This report contains certain forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expects," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology. Such statements are subject to the risks and uncertainties more particularly described in Item 1A, under the caption "Risk Factors," in our Annual Report on Form 10-K for period ended December 31, 2008. These risks and uncertainties could cause actual results to differ materially. 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 or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.

Overview

We are a specialty finance company that focuses primarily on commercial real estate and commercial finance. We are organized and conduct our operations to qualify as a REIT under Subchapter M of the Internal Revenue Code of 1986, as amended. Our objective is to provide our stockholders with total returns over time, including quarterly distributions and capital appreciation, while seeking to manage the risks associated with our investment strategy. We invest in a combination of real estate-related assets and, to a lesser extent, higher-yielding commercial finance assets. We have financed a substantial portion of our portfolio investments through borrowing strategies seeking to match the maturities and repricing dates of our financings with the maturities and repricing dates of those investments, and have sought to mitigate interest rate risk through derivative instruments.

We are externally managed by Resource Capital Manager, Inc., which we refer to as the Manager, a wholly-owned indirect subsidiary of Resource America, Inc. (NASDAQ: REXI), or Resource America, a specialized asset management company that uses industry specific expertise to generate and administer investment opportunities for its own account and for outside investors in the commercial finance, real estate, and financial fund management sectors. As of June 30, 2009, Resource America managed approximately $14.3 billion of assets in these sectors. To provide its services, the Manager draws upon Resource America, its management team and their collective investment experience.

We generate our income primarily from the spread between the revenues we receive from our assets and the cost to finance the purchase of those assets and hedge interest rate risks. We generate revenues from the interest we earn on our whole loans, A notes, B notes, mezzanine debt, commercial mortgage-backed securities, or CMBS, bank loans, payments on equipment leases and notes and other asset-backed securities, or ABS. Historically, we have used a substantial amount of leverage to enhance our returns and we have financed each of our different asset classes with different degrees of leverage. The cost of borrowings to finance our investments comprises a significant part of our expenses. Our net income depends on our ability to control these expenses relative to our revenue. In our bank loans, CMBS, equipment leases and notes and other ABS, we historically have used warehouse facilities as a short-term financing source and collateralized debt obligations, or CDOs, and, to a lesser extent, other term financing as a long-term financing source. In our commercial real estate loan portfolio, we historically have used repurchase agreements as a short-term financing source, and CDOs and, to a lesser extent, other term financing as a long-term financing source. Our other term financing has consisted of long-term match-funded financing provided through long-term bank financing and asset-backed financing programs, depending upon market conditions and credit availability.

Ongoing problems in real estate and credit markets continue to impact our operations, particularly our ability to generate capital and financing to execute our investment strategies. These problems have also affected a number of our commercial real estate borrowers and, with respect to 18 of our commercial real estate loans, caused us to enter into loan modifications. We have increased our provision for loan and lease losses to reflect the effect of these conditions on our borrowers and have recorded both temporary and other than temporary impairments in the market valuation of the CMBS and other ABS in our investment portfolio. While we believe we have appropriately valued the assets in our investment portfolio at September 30, 2009, we cannot assure you that further impairments will not occur or that our assets will otherwise not be adversely effected by market conditions.

The events occurring in the credit markets have impacted our financing and investing strategies and, as a result, our ability to originate new investments and to grow. The market for securities issued by new securitizations collateralized by assets similar to those in our investment portfolio has largely disappeared. Since our sponsorship in June 2007 of Resource Real Estate Funding CDO 2007-1, or RREF CDO 2007-1, we have not sponsored any new securitizations and we do not expect to be able to sponsor new securitizations for the foreseeable future. Short-term financing through warehouse lines of credit and repurchase agreements has become largely unavailable and unreliable as increasing volatility in the valuation of assets similar to those we originate has increased the risk of margin calls. To reduce our exposure to margin calls or facility terminations, we have paid down repurchase agreement borrowings, by $17.0 million during the nine months ended September 30, 2009, which finance commercial real estate loans and other securities that we hold. We no longer have any outstanding short-term borrowings as a result of displacement in the credit markets. Because of rising interest rates year-to-date in 2009, we received proceeds from margin calls related to our interest rate derivatives of $2.3 million during the nine months ended September 30, 2009.

