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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

CRIIMI MAE INC.
(Exact name of registrant as specified in its charter)

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:

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 ý    No o

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

        Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý    No o

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

        The aggregate market value (based upon the last reported sale price on the New York Stock Exchange on June 30, 2003) of the shares of CRIIMI MAE Inc. common stock held by non-affiliates was approximately $148.7 million. (For purposes of calculating the previous amount only, all directors and executive officers of the registrant are assumed to be affiliates.)

        As of March 1, 2004, 15,471,420 shares of CRIIMI MAE Inc. common stock with a par value of $0.01 were outstanding.

Documents Incorporated By Reference

        The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to the Registrant's definitive proxy statement to be filed pursuant to Regulation 14A relating to the Registrant's 2004 annual meeting of shareholders.

CRIIMI MAE INC.

2003 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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        FORWARD-LOOKING STATEMENTS. When used in this Annual Report on Form 10-K, in future filings with the Securities and Exchange Commission (the SEC or the Commission), in our press releases or in our other public or shareholder communications, the words "believe," "anticipate," "expect," "contemplate," "may," "will" and similar expressions are intended to identify forward-looking statements. Statements looking forward in time are included in this Annual Report on Form 10-K 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 risk factors contained or referenced under the headings "Business—Certain Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations". Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake 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 anticipated or unanticipated events.

PART I

ITEM 1. BUSINESS

Overview

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

        During late 2003, we undertook a review of the current market for acquisition of subordinated CMBS in preparation for the expected resumption of such acquisition activities in 2004. Due to a variety of factors such as increased competition in the sector, less attractive investment yields and underwriting standards that are widely believed to be deteriorating due to the surplus of investment capital dedicated to the subordinated CMBS market, we now believe that it is more prudent for us to focus our 2004 investment activity in the "manufacturing" of subordinated CMBS investments rather than pursuing secondary-market acquisition opportunities as we have in the past. By "manufacturing" we mean directly originating, or purchasing at origination, commercial mortgage loans, and financing these loans via the periodic issuance of investment-grade rated CMBS. This strategy would continue our historical focus on higher-yielding tranches of CMBS, but would allow us to better control the risk inherent in such investments by involving the company in the transactions at inception (i.e. at the time the loans are originated).

        As a full-service commercial mortgage company, we expect to originate, service and securitize commercial mortgage loans—which we believe gives us a competitive advantage over other securitized lenders in terms of level of service provided to mortgage loan borrowers and flexibility in addressing borrower needs over the term of their loans. Our aim would be to use securitization as a financing tool to create attractive long-term investment yields as opposed to the current market paradigm in which securitization is primarily used to generate short-term arbitrage gains on sale. Our goal is to deliver an attractive return on shareholders' equity generated by earnings that are sustainable over the long-term. We remain prepared to augment those returns by selectively participating in the subordinated CMBS acquisition market if market conditions warrant.

        Our existing business consists of investments in our core assets (subordinated CMBS backed by pools of commercial mortgage loans on multifamily, retail, hotel, and other commercial real estate) and

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investments in non-core assets (direct and indirect investments in government-insured mortgage-backed securities and a limited number of other assets). We also are a trader in CMBS, residential mortgage-backed securities, agency debt securities and other fixed income securities. We intend to refinance the shorter-term, recourse debt related to our existing subordinated CMBS through a collateralized debt obligation (CDO), other refinancing transaction, or combination thereof, by mid-2004.

        We have significant experience in the following areas:

•

Subordinated CMBS Acquisitions. We were a leading purchaser of subordinated CMBS from 1996 to 1998, acquiring an aggregate face amount of approximately $2.8 billion through 1998. We have not made any further subordinated CMBS acquisitions since 1998.



•

CMBS Resecuritizations. We completed two of the commercial real estate industry's first resecuritizations of subordinated CMBS in 1996 and 1998. These transactions had a combined face value of $449 million and $1.8 billion, respectively.



•

Loan Originations and Securitizations. Prior to 1999, we had originated more than $900 million in aggregate principal amount of commercial real estate mortgage loans. In 1998, we securitized approximately $496 million of commercial mortgage loans originated or acquired by us. We have not originated any loans since 1998.



•

Mortgage Servicing. Through our servicing subsidiary, CRIIMI MAE Services Limited Partnership (CMSLP), we are responsible for special servicing functions for 2,800 loans, representing an aggregate $15.3 billion of commercial mortgage loans underlying our subordinated CMBS. Additionally, CMSLP performs special servicing for third parties on approximately 440 loans, with aggregate principal balances of approximately $2 billion.

2003 Accomplishments

        Our strategic priorities and accomplishments in 2003 were as follows:

•

Refine and Develop Our Team and Realign Executive Compensation

Priority: Ensure that we have the personnel with the requisite expertise to maximize asset values and develop and execute investment strategies.

Accomplishment: We added to our senior management team, led by Barry Blattman, Mark Jarrell and Stephen Abelman and retained Cynthia Azzara. In addition to refining our team, during late 2003, we realigned our executive compensation based on current industry norms, resulting in a reduction in aggregate annual cash compensation payable to executives.

•

Resume Payment of Preferred Stock Dividends

Priority: Address the preferred stock dividends in arrears.

Accomplishment: During 2003, we paid all preferred stock dividends that were in arrears and all current preferred stock dividends to prepare for our return to the capital markets. In furtherance of our goal to return to the capital markets, on January 27, 2004, we filed a shelf registration statement with the Securities and Exchange Commission to register an aggregate principal amount of $200 million of debt securities, warrants, preferred shares and common shares for sale.

•

Maximize Core Asset Values

Priority: Maximize the value of our existing subordinated CMBS portfolio by accelerating workouts or dispositions of commercial mortgage loans in special servicing and by taking advantage of the "delevering" of our portfolio which occurs as CMBS classes senior to our CMBS pay down.

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Accomplishment: We made significant strides towards this priority in 2003 by resolving approximately $596 million of specially serviced assets compared to approximately $354 million during 2002. Additionally, through February 29, 2004, we resolved an additional $54 million of specially serviced assets. In 2004, we intend to structure an anticipated CDO or other refinancing of the Bear Stearns Debt (as defined below) in a manner that we benefit from portfolio delevering and continue to enjoy the potential for increases in value that could result from future ratings upgrades and continued improvement in the secondary market for seasoned subordinated CMBS.

•

Earn Attractive Returns

Priority: Earn attractive returns through the prudent investment of our capital and net cash flows.

Accomplishment: Our 2003 accomplishments in enhancing returns were evident primarily in our non-core investments. For our non-core assets (primarily insured mortgage securities), we enhanced returns by completing or making preparations to complete three "clean-up" calls related to outstanding collateralized mortgage obligation financings, significantly reducing our financing costs associated with these investments. In December 2003, we refinanced the $24.5 million balance of our Fannie Mae funding note resulting in a significant reduction in annualized interest costs. We prepaid the Freddie Mac funding note in March 2004 and expect to prepay the CMO debt by the end of the second quarter of 2004, which is expected to result in further interest savings. For our core subordinate CMBS portfolio, we have hired Stephen Abelman, an experienced manager of distressed real estate, who has restructured our Asset Management group to expedite reviews of our specially serviced loans, which we believe will result in more efficient resolutions of our specially serviced assets.

•

Pursue Investments

Priority: Develop and execute strategies relating primarily to CMBS and commercial mortgage loans that capitalize on our real estate and mortgage finance, underwriting, loan management and special servicing experience, and our access to performance information on mortgages and real estate markets throughout the country derived from our special servicing responsibilities.

Accomplishment: We evaluated returning to the subordinated CMBS acquisition model historically employed by us as a way of capitalizing on our existing expertise and, as indicated above, concluded that we could better utilize this expertise in an originations-focused business plan for 2004. We believe our development in management and personnel in late 2003 provides us with a foundation to begin execution of this strategy in 2004.

2003 Recapitalization Overview

        On January 23, 2003, we completed a recapitalization of the secured debt incurred upon our emergence from Chapter 11 in April 2001. We refer to that secured debt as the Exit Debt. This recapitalization was funded with approximately $344 million in proceeds from debt and equity financings and a portion of our available cash and liquid assets. The recapitalization included approximately $14 million in common equity and $30 million in senior secured subordinated debt purchased by Brascan Real Estate Finance Fund I L.P., a private asset management fund established by Brascan Corporation and a New York-based management team. We refer to the senior secured subordinated debt as the BREF Debt and Brascan Real Estate Finance Fund I L.P. as the BREF Fund. Additionally, we received $300 million in secured financing in the form of a repurchase transaction from a unit of Bear, Stearns & Co., Inc., which we refer to as the Bear Stearns Debt.

        The recapitalization increased our financial flexibility primarily through the elimination of the requirement to use virtually all of our net cash flow to pay down principal on the Exit Debt. This,

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along with the elimination of REIT distribution requirements due to our net operating losses (NOLs), provides us with additional liquidity for mortgage-related investments and acquisitions and other corporate purposes. We presently intend to use substantially all of our net cash flow for investments, hedging activities and general working capital purposes. See Note 6 of Notes to Consolidated Financial Statements for further discussion of the January 2003 recapitalization.

Business Segments

        Management currently assesses our performance and allocates resources principally on the basis of two lines of business: portfolio investment and mortgage servicing. These two lines of business, or operating segments, are managed separately as they provide different sources and types of revenues.

Portfolio Investment

        Portfolio investment primarily includes (i) CMBS, (ii) direct investments in government insured securities and entities that own government insured securities, (iii) direct investments in mezzanine loans and (iv) securities trading activities. Our income from this segment is primarily generated from these assets.

CMBS

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

        At the time of a securitization, one or more entities are appointed as "servicers" for the pool of mortgage loans, and are responsible for performing servicing duties which include collecting payments (master or direct servicing), monitoring performance (loan management) and working out or foreclosing on defaulted loans (special servicing). Each servicer typically receives a fee and other financial incentives based on the type and extent of servicing duties.

        The CMBS are divided into tranches, which are afforded certain priority rights to the cash flow from the underlying mortgage loans. Interest payments typically flow first to the most senior tranche until it receives all of its accrued interest and then to the junior tranches in order of seniority. Principal payments typically flow to the most senior tranche until it is retired. Tranches are then retired in order of seniority, based on available principal. Losses, if any, are generally first applied against the principal balance of the lowest rated or unrated tranche. Losses are then applied in reverse order of seniority. Each tranche is assigned a credit rating by one or more rating agencies based on the agencies' assessment of the likelihood of the tranche receiving its stated payment of principal. The CMBS are then sold to investors through either a public offering or a private placement.

        Historically, we have focused primarily on acquiring or retaining non-investment grade and unrated tranches, issued by mortgage conduit entities, in which we believed our market knowledge and real estate expertise allowed us to earn attractive risk-adjusted returns. We did not acquire any subordinated CMBS subsequent to 1998. Prior to the fall of 1998, we generally acquired subordinated CMBS in

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privately negotiated transactions, which allowed us to perform due diligence on a substantial portion of the mortgage loans underlying the subordinated CMBS as well as the underlying real estate prior to consummating the purchase. In connection with our subordinated CMBS acquisitions, we targeted diversified mortgage loan pools with a mix of property types, geographic locations and borrowers.

        As of December 31, 2003, our $1.1 billion portfolio of assets included $837 million of CMBS (representing approximately 78% of our total consolidated assets), which had the following ratings (based on fair value) reflected as a percentage of total CMBS:

(a)

Represents investment grade securities reflected on our balance sheet as a result of CBO-2, our second resecuritization transaction.

CMBS Resecuritizations

        We initially funded a substantial portion of our subordinated CMBS acquisitions with short-term, variable-rate secured debt. To mitigate our exposure to interest rate risk, our business strategy was to periodically refinance a significant portion of this short-term, variable-rate recourse debt with fixed-rate, non-recourse debt having maturities that matched those of our mortgage assets securing such debt, also known as match-funded debt. We effected such refinancings by pooling subordinated CMBS, once a sufficient pool of subordinated CMBS had been accumulated, and issuing newly created CMBS backed by the pooled subordinated CMBS. The CMBS issued in such resecuritizations were fixed-rate obligations with maturities that matched the maturities of the subordinated CMBS backing the new CMBS. These resecuritizations also increased the amount of borrowings available to us due to the increased collateral value of the new CMBS relative to the pooled subordinated CMBS. The increase in collateral value was principally attributable to the seasoning of the underlying mortgage loans and the diversification that occurred when such subordinated CMBS were pooled. We generally used the cash proceeds from the investment grade CMBS that were sold in the resecuritization to reduce the amount of our short-term, variable-rate debt. We then used the net excess borrowing capacity created by the resecuritization to obtain new short-term, variable-rate secured borrowings, typically provided by the subordinated CMBS issuer and, to a lesser extent, cash, to purchase additional subordinated CMBS.

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

        In May 1998, we completed our second resecuritization of subordinated CMBS, CRIIMI MAE Commercial Mortgage Trust Series 1998-C1 (CBO-2), with a combined face value of approximately $1.8 billion involving 75 individual securities collateralized by 19 mortgage securitization pools and three of the retained securities from CBO-1. In CBO-2, we eventually sold, in private transactions, securities with an aggregate face amount of $673 million and retained securities with a face amount of approximately $1.1 billion.

        As of December 31, 2003, our total debt was approximately $765.6 million, of which approximately 53% was fixed-rate, match-funded, non-recourse debt and approximately 47% was variable-rate or

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fixed-rate debt that was not match-funded. See Notes 4 and 6 to the Notes to Consolidated Financial Statements for further information regarding our CMBS resecuritizations and variable-rate secured borrowings.

