  The primary radiation generated in the central continuum-forming region of
Active Galactic Nuclei can be reprocessed by very dense, small-scale clouds
that are optically-thin to Thomson scattering. In spite of the extreme
conditions expected to prevail in this innermost, central environment, the
radiative clouds can survive and maintain cool temperatures relative to the
ambient emitting region by means of magnetic confinement. Motivated by these
ideas, we present a detailed quantitative study of such clouds, explicitly
describing the physical properties they can attain under thermal and radiative
equilibrium conditions. We also discuss the thermal stability of the gas in
comparison to that of other reprocessing material thought to reside at larger
distances from the central source. We construct a model to predict the emergent
spectra from a source region containing dense clouds which absorb and reemit
the primary radiation generated therein. Our predicted spectra show the
following two important results: (i) the reprocessed flux emitted at optical/UV
energies is insufficient to account for the blue bump component in the observed
spectra; and (ii) the amount of line radiation that is emitted is at least
comparable to (and in many cases dominates) the continuum radiation. The lines
are extremely broad and tend to accumulate in the extreme ultraviolet, where
they form a peak much more prominent than that which is observed in the
optical/UV. This result is supported by current observations, which indicate
that the spectral energy distribution of radio-quiet AGN may indeed reach a
maximum in the EUV band.
