,674,303	)		(130,825	)		130,825			(39,674,303	)
Unrealized loss on reverse repurchase obligation		(4,091,346	)		—			—			(4,091,346	)
Loss on warehouse purchase obligation		(17,630,390	)		—			—			(17,630,390	)
Other expenses		(718,082	)		(1,689,497	)		1,689,497			(718,082	)

Total Expenses		(66,750,927	)		(4,269,762	)		4,269,762			(66,750,927	)

Net loss		(6,340,794	)		(173,816	)		(194,392	)		(6,709,002	)

Preferred dividends accrued or paid		(1,942,377	)		—			—			(1,942,377	)

Net loss available to common Shareholders	$	(8,283,171	)	$	(173,816	)	$	(194,392	)	$	(8,651,379	)

Total Assets	$	2,648,216,411		$	31,341,749		$	(7,601,532	)	$	2,671,956,628

(1): The Company performs the mortgage servicing function through CMSLP which is accounted for under the equity method. The elimination column reclassifies CMSLP under the equity method as it is accounted for in the Company's consolidated financial statements.

	For the nine months ended September 30, 1999
	Portfolio Investment			Mortgage Servicing			Elimination(1)			Consolidated

Interest Income—Subordinated CMBS	$	115,690,376			—		$	—		$	115,690,376
Interest Income-Insured Mortgage Securities		25,424,098			—			—			25,424,098
Interest Income-Originated Loans		26,103,642			—			—			26,103,642
Interest Income-Other		—			2,663,281			(2,663,281	)		—
Servicing Income		—			5,100,356			(5,100,356	)		—
Gain on mortgage security dispositions		1,851,601			—			—			1,851,601
Gain on originated loan dispositions		234,826			—			—			234,826
Other income		2,628,859			2,965,356			(4,947,151	)		647,064

Total Revenue		171,933,402			10,728,993			(12,710,788	)		169,951,607

General and Administrative		(8,953,507	)		(10,537,013	)		10,537,013			(8,953,507	)
Interest Expense		(111,620,420	)		(236,183	)		236,183			(111,620,420	)
Other expenses		(2,158,182	)		(2,105,734	)		2,105,734			(2,158,182	)
Loss on warehouse obligation		(8,000,000	)		—			—			(8,000,000	)
Reorganization Items		(15,552,783	)		—			—			(15,552,783	)

Total Expenses		(146,284,892	)		(12,878,930	)		12,878,930			(146,284,892	)

Net income (loss)		25,648,510			(2,149,937	)		168,142			23,666,715

Preferred dividends accrued		(4,182,792	)		—			—			(4,182,792	)

Net income (loss) available to common shareholders	$	21,465,718		$	(2,149,937	)	$	168,142		$	19,483,923

Total Assets	$	2,325,312,299		$	24,622,189		$	(2,785,958	)	$	2,347,148,530

	For the nine months ended September 30, 1998
	Portfolio Investment			Mortgage Servicing			Elimination(1)			Consolidated

Interest Income—Subordinated CMBS	$	105,319,710		$	—		$	—		$	105,319,710
Interest Income-Insured Mortgage Securities		33,528,290			—			—			33,528,290
Interest Income—Originated Loans		11,619,062			—			—			11,619,062
Interest Income-Other		—			3,248,609			(3,248,609	)		—
Servicing Income		—			5,161,782			(5,161,782	)		—
Gain(Loss) on mortgage security dispositions		920,820			—			—			920,820
Gain on sale of CMBS		28,800,408			—			—			28,800,408
Other income		4,936,123			3,127,685			(2,004,082	)		6,059,726

Total Revenue		185,124,413			11,538,076			(10,414,473	)		186,248,016

General and Administrative		(10,667,797	)		(6,778,292	)		6,778,292			(10,667,797	)
Interest Expense		(99,129,440	)		(359,971	)		359,971			(99,129,440	)
Unrealized loss on reverse repurchase obligation		(4,091,346	)		—			—			(4,091,346	)
Loss on warehouse purchase obligations		(17,630,390	)		—			—			(17,630,390	)
Other expenses		(2,198,234	)		(2,876,909	)		2,876,909			(2,198,234	)

Total Expenses		(133,717,207	)		(10,015,172	)		10,015,172			(133,717,207	)

Net Income		51,407,206			1,522,904			(399,301	)		52,530,809

Preferred dividends accrued or paid		(5,499,881	)		—			—			(5,499,881	)

Net Income Available to common shareholders	$	45,907,325		$	1,522,904		$	(399,301	)	$	47,030,928

Total Assets	$	2,648,216,411		$	31,341,749		$	(7,601,532	)	$	2,671,956,628

(1): The Company performs the mortgage servicing function through CMSLP which is accounted for under the equity method. The elimination column reclassifies CMSLP under the equity method as it is accounted for in the Company's consolidated financial statements.

18. Financial Statements for the Debtor Entities

The following are unconsolidated financial statements for CRIIMI MAE, CM Management and Holdings II:

CRIIMI MAE Inc.
BALANCE SHEET
(Unconsolidated)

	September 30, 1999			December 31, 1998

Assets
Subordinated CMBS, at fair value	$	858,769,309		$	1,071,872,143
Insured Mortgage security, at fair value		5,384,050			5,511,707
Receivables and Other Assets		73,822,184			74,226,682
Cash and Cash Equivalents		85,897,453			22,714,828
Investment in Subsidiaries		225,067,461			246,817,957

Total Assets	$	1,248,940,457		$	1,421,143,317

Liabilities
Accounts Payable and other Accrued Expenses	$	22,802,364		$	7,374,281
Liabilities Subject to Chapter 11 Proceedings		967,589,829			1,105,892,131

Total Liabilities		990,392,193			1,113,266,412

Shareholders' Equity
Convertible Preferred Stock		17,970			18,170
Common Stock		535,532			528,981
Accumulated Other Comprehensive Income		(267,679,420	)		(218,291,756	)
Stock Dividend to be Distributed		16,065,641			—
Additional paid-in capital		509,608,541			525,621,510

Shareholders' Equity		258,548,264			307,876,905

Total Liabilities and Shareholders' Equity	$	1,248,940,457		$	1,421,143,317

CRIIMI MAE Inc.

STATEMENT OF NET INCOME

AND COMPREHENSIVE INCOME

(Unconsolidated)

	For the three months ended September 30, 1999*			For the nine months ended September 30, 1999*

Interest Income	$	28,026,949		$	83,013,923
Interest Expense		(15,862,034	)		(47,954,642	)

Net Interest Margin		12,164,915			35,059,281

Equity in Earnings from Subsidiaries		2,780,702			11,349,143
Other Income		388,261			1,419,217
General and Administrative Expenses		(171,233	)		(596,109	)
Amortization of Assets Acquired in Merger		(719,394	)		(2,158,182	)
Loss on warehouse obligation		(1,074,505	)		(8,000,000	)
Reorganization Items		(3,868,276	)		(13,406,635	)

Subtotal		(2,664,445	)		(11,392,566	)

Net Income	$	9,500,470		$	23,666,715

Other Comprehensive Loss		(20,771,652	)		(49,387,664	)

Comprehensive Loss	$	(11,271,182	)	$	(25,720,949	)

*: The Debtor filed a petition for relief under Chapter 11 on October 5, 1998. Therefore, comparable information for the three and nine months ended September 30, 1998 is not presented.