Loan Originations and Securitizations

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

Portfolio Investment's Assets

        See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of Portfolio Investment's Assets.

Mortgage Servicing

        We conduct our mortgage loan servicing operations through CMSLP. CMSLP's principal servicing activities are described below.

Special Servicing

        A special servicer typically provides asset management and resolution services with respect to nonperforming or underperforming loans within a pool of mortgage loans. When we acquired subordinated CMBS, we typically required that we retain the right to appoint the special servicer for the related mortgage pools. When serving as special servicer of mortgage loans in a CMBS pool, CMSLP has the authority to deal directly with any borrower that fails to perform under certain terms of its mortgage loan, including the failure to make payments, and to manage any loan workouts and foreclosures. As special servicer, CMSLP earns fee income on services provided in connection with any loan servicing function transferred to it from the master servicer. We believe that because we own the first loss unrated or lowest rated bond of all but two CMBS transactions, we have an incentive to quickly resolve any loan workouts. As of December 31, 2003, CMSLP was designated as the special servicer for approximately 2,800 commercial mortgage loans, representing an aggregate principal amount of approximately $15.3 billion of commercial mortgage loans underlying our CMBS. Additionally, CMSLP performed special servicing on approximately 440 loans, representing an aggregate principal balance of approximately $2 billion, for third parties. We currently have a Standard & Poors (S&P) Special Servicer ranking of "below average". Despite the ranking, S&P provided a "positive outlook" and recognized that CMSLP has begun to take measures to stabilize its operations, most notably by hiring some well-experienced asset management personnel.

Loan Management

        In April 2003, we restructured CMSLP's property servicing group resulting in the termination of 10 employees. In conjunction with this restructuring, we have outsourced substantially all of our contractual property servicing duties related to the labor-intensive tasks of financial statement collection and analysis and property inspection performance. The outsourcing was completed in February 2004. This outsourcing does not relieve us of any of our contractual obligations or reduce any of our rights as

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property servicer, since CMSLP remains the property servicer of record, but it does relieve us of the administrative task of collecting financial operating data. This will allow the remaining resources in surveillance to focus more on collateral analysis. For the outsourced loans, CMSLP coordinates the delivery of monthly reports and inspections with the third-party servicers. For the portfolios for which the third-party servicer is not also the master servicer, CMSLP reviews and approves the reports from these servicers prior to submission by CMSLP to the securitization trustees.

        For all of the loans underlying our subordinated CMBS portfolio, including those outsourced as noted above, CMSLP performs analyses of operating performance and property inspections as part of its routine asset monitoring process. This allows CMSLP to identify and evaluate potential issues that could result in losses. As of February 29, 2004, CMSLP analyzes the performance and physical condition of approximately 2,800 commercial mortgage loans, representing an aggregate principal of $15 billion.

Other Servicing

        CMSLP performs master and/or direct servicing for an insignificant number of non-CMBS loans. A master servicer typically provides administrative and reporting services to the trustee with respect to a particular issuance of CMBS or other securitized pools of mortgages. Direct (or primary) servicers typically perform certain functions for the master servicer.

The Reorganization Plan

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

Certain Risk Factors

        In addition to the risk factors set forth below, please see the discussion of various risks in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

        Our significant indebtedness limits our ability to take certain actions and could adversely affect our financial condition if we are unable to meet our obligations.

        We are highly leveraged. As of December 31, 2003, our total consolidated indebtedness was $765.6 million (of which $350.0 million was recourse debt), and our shareholders' equity was $291.8 million.

        Our ability to meet our existing debt service obligations depends on a number of factors, including management's ability to:

•

maintain cash flow from our mortgage assets (which is impacted by, among other things, the credit performance of the mortgage loans underlying our subordinated CMBS and changes in interest rates and spreads); and



•

generate capital internally from operating and investing activities and expected reductions in REIT distribution requirements to shareholders due to net operating losses for tax purposes.

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        Our high level of debt:

•

limits our ability to obtain additional capital;



•

significantly reduces income available for other activities;



•

restricts our ability to react quickly to changes in our business;



•

limits our ability to hedge our assets and liabilities; and



•

makes us more vulnerable to general adverse economic and industry conditions.

        We are subject to a number of borrowing risks, including refinancing risk and margin calls.

        The Bear Stearns Debt and BREF Debt mature in January 2006. As a result, we must either refinance or retire the remaining principal balances of each of the Bear Stearns Debt and BREF Debt at their maturity in 2006. In 2004, we expect to refinance the Bear Stearns Debt through a CDO, other refinancing, or combination thereof. There can be no assurance that a refinancing will occur or that it will be advantageous to us. Such a transaction may increase the cost of our borrowings, require increased amortization payments and cash sweeps and fail to provide us with sufficient funds to retire the entire amount outstanding of the Bear Stearns Debt, all of which may significantly reduce our cash flow, and further limit our financial flexibility.

        Substantially all of our future borrowings are expected to continue to be in the form of collateralized borrowings, as are the Bear Stearns Debt and BREF Debt. A default under our collateralized borrowings could result in a liquidation of the collateral. If we are forced to liquidate any assets that qualify as qualified real estate assets (under the REIT provisions of the Internal Revenue Code) to repay borrowings, there can be no assurance that we will be able to maintain compliance with the REIT provisions of the Internal Revenue Code regarding asset and source of income requirements. See the risk factor related to tax related risks. The liquidation of CMBS or other assets could also result in the loss of our Investment Company Act exclusion. See the risk factor related to the Investment Company Act exclusion. A default under the operative documents of any collateralized borrowing could result in a default under the operative documents of other collateralized or non collateralized borrowing or other obligations, which could result in our being required to pay all such obligations. We may be unable to repay such obligations.

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

        We face considerable competition from competitors with greater resources, which could adversely affect our ability to execute our strategy to become a full-service commercial mortgage company.

        If we resume commercial mortgage loan originations and/or other mortgage related activities, we would compete with financial institutions, mortgage REITs, specialty finance companies, banks, mortgage companies, hedge funds, other lenders, and/or other entities originating and/or purchasing commercial mortgage-related assets. Many of these competitors may have greater access to capital and/or other resources (or the ability to obtain capital at a lower cost) and may have other advantages over us. Although subject to a non-competition agreement with us through January 2006, BREF Fund and its controlled affiliates are permitted to sponsor collateralized bond or loan obligations, or CBOs,

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and to acquire subordinated CMBS for inclusion in such CBOs. As a result, they could compete with us in connection with such activities.

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

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

        Our operating results depend in large part on differences between the income from our mortgage assets and our borrowing costs. We may finance a significant portion of new investments with borrowings, initially, having adjustable interest rates (or borrowing rates) that reset while the rates on fixed rate investments stay constant. If interest rates rise, borrowing rates (and borrowing costs) are expected to rise while coupon rates (and investment income) on our fixed rate mortgage assets remain constant. This would decrease both our net income, potentially resulting in a net loss, and the mark-to-market value of our net assets, and would be expected to slow future investments of assets. Although we intend to invest primarily in fixed-rate mortgage assets, we also may own adjustable rate mortgage assets. We may fund these adjustable rate mortgage assets with borrowings having borrowing rates which reset monthly or quarterly. To the extent that there is a difference between (i) the interest rate index used to determine the coupon rate of the adjustable rate mortgage assets (asset index) and (ii) the interest rate index used to determine the borrowing rate for the related financing (borrowing index), we will be exposed to "basis" risk. Typically, if the borrowing index rises more than the asset index, our net income would decrease, all other things being constant. Additionally, our adjustable rate mortgage assets may be subject to periodic rate adjustment limitations and periodic and lifetime rate caps which limit the amount that the coupon rate can change during any given period. No assurance can be given as to the amount or timing of changes in interest rates or their effect on our mortgage assets, their valuation or income derived therefrom. During periods of changing interest rates, coupon rate and borrowing rate mismatches could negatively impact our net income and distributions.

        Our hedging transactions provide limited protection.

        There can be no assurance that our hedging activities will have the desired impact of protecting us from the risks associated with changes in interest rates. No hedging activity can completely protect us from the risks associated with changes in interest rates. Non-performance by counterparties to hedging transactions could result in losses to us. We may not be able to dispose of, or close out a hedging position without the consent of the counterparty, and we may not be able to enter into an offsetting hedging contract in order to cover our risk. There can be no assurance that a liquid market will exist for the purchase or sale of hedging instruments, and we may be required to maintain a position until expiration, which could result in losses. There can be no assurance that we will be able to replace a hedge upon expiration which could result in increased interest rate risk. See further discussion of our derivative financial instruments in Note 7 of Notes to Consolidated Financial Statements.

        Owning subordinated CMBS subjects us to significant risks.

        Potential Losses and Reduced Cash Flows.    As an owner of the most subordinate tranches of CMBS, we will be the first to bear any loss and will absorb 100% of the losses on the underlying mortgage loan collateral until cumulative losses exceed the principal amount of our subordinated CMBS. We will also be the last to receive cash flow from the underlying mortgage loans. Interest payments typically flow first to the most senior certificates until they receive all of their accrued interest and then sequentially to the junior certificates in order of seniority. Principal payments typically flow to the most senior certificates until they are retired. Tranches are then retired in order of seniority based

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on available principal. When delinquencies, defaults and losses occur, cash flows otherwise due to our subordinated CMBS may not be advanced by the master servicers to the extent required to meet scheduled principal and interest payments, resulting in interest shortfalls to our subordinated CMBS. See below for a discussion of our most significant borrowing relationship and its potential impact on our cash flows. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 4 to Notes of Consolidated Financial Statements.

        Changes in Value due to Economic Factors.    The value of our subordinated CMBS, along with our book value per diluted share, can change due to a number of economic factors. These factors include changes in the value of the underlying real estate, fluctuations in U.S. Treasury rates, and changes in the spread between interest rates on our subordinated CMBS and the U.S. Treasury securities with comparable maturities. For instance, changes in the performance of the properties securing the underlying mortgage loans can result in interest payment shortfalls to the extent there are mortgage payment delinquencies, and principal losses to the extent that there are payment defaults and the amounts of such principal and interest shortfalls are not fully recovered. These losses may result in a permanent decline in the value of our subordinated CMBS and may change our anticipated yield to maturity on such subordinated CMBS if the losses are in excess of those previously estimated. CMBS are priced at a spread above the current U.S. Treasury security (such as the 10 year U.S. Treasury Note) with a maturity that most closely matches the CMBS's weighted average life. The value of CMBS can be affected by changes in U.S. Treasury rates, as well as changes in the spread between such CMBS and the U.S. Treasury security with a comparable maturity. Generally, increases and decreases in both U.S. Treasury rates or spreads will result in temporary changes in the value of our subordinated CMBS assuming that we have the ability and intent to hold our subordinated CMBS investments until maturity. Temporary changes in fair value are reflected as a component of shareholders' equity. However, such temporary changes in the value of our subordinated CMBS become permanent changes realized through our income statement when the expected credit losses related to those subordinated CMBS are greater or occur sooner than originally anticipated or we no longer intend or fail to have the intent and ability to hold such subordinated CMBS to maturity. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 4 to Notes of Consolidated Financial Statements.

        Significant borrowing relationship related to certain mortgage loans underlying our subordinated CMBS.    The most significant borrowing relationship in our specially serviced mortgage loan portfolio consists of 27 loans with scheduled principal balances as of December 31, 2003 totaling approximately $133 million spread across three CMBS transactions secured by hotel properties in the western and Pacific northwestern states. As of December 31, 2003, our total exposure, including advances and interest on advances of approximately $43 million, on these loans was approximately $176 million. Such total exposure is prior to the application of payments made to date by the borrower under the terms of our consensual settlement agreement and is expected to be reduced by the application of such payments at the settlement agreement closing. The borrower initially filed for bankruptcy protection in February 2002 and indicated that the properties had experienced reduced operating performance due to new competition, the economic recession, and reduced travel resulting from the September 11, 2001 terrorist attacks. We entered into a consensual settlement agreement dated February 25, 2003 pursuant to which the loan terms were amended and modified. This agreement was subsequently approved and confirmed by the bankruptcy court on March 28, 2003. The parties are currently proceeding toward closing a comprehensive modification of each loan, which is expected to occur in March 2004 and which is expected to return the loans to performing status. The closing of the loan modification is a complex process involving a large number of parties, all of whom must ultimately agree on, among other things, a reconciliation of payments and funds applied since the loan modification was approved by the bankruptcy court. The borrower continues to make payments under the modified terms. As of December 31, 2003, the borrower has made principal and interest payments totaling approximately $10 million, the majority of which represents interest paid (as compared to principal amortization) on

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the modified loan balances. During the year ended December 31, 2003, the borrower also sold one of the properties that secured these loans. In addition, as of December 31, 2003, the borrower has remitted approximately $1.5 million in funds from debtor-in-possession accounts, which is expected to be applied to arrearages at closing.

        Cash received from our subordinated CMBS could be significantly reduced if we are not successful in resolving these loans favorably and returning them to performing status. If the modifications are not successfully closed, the loans would remain in default. There can be no assurance that the borrower would continue making the loan payments required under the loan modifications or that the trust master servicers would continue to advance loan payments on behalf of the borrower. Further, as previously mentioned, as a result of the borrower's initial default, the trust master servicers have advanced substantial amounts of principal and interest payments to the related trusts. We do not believe that the governing trust agreements are clear as to the manner in which such master servicer advances are to be reimbursed, and are attempting to negotiate an arrangement with the master servicers and other parties to the trust which would provide for reimbursement of master servicer advances that would be in the best interest of all of the respective certificateholders. To the extent that we cannot successfully complete those arrangements, we and the other trust parties could dispute the proper reimbursement mechanics, and, as a result, the timing and/or amount of payments made to us on our subordinated CMBS, and the related fair value of our subordinated CMBS, could be adversely affected. Finally, even if both the loan modifications and master servicer advance reimbursement arrangements are successfully completed, distributions on our subordinated CMBS, and the related fair value of our subordinated CMBS, will continue to be dependent on the borrower's continued performance under the terms of the modified loans.