Credit market conditions and the recessionary economy have also resulted in an increasing number of loan modifications, particularly in our commercial real estate loans. Borrowers have experienced deterioration in the performance of the properties we have financed or delays in implementing their business plans. In order to assist our borrowers in effectuating their business plans, including the leasing and repositioning of the underlying assets, we have been willing to enter into loan modifications that would adapt our financing to their particular situations. The most common loan modifications have included term extensions and modest interest rate reductions through the lowering of London Interbank Offered Rate, or LIBOR, floors, offset by increased interest rate spreads over LIBOR. In exchange for the loan modifications, we have received partial principal pay-downs, new equity investment commitments in the properties from the borrowers or their principals, additional fees and other structural improvements and enhancements to the loans. In addition, in four of our loan modifications, we have reduced our future funding obligations by approximately $12.4 million in the aggregate to preserve our own liquidity. Since the beginning of 2008 through September 30, 2009, we have modified 18 commercial real estate, or CRE, loans. We expect that we may have more CRE loan modifications in the future.

Currently, we seek to manage our liquidity and originate new assets primarily through capital recycling as loan payoffs and paydowns occur and through existing capacities within our completed securitizations. The following is a summary of repayments we received during the nine months ended September 30, 2009:

? $7.0 million of commercial real estate loans paid off;

? $36.8 million of commercial real estate loans principal repayments;

? $51.3 million of bank loan principal repayments; and

? $82.4 million of bank loan sale proceeds.

As of September 30, 2009, we had $54,000 of outstanding repurchase agreements (including accrued interest) with pledged collateral of $3.9 million of CRE CDO notes which was reduced from $17.1 million of outstanding repurchase agreements (including accrued interest) with pledged collateral of $3.9 million CRE CDO notes and CRE loans of $35.8 million at December 31, 2008. On October 28, 2009, we paid-off the $54,000 of repurchase agreement debt.

We expect to continue to generate net investment income from our current investment portfolio and generate dividends for our shareholders.

As of September 30, 2009, we had invested 72% of our portfolio in commercial real estate-related assets 27% in commercial bank loans and 1% in direct financing leases and notes. As of December 31, 2008, we had invested 72% of our portfolio in commercial real estate-related assets 25% in commercial bank loans and 3% in direct financing leases and notes.

Critical Accounting Policies and Estimates

In this section, we discuss our most critical accounting policies and estimates. For a complete discussion of our critical accounting policies and estimates, see the discussion our annual report on Form 10-K for fiscal 2008 under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."

Allowance for Loan and Lease Losses

We maintain an allowance for loan and lease losses. Loans and leases held for investment are first individually evaluated for impairment, and then evaluated as a homogeneous pool of loans with substantially similar characteristics for impairment. The reviews are performed at least quarterly.

We consider a loan to be impaired when, based on current information and events, management believes it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the allowance for loan losses is increased by the amount of the excess of the amortized cost basis of the loan over its fair value. Fair value may be determined based the present value of estimated cash flows; on market price, if available; or on the fair value of the collateral less estimated disposition costs. When a loan, or a portion thereof, is considered uncollectible and pursuit of the collection is not warranted, we will record a charge-off or write-down of the loan against the allowance for credit losses.

The total balance of impaired loans and leases was $124.6 million and $23.9 million at September 30, 2009 and December 31, 2008, respectively. The balance of impaired loans and leases with a valuation allowance was $117.2 million at September 30, 2009. The balance of impaired loans without a specific valuation allowance was $7.4 million at September 30, 2009. All loans and leases deemed impaired at December 31, 2008 had an associated valuation allowance. The specific valuation allowance related to these impaired loans and leases was $44.2 million and $19.6 million at September 30, 2009 and December 31, 2008, respectively. The average balance of impaired loans and leases was $116.8 million and $24.9 million during the nine months ended September 30, 2009 and the year ended December 31, 2008, respectively. For the nine months ended September 30, 2009 and the year ended December 31, 2008, we did not recognize any income on impaired loans and leases.

An impaired loan or lease may remain on accrual status during the period in which we are pursuing repayment of the loan or lease; however, the loan or lease would be placed on non-accrual status at such time as either (i) management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan or lease becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the loan's underlying collateral approximates our carrying value of such loan. While on non-accrual status, we recognize interest income only when an actual payment is received.

The following tables show the changes in the allowance for loan and lease losses (in thousands):

            Allowance for loan loss at January 1, 2009       $  43,867
            Provision for loan loss                             31,183
            Loans charged-off                                  (15,616 )
            Recoveries                                               -
            Allowance for loan loss at September 30, 2009    $  59,434
            Allowance for lease loss at January 1, 2009      $     450
            Provision for lease loss                             1,428
            Leases charged-off                                    (978 )
            Recoveries                                               -
            Allowance for lease loss at September 30, 2009   $     900

Classifications and Valuation of Investment Securities

We follow the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We determined fair value based on quoted prices when available or, if quoted prices are not available through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The hierarchy followed defines three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 - Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between levels will be rare.

Certain assets and liabilities are measured at fair value on a recurring basis. The following is a discussion of these assets and liabilities as well as the valuation techniques applied to each for fair value measurement.

Investment securities available-for-sale are valued by taking a weighted average of the following three measures:

i. using an income approach and utilizing an appropriate current risk-adjusted, time value and projected estimated losses from default assumptions based upon underlying loan performance;

ii. quotes on similar-vintage, higher rate, more actively traded CMBS securities adjusted for the lower subordinated level of our securities; and

iii. dealer quotes on our securities for which there is not an active market.

Derivatives (interest rate swap contracts), both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. We have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following table presents information about our assets (including derivatives that are presented on a net basis) measured at fair value on a recurring basis as of September 30, 2009 and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value.

Assets and liabilities measured on a recurring basis

                                   Level 1      Level 2      Level 3       Total
Assets:
Securities available-for-sale     $       -     $      -     $ 40,599     $ 40,599
Total assets at fair value        $       -     $      -     $ 40,599     $ 40,599

Liabilities:
Derivatives (net)                 $       -     $ 15,658     $      -     $ 15,658
Total liabilities at fair value   $       -     $ 15,658     $      -     $ 15,658

The following table presents additional information about assets which are measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value.

                                                     Level 3
Beginning balance, January 1, 2009                   $ 29,260
Total gains or losses (realized/unrealized):
Included in earnings                                   (4,999 )
Purchases, sales, issuances, and settlements (net)     20,132
Included in other comprehensive income                 (3,794 )
Ending balance, September 30, 2009                   $ 40,599

We had $895,000 and $6.6 million of asset impairments recognized in our consolidated statement of operations related to other-than-temporary impairments on two securities during the three and nine months ended September 30, 2009, respectively.

Loans held for sale consist of bank loans identified for sale due to credit issues. Interest on loans held for sale is recognized according to the contractual terms of the loan and included in interest income on loans. The fair value of loans held for sale and impaired loans is based on what secondary markets are currently offering for these loans. As such, we classify loans held for sale and impaired loans as recurring Level 2. The amount of the adjustment for fair value for loans held for sale for the nine months ended September 30, 2009 was $12.7 million and is included in the consolidated statement of operations as net realized and unrealized losses on loans and investments. For loans where there is no market, the loans are measured third-party using cash flows and other valuation techniques and these loans are classified as nonrecurring Level 3. The amount of nonrecurring fair value losses for impaired loans for the nine months ended September 30, 2009 was $25.6 million and are included in the consolidated statement of operations as provision for loan and lease losses.

Results of Operations - Three and Nine Months Ended September 30, 2009 as compared to
Three and Nine Months Ended September 30, 2008

Our net income for the three months ended September 30, 2009 was $11.5 million, or $0.48 per share-basic ($0.47 per share-diluted) and our net loss for the nine months ended September 30, 2009 was $5.8 million, or ($0.24) per share (basic and diluted) as compared to net income of $88,000 or $0.00 per share (basic and diluted), and $4.2 million, or $0.17 per share (basic and diluted) for the three and nine months ended September 30, 2008.

To a large extent, the increase in net income for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 is primarily due to a gain on the extinguishment of debt of $12.7 million during the three months ended September 30, 2009.