CRIIMI MAE Inc.

Notes to Financial Statements

September 30, 1999

(Unconsolidated)

1. BASIS OF PRESENTATION

GAAP requires that certain entities that meet specific criteria be consolidated with CRIIMI MAE including: CM Management and Holdings II (Debtors) and CRIIMI MAE Financial Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE Holdings Inc. (currently inactive), CRIIMI MAE Holdings L.P. (currently inactive), CRIIMI, Inc., and CRIIMI MAE CMBS Corporation (Non-Debtors). For purposes of this presentation CRIIMI MAE accounts for all subsidiaries (those consolidated under GAAP and those accounted for under the equity method under GAAP) using the equity method of accounting.

All entities that CRIIMI MAE would normally consolidate for GAAP purposes are being accounted for under the equity method of accounting. The equity method of accounting consists of recording an original investment in an investee as the amount originally contributed. Subsequently this investment is increased/(decreased) for CRIIMI MAE's share of the investee's income/(losses), increased for additional contributions and decreased for distributions received from the investee. CRIIMI MAE's share of the investee's income is recognized as "Equity in earnings from subsidiaries" on the income statement.

In management's opinion, with the exception of the matter discussed above, the financial statements of CRIIMI MAE contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of CRIIMI MAE as of September 30, 1999 and December 31, 1998, and the unconsolidated results of its operations for the three and nine months ended September 30, 1999.

CRIIMI MAE Management, Inc.

BALANCE SHEET

	September 30, 1999		December 31, 1998

Assets
Note Receivable	$	3,376,468	$	3,376,468
Cash and Cash Equivalents		1,083,683		958,175
Other Assets		3,020,466		3,332,116
Investment in Subsidiaries		17,416,817		19,209,778

Total Assets	$	24,897,434	$	26,876,537

Liabilities
Accounts Payable and other Accrued Expenses	$	3,559,502	$	2,367,277
Liabilities Subject to Chapter 11 Proceedings		6,969,518		6,150,787

Total Liabilities		10,529,020		8,518,064

Shareholders' Equity		14,368,414		18,358,473

Total Liabilities and Shareholders' Equity	$	24,897,434	$	26,876,537

CRIIMI MAE Management, Inc.

STATEMENT OF NET LOSS

	For the three months ended September 30, 1999*			For the nine months ended September 30, 1999*

Income
Interest Income—Note Receivable and short term interest income	$	84,412		$	249,014

Expenses
Net Equity in Loss from Subsidiaries		10,533			1,547,553
Interest Expense		105,511			310,835
Depreciation and Amortization		130,320			394,765
General and Administrative Expenses		2,190,243			7,279,110
Reorganization Items		605,329			1,579,129

Total Expenses		3,041,936			11,111,392

Net Loss	$	(2,957,524	)	$	(10,862,378	)

*: CRIIMI MAE Management, Inc. filed a petition for relief under Chapter 11 on October 5, 1998. Therefore, comparable information for the three and nine months ended September 30, 1998 is not presented.

CRIIMI MAE Management, Inc.

Notes to Financial Statements

September 30, 1999

1. BASIS OF PRESENTATION

In management's opinion, the accompanying unaudited financial statements of CM Management contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of CM Management on a stand-alone basis as of September 30, 1999 and December 31, 1998 and the results of its operations for the three and nine months ended September 30, 1999.

Holdings II, L.P.

BALANCE SHEET

	September 30, 1999			December 31, 1998

Assets
Subordinated CMBS, at fair value	$	39,293,742		$	43,001,454
Receivables		3,937,825			1,064,071
Cash		100			100

Total Assets	$	43,231,667		$	44,065,625

Liabilities
Liabilities Not subject to Chapter 11 Proceedings	$	18,824,701		$	209,213
Liabilities Subject to Chapter 11 Proceedings		24,161,510			40,132,693

Total Liabilities		42,986,211			40,341,906

Partners' Equity
Contributed Capital		6,150,542			5,927,429
Accumulated Other Comprehensive Income		(5,905,086	)		(2,203,710	)

Partners' Equity		245,456			3,723,719

Total Liabilities and Partners' Equity	$	43,231,667		$	44,065,625

Holdings II, L.P.

STATEMENT OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME

	For the three months ended September 30, 1999*			For the nine months ended September 30, 1999*

Interest Income:
Subordinated CMBS	$	796,591		$	2,389,890

Interest Expense:
Collateralized bond obligations-CMBS		375,430			521,268
Variable rate secured borrowings—CMBS		236,631			1,339,348

Total Interest Expense		612,061			1,860,616

Net Interest Margin		184,530			529,274

Reorganization Expense		121,411			537,783

Net Loss	$	63,119		$	(8,509	)

Other Comprehensive Loss		(693,306	)		(3,701,376	)

Comprehensive Loss	$	(630,187	)	$	(3,709,885	)

*: Holdings II L.P. filed a petition for relief under Chapter 11 on October 5, 1998. Therefore, comparable information for the three and nine months ended September 30, 1998 is not presented.

Holdings II, L.P.

Notes to Financial Statements

September 30, 1999

1. BASIS OF PRESENTATION

Holdings II's CMBS (2 tranches from CMO-IV) are carried as investments in loans at amortized cost basis in CRIIMI MAE's September 30, 1999 10-Q's consolidated financial statements. (See Notes 3 and 6 for discussion of this accounting.) On a stand-alone basis, GAAP requires that Holdings II's investment in CMBS be carried as securities (as opposed to loans) at fair value.

In management's opinion, the accompanying unaudited financial statements of Holdings II contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of Holdings II on a stand-alone basis as of September 30, 1999 and December 31, 1998 and the results of its operations for the three and nine months ended September 30, 1999.

2. COLLATERALIZED BOND OBLIGATIONS—CMBS

On April 5, 1999, the Company finalized an agreement by which, Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell the two classes of investment grade CMBS from CMO-IV held by Holdings II constituting a portion of the collateral security advances under the Citicorp Financing Agreements. This transaction would be accounted for as a financing rather than a sale. This would result in the Company recognizing a fixed rate liability for these bonds, when sold, in the amount of gross proceeds received. In May 1999, the Company sold $20 million face amount of investment grade securities, with a coupon rate of 6.859%, in accordance with the agreement. The variable-rate secured borrowing associated with these investment grade securities were proportionally reduced on the balance sheet to reflect the partial sale. The remaining $25.9 million face amount of the investment grade securities were sold on October 8, 1999 and therefore the transaction will be reflected in the fourth quarter as described above.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form 10-Q, the words "believes," "anticipates," "expects," "contemplates" and similar expressions are intended to identify forward-looking statements. Statements looking forward in time are included in this Quarterly Report on Form 10-Q pursuant to the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially, including, but not limited to the continued instability of the capital markets, the trends in the CMBS market, the ability of CRIIMI MAE to obtain additional capital, competition pressures, the effect of future losses on CRIIMI MAE's need for liquidity, the effects of the bankruptcy proceedings on CRIIMI MAE's ongoing business, the actions of CRIIMI MAE's creditors and equity security holders, the ability of the Company to obtain the reorganization financing called for by its plan of reorganization, the ability to obtain bankruptcy court approval of the stock purchase agreement ("Apollo Purchase Agreement") entered into with an affiliate of Apollo Real Estate Advisors IV L.P. ("Apollo") including the bidding protections therein, the successful completion of due diligence by Apollo, the satisfaction of all conditions to closing the Apollo Purchase Agreement, the confirmation and effectiveness of the Company's plan of reorganization, the possible confirmation of an alternative plan of reorganization, the ability to obtain bankruptcy court approval of a disclosure statement, the outcome of discussions with the Committees and the ability to fashion an amended Plan of Reorganization supported by the Committees that can be confirmed, the outcome of litigation to which CRIIMI MAE is a party, as well as, the risk factors contained below and in the Company's reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, including its Annual Report on Form 10-K for the year ended December 31, 1998. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