        Limited liquidity of the subordinated CMBS market results in uncertainty in the valuation of our portfolio.

        There is no active secondary trading market for subordinated CMBS. This limited liquidity results in uncertainty in the valuation of our portfolio of subordinated CMBS. The liquidity of such market has historically been limited, and during adverse market conditions has been severely limited. Future adverse market conditions would likely adversely impact the value of our subordinated CMBS and amounts we could realize if we were required to sell all or a portion of our subordinated CMBS. Due to this limited liquidity, among other matters, management's estimate of the value of our subordinated CMBS could vary significantly from the value that could be realized in a current sale transaction.

        The limited liquidity of the subordinated CMBS market and the resulting potential uncertainty in the valuation of our subordinated CMBS contributes to the risk of margin calls due to the creditor's discretionary determination of collateral market value in a limited liquidity market. This was a factor in connection with our October 1998 Chapter 11 filing. See the risk factors related to borrowing risks.

        The effects of terrorist attacks, economic and industry slowdown have contributed to defaults on the mortgage loans underlying our subordinated CMBS.

        The economic and commercial real estate industry slowdown, terrorist attacks and threats of further terrorist attacks have contributed to defaults on mortgage loans underlying our subordinated CMBS. These factors may continue to negatively impact the values of the commercial real estate securing the mortgage loans, weakening collateral coverage and the demand for the commercial real estate securing the underlying mortgage loans and increasing the possibility of defaults and losses. Mortgage loan defaults related to our subordinated CMBS have resulted in increased estimated losses, and may result in further losses on our subordinated CMBS. See Note 4 to the Notes to Consolidated Financial Statements and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for information regarding the performance of the underlying mortgage loans underlying our subordinated CMBS. The factors described in this paragraph could also adversely affect loans that we may originate in the future.

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        We are subject to a number of tax related risks including loss of REIT status.

        REIT Status.    We have elected to qualify as a REIT for tax purposes under sections 856-860 of the Internal Revenue Code. We are required to meet income, asset, ownership and distribution tests to maintain our REIT status. Although there can be no assurance, we believe that we have satisfied the REIT requirements for all years through, and including 2003. There can also be no assurance that we will maintain our REIT status for 2004 or subsequent years. If we fail to maintain our REIT status for any taxable year, we 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. Depending on the amount of any such federal and state income tax, we may have insufficient funds to pay any such tax and also may be unable to comply with some or all of our obligations, including the Bear Stearns and BREF Debt.

        We and two of our subsidiaries incorporated in 2001 jointly elected to treat such two subsidiaries as taxable REIT subsidiaries (TRS) effective January 1, 2001. The TRSs allow us to earn non-qualifying REIT income while maintaining our REIT status. These two subsidiaries hold all of the partnership interests of CMSLP.

        Net Operating Loss for Tax Purposes/Trader Election.    For tax purposes we have elected to be classified as a trader in securities. We trade in both short and longer duration fixed income securities, including CMBS, residential mortgage-backed securities and agency debt securities (such securities traded and all other securities of the type described constituting the "Trading Assets" to the extent owned by us or any qualified REIT subsidiary, meaning generally any wholly owned subsidiary that is not a taxable REIT subsidiary). Such Trading Assets are classified as Other MBS on our balance sheet.

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

        We generated a net operating loss (or NOL) for tax purposes of approximately $84.0 million and $83.6 million during the years ended December 31, 2003 and 2002, respectively. As such, our taxable income was reduced to zero and, accordingly, our REIT distribution requirement was eliminated for 2003 and 2002. As of December 31, 2003, our accumulated and unused net operating loss (or NOL) was $307.8 million. Any accumulated and unused net operating losses, subject to certain limitations, generally may be carried forward for up to 20 years to offset taxable income until fully utilized. Accumulated and unused net operating losses cannot be carried back because we are a REIT.

        There can be no assurance that our position with respect to our election as a trader in securities will not be challenged by the Internal Revenue Service (or IRS) and, if challenged, will be defended successfully by us. As such, there is a risk that the January 2000 Loss will be limited or disallowed, resulting in higher tax basis income and a corresponding increase in REIT distribution requirements. It is possible that the amount of any under-distribution for a taxable year could be corrected with a "deficiency dividend" as defined in Section 860 of the Internal Revenue Code; however, interest may also be due to the IRS on the amount of this under-distribution.

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

        Our future use of NOLs for tax purposes could be substantially limited in the event of an "ownership change" as defined under Section 382 of the Internal Revenue Code. As a result of these limitations imposed by Section 382 of the Internal Revenue Code, in the event of an ownership change,

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our ability to use our NOL carryforwards in future years may be limited and, to the extent the NOL carryforwards cannot be fully utilized under these limitations within the carryforward periods, the NOL carryforwards would expire unutilized. Accordingly, after any ownership change, our ability to use our NOLs to reduce or offset taxable income would be substantially limited or not available under Section 382. In general, a company reaches the "ownership change" threshold if the "5% shareholders" increase their aggregate ownership interest in the company over a three-year testing period by more than 50 percentage points. The ownership interest is measured in terms of total market value of the company's capital stock. If an "ownership change" occurs under Section 382 of the Internal Revenue Code, our prospective use of our accumulated and unused NOL will be limited.

        We do not believe BREF Fund's investment in our common stock and warrants to purchase common stock has created an "ownership change" under Section 382. In addition, we are not aware of any other acquisition of shares of our capital stock that has created an "ownership change" under Section 382. We have adopted a shareholder rights plan and amended our charter to minimize the chance of an ownership change within the meaning of Section 382 of the Internal Revenue Code; however there can be no assurance that an ownership change will not occur.

        Changes in Tax Laws.    Our activities, structure and operations may be adversely affected by changes in the tax laws applicable to REITs and "traders in securities" for tax purposes.

        If we recognize phantom income our shareholders may be required to pay federal income tax with respect to such income before such income is realized by them in an economic sense.

        Our investment in subordinated CMBS may cause us, under certain circumstances, to recognize taxable income in excess of our economic income (phantom income) actually received and to experience an offsetting excess of economic income over our taxable income in later years. As a result, our shareholders, from time to time, may be required to treat distributions that economically represent a return of capital as taxable dividends for federal income tax purposes. Such distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for federal income tax purposes. Accordingly, if we recognize phantom income, our shareholders may be required to pay federal income tax with respect to such income on an accelerated basis (i.e., before such income is realized by shareholders in an economic sense). Taking into account the time value of money, such an acceleration of federal income tax liabilities would cause shareholders to receive an after-tax rate of return on an investment in our stock that would be less than the after-tax rate of return on an investment with an identical before-tax rate of return that did not generate phantom income. As the ratio of our phantom income to our total income increases, the after-tax rate of return received by a shareholder paying taxes on such distributions will decrease.

        We are dependent upon the performance of key personnel.

        Our business is dependent upon the performance of key employees, including Barry Blattman, our Chairman and Chief Executive Officer, and Mark Jarrell, our President and Chief Operating Officer, and other executive officers. We cannot be certain that any key employee will continue in such capacity for any particular period of time. All of our key employees are "at will" such that we or they may terminate their employment at any time and for any reason, or no reason. The loss of key personnel, or the inability to hire and retain qualified employees, could adversely effect our business, financial condition and results of operations.

        Failure to qualify for the Investment Company Act exclusion could have a material adverse effect on us.

        Under the Investment Company Act of 1940, as amended, an investment company is required to register with the Securities and Exchange Commission (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 primarily

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engaged in the business of acquiring mortgages and other liens on and interests in real estate (Qualifying Interests) are excluded from the requirements of the Investment Company Act.

        To qualify for the Investment Company Act exclusion, we, among other things, must maintain at least 55% of our assets in Qualifying Interests (the 55% Requirement) and are 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, we believe that all of our government-insured mortgage securities constitute other Real Estate Interests and that certain government-insured mortgage securities also constitute Qualifying Interests. In accordance with current SEC staff interpretations, we believe that all of our subordinated CMBS constitute Other Real Estate Interests and that certain of our subordinated CMBS also constitute Qualifying Interests. On certain of our subordinated CMBS, we, along with other rights, have the unilateral right to direct foreclosure with respect to the underlying mortgage loans. Based on such rights and our economic interest in the underlying mortgage loans, we believe that the related subordinated CMBS constitute Qualifying Interests. As of December 31, 2003, we believe that we were in compliance with both the 55% Requirement and the 25% Requirement.

        If the SEC or its staff were to take a different position with respect to whether such subordinated CMBS constitute Qualifying Interests, we could, among other things, be required either (i) to change the manner in which we conduct our 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 us. If we were required to change the manner in which we conduct our business, we would likely have to dispose of a significant portion of our subordinated CMBS or acquire significant additional assets that are Qualifying Interests. Alternatively, if we were required to register as an investment company, we expect that our operating expenses would significantly increase and that we would have to significantly reduce our indebtedness, which could also require us to sell a significant portion of our assets. No assurances can be given that any such dispositions or acquisitions of assets, or deleveraging, could be accomplished on favorable terms, or at all. There are restrictions under certain of the operative documents evidencing the Bear Stearns and BREF Debt which could limit possible actions we may take in response to any need to modify our business plan in order to register as an investment company or avoid the need to register. Certain dispositions or acquisitions of assets could require approval or consent of certain holders of this Debt. Any such results could have a material adverse effect on us.

        Further, if we were deemed an unregistered investment company, we could be subject to monetary penalties and injunctive relief. We would be unable to enforce contracts with third parties and third parties could seek to obtain rescission of transactions undertaken during the period we were deemed an unregistered investment company, unless the court found that under the circumstances, enforcement (or denial of rescission) would produce a more equitable result than nonenforcement (or grant of rescission) and would not be inconsistent with the Investment Company Act.

        If two trusts formed in connection with two CMBS resecuritization transactions in which we own all the equity interests were to lose their "taxable mortgage pool" exemption, we could be materially adversely affected.

        An entity that constitutes a "taxable mortgage pool" as defined in the Internal Revenue Code (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. As of December 31, 2003, we owned all of the equity interests in two trusts that constitute TMPs (individually a Trust and together the Trusts). The Trusts were formed in connection with our CBO-1 and CBO-2 resecuritization

16

transactions. See "Business-CMBS Resecuritizations" and Note 4 to the Notes to Consolidated Financial Statements for descriptions of CBO-1 and CBO-2. 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 or a qualified REIT subsidiary). As a result of this exemption and the fact that as of December 31, 2003 we owned all of the equity interests in each of the Trusts, as of December 31, 2003 the Trusts were not required to pay a separate corporate level tax on income they derive from their underlying mortgage assets.

        As of December 31, 2003, we also owned certain securities structured as debt issued by the Trusts (the Bonds). As of December 31, 2003, certain of the Bonds owned by us served as collateral (the Pledged Bonds) for certain secured debt. If a creditor were to seize or sell the Pledged Bonds 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 Trusts (including the equity interests and the Pledged Bonds) would instead be applied to tax payments. Since the equity interests and Bonds owned by us 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, the payments received thereon and the value of our stock.

        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, rather than debt, could also jeopardize our REIT status if the value of the remaining ownership interests in any Trust held by us (i) exceeded 5% of the total value of our assets or (ii) constituted more than 10% of the Trust's voting interests. Although it is possible that the election by the TMPs to be treated as taxable REIT subsidiaries could prevent the loss of our REIT status, there can be no assurance that a valid election could be made given the timing of a seizure or sale of the Pledged Bonds.

        On the effective date of our January 2003 recapitalization, we effected an affiliate reorganization principally to indirectly secure the Bear Stearns Debt with the equity interests in the Trusts. As a result of the affiliate reorganization, our REIT subsidiary CBO REIT II owns the Pledged Bonds and indirectly owns all of the equity interests in the Trusts (through its ownership of two qualified REIT subsidiaries which hold the equity interests in the Trusts). We believe that the TMP risks set forth above remain applicable, as of the effective date of our January 2003 recapitalization, with respect to CBO REIT II; provided, however, that the risks referenced in the two immediately preceding paragraphs should only apply if a creditor were to seize or sell collateral which constituted or represented only a portion of the equity interests in a Trust.

Employees

        As of February 1, 2004, we had 81 employees, 52 of whom are employed by CMSLP and 29 of whom are employed by CRIIMI MAE Management, Inc., one of our wholly owned subsidiaries.

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Executive Officers

        The following table sets forth information concerning our executive officers as of March 1, 2004:

        Barry S. Blattman has served as Chairman of the Board and Chief Executive Officer since January 23, 2003, and as President from January 23, 2003 to September 15, 2003.

        Mark R. Jarrell has served as President and Chief Operating Officer since September 15, 2003, and as a director from January 23, 2003 to August 13, 2003.

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

        Stephen M. Abelman has served as Executive Vice President since October 29, 2003.

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

Internet Website

        Our internet website can be found at www.criimimaeinc.com. We make available, free of charge on or through our website, access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is filed with, or furnished to, the SEC. We also make available, free of change, access to our Codes of Business Conduct and Ethics, Board of Directors Goverance Guidelines, Audit Committee Charter, Compensation and Stock Option Committee Charter and Nominating and Governance Committee Charter.