Interest Income

The following table sets forth information relating to our interest income
recognized for the periods presented (in thousands, except percentages):

                                  Three Months Ended                        Three Months Ended
                                  September 30, 2009                        September 30, 2008
                                           Weighted Average                          Weighted Average
                          Interest                                  Interest
                           Income        Yield        Balance        Income        Yield        Balance
Interest income from
loans:
Bank loans               $    8,444       3.64%      $ 917,495     $   12,264       5.19%      $ 925,659
Commercial real estate
loans                        11,763       5.95%      $ 783,682         16,314       7.34%      $ 845,021
Total interest income
from
loans                        20,207                                    28,578

Interest income from securities:
CMBS-private placement        1,509       6.25%      $  95,334          1,062       5.68%      $  74,218
Securities
held-to-maturity                397       4.84%      $  34,256            325       5.00%      $  27,247
Total interest income
from
securities
available-for-
sale                          1,906                                     1,387

Leasing                          11       1.70%      $   2,603          1,995       8.68%      $  89,729

Interest income -
other:
Temporary investment
in over-night
repurchase
agreements                      377        N/A             N/A            352        N/A             N/A
Total interest income
- other                         377                                       352
Total interest income    $   22,501                                $   32,312

                                   Nine Months Ended                         Nine Months Ended
                                  September 30, 2009                        September 30, 2008
                                           Weighted Average                          Weighted Average
                          Interest                                  Interest
                           Income        Yield        Balance        Income        Yield        Balance
Interest income from
loans:
Bank loans               $   25,863       3.77%      $ 923,324     $   40,246       5.66%      $ 920,930
Commercial real estate
loans                        38,470       6.39%      $ 792,070         48,639       7.31%      $ 849,384
Total interest income
from
loans                        64,333                                    88,885

Interest income from securities:
Other ABS                         -        N/A           N/A               19       0.24%      $   6,000
CMBS-private placement        3,274       5.32%      $  81,281          3,382       5.50%      $  76,909
Securities
held-to-maturity              1,400       5.68%      $  32,399          1,143       6.22%      $  25,390
Total interest income
from
securities
available-for-
sale                          4,674                                     4,544

Leasing                       4,337        8.6%      $  65,300          5,946       8.68%      $  92,277

Interest income -
other:
Interest income -
other (1)                         -        N/A           N/A              997        N/A           N/A
Temporary investment
in over-night
repurchase
agreements                    1,053        N/A           N/A            1,181        N/A           N/A
Total interest income
- other                       1,053                                     2,178
Total interest income    $   74,397                                $  101,553

Interest income decreased $9.8 million (30%) and $27.2 million (27%) to $22.5 million and $74.4 million for the three and nine months ended September 30, 2009, respectively, from $32.3 million and $101.6 million for the three and nine months ended September 30, 2008, respectively. We attribute this decrease to the following:

Interest Income from Loans

Aggregate interest income from bank and commercial real estate loans decreased $8.4 million (29%) and $24.6 million (28%) to $20.2 million and $64.3 million for the three and nine months ended September 30, 2009, respectively, from $28.6 million and $88.9 million for the three and nine months ended September 30, 2008, respectively.

Bank loans generated $8.4 million and $25.9 million of interest income for the three and nine months ended September 30, 2009, respectively, as compared to $12.3 million and $40.2 million for the three and nine months ended September 30, 2008, decreases of $3.8 million (31%) and $14.4 million (36%), respectively. These decreases resulted primarily from a decrease in the weighted average rate to 3.64% and 3.77% for the three and nine months ended September 30, 2009, respectively, from 5.19% and 5.66% for the three and nine months ended September 30, 2008, respectively, primarily as a result of the decrease in LIBOR which is a reference index for the rates payable by these loans.

These decreases in LIBOR were partially offset by an increase in accretion income as a result of the purchase of assets at bigger discounts during the nine months ended September 30, 2009.

Commercial real estate loans produced $11.8 million and $38.5 million of interest income for the three and nine months ended September 30, 2009, respectively, as compared to $16.3 million and $48.6 million for the three and nine months ended September 30, 2008, respectively, decreases of $4.6 million (28%) and $10.2 million (21%), respectively. These decreases are the result of the following:

? a decrease in the weighted average balance of $61.2 million and $57.3 million on our commercial real estate loans to $783.9 million and $792.1 million for the three and nine months ended September 30, 2009, respectively, from $845.0 million and $849.4 million for the three and nine months ended September 30, 2008, respectively, primarily as a result of payoffs and paydowns and to a . . .