General

CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless the context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully integrated commercial mortgage company structured as a self-administered real estate investment trust ("REIT"). Prior to the filing by CRIIMI MAE Inc. (unconsolidated) and two of its operating subsidiaries for relief under Chapter 11 of the U.S. Bankruptcy Code on October 5, 1998 (the "Petition Date") as described below, CRIIMI MAE's primary activities included (i) acquiring non-investment grade securities (rated below BBB-) or unrated securities backed by pools of mortgage loans on multifamily, retail and other commercial real estate ("Subordinated CMBS"), (ii) originating and underwriting commercial mortgage loans, (iii) securitizing pools of commercial mortgage loans and resecuritizing pools of Subordinated CMBS, and (iv) through the Company's servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"), performing servicing functions with respect to the mortgage loans underlying the Company's Subordinated CMBS.

Since filing for Chapter 11 protection, CRIIMI MAE has suspended its Subordinated CMBS acquisition, origination and securitization programs. The Company continues to hold a substantial portfolio of Subordinated CMBS, originated loans and mortgage securities and, through CMSLP, acts as a servicer for its own as well as third party securitized mortgage loan pools.

In addition to the two operating subsidiaries which filed for Chapter 11 protection with the Company, the Company owns 100% of multiple financing and operating subsidiaries as well as various interests in other entities (including CMSLP) which either own or service mortgage and mortgage-related assets (the "Non-Debtor Affiliates"). See Note 3 to Notes to Consolidated Financial Statements. None of the Non-Debtor Affiliates has filed for bankruptcy protection.

Chapter 11 Filing

Prior to the Petition Date, CRIIMI MAE financed a substantial portion of its Subordinated CMBS acquisitions with short-term, variable-rate financing facilities secured by the Company's CMBS. The agreements governing these financing arrangements typically required the Company to maintain collateral with a market value not less than a specified percentage of the outstanding indebtedness ("loan-to-value ratio"). The agreements further provided that the creditors could require the Company to provide cash or additional collateral if the market value of the existing collateral fell below this minimum amount.

As a result of the turmoil in the capital markets commencing in late summer of 1998, the spreads between CMBS yields and yields on Treasury securities with comparable maturities began to widen substantially and rapidly. Due to this widening of CMBS spreads, the market value of the CMBS securing the Company's short-term, variable-rate financing facilities declined. CRIIMI MAE's short-term secured creditors perceived that the value of the CMBS securing their facilities with the Company had fallen below the minimum loan-to-value ratio described above and, consequently, made demand upon the Company to provide cash or additional collateral with sufficient value to cure the perceived value deficiency. In August and September of 1998, the Company received and met collateral calls from its secured creditors. At the same time, CRIIMI MAE was in negotiations with various third parties in an effort to obtain additional debt and equity financing that would provide the Company with additional liquidity.

On Friday afternoon, October 2, 1998, the Company was in the closing negotiations of a refinancing with one of its unsecured creditors that would have provided the Company with additional borrowings when it received a significant collateral call from Merrill Lynch Mortgage Capital Inc. ("Merrill Lynch"). The basis for this collateral call, in the Company's view, was unreasonable. After giving consideration to, among other things, this collateral call and the Company's concern that its failure to satisfy this collateral call would cause the Company to be in default under a substantial portion of its financing arrangements, the Company reluctantly concluded on Sunday, October 4, 1998 that it was in the best interests of creditors, equity holders and other parties in interest to seek Chapter 11 protection.

On October 5, 1998, CRIIMI MAE (unconsolidated) and two of its consolidated operating subsidiaries, CRIIMI MAE Management, Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P. ("Holdings II" and, together with CRIIMI MAE and CM Management, the "Debtors") filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland, Southern Division, in Greenbelt, Maryland (the "Bankruptcy Court"). These related cases are being jointly administered under the caption "In re CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.

While in bankruptcy, CRIIMI MAE has streamlined its operations. The Company significantly reduced the number of employees in its origination and underwriting operations in October 1998, but has retained a significant number of key employees in each of these operational areas. In connection with these reductions, the Company closed its five regional loan origination offices, retaining only a core presence in Rockville, Boston, Houston, Chicago and San Francisco.

Although the Company has significantly reduced its work force, the Company recognizes that retention of its executives and other remaining employees is essential to the efficient operation of its business and to its reorganization efforts. Accordingly, the Company has, with Bankruptcy Court approval, adopted an employee retention plan. See Note 14 to Notes to Consolidated Financial Statements.

CRIIMI MAE is working diligently toward reemerging as a successfully reorganized company. On September 9, 1999, the Company entered into a Stock Purchase Agreement (the "Apollo Purchase Agreement") with an affiliate of Apollo Real Estate Advisors IV, L.P. ("Apollo") providing for the purchase of a minimum of $50 million of shares of a new series of senior convertible preferred stock which would represent a portion of aggregate recapitalization financing of approximately $910 million. Closing of the sale of the new senior preferred stock is subject of a number of conditions. The remainder of the recapitalization financing is expected to consist of approximately $445 million of debt financing, substantially all of which would come from certain existing debtholders, and $415 million of additional proceeds, substantially all of which would result from the sale of selected commercial mortgage-backed securities. There can be no assurance that the Company will be able to close the sale of the new senior preferred stock, obtain the necessary debt financing or sell the selected commercial mortgage-backed securities to a party or parties for the necessary proceeds or that, if such recapitalization financing is obtained and finalized, it will take the forms described above.

On November 1, 1999, the Bankruptcy Court approved motions filed by CRIIMI MAE with the support of the Committees in the CRIIMI MAE Case to postpone a hearing on the pending motion to approve the bidding protection provisions in the Apollo Purchase Agreement and the Adequate Protection Order and the date to file the Debtors' Joint Disclosure Statement. At the November 1st hearing the Banruptcy Court was advised of active discussions among the Company, Apollo and the Committees in the CRIIMI MAE Case to fashion an amended plan of reorganization that can be supported by such parties. The Court approved at that hearing the immediate payment of $400,000 to Apollo for reimbursement of expenses incurred with respect to the Apollo Purchase Agreement, continuing negotiations, due diligence and related matters. On November 5, 1999, the Bankruptcy Court entered an order setting December 6, 1999 as the hearing date for the pending motion to approve (i) the balance of the bidding protection provisions in the Apollo Purchase Agreement and (ii) the Adequate Protection Order. The order also provided that the Debtors proposed Joint Disclosure Statement must be filed on or prior to December 6, 1999. See Note 16 to Notes to Consolidated Financial Statements for a general discussion of the bankruptcy process.