Certifications

        Our Chief Executive Officer and Chief Financial Officer have executed certifications dated March 11, 2004, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and we have included those certifications as exhibits to our Annual Report on Form 10-K for the year ended December 31, 2003. In addition, our Chief Executive Officer has certified to the New York Stock Exchange that he is unaware of any violation by CRIIMI MAE of the NYSE's corporate governance listing standards in effect as of February 26, 2004.

ITEM 2. PROPERTIES

        We lease our corporate offices at 11200 Rockville Pike, Rockville, Maryland. As of December 31, 2003, these offices occupy approximately 67,600 square feet. As of March 1, 2004, approximately 32,000 square feet of this office space was available to sublet to third parties and we are actively seeking sublet tenants.

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ITEM 3. LEGAL PROCEEDINGS

        In the course of our normal business activities, various lawsuits, claims and proceedings have been or may be instituted or asserted against us. Although there can be no assurance, based on currently available facts, we believe that the disposition of matters pending or asserted will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. See Note 18 of Notes to Consolidated Financial Statements.

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

        We did not submit any matters to a vote of security holders during the fourth quarter of 2003.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Data

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

        As of March 1, 2004, we had approximately 2,700 holders of record of our common stock. The following table sets forth the high and low closing sales prices for our common stock during the periods indicated.

Dividends

        No cash dividends were paid to common shareholders during 2003 or 2002. See "Business—Certain Risk Factors" for a brief discussion of the elimination of our REIT distribution requirements for 2003 and 2002 due to our net operating losses for tax purposes. Under the operative documents evidencing the BREF Debt and Bear Stearns Debt, we are permitted to pay cash dividends to shareholders after the payment of required principal and interest on that debt.

        In April 2002, dividends to preferred shareholders for the fourth quarter of 2001 and the first quarter of 2002 were paid in the form of shares of common stock. During 2003, dividends were paid to preferred shareholders in cash. See Notes 12 and 13 to Notes to Consolidated Financial Statements.

        On March 21, 2002, we redeemed in cash all 173,000 outstanding shares of our Series E Cumulative Convertible Preferred Stock at the stated redemption price of $106 per share plus accrued and unpaid dividends through and including the date of redemption. The total redemption price was approximately $18.7 million ($396,000 of which represented accrued and unpaid dividends).

Sale of Unregistered Securities

        In connection with the January 2003 recapitalization, BREF acquired 1,212,617 shares of our newly issued common stock, or approximately 8% of our outstanding common stock after giving effect to the share acquisition, at $11.50 per share, or approximately $13.9 million. BREF also received seven-year warrants to purchase up to 336,835 additional shares of common stock at a purchase price of $11.50 per share. In connection with the sale, BREF represented that it was an "accredited investor" within the meaning of Rule 501 under the Securities Act and that it had no intent to distribute the purchased securities. We claimed an exemption from registration under the Securities Act under Rule 506 of Regulation D in connection with this sale.

Repurchases

        We did not repurchase any shares of our equity securities during the fourth quarter of 2003.

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ITEM 6. SELECTED FINANCIAL DATA

Selected Consolidated Financial Data

Accounting Under Accounting Principles Generally Accepted in the United States

        The following table contains selected consolidated financial information about us. The selected financial data should be read in conjunction with the consolidated financial statements, the notes thereto, and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included elsewhere in this Annual Report on Form 10-K. There were no cash dividends declared on our common stock for any of the periods presented. See Note 2 to Notes to Consolidated Financial Statements and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of the accounting for servicing revenue, derivatives, goodwill and other intangibles, preferred stock issuance costs and a discussion of certain expenses related to Chapter 11 reorganization, all of which affect the comparability of the periods presented below.

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(1)

Pro forma net loss per diluted share assuming the adoption of SFAS 142 and the change in accounting for servicing revenue as of January 1, 2001, 2000 and 1999 would have been $(2.11), $(24.51) and $(23.90), respectively.

Tax Basis Accounting

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

Introduction

        Our existing business consists of:

•

investments in our core assets, which are subordinated CMBS backed by pools of commercial mortgage loans on multifamily, retail, hotel, and other commercial real estate;



•

investments in non-core assets, including direct and indirect investments in government-insured mortgage backed securities and a limited number of other assets; and



•

trading in CMBS, residential mortgage-backed securities, agency debt securities and other fixed income securities.

        We also perform mortgage servicing through our servicing subsidiary, CRIIMI MAE Services Limited Partnership (CMSLP). CMSLP performs special servicing on the commercial mortgage loans underlying our subordinated CMBS.

        Currently, our primary source of revenue and cash is our subordinated CMBS. We receive cash flows from our investments in subordinated CMBS in connection with payments made on the underlying commercial mortgage loans. The net interest margin related to our subordinated CMBS is impacted by, among other things, the credit performance of the mortgage loans underlying our subordinated CMBS and the interest expense on our recourse debt.

        During late 2003, we undertook a review of the current market for acquisition of subordinated CMBS in preparation for the expected resumption of such acquisition activities in 2004. Due to a variety of factors such as increased competition in the sector, less attractive investment yields and underwriting standards that are widely believed to be deteriorating due to the surplus of investment capital dedicated to the subordinated CMBS market, we now believe that it is more prudent for us to focus our 2004 investment activity in the "manufacturing" of subordinated CMBS investments rather than pursuing secondary-market acquisition opportunities as we have in the past. By "manufacturing" we mean directly originating, or purchasing at origination, commercial mortgage loan, and financing these loans via the periodic issuance of investment-grade rated CMBS. This strategy would continue our historical focus on higher-yielding tranches of CMBS, but would allow us to better control the risk inherent in such investments by involving the company in the transactions at inception (i.e. at the time the loans are originated).

        As a full-service commercial mortgage company, we expect to originate, service and securitize commercial mortgage loans—which we believe gives us a competitive advantage over other securitized lenders in terms of level of service provided to mortgage loan borrowers and flexibility in addressing borrower needs over the term of their loans. Our aim would be to use securitization as a financing tool to create attractive long-term investment yields as opposed to the current market paradigm in which securitization is primarily used to generate short-term arbitrage gains on sale. Our goal is to deliver an attractive return on shareholders' equity generated by earnings that are sustainable over the long-term. We remain prepared to augment those returns by selectively participating in the subordinated CMBS acquisition market if market conditions warrant.

        We currently face certain significant business risks, including those risks related to owning subordinated CMBS and refinancing risks related to our Bear Stearns Debt and BREF Debt, which mature in January 2006. We are currently exploring refinancing alternatives, including, among others, a collateralized debt obligation, to address our refinancing risk.

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Liquidity and Cash Flow

        Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay recourse borrowings, fund investments and lending activities and for other general business purposes. Currently, our primary source of funds for liquidity consists of cash flows from our subordinated CMBS and, to a lesser extent, cash flows from our insured mortgage securities, equity investments and mezzanine loans.

        Our ability to make mortgage related investments, including direct loan originations, depends on, among other things, our ability to engage in such activities under the terms and conditions of the operative documents evidencing our obligations, our internally generated cash flows, available liquidity, and our ability to access additional capital. Factors which could affect our ability to access additional capital include the amount of our debt, among other things, the cost and availability of such capital, the availability of investment product at attractive rates of return, changes in interest rates and interest rate spreads, changes in the commercial mortgage industry and the commercial real estate market, the effects of terrorism, general economic conditions, perceptions in the capital markets of our business, results of our operations, and our financial leverage, financial condition, and business prospects. There can be no assurance that we will be able to resume mortgage related investments or obtain additional capital, or that the terms of any such capital will be favorable to us.

Summary of Significant Sources and Uses of Cash Related to Existing Business

        The following table is a summary of our significant sources and uses of cash during the years ended December 31, 2003 and 2002 (in millions):

(1)

Cash distributions from the AIM Limited Partnerships are primarily a return on investment.

(2)

The general and administrative expenses and BREF maintenance fee are the amounts as reflected in our Consolidated Statements of Income.

        The decrease in cash received from CMBS (rated BB+ through unrated) is primarily the result of increased interest shortfalls on our subordinated CMBS resulting from increased defaults, realized losses and appraisal reduction events during 2003 as compared to 2002. Cash flows from our subordinated CMBS will continue to be affected by additional defaults, realized losses, interest shortfalls, master servicer advance recoveries and appraisal reduction amounts on properties underlying

24

our subordinated CMBS. Estimated cumulative losses on our subordinated CMBS, which have been included in our estimated yields, are expected to continue to increase significantly through 2005 and will likely result in further decreased cash received from our subordinated CMBS in future years. Also, we currently face uncertainty regarding the potential impact of the outcome of events involving our most significant borrowing relationship as discussed under the caption "Financial Condition—Summary of CMBS—Specially Serviced Mortgage Loans." Our future cash flows from our subordinated CMBS, and the related fair value determination of our subordinated CMBS, could be significantly adversely affected if certain loan modifications and servicer reimbursement arrangements are not resolved satisfactorily.

        The increase in cash received from the AIM Limited Partnerships (which are four publicly traded limited partnerships that hold insured mortgages and whose general partner is one of our subsidiaries) is primarily the result of continuing prepayments of the mortgages held by the AIM Limited Partnerships and the resulting distributions to partners, including one of our wholly-owned subsidiaries. In February 2004, three of the four AIM Limited Partnerships were liquidated; accordingly, we received liquidating distributions aggregating approximately $1.8 million in February 2004. We currently expect our cash flows from the AIM Limited Partnerships to remain at a similar level in 2004 as compared to 2003 due to the liquidations.

        For our insured mortgage securities, the net cash received after debt service, which is generally excess interest and prepayment penalties, decreased during 2003 due to the significant prepayment of the mortgage securities during 2003 and 2002. We expect the net cash flows from our insured mortgages to increase during 2004 compared to 2003, due to the prepayment of the Freddie Mac funding note in March 2004 and the expected prepayment of the CMO debt by the end of the second quarter of 2004, as discussed below in "Capital Resources—Non-Recourse Debt," assuming asset balances and LIBOR remain at current levels. The repayments of the debt will increase our net interest margin related to these assets since we will be replacing higher, fixed rate debt with LIBOR-based debt, which is currently lower.

        The increase in cash received from our mezzanine loans was primarily the result of the $1.7 million repayment of one of the loans. We currently expect the cash flow from our mezzanine loans to decrease in 2004 as compared to 2003.

        The principal payments on our recourse debt decreased by approximately $30.1 million during 2003 as compared to 2002 primarily due to the refinancing of the Exit Debt in January 2003. The Bear Stearns Debt required quarterly principal amortization payments of $1.25 million through January 2004, increasing to approximately $1.9 million per quarter thereafter. If we complete the anticipated refinancing of the Bear Stearns Debt during 2004, our principal payments could be significantly higher than the existing payments required under the Bear Stearns Debt. The BREF Debt does not require principal amortization payments. During 2002, substantially all of our net cash flows were required to be used to pay principal and interest payments on the Exit Debt.

        The interest payments on our recourse debt decreased by approximately $9.5 million during 2003 due to a lower average coupon rate and lower average balance of our recourse debt following the recapitalization in January 2003. We expect our interest payments to decrease further during 2004 under our current recourse debt facilities as compared to 2003 interest payments, assuming LIBOR remains constant. If we complete the anticipated refinancing during 2004, our interest payments could be significantly higher than the interest payments currently required under the Bear Stearns Debt.

        We made preferred dividend payments of approximately $12.2 million during the year ended December 31, 2003 following the Board's decision to pay all previously deferred preferred stock dividends and current dividends during 2003. We expect our total preferred dividend payments to decrease in 2004 as compared to 2003 since we will only be paying current dividends in 2004.

25

        As detailed in the table above, we made payments for general and administrative expenses, executive contract terminations and severance, the BREF maintenance fee and the interest rate swap during 2003 and 2002. See further discussion of these income statement items in our discussion of results of operations in 2003 compared to 2002.

2003 compared to 2002

        Net cash provided by operating activities decreased by approximately $36.1 million to $20.8 million during 2003 as compared to $56.9 million during 2002. The decrease was primarily attributable to us no longer being required to restrict cash due to the retirement of our Exit Debt, a decrease in cash received from our subordinated CMBS as previously discussed, $2.4 million paid to certain executives for contract terminations, and $2.1 million of severance paid to our former Chairman and former President.

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

•

a $50.3 million increase in proceeds from insured mortgage security prepayments during 2003;



•

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



•

$10.1 million of purchases of investment-grade CMBS by CMSLP during 2002; partially offset by



•

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



•

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

        Net cash used in financing activities increased by approximately $37.8 million to $169.6 million during 2003 compared to $131.8 million during 2002. The increase is primarily attributable to the payment of approximately $12.2 million in preferred stock dividends during 2003 and a $61.0 million increase in principal payments on the securitized mortgage obligations due to higher insured mortgage security prepayments as discussed previously. In connection with the January 2003 recapitalization, we repaid approximately $373.6 million of Exit Debt through the incurrence of an aggregate $330.0 million of Bear Stearns and BREF Debt, the net proceeds of $13.5 million from the issuance of common stock to BREF Fund, and $30.1 million of our available cash and liquid assets. During 2003, we also paid approximately $6.4 million of debt issuance costs, primarily in connection with the January 2003 recapitalization. During 2002, we paid $18.7 million (approximately $396,000 of which represented accrued and unpaid dividends) to redeem the Series E Preferred Stock. We redeemed all 173,000 outstanding shares of the Series E Preferred Stock at the stated redemption price of $106 per share plus accrued and unpaid dividends through and including the date of redemption. The approximate $2.2 million difference between the aggregate liquidation value, including preferred stock issuance costs, and the redemption price is reflected as a dividend on preferred stock in 2002.

2002 compared to 2001

        Net cash provided by operating activities increased by approximately $4.2 million during 2002 as compared to 2001. The increase was primarily attributable to net sales of other MBS during 2002 compared to net purchases during 2001. The 2002 results also reflect a decrease in restricted cash and accounts payable and accrued expenses following the settlement of the First Union litigation in March 2002. The 2001 decrease in receivables and other assets reflects the January 2001 receipt of funds withheld related to our interest in CMO-IV. The 2001 results also reflect a decrease in restricted cash and accounts payable and accrued expenses caused by cash outflows on the April 17, 2001 Chapter 11 effective date, including approximately $44.7 million to pay off accrued interest on debt incurred

26

prior to the Chapter 11 filing, $3.9 million to pay an emergence financing origination fee related to a portion of the Exit Debt and $7.4 million to pay accrued payables related to the Chapter 11 filing.

        Net cash provided by investing activities increased by approximately $33.3 million to $86.8 million during 2002 compared to $53.5 million during 2001. The increase was primarily attributable to:

•

a $37.8 million increase in proceeds from mortgage security prepayments during 2002;



•

$8.8 million of proceeds from the sale by CMSLP of its servicing rights (excludes reimbursement of advances, which are included in operating cash flows) during 2002; partially offset by



•

net cash of $4.4 million that CMSLP invested in investment-grade CMBS during 2002; and



•

$6.8 million of cash reflected in 2001 as a result of the consolidation of CMSLP beginning in July 2001.

        Net cash used in financing activities decreased by approximately $63.7 million to $131.8 million during 2002 compared to $195.5 million during 2001. The decrease is primarily attributable to:

•

a $119.8 million decrease in principal payments on our recourse and other non-match funded debt, including the Exit Debt, during 2002; partially offset by



•

$18.7 million paid to redeem the Series E Preferred Stock; and



•

a $37.3 million increase in principal payments on the securitized mortgage debt obligations due primarily to higher mortgage security dispositions in 2002.

        The 2001 principal payments on recourse debt include approximately $127.2 million paid on the April 17, 2001 Chapter 11 effective date, which was used to pay off a portion of the aggregate principal relating to debt incurred prior to the Chapter 11 filing.

Capital Resources

        As of December 31, 2003, our total consolidated indebtedness was $765.6 million (of which $350.0 million was recourse debt), and our shareholders' equity was approximately $291.8 million. The following discussion summarizes our existing recourse debt, hedging instruments and non-recourse debt as of December 31, 2003.

Recourse Debt

        Certain information regarding our existing recourse debt is as follows (in thousands):

        The Bear Stearns Debt is collateralized by first direct and/or indirect liens on all of our subordinated CMBS, and is subject to a number of terms, conditions and restrictions including margin requirements. The BREF Debt is collateralized by an indirect second lien on all of our subordinated CMBS and is not prepayable.

        The Bear Stearns repurchase agreement is collateralized by approximately $25 million of insured mortgage securities as of December 31, 2003. The interest rate under the Bear Stearns repurchase agreement, which is currently based on one-month LIBOR plus 10 basis points, varies by the type of

27

collateral. The Bear Stearns repurchase agreement is also subject to liquidity requirements and, in certain instances, margin requirements. We expect further borrowings under the Bear Stearns repurchase agreement during 2004, including borrowings in connection with the anticipated repayment of the Freddie Mac funding note and the CMO debt, as discussed below. For a discussion of the related risk factors, see "Business—Certain Risk Factors" under the caption "We are subject to a number of borrowing risks, including refinancing risk and margin calls".

        See Note 6 of the Notes to Consolidated Financial Statements for a more detailed description of these borrowing facilities, and see below for a discussion regarding the anticipated refinancing of the Bear Stearns Debt.

Hedging Instruments

        The following is a summary of our derivative financial instruments as of December 31, 2003 (in thousands):

        We have entered into an interest rate swap agreement to hedge the variability of the future interest payments on the anticipated CDO attributable to changes in interest rates. Our obligations to Bear Stearns under the interest rate swap documents are collateralized by certain assets as described in Note 6. Through December 31, 2003, these swaps were treated as cash flow hedges for GAAP. We have entered into three interest rate swap transactions under this agreement in which we agreed to pay Bear Stearns a weighted average fixed rate of 4.15% per annum in exchange for floating payments based on one-month LIBOR on the total notional amount of $100 million. These swaps provide for monthly interest payments which commenced November 15, 2003. We intend to terminate the swaps simultaneously with the issuance of the CDO or other refinancing transaction.

        We also maintain an interest rate cap indexed to one-month LIBOR to partially limit the adverse effects of potential rising interest rates on our variable rate secured debt. The interest rate cap provides protection to the extent interest rates, based on a readily determinable interest rate index, increase above the stated interest rate cap, in which case we would receive payments based on the difference between the index and the cap.

        See "Business—Certain Risk Factors" for a discussion of the related risk factors, under the caption "Our hedging transactions provide limited protection".

Non-Recourse Debt

        Our non-recourse debt of $415.5 million as of December 31, 2003 is collateralized, in general, by either our investment grade CMBS or certain of our insured mortgage securities that are pledged to secure the non-recourse debt. Principal payments on these obligations are required to the extent of principal payments made on the underlying investment grade CMBS or insured mortgage securities. See Note 6 of Notes to Consolidated Financial Statements for a more detailed discussion of our non-recourse debt.

        In January 2004, the face amount of our Freddie Mac funding note was reduced to approximately $25.4 million due to principal prepayments on the underlying mortgage securities. Since the face value of the debt is less than 20% of the original face value after the January 2004 payment, we have the

28

option of prepaying this debt. We prepaid this debt in March 2004 by using $1.1 million of our cash and borrowing $20.9 million under the Bear Stearns repurchase agreement. We expect to recognize a loss on extinguishment of debt of approximately $707,000 during the three months ended March 31, 2004 due to the write-off of unamortized discount and deferred fees.

        In February 2004, the face amount of the CMO debt was reduced to approximately $45.9 million due to principal prepayments on the underlying mortgage securities. Since the face value of the debt is less than 25% of the original face value after the February payment, we have the option of prepaying this debt. We expect to prepay this debt in the second quarter of 2004 by borrowing under the Bear Stearns repurchase agreement, subject to Bear's approval, and/or selling certain of the mortgage loans that collateralize the CMO debt. We will recognize a loss on extinguishment of debt upon the repayment of this debt due to the write-off of unamortized discount and deferred fees.

Anticipated Refinancing of Bear Stearns Debt

        We continue to explore a refinancing of the Bear Stearns Debt during 2004. For a discussion of the related risk factors, see "Business—Certain Risk Factors" under the caption "We are subject to a number of borrowing risks, including refinancing risk and margin calls".

Summary of Contractual Obligations

        The following table summarizes our contractual obligations as of December 31, 2003. For debt obligations, the table presents the contractual principal payments.

Payments due by period
(in thousands)

(a)

Most of these obligations relate to our securitized mortgage obligations. Payments of principal on the securitized mortgage obligations are required to the extent mortgage principal is received on the related collateral. The projected principal payments on the securitized mortgage obligations are based on the stated terms of the underlying mortgages.

        We have entered into employment agreements with three of our senior executive officers. Significant contract provisions include minimum annual base salaries, guaranteed minimum bonus payments and stock awards. These contracts are primarily "at will" employment agreements, under which we or the executive may terminate employment for any reason or no reason. If we terminate any of these executives without cause, then we are obligated to pay the executive as specified in their individual contracts. As of December 31, 2003, minimum aggregate severance payments payable by us was approximately $200,000.

Results of Operations

2003 compared to 2002

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

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        2003 results include:

•

approximately $14.7 million of impairment charges related to certain subordinated CMBS;



•

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



•

approximately $3.2 million of recapitalization expenses;



•

approximately $2.9 million in executive contract termination expenses;



•

approximately $3.3 million of additional amortization expense on collateralized mortgage obligations;



•

approximately $1.9 million in hedge ineffectiveness expense; and



•

approximately $3.1 million of additional interest expense during the 45 day redemption notice period for the Series A and Series B Senior Secured Notes.

        2002 results include:

•

approximately $70.2 million of impairment charges related to certain subordinated CMBS;



•

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



•

approximately $4.9 million from the gain on the sale by CMSLP of master and direct servicing rights;



•

approximately $2.8 million of additional amortization expense on collateralized mortgage obligations;



•

approximately $1.0 million of recapitalization expenses; and



•

approximately $2.2 million reflected as an additional dividend on preferred stock in connection with the redemption of the Series E Preferred Stock (representing the difference between the aggregate liquidation value, including the initial preferred stock issuance costs, and the redemption price).

Net Interest Margin

        Net interest margin increased by approximately $2.9 million to $33.6 million during 2003 compared to $30.7 million during 2002, primarily due to reduced borrowing costs related to the January 2003 recapitalization, partially offset by additional interest expense related to discount amortization of our collateralized mortgage obligations, as discussed below.

Interest Income—CMBS

        Interest income from investment grade CMBS did not change significantly during 2003 as compared to 2002. Interest income from subordinated CMBS decreased by approximately $12.0 million, or 16%, to $62.6 million during 2003 as compared to $74.6 million during 2002, primarily due to changes in our loss estimates related to CMBS during 2002 and 2003 and the resulting reduction in interest income on CMBS. GAAP require that yields on CMBS be recalculated and revised as estimated future cash flows change. The revised yield on CMBS is based on the current amortized cost (adjusted for impairment) and the revised future cash flows, including the assumed timing and amount of future defaults and credit losses. The revised weighted average yield as of January 1, 2004, 2003, and 2002 was 11.9%, 11.6% and 12.4%, respectively.

        The effective interest method of recognizing interest income on CMBS results in income recognition that differs from cash received. For the year ended December 31, 2003, we recognized

30

approximately $11.0 million of discount amortization, partially offset by approximately $3.3 million of cash received in excess of income recognized on subordinated CMBS due to the effective interest method. For the year ended December 31, 2002, we recognized approximately $11.4 million of discount amortization, partially offset by approximately $2.9 million of cash received in excess of income recognized on subordinated CMBS due to the effective interest method. The net effect of the discount amortization and the cash received in excess of income is an adjustment to the basis of our subordinated CMBS.

Interest Income—Insured Mortgage Securities

        Interest income from insured mortgage securities decreased by approximately $8.3 million, or 35%, to $15.5 million during 2003 from $23.8 million during 2002. This decrease was principally due to the prepayment or sale of approximately 45% of the total insured mortgage portfolio from December 31, 2002 through December 31, 2003. The prepayment activity corresponds with the low mortgage interest rate environment during this period. These prepayments result in corresponding reductions in the outstanding principal balances of the collateralized mortgage obligations-insured mortgage securities and the related interest expense.

Interest Expense

        Interest expense of approximately $70.8 million for 2003 was 24% lower than the interest expense of approximately $93.7 million for 2002. The decrease is attributable to a lower average debt balance during 2003 ($849 million) compared to 2002 ($975 million), and a lower average effective interest rate on total debt outstanding during 2003 (8.2%) compared to 2002 (9.5%). These decreases were partially offset by additional amortization on the collateralized mortgage obligations as discussed below.

        The overall weighted average effective interest rate on the Bear Stearns Debt and BREF Debt was 5.8% for the year ended December 31, 2003, and the weighted average coupon (pay) rate on the Bear Stearns Debt and BREF Debt was 4.5%, reflecting the significant reduction in borrowing costs related to the January 2003 recapitalization. The difference in the weighted average effective interest rate and the weighted average pay rate primarily relates to our deferral of two-thirds of the interest on the BREF Debt during the first 5 months of the BREF Debt. The weighted average effective interest rate on the Exit Debt was 10.4% for the year ended December 31, 2002. The weighted average pay rate on the Exit Debt was 8.0% during the same period.

        On January 23, 2003, we deposited amounts with the indenture trustee to pay all principal and interest on our outstanding Series A and Series B Senior Secured Notes on the March 10, 2003 redemption date. This redemption required deposit of the redemption amount 45 days prior to the actual redemption of the notes. The 45 day notice period resulted in approximately $3.1 million of additional interest expense during the period January 23, 2003 through March 10, 2003 since the Bear Stearns Debt, BREF Debt, and the Series A and B secured notes were outstanding at the same time.

        Interest expense on the collateralized mortgage obligations-insured mortgage securities decreased following significant prepayments of mortgages underlying the insured mortgage securities, as discussed previously. This decrease in interest expense was partially offset by approximately $3.3 million of additional discount and deferred fees amortization expenses during 2003, which are reflected as interest expense, compared to approximately $2.8 million of additional amortization expenses during 2002. The increase in amortization is the result of the mortgages prepaying faster than anticipated and increases in our assumed prepayment speed which, under the effective interest method of recognizing interest expense, required an adjustment to cumulative amortization recorded through interest expense.

        During the years ended December 31, 2003 and 2002, we recognized hedge expense of approximately $1.0 million and $1.1 million, respectively, on our interest rate caps. Our interest rate cap, which matured on November 3, 2003 (which we purchased in April 2002), set one-month LIBOR

31

at a rate of 3.25%. On October 31, 2003, we purchased an interest rate cap with a notional amount of $50 million, maturity on November 4, 2004, and capping one-month LIBOR at 2.25%. As of December 31, 2003, the one-month LIBOR rate was 1.12%.