Effect of Chapter 11 Filing on REIT Status and Other Tax Matters

The Company's 1998 Taxable Income. On September 14, 1999, the Company declared a dividend payable to common shareholders of approximately 1.61 million shares of a new series of junior convertible preferred stock with a face value of $10 per share (see Note 12 of Notes to the Consolidated Financial Statements). The purpose of the dividend was to distribute approximately $15.7 million in undistributed taxable income. To the extent that it is determined such amount is not distributed, the Company would bear a corporate level income tax on the undistributed amount. There can be no assurance that all of the Company's tax liability will be eliminated by payment of such junior preferred stock dividend. The Company paid the junior preferred stock dividend on November 5, 1999. The junior preferred stock dividend will be taxable to common shareholder recipients.

Investment Company Act Risk

Year 2000

The Year 2000 issue is a computer programming issue that may affect many electronic processing systems. Until relatively recently, in order to minimize the length of data fields, most date-sensitive programs eliminated the first two digits of the year. This issue could affect information technology ("IT") systems and date sensitive embedded technology that controls certain systems (such as telecommunications systems, security systems, etc.) leaving them unable to properly recognize or distinguish dates in the twentieth and twenty-first centuries. This treatment could result in significant miscalculations when processing critical date-sensitive information relating to dates after December 31, 1999.

CRIIMI MAE has substantially completed the Year 2000 testing and remediation of its IT systems, which include software systems to service mortgage loans, administer securitizations and manage mortgage assets, as well as software systems used for internal accounting purposes. A majority of the IT systems used by the Company are licensed from third parties. These third parties have either provided upgrades to existing systems or have indicated that their systems are Year 2000 compliant. CRIIMI MAE has applied upgrades and has substantially completed compliance testing and remediation as of November 10, 1999. There can be no assurance, however, that the Company's IT systems will be Year 2000 compliant by December 31, 1999.

The Year 2000 issue may also affect CRIIMI MAE's date-sensitive embedded technology, which controls systems such as the telecommunications systems, security systems, etc. The failure of any such systems to be Year 2000 compliant could be material to the Company. The Company does not currently believe that it has any significant exposure for failure of any such systems to be Year 2000 compliant or that the cost to modify or replace such technology to make it Year 2000 compliant will be material.

The potential impact of the Year 2000 issue depends not only on the corrective measures CRIIMI MAE has undertaken and will undertake, but also on the ways in which the Year 2000 issue is addressed by third parties with whom CRIIMI MAE directly interfaces or whose financial condition or operations are important to CRIIMI MAE, including government agencies, financial institutions, creditors, borrowers and others involved in the CMBS industry. CRIIMI MAE has initiated communications with third parties with which it directly interfaces to evaluate the risk of their failure to be Year 2000 compliant and the extent to which CRIIMI MAE may be vulnerable to such failure. Although the Company has received positive responses from those third parties that have been contacted, there can be no assurance that the systems of these third parties or those who have not yet been contacted will be Year 2000 compliant by December 31, 1999. The failure of these third parties to be Year 2000 compliant could have a material adverse effect on the operations of CRIIMI MAE.

The Company believes that its greatest risk with respect to the Year 2000 issue relates to failures by third parties to be Year 2000 compliant. In addition to risks posed by third parties with which the Company interfaces directly, risks are created by third parties (i.e., tenants in mortgage collateral, borrowers, building service providers to mortgage collateral, banks and other financial institutions, etc.) providing services to large segments of society. The failure of third parties to be Year 2000 compliant could, among other things, cause disruptions in the capital and real estate markets and borrower defaults on real estate loans and mortgage-backed securities as well as the pools of mortgage loans underlying such securities.

With respect to the systems used directly by the Company, the Company believes that its greatest internal exposure to the Year 2000 issue involves the Company's loan servicing operations, which rely on computers to process and manage loans. The Company has applied a vendor upgrade and has completed compliance testing on the upgrade. The Company believes that the results of such testing indicate that this risk has been substantially mitigated. However, any failure of these systems to be Year 2000 compliant could have a material adverse effect on the Company's loan servicing operations.

The cost of IT and embedded technology systems testing and upgrades is not expected to be material to CRIIMI MAE's consolidated operating results. The Company estimates incurring total costs of approximately $350,000 for the Year 2000 assessment and compliance testing, which will be recorded as noninterest expense. Currently, the Company also estimates the cost of system upgrades purely in relation to the Year 2000 issue will be immaterial.

Although CRIIMI MAE has substantially completed its organizational compliance testing and remediation, it has drafted contingency plans in case the Company or third parties fail to be Year 2000 compliant. Management intends to complete contingency plans for the Year 2000 issue in late 1999. Due to the inability to predict all of the potential problems that may arise from the Year 2000 issue, there can be no assurance that all contingencies will be adequately addressed by such plans.

Results of Operations

1999 versus 1998

Interest Income—Subordinated CMBS

The decrease in income from Subordinated CMBS was immaterial for the three months ended September 30, 1999 as compared to the corresponding period in 1998. Interest income from subordinated CMBS increased by approximately $10.4 million or 10% to approximately $115.7 million for the nine months ended September 30, 1999 from $105.3 million for the corresponding period in 1998. During the nine months ended September 30, 1998, the Company increased its CMBS portfolio by acquiring Subordinated CMBS at purchase prices aggregating approximately $853 million. This overall increase in income from Subordinated CMBS was partially offset by a reduction in income from Subordinated CMBS due to the de-recognition of $132 million face amount of CMBS from CBO-1 in connection with CBO-2 and also the de-recognition of $345 million face amount of CMBS in connection with CBO-2. See Note 5 to Notes to Consolidated Financial Statements.

Generally accepted accounting principles ("GAAP") require that interest income generated by Subordinated CMBS be recorded based on the effective interest method using the anticipated yield over the expected life of the Subordinated CMBS. This currently results in income which is lower for financial statement purposes than for tax purposes. Based upon the timing and amount of future credit losses and certain other assumptions estimated by management, as discussed below, the estimated weighted average anticipated unleveraged yield for CRIIMI MAE's Subordinated CMBS for financial statement purposes as of September 30, 1999 was approximately 10.1%. These returns were determined based on the anticipated yield over the expected weighted average life of the Subordinated CMBS, which considers, among other things, anticipated losses.

Interest Income-Insured Mortgage Securities

Interest income from Insured Mortgage Securities decreased by approximately $ 2.6 million or 25% to approximately $8.0 million for the three months ended September 30, 1999 from $10.7 million for the corresponding period in 1998. Interest income from Insured Mortgage Securities decreased by approximately $8.1 million or 24% to approximately $25.4 million for the nine months ended September 30, 1999 from approximately $33.5 million for the corresponding period in 1998. This decrease was principally due to the prepayment of mortgage securities during the first three quarters of 1999, and due to the sale or prepayment of mortgage securities held by CRIIMI MAE and certain of its wholly owned subsidiaries during the year ended 1998. The prepayments aggregated approximately $66.4 million and $104.6 million in net proceeds for the nine months ended September 30, 1999 and 1998, respectively.

Interest Income-Originated Loans

Interest income from originated loans decreased by approximately $255,000 or 3% to approximately $8.6 million for the three months ended September 30, 1999 as compared to $8.9 million for the corresponding period in 1998. Interest income from originated loans increased by approximately $14.5 million to approximately $26.1 million for the nine months ended September 30, 1999 as compared to approximately $11.6 million for the corresponding period in 1998. The interest income from originated loans was derived from originated loans included in the CMO-IV securitization which closed in June 1998. The CMO-IV securitization, where loans were simultaneously acquired and securitized, totaled $496 million face value of conduit loans, a majority of which were no-lock loans. During the first three quarters of 1999, four properties and the related mortgage loans prepaid resulting in net proceeds of approximately $10.6 million.

Interest Expense

Total interest expense decreased by approximately $1.8 million or 5% to approximately $37.9 million for the three months ended September 30, 1999 from approximately $39.7 million for the corresponding period in 1998. The decrease was primarily due to prepayments in the Insured Mortgage portfolio and an overall decrease in CMBS interest expense for the quarter due to principal payments on the secured debt. The decrease was partially offset by an increase in interest expense on unsecured borrowings due to the timing of the borrowings during the third quarter of 1998. Total interest expense increased by approximately $12.5 million or 13% to approximately $111.6 million for the nine months ended September 30, 1999 compared to approximately $99.1 million for the corresponding period in 1998. This increase was principally a result of increased borrowings in connection with the acquisition of Subordinated CMBS during 1998. Additionally, CRIIMI MAE incurred interest expense in connection with the issuance of collateralized mortgage obligations in connection with CMO-IV. These increases were partially offset by the impact of $477 million face amount of debt de-recognized from the financial statements in conjunction with CBO-2 in May 1998. Due to the Chapter 11 filing, certain lenders declared defaults or otherwise took action against the Company with respect to a number of CRIIMI MAE's financing facilities. See Note 16 to Notes to Consolidated Financial Statements for a discussion of material litigation between the Company and various creditors and agreements the Company has reached with certain of these creditors.

Net Interest Margin

Net interest margin decreased by approximately $1.2 million or 6% to approximately $17.6 million for the three months ended September 30, 1999 from approximately $18.7 million for the corresponding period in 1998. The decrease was primarily due to the increase in interest expense on unsecured borrowings due to the timing of the borrowings during the third quarter of 1998. For the nine months ended September 30, 1999, net interest margin increased by approximately $4.3 million or 8.3% to approximately $55.6 million from approximately $51.3 million for the corresponding period in 1998. The net interest margin increase was due primarily to the increase in Subordinated CMBS and, to a lesser extent, income from originated loans, as previously discussed.

Gain on Sale of CMBS

In May 1998, CRIIMI MAE completed CBO-2 pursuant to which it sold $468 million of investment grade securities created through the resecuritization of approximately $1.8 billion of its Subordinated CMBS. CRIIMI MAE recognized a gain of approximately $29 million on the sale of $345 million face amount investment grade securities sold without call provisions, recognizing CRIIMI MAE's transfer of control on those securities. The sale of $123 million face amount investment grade securities with significant call provisions was treated as a financing and resulted in an unrealized gain of approximately $26 million. These securities and certain other securities in the transaction included call provisions to enable CRIIMI MAE to 1) repurchase bonds if market conditions warrant, and 2) call bonds when it is no longer cost effective to service them. The sold investment grade securities treated as a financing, as well as approximately $1.3 billion face amount of investment grade and non-investment grade securities retained by CRIIMI MAE, are now required to be reflected on CRIIMI MAE's balance sheet at their fair market value. Additionally, due to the sale treatment under FAS 125, all remaining Subordinated CMBS and insured mortgage securities are required to be carried at fair market value.

Additionally, as part of CBO-2, in May 1998, CMSLP sold trustee servicing rights for $4.2 million, resulting in a gain of $4.2 million for tax purposes, and approximately $400,000 for financial reporting purposes.

Equity in Earnings from Investments

Equity in earnings increased to approximately $260,000 during the third quarter of 1999 as compared to equity in earnings of $(58,000) for the third quarter of 1998. Equity in earnings decreased by approximately $3.4 million during the nine months ended September 30, 1999 due to a net loss of approximately $1.2 million as compared to equity in earnings of $2.2 million for the corresponding period in 1998. This decrease included an $860,000 expense for a prepayment penalty shortfall during the first quarter of 1999 and an increase in general and administrative expenses due to the growth of CMSLP during 1998 and personnel costs related to a retention program as well as impairment on certain servicing rights due to the increase in Treasury rates as discussed in Note 5 to Notes to Consolidated Financial Statements. In addition, as stated in the Company's 1998 Annual Report on Form 10-K, during the fourth quarter of 1998, due to CRIIMI MAE's Chapter 11 filing and its relationship with CRIIMI MAE, CMSLP arranged for ORIX to succeed CMSLP as master servicer on two commercial mortgage pools. The remaining servicing portfolio was approximately $29.4 billion as of September 30, 1999 as compared to approximately $32.0 billion as of September 30, 1998.

Other Income

Other income decreased by approximately $612,000 or 58% to $449,000 during the third quarter of 1999 as compared to approximately $1.1 million for the corresponding period in 1998. Other income decreased by approximately $2.0 million or 52% to $1.9 million during the nine months ended September 30, 1999 as compared to approximately $3.9 million for the corresponding period in 1998. This decrease was primarily attributable to a decrease in short-term interest and other income earned during the first three quarters of 1999 on the amounts deposited in the loan origination reserve account due to suspending the origination loan program in 1998. Approximately $ 498,000 and $1.9 million of short-term interest income and net-carry income were earned on these deposits for the three and nine months ended September 30, 1998, respectively.

Net Gains on Mortgage Securities Dispositions

During the third quarter of 1999 and 1998, net gains on mortgage dispositions were approximately $266,000 and $967,000, respectively. For the nine months ended September 30, 1999 and 1998, net gains on mortgage dispositions were approximately $1.9 million and $921,000, respectively. For the nine months ended September 30, 1999, the prepayments of insured mortgage securities represented approximately 13% of CRIIMI MAE's beginning of the year portfolio balance. For any period, gains or losses on mortgage dispositions are based on the number, carrying amounts and proceeds of mortgages disposed of during the period. The proceeds realized from the disposition of mortgage assets are based on the net coupon rates of the specific mortgages disposed of in relation to prevailing long-term interest rates at the date of disposition.

Gains on Originated Loan Mortgage Disposition

During the third quarter of 1999, net gains on originated loan dispositions were approximately $75,000, which was a result of prepayments in the originated loan portfolio. During the nine months ended September 30, 1999, net gains on originated loan dispositions were approximately $235,000.

General and Administrative Expenses

General and administrative expenses decreased by approximately $1.9 million, or 42%, to approximately $2.7 million for the third quarter of 1999 as compared to approximately $4.6 million for the third quarter of 1998. General and administrative expenses decreased by approximately $1.7 million or 16% to approximately $9.0 million for the nine months ended September 30, 1999 as compared to approximately $10.7 million for the corresponding period in 1998. This decrease is primarily due to the suspension of certain business activities and the dismissal of employees following the Chapter 11 filing in the fourth quarter of 1998.

Unrealized Loss on Reverse Repurchase Obligation

As part of CMO-IV, the Company intended to sell certain of the security tranches that were not initially sold to the public (the "CMO-IV BBB bonds"). In anticipation of this sale, the Company entered into a transaction to hedge the value of those securities in June 1998. As a result, CRIIMI MAE borrowed and then sold a 10-year treasury note in the amount of $44 million. This transaction did not qualify for hedge accounting purposes because it involved the purchase and sale of a cash instrument and therefore was required to be recorded at market ("marked to market"). Because Treasury rates declined in the third quarter of 1998, the Company recorded a $4.1 million unrealized loss as of September 30, 1998. The position was closed and the loss was realized in the fourth quarter of 1998.

Loss on Warehouse Obligation

During the three and nine months ended September 30, 1999, the Company recorded losses of approximately $1.1 million and $8.0 million respectively, primarily due to a decrease in the selling price of the loans in the Company's warehouse line with Citibank, when the loans were sold in the third quarter of 1999. The Company recorded, in total, an approximately $36.3 million loss for this transaction for both GAAP and tax purposes.. (See "Tax Basis Income" discussion which follows).

During the three and nine months ended September 30, 1998, unrealized losses of $17.6 million were recorded, respectively. At September 30, 1998, the unrealized loss consisted of the obligation under the Citibank program was estimated to be $15.6 million (based primarily on information provided by Citibank) in excess of the fair market value of the loans and the Company's loss exposure under the Prudential program (approximately $2 million).

Reorganization Items

During the three and nine months ended September 30, 1999, the Company recorded approximately $4.6 million and $15.6 million, respectively, in reorganization items due to the Chapter 11 filings of CRIIMI MAE, CM Management and Holdings II.

Reorganization Item	For the three months ended September 30, 1999			For the nine months ended ended September 30, 1999

Short-term interest income	$	(852,600	)	$	(1,322,000	)
Professional fees		2,896,771			13,010,926
Employee Retention Program accrued costs		426,353			1,171,855
Excise Tax		475,000			475,000
Other		1,660,478			2,217,002

Total	$	4,606,002		$	15,552,783

Financial Statement Net Income

As a result of the foregoing, net income available to common shareholders for financial statement purposes was approximately $8.1 million for the three months ended September 30, 1999 as compared to a net loss of approximately $8.7 million as of September 30, 1998. On a per basic share basis, financial statement net income increased to $0.15 per basic share for the third quarter of 1999 as compared to a net loss of $0.18 per basic share for the third quarter of 1998. Net income available to common shareholders for financial statement purposes was approximately $19.5 million for the nine months ended September 30, 1999, as compared to approximately $47.0 million for the nine months ended September 30, 1998.

Tax Basis Income

CRIIMI MAE recorded a tax basis loss to common shareholders of approximately $17.8 million or $0.33 per share during the third quarter of 1999 as compared to tax basis income available to common shareholders of approximately $19.9 million or $0.41 per share for the third quarter of 1998. CRIIMI MAE earned approximately $13.7 million or $0.26 per share for the nine months ended September 30, 1999, compared to approximately $57.3 or $1.22 per share for the nine months ended September 30, 1998.

The primary factor in the decrease during the third quarter 1999, was due to the approximately $36.3 million tax basis loss realized on the loans sold in the third quarter from the warehouse line with Citibank. Other factors contributing to the decline in tax basis income were the deduction of reorganization costs and net decreases in earnings from equity investments. In the second quarter of 1998, as part of CBO-2, CMSLP sold servicing rights for $4.2 million resulting in a gain of $4.2 million for tax purposes which was included in equity in earnings in 1998. Partially offsetting the decreases was an increase in net interest margin due to the growth of CRIIMI MAE's portfolio of Subordinated CMBS and, to a lesser extent, earnings from CMO-IV.

Cash Flow

1999 versus 1998

Net cash provided by operating activities increased for the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998. The increase was primarily due to an increase in payables incurred due to the reorganization of the Company and a decrease in receivables due to stipulations and agreements with secured lenders that have resulted in the Company receiving past due CMBS payments.

Net cash provided by investing activities increased for the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998. The increase was primarily due to the suspension of the Company's Subordinated CMBS acquisition and origination programs as a result of the Chapter 11 filing in October 1998.

Net cash used in financing activities increased for the nine months ended September 30, 1999 as compared to the nine months ended September 30, 1998. The increase was primarily due to the suspension of the Company's Subordinated CMBS acquisition activities, suspension of equity and debt offerings, payment of principal paydowns per the stipulation agreements with secured lenders and, to a lesser extent, the suspension of cash dividends paid as a result of the Chapter 11 filing in October 1998.

Liquidity and Capital Resources

Prior to the Petition Date, CRIIMI MAE used proceeds from long-term, fixed-rate match-funded debt refinancings, short-term, variable-rate, secured borrowings, unsecured and other borrowings, securitizations and issuances of common and preferred shares to meet the capital requirements of its business plan. Since the Chapter 11 filing, the Company has suspended its Subordinated CMBS acquisition, origination and securitization operations, but continues to service mortgage loans through CMSLP.

In order to refinance a portion of its short-term, variable rate secured borrowings with long-term, fixed rate debt, the Company entered into resecuritization transactions. In May 1998, CRIIMI MAE completed CBO-2, its second resecuritization of its Subordinated CMBS portfolio, which under FAS 125, qualified for both sale and financing accounting. Through CBO-2, CRIIMI MAE refinanced $468 million of its variable rate debt with fixed-rate, match-funded debt. The debt is considered match-funded because the maturities and principal requirements of the debt match those of the related collateral. The transaction also generated additional borrowing capacity of approximately $160 million, which was used primarily to fund additional Subordinated CMBS purchases. In June 1998, CRIIMI MAE securitized $496 million of originated and acquired commercial mortgage loans by selling $397 million face amount of fixed-rate investment grade securities. The tranches not sold to the public were partially financed with variable-rate, secured financing agreements.

After the above structured finance transactions, the Company continued to have a substantial amount of short-term, variable rate, secured financing facilities which were subject to the previously discussed collateral requirements based on CMBS security prices. As a result of the turmoil in the capital markets commencing in late summer of 1998, the spreads between CMBS yields and the yields on Treasury securities with comparable maturities began to increase substantially and rapidly. CRIIMI MAE's short-term secured creditors perceived that the value of the Subordinated CMBS securing their facilities with the Company had fallen below the minimum loan-to-value ratio and, consequently, made demand upon the Company to provide cash or additional collateral with sufficient value to cure the perceived value deficiency. In August and September of 1998, the Company received and met collateral calls from its secured creditors. At the same time, CRIIMI MAE was in negotiations with various third parties in an effort to obtain additional debt and equity financing that would provide the Company with additional liquidity.

On Friday afternoon, October 2, 1998, the Company was in the closing negotiations of a refinancing with one of its unsecured creditors that would have provided the Company with additional borrowings, when it received a significant collateral call from Merrill Lynch. The basis for this collateral call, in the Company's view, was unreasonable. After giving consideration to, among other things, this collateral call and the Company's concern that its failure to satisfy this collateral call would cause the Company to be in default under a substantial portion of its financing arrangements, the Company reluctantly concluded on Sunday, October 4, 1998 that it was in the best interests of creditors, equity holders and other parties in interest to seek Chapter 11 protection. Accordingly, the Company filed for relief under Chapter 11 on Monday, October 5, 1998.

As of September 30, 1999, CRIIMI MAE had secured financing agreements with GACC, Lehman ALI, Inc., First Union, Merrill Lynch, Morgan Stanley and Citicorp. Certain of these lenders have registered the pledged securities in their own names. As a result, the trustee makes payments on such securities to the registered holder. During the fourth quarter of 1998 and first half of 1999, certain registered holders withheld payments related to securities not registered to CRIIMI MAE. The Company has negotiated and finalized agreements with five of its lenders. CRIIMI MAE Inc.'s cash position has increased from approximately $7 million on October 5, 1998 to approximately $ 84 million as of October 31, 1999. Based on present information, the Company believes that it will have sufficient cash flow to fund its current operations while in bankruptcy during 1999. However, due to the uncertainty of the effects of the Chapter 11 filing on the business of the Company, pending litigation, material reorganization items to be incurred during the pendency of the bankruptcy and numerous other factors beyond the Company's control, no assurance can be given that the Company's cash flow will be sufficient to fund operations while the Company is in bankruptcy during 1999.

The value of the Company's portfolio is based upon the combined yield of current treasury rates and the current spread above treasury rates that an investor would be willing to pay in a purchase transaction. During the nine months ended September 30, 1999, the required weighted average spread above treasury rates was substantially unchanged on a total portfolio basis. However, treasury rates increased significantly from December 31, 1998 which, when combined with the required spreads, resulted in an aggregate $68.8 million decrease in the value of the Company's portfolio of CMBS and FHA's and GNMA's from December 31, 1998 to September 30, 1999. For the period from September 30, 1999 to November 12, 1999 treasury rates have increased. If treasury rates increase and/or spreads widen from the September 30, 1999 levels, the value of the Company's portfolio of securities would decrease.

In addition, on March 5, 1999, Morgan Stanley sold the CBO-2 BBB Bonds which have a face amount of $205.8 million and a coupon of 7%. The proceeds of $159 million were used to pay off $141.2 million of the related short-term, variable-rate debt due Morgan Stanley and the remaining net proceeds of $17.8 million were remitted to CRIIMI MAE. CRIIMI MAE retained the right to call each CMBS when the outstanding principal balance amortizes to 15% of its original face balance. The 15% call option prevents CRIIMI MAE from surrendering control of the assets pursuant to the requirements of FAS 125 and thus the transaction is accounted for as a secured borrowing and not a sale. This resulted in CRIIMI MAE recognizing a fixed-rate liability for these bonds in the amount of the gross proceeds, which was approximately $159 million.

On April 5, 1999, the Company finalized an agreement by which, Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell two classes of investment grade CMBS from CMO-IV with a face amount of $45.9 million and an average coupon rate of 6.96% constituting a portion of the collateral security advances under financing agreements with Citicorp. CRIIMI MAE would retain the right to call each CMBS when the principal balance amortizes to 15% of its original face balance. The 15% call option would prevent CRIIMI MAE from surrendering control of the assets pursuant to the requirements of FAS 125 and thus the transaction would be accounted for as a secured borrowing and not a sale. A minimum sales price was established in order to sell the bonds. Proceeds from the sale would be used to pay off $39.6 million of secured debt, certain costs, and the remainder, if any, remitted to CRIIMI MAE. This would result in CRIIMI MAE recognizing a fixed-rate liability for these bonds, when sold, in the amount of the gross proceeds received. During May 1999, the Company sold $20 million face amount of investment grade CMBS from CMO-IV in accordance with the agreement noted above. Accordingly, the proceeds from the sale of these CMBS were used to pay off a portion of the secured debt owed under the Citicorp Financing agreements and the Company recognized fixed rate debt in the amount of the gross proceeds received. The variable rate secured borrowings associated with these investment grade securities were proportionally reduced (approximately $17 million) on the balance sheet to reflect the partial sale. The remaining $25.9 million face amount of the investment grade CMBS from CMO-IV were sold on October 8, 1999 and therefore the transaction will be reflected in the fourth quarter as described above

On August 5, 1999, all but three of the commercial loans originated under the Citibank Program in 1998 were sold for gross proceeds of approximately $308 million. The loans sold had an aggregate unpaid principal balance of $339 million. As a result of the valuation received in the sale, the Company recorded an additional $10.9 million unrealized loss in the second quarter bringing its unrealized losses through June 30, 1999 to $35.3 million. The unrealized losses recorded as of June 30, 1999 also included an estimate of losses (approximately $2 million) related to the three loans in the Citibank warehouse program (unpaid principal balance of $32.7 million) not sold. On September 16, 1999, the remaining three loans were sold resulting in approximately $1.1 million in additional losses due to a decrease in the actual proceeds received as compared to the estimated proceeds anticipated at June 30, 1999. Therefore, the total realized loss for the transaction is approximately $36.3 million. Prior to the actual sale of these loans the Company had recorded its unrealized losses based on pricing data received from Citibank. In the case of each sale of the commercial loans, the minimum net proceeds provision was waived by agreement of the Company, the Unsecured Committee and the Equity Committee.

The Company's ability to resume the acquisition of Subordinated CMBS, as well as its loan origination and securitization programs, depends first, on its ability to obtain the requisite recapitalization financing, obtain confirmation and approval of a plan reorganization and emerge from bankruptcy as a successfully reorganized company and second, on its ability to access additional capital once it has successfully emerged from bankruptcy. Factors which could affect the Company's ability to access additional capital include, among other things, the cost and availability of such capital, changes in interest rates and interest rate spreads, changes in the commercial mortgage industry and the commercial real estate market, general economic conditions, perceptions in the capital markets of the Company's business, convenants under the Company's debt securities and credit facilities, results of operations, leverage, financial condition, and business prospects. The Company can give no assurances as to whether it will be able to obtain additional capital or the terms of any such capital.

Dividends

During the pendency of the Chapter 11 proceedings, the Company is prohibited from paying cash dividends without first obtaining Bankruptcy Court approval. Among the other factors which impact CRIIMI MAE's dividends are (i) the level of income earned on uninsured mortgage assets, such as Subordinated CMBS (including, but not limited to, the amount of OID income and losses, if any, on Subordinated CMBS), and, to the extent applicable, originated loans, which varies depending on prepayments, defaults, etc., (ii) the level of income earned on CRIIMI MAE's or its subsidiaries' insured mortgage security collateral depending on prepayments, defaults, etc., (iii) the fluctuating yields on short-term, variable rate, debt and the rate at which CRIIMI MAE's LIBOR-based debt is priced, as well as the rate CRIIMI MAE pays on its other borrowings, (iv) the rate at which cash flows from mortgage assets, mortgage dispositions, and, to the extent applicable, loan origination reserves, escrow deposits and distributions from its subsidiaries can be reinvested, (v) changes in operating expenses (including those related to the Chapter 11 filing), (vi) to the extent applicable, cash dividends paid on preferred shares, (vii) to the extent applicable, whether the Company's taxable mortgage pools continue to be exempt from corporate level taxes, (viii) the timing and amounts of cash flows attributable to its other lines of business—mortgage servicing, advisory, to the extent applicable, origination services and, (ix) to the extent applicable, realized losses on certain transactions. See "Effect of Chapter 11 Filing on REIT Status" regarding the declaration of a junior preferred dividend with respect to 1998 taxable income and the anticipated distribution of a substantial portion of its 1999 taxable income in the form of non-cash taxable dividends.

Due to the Chapter 11 filing on October 5, 1998, dividends were not paid during the first nine months of 1999 on common or preferred shares. However, since dividends on the Company's Series B, C and D Preferred Shares are cumulative, the dividends payable at September 30, 1999 were accrued in the financial statements. For the three and nine months ended September 30, 1998, dividends paid on Series B were approximately $1.5 million and approximately $4.3 million or $0.915 and $2.675 per share, respectively, dividends paid on Series C Preferred Shares were approximately $357,000 and $1.1 million, respectively, and dividends paid on Series D Preferred Shares where approximately $109,000, respectively.

REIT Status

CRIIMI MAE has elected to qualify as a REIT for tax purposes under Sections 856-860 of the Internal Revenue Code for the 1998 tax year. To qualify for tax treatment as a REIT under the Internal Revenue Code, CRIIMI MAE must satisfy certain criteria, including certain requirements regarding the nature of its ownership, assets, income and distributions of taxable income. For a discussion of the effect of the Chapter 11 filing on REIT status and related risks. See "Management's Discussion and Analysis- Effect of Chapter 11 Filing on REIT Status and Certain Tax Matters".

ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's principal market risk is exposure to changes in interest rates related to the US Treasury market as well as the LIBOR market. The Company will experience fluctuations in the market value of its assets related to changes in the interest rates of US Treasury bonds as well as increases in the spread between US Treasury bonds and CMBS. The Company will also have an increase in the amount of interest expense paid on its variable rate obligations primarily due to increases in One-Month LIBOR.

CRIIMI MAE has entered into interest rate protection agreements to mitigate the adverse effects of rising interest rates on its variable-rate borrowings. The caps provide protection to CRIIMI MAE to the extent interest rates, based on a readily determinable interest rate index (typically One-Month LIBOR), increase above the stated interest rate cap, in which case, CRIIMI MAE will receive payments based on the difference between the index and the cap. The term of the cap as well as the stated interest rate of the cap, which in most cases is currently above the current rate of the index, will limit to some degree the amount of protection that the caps offer.

Prior to the Petition Date, CRIIMI MAE financed a substantial portion of its Subordinated CMBS acquisitions with short-term, variable rate borrowings secured by the Company's CMBS. The agreements governing these financing arrangements typically required the Company to maintain collateral at all times with a market value not less than a specified percentage of the outstanding indebtedness. The agreements further provided that the lenders could require the Company to post cash or additional collateral if the value of the existing collateral fell below this threshold amount. These financing arrangements were used by CRIIMI MAE to provide financing during the period of time from the acquisition or creation of the Subordinated CMBS to the date when CRIIMI MAE would resecuritize the portfolio in order to match-fund a significant portion of the portfolio with fixed rate debt, thereby eliminating interest rate risk on this portion of the CMBS. CRIIMI MAE, in limited cases, entered into transactions to hedge the value of securities it intended to sell by selling short Treasury or government insured securities the Company did not own. These transactions are marked to market with unrealized gains or losses reflected in the Company's income statement.

The value of the Company's portfolio is based upon the combined yield of current treasury rates and the current spread above treasury rates that an investor would be willing to accept in a purchase transaction. During the nine months ended September 30, 1999, the required weighted average spread above treasury rates was substantially unchanged on a total portfolio basis. However, treasury rates increased significantly from December 31, 1998, which, when combined with the required spreads, resulted in an aggregate $68.8 million decrease in the value of the Company's portfolio of CMBS and FHA's and GNMA's from December 31, 1998 to September 30, 1999. For the period from September 30, 1999 to November 12, 1999 treasury rates have increased. If treasury rates increase and/or spreads widen from the September 30, 1999 levels, the value of the Company's portfolio of securities would decrease.

PART II

ITEM 1. LEGAL PROCEEDINGS

Reference is made to Note 16 of Notes to Consolidated Financial Statements of CRIIMI MAE Inc. which is incorporated herein by reference.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Reference is made to Notes 1, 9, 12 and 16 to Notes to Consolidated Financial Statements of CRIIMI MAE which are incorporated herein by reference. Such Notes contain a description of alleged defaults asserted by certain of the Company's secured lenders.

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

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Exhibit No.		Description

27		Financial Data Schedule (filed herewith)
99(a	)	Stipulation and Agreed Order (i) Authorizing Use of Cash and (ii) Granting Other Relief (First Union National Bank) entered August 5, 1999 (filed herewith)
99(b	)	Stipulation Extending Wells Fargo Standstill (Morgan Stanley and Co. International Limited) entered July 9, 1999 (filed herewith).
99(c	)	Stipulation Extending Wells Fargo Standstill (Morgan Stanley and Co. International Limited) entered July 16, 1999 (filed herewith).
99(d	)	Stipulation Extending Wells Fargo Standstill (Morgan Stanley and Co. International Limited) entered August 9, 1999 (filed herewith).
99(e	)	Stipulation Extending Wells Fargo Standstill (Morgan Stanley and Co. International Limited) entered September 16, 1999 (filed herewith).
99(f	)	Stipulation Extending Wells Fargo Standstill (Morgan Stanley and Co. International Limited) entered October 12, 1999 (filed herewith).

(b) REPORTS ON FORM 8-K

Date		Purpose

July 14, 1999		To report July 13, 1999 press release announcing CRIIMI MAE working to finalize an equity proposal and filing a motion to extend the exclusivity period.
August 4, 1999		To report July 27, 1999 press release announcing the August 5th hearing date for the CRIIMI MAE request for extension of the exclusivity period.
August 18, 1999		To report August 16, 1999 press release reporting 1999 second quarter earnings.
September 16, 1999		To report (1) a Stock Purchase Agreement between the Company and AP-CM, L.L.C. dated September 9, 1999, including draft Articles Supplementary to the Articles of Incorporation of CRIIMI MAE Inc. for Series E Cumulative Convertible Preferred Stock attached as an exhibit to the Stock Purchase Agreement (2) a press release issued on September 9, 1999 announcing the execution of a stock purchase agreement between the Company and an affiliate of Apollo Real Estate Advisors IV, L.P. and (3) a press release issued on September 15, 1999 announcing the declaration of a dividend to common shareholders of 1.61 million shares of a new Series of $10 Face Value Series F Redeemable Cumulative Dividend Preferred Stock.
September 24, 1999		To report (1) a Joint Plan of Reorganization filed by the Company and its affiliates CRIIMI MAE Holdings II, L.P. and CRIIMI MAE Management, Inc. with the United States Bankruptcy Court, District of Maryland, Greenbelt Division on September 22, 1999 and (2) a press release issued by the Company on September 23, 1999 announcing the filing of the Joint Plan of Reorganization.

Signature

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

	CRIIMI MAE INC.
/S/ NOVEMBER 15, 1999 DATE	/s/ CYNTHIA O. AZZARA Cynthia O. Azzara Senior Vice President, Principal Accounting Officer and Chief Financial Officer

QuickLinks

CRIIMI MAE INC. Quarterly Report on Form 10-Q

PART I
CRIIMI MAE INC. CONSOLIDATED BALANCE SHEETS

CRIIMI MAE Inc. BALANCE SHEET (Unconsolidated)

PART II

Signature