General and Administrative Expenses

        General and administrative expenses increased by approximately $1.4 million to $12.0 million during 2003 as compared to $10.6 million during 2002 primarily due to an increase in professional fees incurred in connection with the interest rate swap and related netting agreement and corporate governance compliance due to the Sarbanes-Oxley Act of 2002, and an increase in salary expenses. We expect a reduction in general and administrative expenses during 2004, excluding any additional general and administrative expenses that may result from our new business initiatives, primarily due to anticipated decreases in corporate legal fees and the realignment of executive cash compensation. We are currently estimating general and administrative expenses to be $10 million during 2004, excluding any additional general and administrative expenses that may result from our new business initiatives.

Mortgage Servicing

        The following is a summary of the consolidated results of operations of CMSLP (in thousands):

        The net loss from CMSLP of $(1.7) million for the year 2003 compares to the net income from CMSLP of $4.9 million for 2002. CMSLP's 2002 results include a $4.9 million gain from the sale of servicing rights. CMSLP's total revenue decreased by approximately $1.5 million, or 14%, to approximately $9.5 million during 2003. This decrease is primarily the result of reduced mortgage, servicing income, other servicing revenue and interest income earned on cash and investments. General and administrative expenses were $9.2 million and $8.9 million during 2003 and 2002, respectively. The increase in general and administrative expenses was primarily attributable to increased expenses related to additional resources dedicated to special servicing resolutions and severance payments made in connection with managerial changes.

        During 2003, amortization, depreciation and impairment was approximately $1.8 million as compared to $2.2 million during 2002. This $362,000 decrease was primarily the result of accelerated prepayments on the AIM Limited Partnerships' insured mortgages and a lower balance of depreciable assets in 2003 as compared to 2002, which reduced amortization expense. During 2003 and 2002, the AIM Limited Partnerships experienced a significant amount of prepayments of their insured mortgages which reduced CMSLP's cash flows from its sub-advisory contracts with the AIM Limited Partnerships. As a result, in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we evaluated CMSLP's investment in the sub-advisory contracts for impairment. We reduced the value of CMSLP's investment in the sub-advisory contracts with the AIM Limited Partnerships and recorded an impairment charge of approximately $499,000 and $340,000 during 2003 and 2002, respectively.

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        In April 2003, we restructured CMSLP's property servicing group resulting in the termination of 10 employees. In conjunction with this restructuring, we have outsourced substantially all of our contractual property servicing duties related to the labor-intensive tasks of financial statement collection and analysis and property inspection performance. The outsourcing was completed in February 2004. This outsourcing does not relieve us of any of our contractual obligations or reduce any of our rights as property servicer, since CMSLP remains the property servicer of record, but it does relieve us of the administrative task of collecting financial operating data. This will allow the remaining resources in surveillance to focus more on collateral analysis. For the outsourced loans, CMSLP coordinates the delivery of monthly reports and inspections with the third-party servicers. For the portfolios for which the third-party servicer is not also the master servicer, CMSLP reviews and approves the reports from these servicers prior to submission by CMSLP to the trustees.

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

Income Tax Benefit (Expense)

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

Equity in Earnings (Losses) from Investments

        Total equity in earnings (losses) from investments of approximately $142,000 and $(42,000) for the years ended December 31, 2003 and 2002, respectively, includes our net equity from the AIM Limited Partnerships and the net equity from our 20% limited partnership interest in the advisor to the AIM Limited Partnerships during these periods. The 2003 and 2002 results also include impairment charges on our equity investment in the advisor to the AIM Limited Partnerships. These impairment charges of $233,000 and $460,000 relate to significant prepayments of the insured mortgages in the AIM Limited Partnerships' portfolios during the years ended December 31, 2003 and 2002, respectively. On a comparative basis, the net equity from the AIM Limited Partnerships decreased primarily due to a reduction in the AIM Limited Partnerships' mortgage assets. Three of the AIM Limited Partnerships (AIM 84, AIM 86 and AIM 88) were liquidated in February 2004, resulting in an aggregate liquidating distribution to us of approximately $1.8 million.

Other Income

        Other income decreased by approximately $1.3 million to $1.3 million during 2003 from $2.6 million during 2002. This decrease was primarily attributable to lower interest income earned on reduced cash balances during 2003 as compared to 2002.

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        We own a shopping center in Orlando, Florida, which we account for as real estate owned. The following is a summary of the financial results of the shopping center (in thousands):

        The other, net amount is included in other income. Interest expense and depreciation expense are included in their respective captions in our Consolidated Statements of Income. We have been working to reposition and stabilize this asset to increase its value, although we are also considering other alternatives.

Impairment on Subordinated CMBS

        Impairment on subordinated CMBS decreased to $14.7 million during 2003 compared to $70.2 million during 2002. As of December 31, 2003, the projected loss severities of certain of the underlying mortgage loans have increased which has resulted in an increase in our overall expected loss estimate related to our subordinated CMBS to $581 million. This revision to the overall expected loss estimate is primarily the result of increased projected losses due to lower internal estimates of values on properties underlying certain mortgage loans and real estate owned by underlying trusts, and, in some cases, changes in the timing of resolution and disposition of certain specially serviced assets, which when combined, has resulted in higher projected loss severities on certain loans and real estate owned by underlying trusts currently or anticipated to be in special servicing. The primary reasons for lower estimates of value include the poor performance of certain properties and related markets and changes to workout negotiations due, in large part, to the softness in the economy and the lag typically associated with real estate fundamentals, the continued slowdown in travel and, in some cases, over-supply of hotel properties, and a shift in retail activity in some markets. There can be no assurance that our revised overall expected loss estimate of $581 million will not be exceeded as a result of additional or adverse events or circumstances.

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

        During 2002, we also revised our overall expected loss estimate related to our subordinated CMBS. The revisions to the overall expected loss estimate during 2002 were primarily the result of the same factors as those described above. As we determined that there had been an adverse change in expected future cash flows, we believed some of our CMBS had been impaired during 2002 and recorded other than temporary impairment charges aggregating $70.2 million through the income statement during 2002.

        For further discussion of our loss estimate see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Summary of CMBS".

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BREF Maintenance Fee

        Pursuant to the Investment Agreement with Brascan Real Estate Financial Investments LLC, which we refer to as BREF Investments, we are obligated to pay BREF Investments a quarterly maintenance fee of $434,000 through January 2006. The expense of approximately $1.7 million during 2003 represents the maintenance fee for the period January 14 through December 31, 2003.

Hedge Ineffectiveness Expense

        As previously stated, during 2003, we entered into a total of three interest rate swaps to hedge the variability of the future interest payments on the anticipated CDO attributable to future changes in interest rates. Through December 31, 2003, these swaps are treated as cash flow hedges for GAAP. Under these swaps, we agreed to pay Bear Stearns a weighted average fixed interest rate of 4.15% per annum in exchange for floating rate payments based on one-month LIBOR on the total notional amount of $100 million. These swaps were effective on October 15, 2003, terminate on October 15, 2013 and provide for monthly interest payments commencing November 15, 2003. On November 15, 2003, we began making monthly payments to Bear Stearns equal to the difference between the weighted average swap rate of 4.15% per annum and the then current one-month LIBOR rate, on the notional amount of $100 million. We made actual payments of approximately $501,000 during 2003. The interest rate swaps were designated to hedge future interest payments on the anticipated CDO. As the expected date of the CDO has changed, we recognized approximately $1.9 million of hedge ineffectiveness during the year ended December 31, 2003, in accordance with SFAS No. 133. The $1.9 million expense represents the present value of the expected payments during the period of delay. We have an asset of approximately $3.4 million in Other Assets as of December 31, 2003, representing the aggregate fair value of the interest rate swaps. During the first quarter of 2004, we have started exploring other refinancing alternatives, including the CDO. As a result, we will begin reflecting changes in the fair value of the swaps through earnings as hedge ineffectiveness in 2004.

Executive Contract Termination Costs

        In August 2003, the employment contracts for former executive officers David Iannarone and Brian Hanson, and Cynthia Azzara expired and were not renewed. These contracts were put into place in 2001 to ensure management continuity following our emergence from Chapter 11 proceedings and through our January 2003 recapitalization. In connection with the contract terminations, we recognized approximately $1.0 million of executive contract termination expenses for each of Mr. Iannarone and Ms. Azzara and approximately $825,000 of executive contract termination expense related to severance and related benefit payments for Mr. Hanson. Mr. Iannarone and Ms. Azzara were each paid their contract termination payments during the year ended December 31, 2003. Approximately $399,000 of Mr. Hanson's payments was made during the year ended December 31, 2003, and approximately $414,000 was paid in January 2004 in accordance with the terms of his terminated employment agreement.

        Ms. Azzara has continued with us as an "at will" employee and was promoted to Executive Vice President, Chief Financial Officer and Treasurer. Mr. Hanson was subsequently rehired as an "at will" employee, as Vice President, Portfolio Management, effective January 1, 2004. Mr. Iannarone resigned his position as Executive Vice President, Legal and Deal Management effective October 24, 2003.

Recapitalization Expenses

        In connection with the January 2003 recapitalization, we amended the employment contracts of our former Chairman, William B. Dockser, and former President, H. William Willoughby, to provide for their termination on January 23, 2003. During the first quarter 2003, we recognized approximately

35

$2.6 million of expenses related to severance and related benefit payments and accelerated vesting of certain outstanding stock options held by Messrs. Dockser and Willoughby.

        We consolidated our office space in connection with our January 2003 recapitalization and, as a result, we recorded approximately $580,000 of expense for vacant office space during 2003. The accrual for the vacant space represents the fair value of lease payments through 2007, a tenant improvement allowance and a broker commission, all net of estimated sublease revenue in accordance with SFAS No. 146.

        During 2002, we recognized approximately $1.0 million of recapitalization expenses related to the services performed by our investment banking firm during the initial stages of our exploration of strategic alternatives.

Net Gain on Extinguishment of Debt

        During the three months ended March 31, 2003, we reversed approximately $7.8 million of accrued extension fees related to the Exit Debt since the debt was repaid and the extension fees were no longer payable. This reversal is reflected as a gain on extinguishment of debt in our consolidated statement of income. This reversal was partially offset by approximately $403,000 of breakage fee paid to the lender of the Exit Variable-Rate Secured Borrowing and legal fees of approximately $47,000, resulting in a net gain on extinguishment of debt of $7.3 million.

        In December 2003, we repaid our Fannie Mae funding note, which had a unpaid principal balance of approximately $24.5 million by using approximately $22.5 million available under our $200 million repurchase facility with Bear Stearns and approximately $2.0 million of our cash. In connection with the funding note repayment, we recognized a $665,000 loss on extinguishment of debt for the write-off of unamortized bond discount and deferred financing fees.

Cumulative Effect of Adoption of SFAS 142

        In 2001, the Financial Accounting Standards Board issued SFAS No. 142. SFAS No. 142, among other things, prohibits the amortization of existing goodwill and certain types of other intangible assets and establishes a new method of testing goodwill for impairment. Under SFAS No. 142, the method for testing goodwill for impairment occurs at the reporting segment level (as defined in SFAS No. 142) and is performed using a fair value based approach. SFAS No. 142 was effective for us on January 1, 2002. Effective upon adoption on January 1, 2002, we wrote off our goodwill and recorded a resulting impairment charge of approximately $9.8 million for this change in accounting principle. The goodwill relates to the Portfolio Investment reporting segment (as defined in Note 20 of the Notes to Consolidated Financial Statements). The fair value of the reporting segment was determined using a market capitalization approach, and the impairment was primarily a result of the significant decrease in the price of our common stock price since the merger of certain mortgage businesses affiliated with CRI, Inc. into CRIIMI MAE in 1995. This change in accounting principle reduced our annual amortization expense by approximately $2.8 million through June 2005. The pro forma net income and pro forma earnings per share disclosures in Note 2 of the Notes to Consolidated Financial Statements present our net income and earnings per share as if this accounting principle had been applied to those periods presented.

REIT Status and Other Tax Matters

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

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        Net Operating Loss for Tax Purposes.    We generated a net operating loss for tax purposes of approximately $84.0 million during the year ended December 31, 2003 compared to a net operating loss of approximately $83.6 million during the year ended December 31, 2002. As a result of our trader election in early 2000, we recognized a mark-to-market tax loss of approximately $478 million on certain trading assets on January 1, 2000. The January 2000 loss was recognized evenly from 2000 through 2003 for tax purposes (approximately $120 million per year).

        A summary of our 2003 and 2002 net operating loss is as follows (in millions):

Results of Operations

2002 compared to 2001

        Financial statement net loss to common shareholders for the years ended December 31, 2002 and 2001 was $(65.5) million and $(24.2) million, respectively. The significant change in the 2002 results from 2001 was primarily the result of $70.2 million of impairment charges related to certain subordinated CMBS that were recognized during 2002 compared to impairment charges of $34.7 million that were recognized during 2001.

        2002 results include:

•

approximately $70.2 million of impairment charges related to certain subordinated CMBS;



•

an approximate $9.8 million non-cash charge to write-off goodwill;



•

approximately $4.9 million from the gain on the sale by CMSLP of master and direct servicing rights;



•

approximately $2.2 million reflected as an additional dividend on preferred stock in connection with the redemption of the Series E Preferred Stock (representing the difference between the aggregate liquidation value, including the initial preferred stock issuance costs, and the redemption price); and



•

approximately $2.8 million of additional amortization expense on collateralized mortgage obligations.

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        2001 results include:

•

approximately $34.7 million of impairment charges related to certain subordinated CMBS;



•

approximately $1.9 million of net revenue due to the effect of changes in accounting principles, primarily a change in accounting for servicing revenue;



•

an aggregate of approximately $5.7 million of expenses relating to the Chapter 11 reorganization;



•

approximately $2.8 million of amortization that was recorded during the year ended December 31, 2001 on the goodwill written-off on January 1, 2002; and



•

approximately $356,000 of additional amortization expense on collateralized mortgage obligations.

Net Interest Margin

        Net interest margin decreased by approximately $4.8 million to $30.7 million during 2002 compared to $35.5 million during 2001, primarily due to a reduction in income from subordinated CMBS following decreases in the amortized cost of the subordinated CMBS, and an increase in additional interest expense related to discount amortization of our collateralized mortgage obligations. These items are discussed in further detail below.

Interest Income—CMBS

        Interest income from investment grade CMBS did not change significantly during 2002 as compared to 2001. Interest income from subordinated CMBS decreased by approximately $5.2 million, or 7%, to $74.6 million during 2002 as compared to $79.8 million during 2001 primarily due to changes in our loss estimates related to CMBS during 2002 and 2001 and the resulting reduction in interest income on CMBS. The revised weighted average yield as of January 1, 2002 and 2001 was 12.4%.

        The effective interest method of recognizing interest income on CMBS results in income recognition that differs from cash received. For the year ended December 31, 2002 we recognized approximately $11.4 million of discount amortization, partially offset by approximately $2.9 million of cash received in excess of income recognized on subordinated CMBS due to the effective interest method. For the year ended December 31, 2001, we recognized approximately $10.5 million of discount amortization, partially offset by approximately $3.5 million of cash received in excess of income recognized on subordinated CMBS due to the effective interest method. The net effect of the discount amortization and the cash received in excess of income is an adjustment to the basis of our subordinated CMBS.

Interest Income—Insured Mortgage Securities

        Interest income from insured mortgage securities decreased by approximately $5.0 million, or 17%, to $23.8 million during 2002 from $28.9 million during 2001. This decrease was principally due to the prepayment of approximately 21% of the total insured mortgage portfolio from December 31, 2001 through December 31, 2002. This prepayment activity corresponded with the low mortgage interest rate environment during this period. These prepayments resulted in corresponding reductions in the outstanding principal balances of the collateralized mortgage obligations-insured mortgage securities and the related interest expense.

Interest Expense

        Interest expense of approximately $93.7 million for 2002 was approximately $5.1 million lower than the interest expense of approximately $98.9 million for 2001. The decrease is attributable to a lower

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average debt balance during 2002 ($975 million) compared to 2001 ($1.1 billion), partially offset by a higher average effective interest rate on total debt outstanding during 2002 (9.5%) compared to 2001 (8.9%). Interest expense on the collateralized mortgage obligations-insured mortgage securities decreased following significant prepayments of mortgages underlying the insured mortgage securities, which was partially offset by approximately $2.8 million of additional discount and deferred cost amortization expenses during 2002. These additional amortization expenses are the result of the mortgages prepaying faster than previously anticipated and increases in our assumed prepayment speed during 2002 which, under the effective interest method of recognizing interest expense, required an adjustment to cumulative interest expense.

        The overall weighted average effective interest rate and weighted average coupon rate on the Exit Debt was 10.4% and 8.0%, respectively, during 2002. The overall weighted average effective interest rate and weighted average coupon rate on the Exit Debt was 11.1% and 8.9%, respectively, for the period April 17, 2001 to December 31, 2001. The difference in the Exit Debt's weighted average effective interest rate and the weighted average coupon rate primarily related to the accrual of estimated extension fees and the accrued interest related to the 7% per annum, accreting interest on the Series B Senior Secured Notes, both of which are included in the weighted average effective interest rate, but not included in the weighted average coupon rate.

        During 2002 and 2001, we recognized hedging expense through earnings of approximately $1.1 million on our interest rate caps. In addition, we recognized a $135,000 loss through earnings during 2001 due to the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".

General and Administrative Expenses

        General and administrative expenses decreased by approximately $333,000 to $10.6 million during 2002 as compared to $11.0 million during 2001 primarily due to a decrease in legal fees in 2002, partially offset by an increase in employment costs and higher directors and officers liability insurance premiums in 2002.

Depreciation and Amortization

        Depreciation and amortization decreased by approximately $2.6 million to $1.1 million during 2002 as compared to $3.7 million during 2001. The decrease is primarily attributable to the adoption of SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 reduced our annual amortization expense by approximately $2.8 million. See further discussion above in 2003 compared to 2002 under the caption "Cumulative Effect of Adoption of SFAS 142".

Mortgage Servicing

        In July 2001, we began accounting for CMSLP on a consolidated basis due to a reorganization which resulted in the partnership interests of CMSLP being held by two of our wholly owned TRSs. Prior to July 2001, we accounted for CMSLP under the equity method as we did not control the voting common stock of the general partner of CMSLP. CMSLP's assets, liabilities, revenues and expenses are labeled as "servicing" on our consolidated financial statements.

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        The following is a summary of the consolidated results of operations of CMSLP (in thousands):

        The net income from CMSLP of $4.9 million for the year ended December 31, 2002 compares to the aggregate of the net equity in losses from CMSLP/CRIIMI MAE Services, Inc. (or CMSI) of $(2.3) million for the year ended December 31, 2001 (as summarized below) and the net loss from CMSLP of $(1.0) million for the six months ended December 31, 2001. CMSLP's net income of $4.9 million during 2002 includes a $4.9 million gain from the sale of servicing rights and $189,000 of restructuring expenses. CMSLP's total revenue decreased by approximately $1.5 million to approximately $11.0 million during 2002 compared to $12.5 million during 2001 (includes full year 2001 results). This decrease is primarily the result of the sale of servicing rights which reduced mortgage servicing income and interest income earned on the escrow balances, partially offset by higher revenue from special servicing. General and administrative expenses were $8.9 million and $11.9 million (includes full year 2001 results) during the years ended December 31, 2002 and 2001, respectively. The decrease in general and administrative expenses was primarily attributable to the staff reductions that occurred in the fourth quarter of 2001 and the first quarter of 2002 following CMSLP's sale of its CMBS master and direct servicing contracts, as discussed below.

        During 2002, amortization, depreciation and impairment was approximately $2.2 million as compared to $3.4 million (includes full year 2001 results) during 2001. This $1.2 million decrease was primarily the result of the 2002 sale of servicing rights, which reduced amortization expense, and lower impairment on CMBS held by CMSLP during 2002 as compared to 2001. The decrease was partially offset by an impairment charge of approximately $340,000 that was recorded on CMSLP's investment in AIM Limited Partnerships' sub-advisory contracts during 2002. See a discussion of this impairment charge in the discussion of "2003 compared to 2002".

        As previously discussed, in February 2002, CMSLP sold all of its rights and obligations under its CMBS master and direct servicing contracts. A restructuring charge of approximately $438,000 was recorded during the fourth quarter of 2001 to account for employee severance costs, non-cancelable lease costs, and other costs related to the restructuring. During 2002, additional net restructuring expenses of approximately $189,000 were recorded primarily to account for vacant office space that was taking longer to sublease than originally anticipated. CMSLP received approximately $12.4 million in cash, which included reimbursement of servicing advances, in connection with this sale.

Equity in Earnings (Losses) from Investments

        Total equity in earnings (losses) from investments for 2002 and 2001 included our net equity from the AIM Limited Partnerships and the net equity from our 20% limited partnership interest in the advisor to the AIM Limited Partnerships, and includes net equity from CMSLP/CMSI for the six months ended June 30, 2001 (since CMSLP's operations were consolidated effective July 1, 2001).

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In addition, as discussed below, the 2002 results include an impairment charge on our equity investment in the advisor to the AIM Limited Partnerships. On a comparative basis, the net equity from the AIM Limited Partnerships decreased primarily due to a reduction in the AIM Limited Partnerships' mortgage assets.

        As previously discussed, during 2002, the AIM Limited Partnerships experienced a significant amount of prepayments of their insured mortgages. These prepayments reduced cash flows on our 20% investment in the advisor to the AIM Limited Partnerships. As a result, the advisor to the AIM Limited Partnerships evaluated its investment in the advisory contracts for impairment. The advisor reduced the value of its investment in the advisory contracts to the AIM Limited Partnerships and recorded an impairment charge. We recorded our portion of the impairment charge, totaling approximately $460,000, as of December 31, 2002. This impairment charge is included in equity in earnings (losses) from investments in our Consolidated Statement of Income. This investment is included in our Portfolio Investment segment.

        The following is a summary of our equity in earnings (losses) from investments (in thousands):

Income Tax Benefit (Expense)

        During 2002, we recorded a net income tax expense of approximately $460,000. During 2001, we recorded an income tax benefit of approximately $336,000. During 2002, approximately $1.0 million of income tax expense was recognized as a result of the gain on the sale by CMSLP of its CMBS master and direct servicing rights. This tax expense of $1.0 million was partially offset by tax refunds that were not previously accrued of approximately $552,000 that were recognized during 2002. The income tax expense was incurred by our TRSs that own the partnership interests in CMSLP, which are separate taxable entities that cannot use our net operating loss carryforward to reduce their taxable income. The income tax benefit that was recognized by our TRSs during 2001 was the result of the net loss incurred by CMSLP during the period July through December 2001.

Other Income

        Other income decreased by approximately $1.3 million to $2.6 million during 2002 from $4.0 million during 2001. This decrease was primarily attributable to lower interest income earned on reduced cash balances during 2002 as compared to 2001, partially offset by an increase in net income (before interest expense and depreciation expense) from a shopping center that we account for as real estate owned, as discussed below.

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        In October 2001, one of our wholly owned subsidiaries acquired certain partnership interests in a partnership that was the obligor on a mezzanine loan payable to us in exchange for curing a default on the first mortgage loan through a cash payment of approximately $276,000. This partnership and another of our wholly owned subsidiaries own 100% of the partnership interests in the partnership which is the obligor on the first mortgage loan. The first mortgage loan is secured by a shopping center in Orlando, Florida. As a result of this acquisition, we own 100% of the partnership interests and are consolidating the partnership's financial results as of October 1, 2001. We account for these assets as real estate owned, and the real estate is being held for investment. The following is a summary of the financial results of the shopping center (in thousands):

Impairment on Subordinated CMBS

        Impairment on subordinated CMBS increased to $70.2 million during 2002 compared to $34.7 million during 2001. Although the total amount of loans in special servicing only increased slightly from $792 million as of December 31, 2001 to $811 million as of December 31, 2002, the amount of estimated total mortgage loan defaults had increased, the projected loss severities of the underlying mortgage loans currently or anticipated to be in special servicing had increased, and the timing of certain projected losses was anticipated to occur sooner than previously estimated, all of which resulted in an increase in our overall expected loss estimate related to our subordinated CMBS portfolio to $503 million as of December 31, 2002. The revisions to the overall expected loss estimate during 2002 were primarily the result of increased projected loan losses due to lower than anticipated appraisals and lower internal estimates of values on real estate owned by underlying trusts and properties underlying certain defaulted mortgage loans, which, when combined with the updated loss severity experience and increased expectation of defaults, resulted in higher projected loss severities on mortgage loans and real estate owned by underlying trusts currently or anticipated to be in special servicing. Primary reasons for lower appraisals and lower estimates of value resulting in higher projected loss severities on mortgage loans included the poor performance of certain properties and related markets, failed workout negotiations, and extended time needed to liquidate assets due, in large part, to the continued softness in the economy, the continued downturn in travel and, in some cases, over-supply of hotel properties, and a shift in retail activity in some markets, including the closing of stores by certain national and regional retailers. In addition, two significant hotel portfolios transferred into special servicing in early January 2003. The unpaid principal balances of these two hotel portfolios aggregated approximately $212.2 million. Since we determined that there had been an adverse change in expected future cash flows, we believed some of our subordinated CMBS had been impaired as of June 30, 2002, September 30, 2002 and December 31, 2002. As the fair values of the impaired subordinated CMBS aggregated approximately $5.2 million, $29.9 million and $35.1 million below the amortized cost basis as of June 30, 2002, September 30, 2002 and December 31, 2002, respectively, we recorded other than temporary impairment charges through the income statement aggregating $70.2 million during the second, third and fourth quarters of 2002. The impairment charges reduced our basis in those impaired bonds (see also "Interest Income—CMBS").

        During 2001, we also revised our overall expected loss estimate related to our subordinated CMBS portfolio. The revisions to the overall expected loss estimate during 2001 were primarily the result of

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the continued slowing U.S. economy and recession exacerbated by the terrorist attacks on September 11, 2001 and subsequent threats of terrorism, which were principal causes of greater than previously anticipated monetary defaults on the underlying mortgage loans and lower than previously anticipated appraisal amounts on properties underlying certain defaulted loans. These factors increased the estimated principal loss on the mortgage loans. As we determined that there had been an adverse change in expected future cash flows, we believed some of our subordinated CMBS had been impaired during 2001. As the fair value of the impaired subordinated CMBS was below the amortized cost during 2001, we recorded other than temporary impairment charges through the income statement aggregating $34.7 million during 2001.

Reorganization Items

        During 2001, we recorded reorganization items due to the Chapter 11 filings of CRIIMI MAE Inc., CRIIMI MAE Management, Inc., and CRIIMI MAE Holdings II, L.P. as follows (in thousands):

        We did not recognize any reorganization expense in 2002.

Emergence Financing Origination Fee

        In connection with the emergence from Chapter 11 in April 2001, we paid a one-time, emergence financing origination fee of approximately $3.9 million related to the Exit Variable-Rate Secured Borrowing. This fee was required to be expensed immediately under GAAP.

Cumulative Effect of Adoption of SFAS 142

        See discussion of this item in "2003 compared to 2002".

Cumulative Effect of Change in Accounting Principle Related to Servicing Revenue

        As of July 1, 2001, CMSLP changed its accounting policy related to the recognition of special servicing fee revenue. Special servicing fees are paid to CMSLP when mortgage loans collateralizing our CMBS are in default. Historically, CMSLP had deferred special servicing fee revenue and recorded that revenue into earnings using the method consistent with our policy of recognizing interest income over the life of our CMBS on the level yield basis. CMSLP changed its accounting policy to recognize the special servicing fees in earnings on a current basis as we believe this policy better matches the special servicing fees CMSLP earns with the direct costs expended for performing its special servicing obligations. The CMBS and special servicing contracts are separate legal instruments or contracts.

        We were required to reflect this change in accounting principle as a cumulative catch-up as of January 1, 2001. As of January 1, 2001, CMSLP had approximately $2.0 million in deferred revenue related to the special servicing fee revenue. As a result, this amount was recorded in income and reflected as a cumulative change in accounting principle for the year ended December 31, 2001. The results of operations for the year ended December 31, 2001 reflect the recognition of special servicing fee revenue on a current basis. As previously discussed, prior to July 1, 2001, CMSLP was accounted for using the equity method and, as a result, the impact of the new accounting principle (except for the

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cumulative catch-up) is reflected in equity in earnings (losses) from investments for the six months ended June 30, 2001 and on a consolidated basis for the six months ended December 31, 2001.

Net Operating Loss for Tax Purposes

        We generated a net operating loss for tax purposes of approximately $83.6 million for the year ended December 31, 2002 compared to a net operating loss of approximately $90.6 million in 2001, as follows:

(1)

Taxable income for the year ended December 31, 2001 includes an approximate $8.6 million loss on certain trading securities in connection with the transfer of certain trading securities on April 17, 2001 to CBO REIT following the reorganization effected to facilitate the collateral structure for the Exit Debt. Assets transferred to CBO REIT (and subsequently transferred to CBO REIT II in January 2003) are no longer required to be marked-to-market on a tax basis.

Financial Condition

Summary of Cash Position and Shareholders' Equity

        As of December 31, 2003, our cash and cash equivalents aggregated approximately $21.7 million, including approximately $4.4 million held by CMSLP. In addition to our cash, we had additional liquidity at December 31, 2003 comprised of $3.9 million in Other MBS which are included elsewhere in our balance sheet. As of March 5, 2004, our liquidity included approximately $26.6 million of cash and cash equivalents and approximately $4.1 million of Other MBS.

        As of December 31, 2003 and 2002, shareholders' equity was approximately $291.8 million or $14.91 per diluted share and approximately $291.7 million or $16.32 per diluted share, respectively. The decrease in book value per diluted share is primarily the result of the common shares issued in connection with the January 2003 recapitalization. These diluted book value per share amounts are based on shareholders' equity presented in accordance with GAAP. The December 2003 amounts include, among other things, approximately $36.3 million of net assets related to our CMBS rated A+ through BBB, which we do not actually own, but are required by GAAP to be included on our balance

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sheet (see "Summary of CMBS" below for a further discussion). These investment grade CMBS, which aggregate approximately $325.3 million at December 31, 2003, are reflected at fair value and the related match-funded debt, which aggregates approximately $289.0 million at December 31, 2003, is reflected at amortized cost, in each case in accordance with GAAP.

Summary of CMBS

        As of December 31, 2003, our assets, in accordance with GAAP, include CMBS with an aggregate face amount of approximately $1.5 billion rated from A+ to D and unrated. Such CMBS had an aggregate fair value of approximately $837 million (representing approximately 78% of our total consolidated assets) and an aggregate amortized cost of approximately $750 million. Such CMBS represent investments in securities issued in connection with CBO-1, CBO-2 and Nomura Asset Securities Corporation Series 1998-D6 (or Nomura). The following is a summary of the ratings of our CMBS as of December 31, 2003 (in millions):

(1)

Ratings are provided by Standard & Poor's.

(2)

Represents investment grade securities that we reflect as assets on our balance sheet as a result of the issuance of the CBO-2 transaction. As indicated in footnote 4 to the table below, GAAP requires both these assets (reflected as "CMBS pledged to Secure Securitized Mortgage Obligation-CMBS") and their related liabilities (reflected as "Collateralized Bond Obligations—CMBS") to be reflected on our balance sheet. As of December 31, 2003, the fair value of these assets as reflected in our balance sheet was approximately $325.3 million and the amortized cost of the debt as reflected in our balance sheet was approximately $289.0 million. All cash flows related to the investment grade CMBS are used to service the corresponding securitized mortgage obligations. As a result, we currently receive no cash flows from the investment grade CMBS.

        As of December 31, 2003, the weighted average pay rate and the loss adjusted weighted average life (based on face amount) of the investment grade securities was 7.0% and 7.9 years, respectively. The weighted average pay rate and the loss adjusted weighted average life (based on face amount) of the

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BB+ through unrated CMBS securities, sometimes referred to as the retained portfolio, were 5.2% and 11.0 years, respectively. The aggregate investment by the rating of the CMBS is as follows:

(1)

The loss adjusted weighted average life represents the weighted average expected life of the CMBS based on our current estimate of future losses. As of December 31, 2003, the fair values of the B-, CCC, D and the unrated/issuer's equity were derived primarily from interest cash flow anticipated to be received since our current loss expectation assumes that the full principal amount of these securities will not be recovered. See also "Advance Limitations, Appraisal Reductions and Losses on CMBS" below.

(2)

The CMBS experience interest shortfalls when the weighted average net coupon rate on the underlying CMBS is less than the weighted average stated coupon payments on our subordinated CMBS. Such interest shortfalls will continue to accumulate until they are repaid through either excess interest and/or recoveries on the underlying CMBS or a re-characterization of principal cash flows, in which case they may be realized as a loss of principal on the subordinated CMBS. Such anticipated losses, including shortfalls, have been taken into consideration in the calculations of fair market values and yields to maturity used to recognize interest income as of December 31, 2003.

(3)

The unrated/issuer's equity subordinated CMBS from CBO-1 and CBO-2 currently do not have a stated coupon rate since these securities are only entitled to the residual cash flow payments, if any, remaining after paying the securities with a higher payment priority. As a result, effective coupon rates on these securities are highly sensitive to the monthly cash flow payments received from the underlying CMBS that represent the collateral for CBO-1 and CBO-2.

(4)

In connection with CBO-2, $62.6 million (currently A+ rated) and $60.0 million (currently BBB+ rated) face amount of investment grade CMBS were sold with call options and $345 million (currently A+ rated) face amount were sold without call options. Also in connection with CBO-2, in May 1998, we initially retained $90.6 million (currently BBB+ rated) and $115.2 million (currently BBB rated) face amount of CMBS, both with call options, with the intention to sell these CMBS at a later date. Such sale occurred March 5, 1999. Since we retained call options on certain sold CMBS (currently rated A+, BBB+ and BBB bonds), we did not surrender control of these CMBS pursuant to the requirements of SFAS No. 125, and thus these CMBS are accounted for as a financing and not a sale. Since the CBO-2 transaction is recorded as a partial financing and a partial sale, we are deemed to have retained these CMBS with call options issued in connection with CBO-2, from which we currently receive no cash flows, and are required to reflect them as CMBS on the balance sheet.

(5)

Amortized cost reflects approximately $14.7 million of impairment charges related to the unrated/issuer's equity bonds in CBO-2 and Nomura, and the CCC bond and the D bond in CBO-2, which were recognized during the year ended December 31, 2003. These impairment charges are in addition to the cumulative impairment charges of approximately $248.4 million that were recognized through December 31, 2002. See discussion of the impairment charges in "Impairment on CMBS".

(6)

See Notes 1 and 8 to Notes to Consolidated Financial Statements for information regarding the subordinated CMBS for tax purposes.

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(7)

As of December 31, 2003, the aggregate fair values of the CBO-1, CBO-2 and Nomura bonds were approximately $18.7 million, $813.6 million and $4.7 million, respectively.

(8)

As a result of the estimated loss of principal on these CMBS, the fair values and discount rates of these CMBS are based on a loss adjusted yield to maturity.

(9)

Although the principal balance of the D bond in CBO-2 is expected to be outstanding for approximately 25 years, the bond is not expected to receive any cash flows beyond the next 18 months.

(10)

In November 2003, the B- bond in CBO-2 was downgraded to D by Standard & Poor's.

Determination of Fair Value of CMBS

        Our determination of fair values for our CMBS portfolio is a process that requires significant judgements and estimates. The process begins with the compilation and evaluation of pricing information (such as nominal spreads to U.S. Treasury securities or nominal yields) that, in our view, is commensurate with the market's perception of value and risk of comparable assets. We use a variety of sources to compile such pricing information including: (i) recent offerings and/or secondary trades of comparable CMBS (i.e., securities comparable to our CMBS and/or to the CMBS (or collateral) underlying our CMBS issued in connection with CBO-1 and CBO-2), (ii) communications with dealers and active CMBS investors and/or advisors regarding the pricing and valuation of our securities and comparable securities, (iii) institutionally available research reports, (iv) analyses prepared by the nationally recognized rating organizations responsible for the initial rating assessment and on-going surveillance of such CMBS, and (v) other qualitative and quantitative factors that may impact the value of the CMBS such as the market's perception of the issuers of the CMBS and the credit fundamentals of the commercial properties securing each pool of underlying commercial mortgage loans. We make further adjustments to such pricing information based on our specific knowledge of our CMBS and the impact of relevant events, which is then used to determine the fair value of our CMBS using a discounted cash flow approach. Expected future gross cash flows are discounted at assumed market yields for our CMBS rated A+ through B, depending on the rating. The fair value for those CMBS incurring principal losses and interest shortfalls (i.e., B-rated bonds through our unrated/issuer's equity) based on our overall expected loss estimate are valued at a loss adjusted yield to maturity that, in our view, is commensurate with the market's perception of the value and risk of comparable securities, using a discounted cash flow approach. Such anticipated principal losses and interest shortfalls, as well as the timing and amount of potential recoveries of such shortfalls, are critical estimates and have been taken into consideration in the calculation of fair values and yields to maturity used to recognize interest income as of December 31, 2003. We have disclosed the range of discount rates by rating category used in determining the fair values as of December 31, 2003 in the table above.

        The liquidity of the subordinated CMBS market has historically been limited. Additionally, during adverse market conditions, the liquidity of such market has been severely limited. For this reason, among others, management's estimate of the value of our subordinated CMBS could vary significantly from the value that could be realized in a current transaction.

Mortgage Loan Pool

        We have $15.3 billion and $17.4 billion of seasoned commercial mortgage loans underlying our subordinated CMBS as of December 31, 2003 and 2002, respectively. This decline in unpaid principal balance is primarily due to prepayments, pay-offs at maturity and liquidations of certain underlying mortgage loans, and to a lesser extent, normal loan amortization related to the underlying mortgage

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loans. The commercial mortgage loans are secured by properties of the types and in the geographic locations identified below:

(i)

Based on a percentage of the total unpaid principal balance of the underlying loans.

(ii)

No significant concentration by region.

(iii)

No other individual state makes up more than 5% of the total.

(iv)

Our ownership interest in one of the 20 CMBS transactions underlying CBO-2 includes subordinated CMBS in which our exposure to losses arising from certain healthcare and senior housing mortgage loans is limited by other subordinated CMBS (referred to herein as the "Subordinated Healthcare/Senior-Housing CMBS"). These other CMBS are not owned by us and are subordinate to our CMBS in this transaction. As a result, our investment in such underlying CMBS will only be affected if interest shortfalls and/or realized losses on such healthcare and senior housing mortgage loans are in excess of the other Subordinated Healthcare/Senior-Housing CMBS. We currently estimate that the interest shortfalls and/or realized losses on such healthcare and senior housing mortgage loans will exceed the Subordinated Healthcare/Senior Housing CMBS. The principal balance of the Subordinated Healthcare/Senior Housing CMBS as of December 31, 2003 is approximately $3.4 million. As of December 2003, the aggregate principal balance of healthcare and senior housing mortgage loans, underlying the Subordinated Healthcare/Senior Housing CMBS, that are specially serviced by another special servicer, and therefore not in our special servicing loan balance, is approximately $83 million.

Specially Serviced Mortgage Loans

        CMSLP performs special servicing on the loans underlying our subordinated CMBS. A special servicer typically provides asset management and resolution services with respect to nonperforming or underperforming loans within a pool of mortgage loans. When serving as special servicer of a mortgage loan pool, CMSLP has the authority, subject to certain restrictions in the applicable CMBS pooling and servicing documents, to deal directly with any borrower that fails to perform under certain terms of its mortgage loan, including the failure to make payments, and to manage any loan workouts and foreclosures. As special servicer, CMSLP earns fee income on services provided in connection with any loan servicing function transferred to it from the master servicer. We believe that because we own the first loss unrated or lowest rated bond of virtually all of the CMBS transactions underlying our subordinated CMBS, we have an incentive to efficiently and effectively resolve any loan workouts. As

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of December 31, 2003 and 2002, specially serviced mortgage loans included in the commercial mortgage loans described above are as follows: