SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-Q

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

                  For the quarterly period ended June 30, 2006

                                       OR

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

              For the transition period from: ________ to ________

                        Commission File Number 001-13937

                            ANTHRACITE CAPITAL, INC.
             (Exact name of registrant as specified in its charter)


                 Maryland                                     13-3978906
                 --------                                     ----------
     (State or other jurisdiction of                       (I.R.S. Employer
      incorporation or organization)                      Identification No.)

 40 East 52nd Street, New York, New York                         10022
 ---------------------------------------                         -----
 (Address of principal executive offices)                     (Zip Code)

      (Registrant's telephone number including area code): (212) 810-3333
                                                           ---------------

                                 NOT APPLICABLE
                                 --------------

(Former name, former address, and for new fiscal year; if changed since last
report)

         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.

                         (1) Yes X          No
                         (2) Yes X          No


         Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer |_|   Accelerated filer |X|   Non-accelerated filer |_|

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

                         (1)     Yes _      No X _

         At August 9, 2006, 57,096,618 shares of common stock ($.001 par value
per share) were outstanding.


                                       1
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                            ANTHRACITE CAPITAL, INC.
                                   FORM 10-Q
                                     INDEX

PART I - FINANCIAL INFORMATION                                                                                  Page
                                                                                                                ----

<S>           <C>                                                                                             <C>
Item 1.       Financial Statements................................................................................4

              Consolidated Statements of Financial Condition (Unaudited)
              At June 30, 2006 and December 31, 2005..............................................................4

              Consolidated Statements of Operations (Unaudited)
              For the Three and Six Months Ended June 30, 2006 and 2005...........................................5

              Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
              For the Six Months Ended June 30, 2006..............................................................6

              Consolidated Statements of Cash Flows (Unaudited)
              For the Six Months Ended June 30, 2006 and 2005.....................................................7

              Notes to Consolidated Financial Statements (Unaudited)..............................................9

Item 2.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations..............................................................................25

Item 3.       Quantitative and Qualitative Disclosures about Market Risk.........................................53

Item 4.       Controls and Procedures............................................................................58

Part II - OTHER INFORMATION

Item 1.       Legal Proceedings..................................................................................59

Item 1A.      Risk Factors.......................................................................................59

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds........................................59

Item 3.       Defaults Upon Senior Securities....................................................................59

Item 4.       Submission of Matters to a Vote of Security Holders................................................59

Item 5.       Other Information..................................................................................59

Item 6.       Exhibits...........................................................................................59

SIGNATURES.......................................................................................................61
</TABLE>

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Anthracite Capital, Inc. is a real estate finance company focused on
investments in high yield commercial real estate loans and related securities.
Anthracite is externally managed by BlackRock Financial Management, Inc., which
is a subsidiary of BlackRock, Inc. ("BlackRock") (NYSE:BLK), one of the largest
publicly traded investment management firms in the United States with
approximately $464.1 billion in global assets under management at June 30,
2006. BlackRock Realty Advisors, Inc., another subsidiary of BlackRock,
provides real estate equity and other real estate-related products and services
in a variety of strategies to meet the needs of institutional investors.
BlackRock is a member of The PNC Financial Services Group, Inc. ("PNC")
(NYSE:PNC), a diversified financial services organization. Through its
affiliates, PNC originates commercial, multifamily and residential real estate
loans, and services $173.7 billion in commercial mortgage loans for third
parties through its Midland Loan Services, Inc. subsidiary at June 30, 2006.

 Forward-Looking Statements

Certain statements contained herein constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to future financial or business performance, strategies or
expectations. Forward-looking statements are typically identified by words or
phrases such as "trend," "potential," "opportunity," "pipeline," "believe,"
"comfortable," "expect," "anticipate," "current," "intention," "estimate,"
"position," "assume," "outlook," "continue," "remain," "maintain," "sustain,"
"seek," "achieve," and similar expressions, or future or conditional verbs such
as "will," "would," "should," "could," "may" or similar expressions. Anthracite
cautions that forward-looking statements are subject to numerous assumptions,
risks and uncertainties, which change over time. Forward-looking statements
speak only as of the date they are made, and Anthracite assumes no duty to and
does not undertake to update forward-looking statements. Actual results could
differ materially from those anticipated in forward-looking statements and
future results could differ materially from historical performance.

In addition to factors previously disclosed in the Company's Securities and
Exchange Commission (the "SEC") reports and those identified elsewhere in this
report, the following factors, among others, could cause actual results to
differ materially from forward-looking statements or historical performance:

             (1)  the introduction, withdrawal, success and timing of business
                  initiatives and strategies;
             (2)  changes in political, economic or industry conditions, the
                  interest rate environment or financial and capital markets,
                  which could result in changes in the value of Anthracite's
                  assets;
             (3)  the relative and absolute investment performance and
                  operations of BlackRock;
             (4)  the impact of increased competition;
             (5)  the impact of capital improvement projects;
             (6)  the impact of future acquisitions or divestitures;
             (7)  the unfavorable resolution of legal proceedings;
             (8)  the extent and timing of any share repurchases;
             (9)  the impact, extent and timing of technological changes and
                  the adequacy of intellectual property protection;
             (10) the impact of legislative and regulatory actions
                  and reforms and regulatory, supervisory or enforcement actions
                  of government agencies relating to Anthracite, BlackRock or
                  PNC;
             (11) terrorist activities and international hostilities, which may
                  adversely affect the general economy, domestic and global
                  financial and capital markets, specific industries, and
                  Anthracite;
             (12) the ability of BlackRock to attract and retain highly
                  talented professionals;

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             (13) fluctuations in foreign currency exchange rates;
             (14) the impact of changes to tax legislation and, generally, the
                  tax position of the Company;
             (15) the ability of BlackRock to successfully integrate the
                  business of Merrill Lynch Investment Managers (MLIM) with its
                  existing business following the closing of its pending
                  transaction with Merrill Lynch;
             (16) the ability of BlackRock to effectively manage the former
                  MLIM assets along with its historical assets under management;
                  and
             (17) the ability of BlackRock to complete the transaction with
                  Merrill Lynch.

Anthracite's Annual Report on Form 10-K for the year ended December 31, 2005
and Anthracite's subsequent reports filed with the SEC, accessible on the SEC's
website at www.sec.gov, identify additional factors that can affect
forward-looking statements.

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<CAPTION>

Part I - FINANCIAL INFORMATION
Item 1.  Financial Statements

                                               Anthracite Capital, Inc. and Subsidiaries
                                            Consolidated Statements of Financial Condition
                                                             (in thousands)
                                                              (unaudited)
------------------------------------------------------------------------------------------------------------------------------
                                                                            June 30, 2006              December 31, 2005
                                                                            -------------              -----------------

<S>                                                                 <C>              <C>         <C>               <C>
ASSETS
Cash and cash equivalents                                                             $31,211                         $40,556
Restricted cash equivalents                                                            53,647                           1,246
Securities available-for-sale, at fair value:
     Subordinated commercial mortgage-backed securities ("CMBS")          $802,625                     $826,955
     Investment grade CMBS                                               1,464,642                    1,157,164
     Residential mortgage-backed securities ("RMBS")                       155,751                       92,817
                                                                     --------------               --------------
Total securities available-for-sale                                                  2,423,018                      2,076,936
Commercial mortgage loan pools, at amortized cost                                    1,281,946                      1,292,407
Securities held-for-trading, at estimated fair value
     CMBS                                                                   21,079                       21,264
     RMBS                                                                  146,201                      166,209
                                                                     --------------               --------------
Total securities held-for-trading
                                                                                          167,280                      187,473
Commercial mortgage loans, net                                                            435,713                     365,806
Equity investments                                                                        167,951                     110,650
Interest rate swap agreements, at fair value                                               68,631                      31,172
Receivable for investments sold                                                            21,372                           -
Other assets                                                                               53,973                      58,013
                                                                                   ---------------              --------------
     Total Assets                                                                      $4,704,742                  $4,164,259
                                                                                   ===============              ==============


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings:
    Collateralized debt obligations ("CDOs")                            $1,483,078                   $1,066,930
    Secured by pledge of subordinated CMBS                                  36,366                       83,213
    Secured by pledge of other securities available-for-sale               800,749                      606,209
    Secured by pledge of commercial mortgage loan pools                  1,268,315                    1,278,908
    Secured by pledge of securities held-for-trading                       140,808                      176,361
    Secured by pledge of commercial mortgage loans                         119,259                      229,556
    Junior subordinated notes to subsidiary trust issuing preferred
    securities                                                             180,477                       77,380
                                                                     --------------               --------------
Total borrowings                                                                       $4,029,052                  $3,518,557
Payable for investments purchased                                                          11,996                           -
Distributions payable                                                                      17,456                      16,673
Interest rate swap agreements, at fair value                                                   67                       8,907
Other liabilities                                                                          25,725                      22,104
                                                                                   ---------------              --------------
     Total Liabilities                                                                  4,084,296                  $3,566,241
                                                                                   ---------------              --------------

Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $0.001 per share; 400,000 shares authorized;
   57,097 shares issued and outstanding in 2006;
   56,339 shares issued and outstanding in 2005                                                57                          56
9.375% Series C Preferred stock, liquidation preference $57,500                            55,435                      55,435
Additional paid-in capital                                                                620,419                     612,368
Distributions in excess of earnings                                                      (127,424)                   (130,038)
Accumulated other comprehensive income                                                     71,959                      60,197
                                                                                   ---------------              --------------
      Total Stockholders' Equity                                                          620,446                     598,018
                                                                                   ---------------              --------------
      Total Liabilities and Stockholders' Equity                                       $4,704,742                  $4,164,259
                                                                                   ===============              ==============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                               5

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<TABLE>
<CAPTION>

                                               Anthracite Capital, Inc. and Subsidiaries
                                           Consolidated Statements of Operations (Unaudited)
                                                 (in thousands, except per share data)

                                                        For the Three Months Ended           For the Six Months Ended
                                                                 June 30                              June 30
                                                     ----------------------------------------------------------------------
                                                          2006              2005               2006             2005
                                                     ----------------------------------------------------------------------
<S>                                                 <C>                <C>              <C>                <C>
Income:
    Interest from securities available-for-sale              $43,080          $34,203            $81,977           $67,544
    Interest from commercial mortgage loans                    8,973            4,937             16,989            10,281
    Interest from commercial mortgage loan pools              13,287           13,605             26,513            27,157
    Interest from securities held-for-trading                  1,847            2,090              3,771             4,260
    Earnings from equity investments                           9,674            3,024             19,016             5,629
    Earnings from real estate joint ventures                       -                -                  -                59
    Interest from cash and cash equivalents                      580              266                918               503
                                                     ----------------   --------------   ----------------  ----------------
        Total income                                          77,441           58,125            149,184           115,433
                                                     ----------------   --------------   ----------------  ----------------

Expenses:
    Interest                                                  49,529           37,418             94,160            72,561
    Interest - securities held-for-trading                     1,829            1,552              3,722             2,913
    Management and incentive fees                              5,503            2,661              9,724             5,240
    General and administrative expense                         1,135              938              2,238             1,758
                                                     ----------------   --------------   ----------------  ----------------
        Total expenses                                        57,996           42,569            109,844            82,472
                                                     ----------------   --------------   ----------------  ----------------

Other gains (losses):
Gain (loss) on sale of securities                               (93)               47               (60)                57
available-for-sale, net
Gain (loss) on securities held-for-trading, net                1,365          (1,306)              2,315           (2,678)
Foreign currency gain (loss)                                     271            (176)                315             (344)
Loss on impairment of assets                                 (4,653)          (3,072)            (5,434)           (3,231)
                                                     ----------------   --------------   ----------------  ----------------
       Total other losses                                    (3,110)          (4,507)            (2,864)           (6,196)
                                                     ----------------   --------------   ----------------  ----------------

Income from Continuing Operations                             16,335           11,049             36,476            26,765
                                                     ----------------   --------------   ----------------  ----------------

Income from Discontinued Operations                            1,366                -              1,366                 -
                                                     ----------------   --------------   ----------------  ----------------

Net income                                                    17,701           11,049             37,842            26,765
                                                     ----------------   --------------   ----------------  ----------------

Dividends on preferred stock                                   1,348            1,348              2,696             2,696
                                                     ----------------   --------------   ----------------  ----------------

Net income available to common stockholders                  $16,353           $9,701            $35,146           $24,069
                                                     ================   ==============   ================  ================

Net income per common share, basic:                            $0.29            $0.18              $0.62             $0.45
                                                     ================   ==============   ================  ================

Net income per common share, diluted:                          $0.29            $0.18              $0.62             $0.45
                                                     ================   ==============   ================  ================
</TABLE>

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<TABLE>
<CAPTION>
<S>                                                         <C>               <C>                <C>                <C>
Income from continuing operations per share
   of common stock, after preferred dividends
   Basic                                                       $0.26            $0.18              $0.60             $0.45
   Diluted                                                     $0.26            $0.18              $0.60             $0.45

Income from discontinued operations per share
   of common stock
   Basic                                                       $0.03                -              $0.02                 -
   Diluted                                                     $0.03                -              $0.02                 -

Weighted average number of shares outstanding:
    Basic                                                     57,066           53,302             56,870            53,298
    Diluted                                                   57,355           53,311             57,016            53,307

Dividend declared per share of Common Stock                    $0.29            $0.28              $0.57             $0.56


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

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<TABLE>
<CAPTION>
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2006
(in thousands)
------------------------------------------------------------------------------------------------------------------------------
                                                   Series                           Accumulated
                                        Common       C      Additional Distributions   Other                        Total
                                        Stock,   Preferred   Paid-In    In Excess  Comprehensive  Comprehensive  Stockholders'
                                      Par Value    Stock     Capital   Of Earnings     Income          Income       Equity
                                      ----------------------------------------------------------------------------------------
<S>                                      <C>    <C>       <C>          <C>             <C>                         <C>
Balance at January 1, 2006                 $56    $55,435   $612,368     $(130,038)      $60,197                     $598,018

Net income                                                                  37,842                       $37,842       37,842

Unrealized gain on cash flow hedges                                                       58,855          58,855       58,855

Reclassification of losses from cash
flow hedges included in net income                                                         2,770           2,770        2,770

Change in net unrealized loss on
securities available-for-sale, net
of reclassification adjustment                                                           (49,863)        (49,863)     (49,863)
                                                                                                  ---------------
                                                                                                          11,762
Other comprehensive income
                                                                                                  ---------------
Comprehensive income                                                                                      $49,604
                                                                                                  ===============

Dividends declared-common stock                                           (32,532)                                   (32,532)

Dividends declared - preferred stock                                       (2,696)                                    (2,696)

Issuance of common stock                       1                 8,051                                                  8,052
                                      ----------------------------------------------------------------------------------------

Balance at June 30, 2006                     $57    $55,435   $620,419  $(127,424)        $71,959                    $620,446
                                      ========================================================================================

Disclosure of reclassification adjustment:

Unrealized holding loss                                                                                $(49,803)
Reclassification for realized gains previously recorded as unrealized                                       (60)
                                                                                                  ---------------
                                                                                                       $(49,863)
                                                                                                  ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       8
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<TABLE>
<CAPTION>
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

                                                                                      For the Six              For the Six
                                                                                      Months Ended            Months Ended
                                                                                     June 30, 2006            June 30, 2005
                                                                                     -------------            -------------
 <S>                                                                                 <C>                    <C>
 Cash flows from operating activities:
                                                                                      $     37,842            $     26,765
      Net income

 Adjustments to reconcile net income to net cash provided by (used in)
 operating activities:

         Net decrease (purchase) in trading securities                                      22,509                 (58,862)

         Net (gain) loss on sale of securities                                              (2,255)                  2,621

         Gain on sale of real estate held for sale                                          (1,366)                      -

         Earnings from subsidiary trust                                                       (201)                      -

         Distributions from subsidiary trust                                                   171                       -

         Earnings from equity investments and real estate joint ventures                   (19,016)                 (5,688)

         Distributions of  earnings from equity investments and real estate
                 joint ventures                                                              8,659                   2,767

         Amortization of collateralized debt obligation issuance costs                       1,171                   1,083

         Amortization of junior subordinated note issuance costs                                76                       -

         Discount accretion (net)                                                           (2,613)                 (5,009)

         Loss on impairment of assets                                                        5,434                   3,231

         Unrealized net foreign currency gain                                               (7,772)                 (1,250)

         Proceeds from sale of interest rate swap agreements                                15,102                       -

         Decrease (increase) in other assets                                                22,333                  (4,020)

         (Decrease) increase in other liabilities                                           (3,931)                  8,055
                                                                                 -----------------------  ----------------------
 Net cash provided by (used in) operating activities                                        76,143                 (30,307)
                                                                                 -----------------------  ----------------------

 Cash flows from investing activities:

      Purchase of securities available-for-sale                                           (506,068)               (223,081)

      Proceeds from sale of securities available-for-sale                                   73,563                       -

      Principal payments received on securities available-for-sale                          24,643                  28,507

      Funding of commercial mortgage loans                                                (123,779)                (30,264)

      Repayments received from commercial mortgage loans                                    65,981                  70,583

      Repayments received from commercial mortgage loan pools                                4,344                   4,039

      Purchase of real estate held-for-sale                                                 (5,435)                      -

      Proceeds from sale of real estate held-for-sale                                        6,801                       -

      Increase in restricted cash equivalents                                              (52,401)                 (1,196)

      Return of capital from equity investments and joint ventures                          14,742                  16,651

      Investment in equity investments                                                     (55,990)                (12,359)
                                                                                 -----------------------  ----------------------
 Net cash used in investing activities                                                    (553,599)               (147,120)
                                                                                 -----------------------  ----------------------
 Cash flows from financing activities:

      Net (decrease) increase in borrowings under reverse repurchase agreements
            and credit facilities                                                           (5,659)                197,771
</TABLE>
                                       9

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<TABLE>
<CAPTION>
<S>                                                                                    <C>                   <C>
      Repayments of borrowings secured by commercial mortgage loan pools                    (3,994)                  1,891

      Issuance of collateralized debt obligations                                          417,000                       -

      Issuance costs for collateralized debt obligations                                    (7,057)                      -

      Repayments of collateralized debt obligations                                         (1,353)                   (378)

      Issuance of junior subordinated notes to subsidiary trust                            100,000                       -

      Issuance costs of junior subordinated notes                                           (3,146)                      -

      Dividends paid on preferred stock                                                     (2,695)                 (2,696)

      Proceeds from issuance of common stock, net of offering costs                          6,764                     184

      Dividends paid on common stock                                                       (31,749)                (29,849)
                                                                                 -----------------------  ----------------------
 Net cash provided by financing activities                                                 468,111                 166,923
                                                                                 -----------------------  ----------------------
                                                                                            (9,345)                (10,504)
 Net decrease in cash and cash equivalents

 Cash and cash equivalents, beginning of period                                             40,556                  23,755
                                                                                 -----------------------  ----------------------
 Cash and cash equivalents, end of period                                             $     31,211            $     13,251
                                                                                 =======================  ======================


 Supplemental disclosure of cash flow information:
      Interest paid                                                                   $     93,843            $     75,117
                                                                                 =======================  ======================
      Investments purchased not settled                                               $     11,996            $      5,155
                                                                                 =======================  ======================
      Investments sold  not settled                                                   $     21,372            $          -
                                                                                 =======================  ======================

 Supplemental disclosure of non-cash investing and financing activities:

 Investments in subsidiary trusts                                                     $      3,097            $          -
                                                                                 =======================  ======================
 Incentive fees paid by the issuance of common stock                                  $      1,287            $          -
                                                                                 =======================  ======================


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

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Anthracite Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Dollar amounts in thousands, except share and per share data)
--------------------------------------------------------------

Note 1        ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Anthracite Capital, Inc., a Maryland corporation, and its subsidiaries (the
"Company") is a real estate finance company that primarily generates income
based on the spread between the interest income, gains and net operating income
on its commercial real estate assets and the interest expense from borrowings
to finance its investments. The Company seeks to earn high returns on a
risk-adjusted basis to support a consistent quarterly dividend. The Company has
elected to be taxed as a real estate investment trust ("REIT") under the United
States Internal Revenue Code of 1986, as amended (the "Code") and, therefore,
its income is largely exempt from corporate taxation. The Company commenced
operations on March 24, 1998.

The Company's ongoing investment activities primarily encompass three core
investment activities:
1)       Commercial Real Estate Securities
2)       Commercial Real Estate Loans
3)       Commercial Real Estate Equity

The accompanying June 30, 2006 unaudited consolidated financial statements have
been prepared in conformity with the instructions to Form 10-Q and Article 10,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America ("GAAP") for
complete financial statements. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in cash flows have
been made. These consolidated financial statements should be read in
conjunction with the annual audited financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 2005 filed with the Securities and Exchange Commission (the
"SEC").

In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the statements of financial condition and revenues and expenses for the periods
covered. Actual results could differ from those estimates and assumptions.
Significant estimates in the financial statements include the valuation of
certain of the Company's mortgage-backed securities and certain other
investments.

Recent Accounting Developments

Accounting Changes and Corrections

In June 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 154, Accounting Changes and
Error Corrections ("SFAS No. 154"). SFAS

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No. 154 replaces Accounting Principles Board ("APB") Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior period financial statements
presented in accordance with the new accounting principle. SFAS No. 154 also
requires that a change in the method of depreciating or amortizing a long-lived
non-financial asset be accounted for prospectively as a change in estimate, and
correction of errors in previously issued financial statements should be termed
"restatements." SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The implementation of SFAS No. 154 had no impact on the Company's consolidated
financial statements.

Stock Based Compensation

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This
statement is a revision to SFAS No. 123, Accounting for Stock-Based
Compensation, and superseded APB Opinion No. 25, Accounting for Stock Issued to
Employees. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on the accounting for transactions in which an
entity obtains employee services in share-based payment transactions. Entities
will be required to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service (usually the vesting
period) in exchange for the award. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models.
If an equity award is modified after the grant date, incremental compensation
cost will be recognized in an amount equal to the excess of the fair value of
the modified award over the fair value of the original award immediately before
the modification. As amended by Rule 4-01(a) of Regulation S-X promulgated by
the SEC, this statement is effective as of the beginning of the first interim
or annual reporting period of the Company's first fiscal year beginning on or
after December 15, 2005. The Company adopted SFAS No. 123R, as amended,
effective January 1, 2006 with no impact on the consolidated financial
statements as there are no unvested options as of December 31, 2005 and the
Company applied the fair value method to all options issued after January 1,
2003.

Reverse Repurchase Agreements

The FASB has placed an item on its agenda relating to the treatment of
transactions where mortgage-backed securities purchased from a particular
counterparty are financed via a repurchase agreement with the same
counterparty. Currently, the Company records such assets and the related
financing gross on the consolidated statement of financial condition, and the
corresponding interest income and interest expense gross on the consolidated
statement of operations. Any change in fair value of the security is reported
through other comprehensive income pursuant to SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, because the security is
classified as available-for-sale. However, in a transaction where the
mortgage-backed securities are acquired from and financed under a repurchase
agreement with the same counterparty, the acquisition may not qualify as a sale
from the seller's perspective under the provisions of SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. In such cases, the seller may be required to continue to

                                      12

<PAGE>

consolidate the assets sold to the Company, based on their continuing
involvement with such investments. Depending on the ultimate outcome of the
FASB deliberations, the Company may be precluded from presenting the assets
gross on the Company's balance sheet and should instead be treating the
Company's net investment in such assets as a derivative. If it is determined
that these transactions should be treated as investments in derivatives, the
derivative instruments entered into by the Company to hedge the Company's
interest rate exposure with respect to the borrowings under the associated
repurchase agreements may no longer qualify for hedge accounting, and would
then, as with the underlying asset transactions, also be marked to market
through the income statement. This potential change in accounting treatment
does not affect the economics of the transactions but does affect how the
transactions would be reported on the consolidated financial statements. The
Company's cash flows, liquidity and ability to pay a dividend would be
unchanged, and the Company does not believe its REIT taxable income or REIT
status would be affected. The Company's net equity would not be materially
affected. At June 30, 2006, the Company has identified available-for-sale
securities with a fair value of approximately $207,985 which had been purchased
from and financed with reverse repurchase agreements totaling approximately
$142,719 with the same counterparty since their purchase. If the Company were
to change the current accounting treatment for these transactions at June 30,
2006, total assets and total liabilities would be reduced by approximately
$142,719.

Impairment of Investments

In November 2005, the FASB issued FASB Staff Position ("FSP") FAS 115-1/124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, which provides guidance for determining when impairment charges
should be taken on certain debt and equity securities. FSP FAS 115-1/124-1
requires that debt and equity securities subject to the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, and
equity securities subject to the provisions of APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock, but which are not
accounted for under the equity method (i.e., securities accounted for under the
cost method) shall be reviewed for impairment when circumstances warrant. For
securities subject to SFAS No. 115, a review for other-than-temporary
impairments shall occur in each accounting period where the fair value of the
security is less than its cost. For securities subject to APB Opinion No. 18, a
review for other-than-temporary impairments shall occur in each accounting
period where a) circumstances indicate that impairment may exist and b) the
fair value of the security is less than its carrying value. The provisions of
the FSP were required to be applied to reporting periods beginning after
December 15, 2005. The adoption of FSP FAS 115-1/124-1 on January 1, 2006 had
no material impact on the Company's consolidated financial statements.

Certain Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The
Statement provides, among other things, that:

                                      13

<PAGE>

         o  Permits fair value measurement for any hybrid financial instrument
            that contains an embedded derivative that otherwise would require
            bifurcation.

         o  Concentrations of credit risk in the form of subordination are not
            considered embedded derivatives.

         o  Clarifies which interest-only strips and principal-only strips are
            not subject to the requirements of SFAS No. 133.

SFAS No. 155 is effective for all financial instruments acquired, issued or
subject to remeasurement after the beginning of an entity's first fiscal year
that begins after September 15, 2006. Upon adoption, differences between the
total carrying amount of the individual components of an existing bifurcated
hybrid financial instrument and the fair value of the combined hybrid financial
instrument should be recognized as a cumulative effect adjustment to beginning
retained earnings. Prior periods should not be restated. The Company intends to
adopt the Statement on January 1, 2007 and does not expect the impact of
adoption to be material to its consolidated financial statements.

Determining the Variability in a Potential VIE

The FASB issued FASB Staff Position FIN 46(R)-6, Determining the Variability to
be Considered in Applying FASB Interpretation No. 46(R) ("FSP FIN 46(R)-6") in
April 2006. FSP FIN 46(R)-6 addresses the application of FIN 46(R),
Consolidation of Variable Interest Entities, in determining whether certain
contracts or arrangements with a variable interest entity ("VIE") are variable
interests by requiring companies to base such evaluations on an analysis of the
VIE's purpose and design, rather than its legal form or accounting
classification.

FSP FIN 46(R)-6 is required to be applied for all reporting periods beginning
after June 15, 2006. While the Company is still evaluating the impact of this
FSP, the adoption of FIN 42(R)-6 is not expected to result in material
differences from the Company's existing accounting policies regarding the
consolidation of VIEs.

Reclassifications

Certain items previously reported have been reclassified to conform to the
current presentation.


Note 2        NET INCOME PER SHARE

Net income per share is computed in accordance with SFAS No. 128, Earnings Per
Share. Basic income per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted income per share is calculated using the weighted
average number of common shares outstanding during the period plus the
additional dilutive effect, if any, of common stock equivalents. The dilutive
effect of outstanding stock options is calculated using the treasury stock
method.

                                      14

<PAGE>
<TABLE>
<CAPTION>

                                                                        For the Three Months          For the Six Months
                                                                           Ended June 30,               Ended June 30,
                                                                         2006          2005          2006           2005
                                                                     ------------- ------------- -------------- --------------
<S>                                                                  <C>            <C>           <C>            <C>
 Numerator:

        Net income available to common stockholders                       $16,353        $9,701        $35,146        $24,069
                                                                     ------------- ------------- -------------- --------------
        Numerator for basic and diluted earnings per share                $16,353        $9,701        $35,146        $24,069
                                                                     ============= ============= ============== ==============

 Denominator:
        Denominator for basic earnings per share--weighted average
          common shares
        Outstanding                                                    57,065,593    53,302,298     56,869,865     53,298,184
        Dilutive effect of stock options                                    3,741         8,671          3,616          8,930
        Dilutive effect of stock based incentive fee                      285,483             -        142,741              -
                                                                     ------------- ------------- -------------- --------------
        Denominator for diluted earnings per share--weighted average
          common shares outstanding and common stock equivalents
          outstanding                                                  57,354,817    53,310,969     57,016,222     53,307,114
                                                                     ============= ============= ============== ==============

 Basic net income per weighted average common share:                        $0.29         $0.18          $0.62          $0.45
                                                                     ------------- ------------- -------------- --------------
 Diluted net income per weighted average common share and common
 share equivalents:                                                         $0.29         $0.18          $0.62          $0.45
                                                                     ------------- ------------- -------------- --------------
</TABLE>



Total anti-dilutive stock options excluded from the calculation of net income
per share were 1,384,151 for the three and six months ended June 30, 2006.
Total anti-dilutive stock options excluded from the calculation of net income
per share were 1,384,151 for the three and six months ended June 30, 2005.


Note 3        SECURITIES AVAILABLE-FOR-SALE

The Company's securities available-for-sale are carried at estimated fair
value. The amortized cost and estimated fair value of securities
available-for-sale at June 30, 2006 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                   Gross           Gross          Estimated
                                                                Amortized     Unrealized Gain    Unrealized          Fair
                   Security Description                           Cost                              Loss            Value
------------------------------------------------------------ ---------------- ---------------- --------------- -----------------
<S>                                                          <C>              <C>               <C>             <C>
CMBS:
CMBS interest only securities ("IOs")                                $90,315             $737        $(3,251)           $87,801
Investment grade CMBS                                                708,573           36,764        (15,624)           729,713
Non-investment grade rated subordinated securities                   598,849           51,630        (12,327)           638,152
Non-rated subordinated securities                                     46,798            3,208         (1,621)            48,385
Credit tenant leases                                                  24,720              518           (668)            24,570
Investment grade REIT debt                                           229,497            3,162         (6,291)           226,368
Multifamily agency securities                                        413,876                -        (17,686)           396,190
CDO investments                                                      116,752            2,545         (3,209)           116,088
                                                             ---------------- ---------------- --------------- -----------------
     Total CMBS                                                    2,229,380           98,564        (60,677)         2,267,267
                                                             ---------------- ---------------- --------------- -----------------
</TABLE>


                                      15



<PAGE>
<TABLE>
<CAPTION>
<S>                                                          <C>              <C>               <C>             <C>
Single-family RMBS:
Agency adjustable rate securities                                      2,006               21               -             2,027
Residential CMOs                                                     143,687               67         (3,420)           140,334
Hybrid adjustable rate mortgages ("ARMs")                             13,893                -           (503)            13,390
                                                             ---------------- ---------------- --------------- -----------------
     Total RMBS                                                      159,586               88         (3,923)           155,751
                                                             ---------------- ---------------- --------------- -----------------

                                                             ---------------- ---------------- --------------- -----------------
Total securities available-for-sale                               $2,388,966          $98,652       $(64,600)        $2,423,018
                                                             ================ ================ =============== =================
</TABLE>

At June 30, 2006, the Company's securities available-for-sale included non-U.S.
dollar denominated assets with an estimated fair value of $105,828.

At June 30, 2006, an aggregate of $2,284,860 in estimated fair value of the
Company's securities available-for-sale was pledged to secure its
collateralized borrowings.

During the six months ended June 30, 2006, the Company sold three securities
classified as available for sale. Total proceeds from the sales were $73,563.
The sales resulted in a gain of $1,142 from two securities and a loss of $1,202
on the third security sold. During the six months ended June 30, 2005, the
Company realized a gain of $57 on securities available-for-sale.

The following table shows the Company's estimated fair value and gross
unrealized losses, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
June 30, 2006.

<TABLE>
<CAPTION>
                                       Less than 12 Months             12 Months or More                      Total
                                   ------------ ---------------- ------------ ----------------- ---------------- -----------------
                                    Estimated        Gross        Estimated        Gross           Estimated          Gross
                                      Fair        Unrealized        Fair         Unrealized          Fair           Unrealized
                                      Value         Losses          Value          Losses            Value            Losses
                                   ------------ ---------------- ------------ ----------------- ---------------- -----------------
<S>                                    <C>             <C>           <C>              <C>               <C>              <C>
CMBS IOs                               $30,181         $(1,263)      $29,221          $(1,988)          $59,402          $(3,251)
Investment grade CMBS                  165,953          (4,660)      112,854          (10,964)          278,807          (15,624)
Non-investment grade rated
   subordinated securities             215,202         (10,025)       19,742           (2,302)          234,944          (12,327)
Non-rated subordinated securities       17,934          (1,621)            -                 -           17,934           (1,621)
Credit tenant leases                         -                -       15,794             (668)           15,794             (668)
Investment grade REIT debt              57,554          (1,949)       47,541           (4,342)          105,095           (6,291)
Multifamily agency securities          207,198          (6,959)      188,992          (10,727)          396,190          (17,686)
CDO investments                         34,959          (3,209)            -                 -           34,959           (3,209)
Agency adjustable rate securities            -                -            -                 -                -                 -
Residential CMOs                       139,808          (3,420)            -                 -          139,808           (3,420)
Hybrid ARMs                                  -                -       13,390             (503)           13,390             (503)
                                   ------------ ---------------- ------------ ----------------- ---------------- -----------------
Total temporarily impaired            $868,789        $(33,106)     $427,534         $(31,494)       $1,296,323         $(64,600)
   securities
                                   ============ ================ ============ ================= ================ =================
</TABLE>

The temporary impairment of the available-for-sale securities results from the
estimated fair value of the securities falling below the amortized cost basis.
These unrealized losses are primarily the result of market factors other than
credit impairment and the Company believes the carrying value of the securities
are fully recoverable over their expected holding period. Management possesses
both the

                                      16

<PAGE>

intent and the ability to hold the securities until maturity, allowing
for the anticipated recovery in estimated fair value of the securities held. As
such, management does not believe any of the securities held are
other-than-temporarily impaired at June 30, 2006.

At June 30, 2006, the anticipated weighted average yield to maturity based upon
the amortized cost of the Company's securities available-for-sale ("reported
yield") was 7.6% per annum. At June 30, 2006, the anticipated weighted average
yields of the Company's subordinated CMBS and investment grade securities
available-for-sale were 10.8% and 6.1%, respectively. The Company's anticipated
yields on its subordinated CMBS and other securities available-for-sale are
based upon a number of assumptions that are subject to certain business and
economic uncertainties and contingencies. Examples of these include, among
other things, the rate and timing of principal payments (including prepayments,
repurchases, defaults, and liquidations and related expenses), the pass-through
or coupon rate, and interest rate fluctuations. The Company considers the CMBS
securities where it maintains the right to influence the foreclosure/workout
process on the underlying loans to be its controlling class CMBS ("Controlling
Class"). Additional factors that may affect the Company's anticipated yields to
maturity on its Controlling Class CMBS include interest payment shortfalls due
to delinquencies on the underlying mortgage loans, and the timing and magnitude
of credit losses on the mortgage loans underlying the Controlling Class CMBS
that are a result of the general condition of the real estate market (including
competition for tenants and their related credit quality) and changes in market
rental rates. As these uncertainties and contingencies are difficult to predict
and are subject to future events which may alter these assumptions, no
assurance can be given that the anticipated yields to maturity, discussed above
and elsewhere, will be achieved.


Note 4        IMPAIRMENTS - CMBS

The Company updates its estimated cash flows for securities subject to Emerging
Issues Task Force Issue 99-20, Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets
("EITF 99-20") on a quarterly basis. The Company compares the yields resulting
from the updated cash flows to the current accrual yields. An impairment charge
is required under EITF 99-20 if the updated yield is lower than the current
accrual yield and the security has a market value less than its adjusted
purchase price. The Company carries all these securities at their market value
on its consolidated statement of financial condition.

For the six months ended June 30, 2006, the Company had eight CMBS that
required an impairment charge of $5,434, of which $4,226 was attributed to
higher prepayment rates on a pool of Small Business Administration commercial
mortgages. The decline in the updated yields that caused the remaining
impairment charge of $1,208 is not related to increases in losses but rather
accelerated prepayments and changes in the timing of credit losses.

For the six months ended June 30, 2005, the Company had two CMBS that required
an impairment charge of $3,231, of which $3,072 was attributable to the Company
increasing its underlying loan loss expectations on a 1998 vintage CMBS. The
remaining impairment charge of $159 was not related to an increase in losses
but rather a change in prepayment assumptions.

                                      17

<PAGE>

Note 5        COMMERCIAL MORTGAGE LOAN POOLS

During the second quarter of 2004, the Company acquired subordinated CMBS in a
trust establishing a Controlling Class interest. The Company negotiated for and
obtained a greater degree of influence over the disposition of the commercial
mortgage loans than is typically granted to the special servicer. As a result
of this expanded influence, the trust was not a qualifying special-purpose
entity ("QSPE") and FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (revised December 2003) ("FIN 46R") required the Company to
consolidate the net assets and results of operations of the trust.

Approximately 45% of the par amount of the commercial mortgage loan pool is
comprised of investment grade loans and the remaining 55% are unrated. For
income recognition purposes, the Company considers the investment grade and
unrated commercial mortgage loans in the pool as single assets reflecting the
credit assumptions made in establishing loss adjusted yields for Controlling
Class securities. The Company has taken into account the credit quality of the
underlying loans in formulating its loss assumptions. Credit losses assumed on
the entire pool are 1.40% of the principal balance, or 2.53% of the unrated
principal balance.

Over the life of the commercial mortgage loan pools, the Company reviews and
updates its loss assumptions to determine the impact on expected cash flows to
be collected. A decrease in estimated cash flows will reduce the amount of
interest income recognized in future periods and may result in a loan loss
reserve depending upon the severity of the cash flow reductions. An increase in
estimated cash flows will first reduce the loan loss reserve and any additional
cash will increase the amount of interest income recorded in future periods.


Note 6        SECURITIES HELD-FOR-TRADING

The Company's securities held-for-trading are carried at estimated fair value.
At June 30, 2006, the Company's securities held-for-trading consisted of FNMA
Mortgage Pools with an estimated fair value of $146,201 and subordinated CMBS
with an estimated fair value of $21,079. The FNMA Mortgage Pools, and the
underlying mortgages, bear interest at fixed rates for specified periods,
generally three to seven years, after which the rates are periodically reset to
market.


Note 7        EQUITY INVESTMENTS

The Company has a $100,000 commitment to acquire shares of BlackRock Diamond
Property Fund ("BlackRock Diamond"). At June 30, 2006, 86.3% of the commitment
has been called and the Company owned approximately 25.5% of BlackRock Diamond.
The Company's investment in BlackRock Diamond at June 30, 2006 was $96,962.

                                      18

<PAGE>

The Company recorded $11,697 of income related to its ownership in BlackRock
Diamond for the six months ended June 30, 2006, as reported by BlackRock
Diamond. Of the $11,697 in income, $652 represented current income and $11,045
represented unrealized capital appreciation. To date, the Company has invested
an aggregate of $86,272, which represents a 25.5% interest in BlackRock Diamond,
and has remaining capital commitments totaling $13,728. At June 30, 2006,
BlackRock Diamond's portfolio consisted of nineteen assets with a total market
value of approximately $460,400. BlackRock Diamond carries its real estate
investments at estimated fair values based upon valuations performed internally
and upon appraisal reports prepared annually by independent real estate
appraisers. The estimated fair values of real estate may differ significantly
from those that could be realized if the real estate were actually offered for
sale in the marketplace.

The Company entered into a $50,000 commitment on July 20, 2001 to acquire
shares in Carbon Capital, Inc. ("Carbon I"). On July 12, 2004, Carbon I's
investment period expired. The Company's investment in Carbon I at June 30,
2006 was $3,265. At June 30, 2006, the Company owned approximately 20% of
Carbon I.

The Company entered into an aggregate commitment of $100,000 to acquire shares
in Carbon Capital II, Inc. ("Carbon II"). The Company's investment in Carbon II
at June 30, 2006 was $63,874. The Company's remaining commitment at June 30,
2006 was $39,472. At June 30, 2006, the Company owned approximately 26% of
Carbon II.

On December 22, 2005, the Company entered into an $11,000 commitment to acquire
shares of Dynamic India Fund IV. At June 30, 2006, 35% of the commitment has
been called. The Company's investment in Dynamic India Fund IV at June 30, 2006
was $3,850. The Company's remaining commitment at June 30, 2006 was $7,150.


Note 8        REAL ESTATE, HELD-FOR-SALE

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
specifies that long-lives assets to be disposed by sale, which meet certain
criteria, should be classified as real estate held-for-sale and measured at the
lower of its carrying amount or fair value less costs of sale. In addition,
depreciation is not recorded for real estate held-for-sale.

On March 6, 2006, the Company purchased a defaulted loan from a Controlling
Class CMBS trust. The loan was secured by a first mortgage on a multi-family
property in Texas. Subsequent to the loan purchase, the property was acquired
by the Company at foreclosure. The Company sold the property during the second
quarter of 2006 and recorded a gain from discontinued operations of $1,366 on
the consolidated statement of operations.


Note 9        BORROWINGS

The Company's borrowings consist of reverse repurchase agreements, credit
facilities, commercial mortgage loan pools, CDOs and trust preferred
securities.

                                      19

<PAGE>

Certain information with respect to the Company's borrowings at June 30, 2006
is summarized as follows:
<TABLE>
<CAPTION>

                                Reverse                 Commercial   Collateralized      Trust           Total
                              Repurchase     Credit      Mortgage         Debt         Preferred     Collateralized
                              Agreements   Facilities   Loan Pools     Obligations     Securities       Borrowings
                             ------------ ------------ ------------- ---------------- ------------- ----------------
<S>                             <C>          <C>         <C>              <C>             <C>            <C>
Outstanding borrowings          $895,236     $208,272    $1,261,989       $1,483,078      $180,477       $4,029,052

Weighted average
    borrowing rate                 5.27%        5.11%         3.79%            6.04%         7.64%            5.07%
Weighted average remaining
    maturity                     25 days   1.53 years    6.33 years       7.37 years   29.60 years       5.01 years
Estimated fair value of
    assets pledged              $948,602     $277,168    $1,281,946       $1,628,189             -       $4,135,905


At June 30, 2006, the Company's borrowings had the following remaining maturities:
</TABLE>

<TABLE>
<CAPTION>

                             Reverse                     Commercial                                             Total
                           Repurchase       Credit      Mortgage Loan    Collateralized  Trust Preferred   Collateralized
                           Agreements     Facilities        Pools      Debt Obligations*    Securities       Borrowings
                        ---------------- ------------ ---------------- ----------------- --------------- ------------------
<S>                          <C>                <C>            <C>               <C>             <C>          <C>
Within 30 days                 $861,520           $-             $-                $-              $-           $861,520
31 to 59 days                    22,164            -              -                 -               -             22,164
60 days to less than 1 year      11,552       39,772              -                 -               -             51,324
1 year to 3 years                     -      168,500              -                 -               -            168,500
3 years to 5 years                    -            -              -                 -               -                  -
Over 5 years                          -            -      1,261,989         1,483,078         180,477          2,925,544
                        ---------------- ------------ ---------------- ----------------- --------------- ------------------
                               $895,236     $208,272     $1,261,989        $1,483,078        $180,477         $4,029,052
                        ================ ============ ================ ================= =============== ==================
</TABLE>

* At June 30, 2006, collateralized debt obligations are comprised of $418,809
of CDO debt with a weighted average remaining maturity of 5.79 years, $292,358
of CDO debt with a weighted average remaining maturity of 6.16 years, $367,007
of CDO debt with a weighted average remaining maturity of 6.89 years, and
$416,935 of CDO debt with a weighted average remaining maturity of 10.18 years.

Reverse Repurchase Agreements and Credit Facilities

On February 16, 2006, the Company entered into a $200,000 committed non-U.S.
dollar credit facility with Morgan Stanley Mortgage Servicing, Inc. which
matures in February 2008. Outstanding borrowings under this credit facility
bear interest at a LIBOR based variable rate. At June 30, 2006, there were
$35,604 of borrowings under this facility.

On March 17, 2006, the Company entered into a $100,000 committed non-U.S.
dollar credit facility with Bank of America, N.A. which matures in September
2008. Outstanding borrowings under this credit facility bear interest at a
LIBOR based variable rate. At June 30, 2006, there were $34,838 of borrowings
under this facility.

                                      20

<PAGE>

Under the credit facilities and the reverse repurchase agreements, the
respective lender retains the right to mark the underlying collateral to
estimated fair value. A reduction in the estimated fair value of its pledged
assets will require the Company to provide additional collateral or fund margin
calls. From time to time, the Company expects that it will be required to
provide such additional collateral or fund margin calls.

The Company is subject to various covenants in its credit facilities, including
maintaining a minimum net worth measured on GAAP of $400,000, a recourse
debt-to-equity of 3.0 to 1, a minimum cash requirement based upon certain
debt-to-equity ratios, a minimum recourse debt service coverage ratio of 1.75
and a minimum liquidity reserve of $10,000. At June 30, 2006, the Company was
in compliance with all covenants in its credit facilities.

CDOs

On May 23, 2006, the Company closed its sixth CDO issuance ("CDO HY3")
resulting in the issuance of $417,000 of non-recourse debt to investors. The
debt is secured by a portfolio of CMBS and subordinated commercial real estate
loans. This debt, rated AAA through BBB-, was privately placed, and the Company
retained additional CDO debt rated BB and 100% of the preferred shares issued
by the CDO.

In accordance with the terms of this offering, the Company is expected to
contribute to the CDO up to $50,000 of additional CMBS during a ramp-up period
ending in October 2006. The additional CMBS will be contributed at face value.
The debt issuance match funded existing Company assets that were contributed to
the CDO at closing as well as the assets to be purchased during the ramp-up
period, with long-term liabilities. The Company accounts for this transaction
as a financing. All debt placed has legal final maturity of May 2051 but an
assumed weighted average life of 8.1 years. Including interest rate hedges,
this debt had a cost of funds of approximately 6.3% for the second quarter of
2006 after issuance expenses.

Trust Preferred

On January 31, 2006, the Company issued $50,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust II, a Delaware
statutory trust ("Trust II"). The trust preferred securities have a
thirty-year term ending April 30, 2036 with interest at a fixed rate of 7.73%
for the first ten years and at a floating rate of three-month LIBOR plus 2.7%
thereafter. The trust preferred securities can be redeemed at par by the
Company beginning in April 2011. Trust II issued $1,550 aggregate liquidation
amount of common securities, representing 100% of the voting common stock of
Trust II to the Company for a purchase price of $1,550. The Company realized
net proceeds from this offering of approximately $48,491.

On March 16, 2006, the Company issued $50,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust III, a Delaware
statutory trust ("Trust III" and collectively with Trust II, the "Trusts").
The trust preferred securities have a thirty-year term ending March 15, 2036
with interest at a fixed rate of 7.77% for the first ten years and at a
floating rate of three-month LIBOR plus 2.7% thereafter. The trust preferred
securities can be redeemed at par by the Company

                                      21

<PAGE>


beginning in March 2011. Trust III issued $1,547 aggregate liquidation amount
of common securities, representing 100% of the voting common stock of Trust
III to the Company for a purchase price of $1,547. The Company realized net
proceeds from this offering of approximately $48,435.

The Trusts used the proceeds from the sale of the trust preferred securities
and the common securities to purchase the Company's junior subordinated
notes. The terms of the junior subordinated notes match the terms of the
trust preferred securities. The notes are subordinate and junior in right of
payment to all present and future senior indebtedness and certain other of
our financial obligations.

The Company's interests in the Trusts are accounted for using the equity
method and the assets and liabilities of the Trusts are not consolidated into
the Company's financial statements. Interest on the junior subordinated notes
is included in interest expense on the consolidated statement of operations
while the common securities are included as a component of other assets on
the Company's consolidated statement of financial condition.


Note 10       COMMON STOCK

Pursuant to its 2006 Management Agreement (defined below), 30% of the incentive
fees earned in 2005 or after may be paid in shares of the Company's Common
Stock. On March 20, 2006 the Company issued 117,679 shares of Common Stock
related to $1,287 of fourth quarter 2005 incentive fees. On June 7, 2006, the
Company issued 33,183 shares of Common Stock related to $351 of first quarter
2006 incentive fees. See Note 11 of the consolidated financial statements,
Transactions with Affiliates, for further discussion of the Company's
Management Agreement.

For the six months ended June 30, 2006, the Company issued 590,216 shares of
Common Stock under its Dividend Reinvestment and Stock Purchase Plan (the
"Dividend Reinvestment Plan"). Net proceeds to the Company were approximately
$6,270. For the six months ended June 30, 2005, the Company issued 16,230
shares of Common Stock under its Dividend Reinvestment Plan. Net proceeds to
the Company were approximately $184. As of February 24, 2006, the Company
suspended the Dividend Reinvestment Plan for all future investments dates.

During the six months ended June 30, 2006, 17,000 stock options with an
exercise price of $8.44 per share were exercised pursuant to the Company's
stock option plan (the "1998 Stock Option Plan"). Net proceeds to the Company
were $143.

On May 18, 2006, the Company declared dividends to its common stockholders of
$0.29 per share, payable on July 31, 2006 to stockholders of record on June 30,
2006. For U.S. federal income tax purposes, the dividends are expected to be
ordinary income to the Company's stockholders.


Note 11       TRANSACTIONS WITH AFFILIATES

The Company has a Management Agreement with the Manager, a majority owned
indirect subsidiary of

                                      22

<PAGE>

The PNC Financial Services Group, Inc. and the employer of certain directors
and all of the officers of the Company, under which the Manager manages the
Company's day-to-day operations, subject to the direction and oversight of the
Company's Board of Directors ("Management Agreement"). Pursuant to the
Management Agreement, the Manager formulates investment strategies, arranges
for the acquisition of assets, arranges for financing, monitors the performance
of the Company's assets and provides certain other advisory and managerial
services in connection with the operations of the Company. For performing these
services, the Company pays the Manager a base management fee equal to 2.0% of
the quarterly average total stockholders' equity for the applicable quarter.

To provide an incentive, the Manager is entitled to receive an incentive fee
equal to 25% of the amount by which the rolling four-quarter GAAP net income
before the incentive fee exceeds the greater of 8.5% or 400 basis points over
the ten-year Treasury note multiplied by the adjusted per share issue price of
the common stock ($11.35 per common share at June 30, 2006).

The Company's unaffiliated directors approved an extension of the Management
Agreement to March 31, 2007 at the Board of Directors' February 2006 meeting.
Additionally, pursuant to a resolution of the Company's Board of Directors
adopted at the February 2006 meeting, 30% of the incentive fees earned in 2005
or after may be paid in shares of the Company's Common Stock subject to certain
provisions. The Board of Directors also authorized a stock based incentive plan
where one half of one percent of common shares outstanding will be paid to the
Manager in 2006. The Company recognized an expense of $856 related to the
deferred shares of Common Stock to be issued under the stock-based incentive
plan.

The Company incurred $3,109 and $6,160 in base management fees in accordance
with the terms of the Management Agreement for the three and six months ended
June 30, 2006, respectively, and $2,661 and $5,240 for the three and six months
ended June 30, 2005, respectively. The Company incurred $1,538 and $2,708 in
incentive fees for the three and six months ended June 30, 2006. The Company
did not incur incentive fees for the three and six months ended June 30, 2005.
At June 30, 2006 and 2005, respectively, management and incentive fees of
$4,422 and $2,477 are payable to the Manager and are included on the
accompanying consolidated statement of financial condition as a component of
other liabilities. In accordance with the provisions of the Management
Agreement, the Company recorded reimbursements to the Manager of $100 and $200
for certain expenses incurred on behalf of the Company for the three and six
months ended June 30, 2006, respectively, and $40 and $80 for the three and six
months ended June 30, 2005, respectively, which are included in general and
administrative expense on the accompanying consolidated statements of
operations.

The Company has administration and investment accounting agreements with the
Manager. Under the terms of the administration agreement, the Manager provides
financial reporting, audit coordination and accounting oversight services to
the Company. Under the terms of the investment accounting agreement, the
Manager provides investment accounting services to the Company. For the six
months ended June 30, 2006 and 2005, the Company recorded administration and
investment accounting fees of $140 and $115 respectively, which are included in
general and administrative expense on the accompanying consolidated statements
of operations.

                                      23

<PAGE>

The special servicer on 20 of the Company's 25 Controlling Class trusts is
Midland Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of
PNC Bank, and therefore an affiliate of the Manager. The Company's fees for
Midland's services are at market rates.

The Company has a $100,000 commitment to acquire shares of BlackRock Diamond.
BlackRock Diamond is a private REIT managed by BlackRock Realty Advisors, Inc.,
a subsidiary of the Manager. At June 30, 2006, 86.3% of the commitment has been
called and the Company owned approximately 25.5% of BlackRock Diamond. The
Company does not incur any additional management or incentive fees to the
Manager as a result of its investment in BlackRock Diamond. The Company's
investment in BlackRock Diamond at June 30, 2006 was $96,962. The Company's
unaffiliated directors approved this transaction in September 2005.

During 2001, the Company entered into a $50,000 commitment to acquire shares in
Carbon I, a private commercial real estate income opportunity fund managed by
the Manager. The Carbon I investment period ended on July 12, 2004 and the
Company's investment in Carbon I at June 30, 2006 was $3,265. The Company does
not incur any additional management or incentive fees to the Manager as a
result of its investment in Carbon I. On June 30, 2006, the Company owned
approximately 20% of the outstanding shares in Carbon I. The Company's
unaffiliated directors approved this transaction in July 2001.

The Company entered into an aggregate commitment of $100,000 to acquire shares
in Carbon II, a private commercial real estate income opportunity fund
managed by the Manager. At June 30, 2006, the Company's investment in Carbon II
was $63,874 and the Company's remaining commitment to Carbon II is $39,472. The
Company does not incur any additional management or incentive fees to the
Manager as a result of its investment in Carbon II. The Company's unaffiliated
directors approved this transaction in September 2004.

During 2000, the Company completed the acquisition of CORE Cap, Inc. At the
time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE
Cap, Inc.'s external advisor) $12,500 over a ten-year period ("Installment
Payment") to purchase the right to manage the CORE Cap, Inc. assets under the
existing management contract ("GMAC Contract"). The GMAC Contract had to be
terminated in order to allow the Company to complete the merger, as the
Company's management agreement with the Manager did not provide for multiple
managers. As a result the Manager offered to buy-out the GMAC Contract as the
Manager estimated it would receive incremental fees above and beyond the
Installment Payment, and thus was willing to pay for, and separately negotiate,
the termination of the GMAC Contract. Accordingly, the value of the Installment
Payment was not considered in the Company's allocation of its purchase price to
the net assets acquired in the acquisition of CORE Cap, Inc. The Company agreed
that should the Management Agreement with its Manager be terminated, not
renewed or not extended for any reason other than for cause, the Company would
pay to the Manager an amount equal to the Installment Payment less the sum of
all payments made by the Manager to GMAC. At June 30, 2006, the Installment
Payment would be $4,000 payable over four years. The Company does not accrue
for this contingent liability.

                                      24

<PAGE>

Note 12      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 The Company accounts for its derivative investments under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the consolidated statement
of financial condition at estimated fair value. If the derivative is designated
as a cash flow hedge, the effective portions of change in the estimated fair
value of the derivative are recorded in other comprehensive income ("OCI") and
are recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the estimated fair value of cash flow hedges
are recognized in earnings. If the derivative is designated as a fair value
hedge, the changes in the estimated fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in earnings.

The Company uses interest rate swaps to manage exposure to variable cash flows
on portions of its borrowings under reverse repurchase agreements and the
floating rate debt of its CDOs and as trading derivatives intended to offset
changes in estimated fair value related to securities held as trading assets.
On the date in which the derivative contract is entered, the Company designates
the derivative as either a cash flow hedge or a trading derivative.

Occasionally, counterparties will require the Company or the Company will
require counterparties to provide collateral for the interest rate swap
agreements in the form of margin deposits. Net deposits are recorded as a
component of either other assets or other liabilities. Should the counterparty
fail to return deposits paid, the Company would be at risk for the estimated
fair value of that asset. At June 30, 2006 and December 31, 2005, the balance
of such net margin deposits held by the Company as collateral under these
agreements totaled $3,647 and $1,246, respectively.

At June 30, 2006, the Company had interest rate swaps with notional amounts
aggregating $1,552,808 designated as cash flow hedges of borrowings under
reverse repurchase agreements and the floating rate debt of its CDOs. Cash flow
hedges with an estimated fair value of $61,993 are included in other assets on
the consolidated statement of financial condition and cash flow hedges with an
estimated fair value of $21 are included in other liabilities on the
consolidated statement of financial condition. For the six months ended June
30, 2006, the net change in the estimated fair value of the interest rate swaps
was an increase of $59,430, of which $575 was deemed ineffective and is
included as a decrease of interest expense and $58,855 was recorded as an
addition to OCI. At June 30, 2006, the $1,552,808 notional of swaps designated
as cash flow hedges had a weighted average remaining term of 7.54 years.

During the six months ended June 30, 2006, the Company terminated nine of its
interest rate swaps with a notional amount of $260,650 that were designated as
a cash flow hedge of borrowings under reverse repurchase agreements. The
Company will reclassify the $14,357 gain in value incurred from OCI to interest
expense over 9.1 years, which was the weighted average remaining term of the
swaps at the time they were closed out. For the six months ended June 30, 2006,
$306 was reclassified as a decrease to interest expense and $1,480 will be
reclassified as a decrease to interest expense for the next twelve months. At
June 30, 2006 the Company has, in aggregate, $18,070 of net losses related to
terminated

                                      25

<PAGE>

swaps in OCI. For the quarter ended June 30, 2006, $1,267 was reclassified as
an increase to interest expense and $4,603 will be reclassified as an increase
to interest expense for the next twelve months.

At June 30, 2006, the Company had interest rate swaps with notional amounts
aggregating $323,445 designated as trading derivatives. Trading derivatives
with an estimated fair value of $6,269 are included in other assets on the
consolidated statement of financial condition and trading derivatives with an
estimated fair value of $46 are included in other liabilities on the
consolidated statement of financial condition. For the six months ended June
30, 2006, the change in estimated fair value for these trading derivatives was
an increase of $3,637 and is included as a reduction of loss on securities
held-for-trading on the consolidated statement of operations. At June 30, 2006,
the $323,445 notional of swaps designated as trading derivatives had a weighted
average remaining term of 6.24 years.

At June 30, 2006, the Company had a forward LIBOR cap with a notional amount of
$85,000 and an estimated fair value at June 30, 2006 of $369 which is included
in other assets, and the change in estimated fair value related to this
derivative is included as a component of gain (loss) on securities
held-for-trading on the consolidated statements of operations.

Foreign Currency

The U.S. dollar is considered the functional currency for the Company's
international subsidiaries. Foreign currency transaction gains or losses
related to the Company's non-U.S. dollar denominated assets and liabilities are
recognized in the period incurred and are included in other gain (loss) on the
consolidated statement of operations. The Company uses foreign currency forward
commitments to hedge the Company's net foreign investments. Gains and losses on
foreign currency forward commitments are included in other gain (loss) on the
consolidated statement of operations. The Company recorded net foreign currency
transaction gain of $271 and $315 for the three and six months ended June 30,
2006, respectively, and $(176) and $(344) for the three and six months ended
June 30, 2005, respectively. At June 30, 2006 and December 31, 2005, the
Company also had foreign currency forward commitments with an estimated fair
value of $(156,580) and $(55,390) included in other liabilities on the
consolidated statements of financial condition.

                                      26

<PAGE>


ITEM 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

All dollar figures expressed herein are expressed in thousands, except share or
per share amounts or as otherwise noted.

I.       General

Anthracite Capital, Inc., a Maryland corporation, and subsidiaries (the
"Company") is a commercial real estate company that invests in commercial real
estate opportunities on a global basis. The Company seeks to generate income
from the spread between the interest income, gains and net operating income on
its commercial real estate assets and the interest expense from borrowings to
finance its investments. The Company's primary activity is investing in high
yielding commercial real estate debt. The Company combines traditional real
estate underwriting and capital markets expertise to maximize the opportunities
arising from the continuing integration of these two disciplines. The Company
focuses on acquiring pools of performing loans in the form of commercial
mortgage-backed securities ("CMBS"), issuing secured debt backed by CMBS and
providing strategic capital for the commercial real estate industry in the form
of mezzanine loan financing. The Company also began investing in diversified
portfolios of commercial real estate in the United States during December 2005.
The Company commenced operations on March 24, 1998.

The Company's common stock is traded on the New York Stock Exchange under the
symbol "AHR". The Company's primary long-term objective is to distribute
consistent dividends supported by earnings. The Company establishes its
dividend by analyzing the long-term sustainability of earnings given existing
market conditions and the current composition of its portfolio. This includes
an analysis of the Company's credit loss assumptions, general level of interest
rates, projected hedging costs and the estimated return potential of its real
estate investments.

The Company is managed by BlackRock Financial Management, Inc. (the "Manager"),
a subsidiary of BlackRock, Inc., a publicly traded (NYSE:BLK) asset management
company with approximately $464 billion of assets under management, including
more than $10 billion in real estate equity and debt at June 30, 2006. The
Manager provides an operating platform that incorporates significant asset
origination, risk management, operational and property management capabilities.

The Company's ongoing investment activities primarily encompass three core
investment activities:
     1)  Commercial Real Estate Securities
     2)  Commercial Real Estate Loans
     3)   Commercial Real Estate Equity

The commercial real estate securities portfolio provides diversification and
high yields that are adjusted for anticipated losses over a period of time
(typically, a ten-year weighted average life) and can be financed through the
issuance of secured debt that matches the life of the investment. Commercial
real estate loans provide attractive risk adjusted returns over shorter periods
of time through strategic investments in specific property types or regions.
The Company's equity strategy is to invest in a diverse portfolio of commercial
real estate with the objective of repositioning the property to maximize its
value.

                                      27

<PAGE>


The return objective is to provide strong returns over a medium term period of
four to seven years through a combination of real estate operating income and
capital gains. It is expected that, over the short term, current returns will
fluctuate as gains and losses are reported based on a valuation process each
quarter. The Company believes that the combination of these activities will
result in a strong, sustainable dividend stream for its shareholders.

The Company's fixed income investment activity continues to be managed to
maintain a positive, though controlled, exposure to both long- and short-term
interest rates through its active hedging strategies. See "Item 3 -
Quantitative and Qualitative Disclosures About Market Risk" for a discussion of
interest rates and their effect on earnings and book value.

The following table illustrates the mix of the Company's asset types at June
30, 2006 and December 31, 2005:

<TABLE>
<CAPTION>
                                                      Carrying Value at
                                             June 30, 2006         December 31, 2005
                                            Amount        %         Amount        %
                                        -------------------------------------------------
<S>                                         <C>         <C>         <C>         <C>
Commercial real estate securities           $2,288,346   51.1%      $2,005,383   49.7%
Commercial mortgage loan pools(1)            1,281,946   28.6        1,292,407   32.0
Commercial real estate loans((2))              502,852   11.2          425,453   10.6
Commercial real estate equity                  100,812    2.3           51,003    1.3
                                        -------------------------------------------------
Total commercial real estate assets          4,173,956   93.2        3,774,246   93.6
                                        -------------------------------------------------
Residential mortgage-backed securities         301,952    6.8          259,026    6.4
                                        -------------------------------------------------

Total                                       $4,475,908  100.0%      $4,033,272  100.0%
                                        -------------------------------------------------
</TABLE>

(1)      Represents a Controlling Class CMBS that is consolidated for
         accounting purposes.  See Note 5 of the consolidated financial
         statements.
(2)      Includes the Company's investments in Carbon Capital, Inc. ("Carbon
         I") and Carbon Capital II, Inc. ("Carbon II", and collectively with
         Carbon I, the "Carbon Capital Funds") at June 30, 2006 and December
         31, 2005.

During the six months ended June 30, 2006, the Company purchased a total of
$527,169 of commercial real estate assets. Included in this amount is $158,665
of non-U.S. dollar denominated assets as the Company continues to expand its
global investment activities. Commercial real estate assets purchased were
comprised of: $209,724 of CMBS, $148,743 of multifamily agency securities,
$4,939 of investment grade real estate investment trust ("REIT") debt, $124,484
of commercial real estate loans and $39,279 of real estate equity. In addition,
the Company purchased $142,767 of investment grade residential mortgage-backed
securities.

Summary of Commercial Real Estate Assets

A summary of the Company's commercial real estate assets with estimated fair
values in local currencies at June 30, 2006 is as follows:

                                      28

<PAGE>
<TABLE>
<CAPTION>

                                                                                 Total           Total
                  Commercial Real  Commercial   Commercial     Commercial     Commercial        Commercial
                       Estate      Real Estate  Real Estate     Mortgage      Real Estate      Real Estate
                     Securities     Loans(1)       Equity      Loan Pools       Assets         Assets (USD)
                  -------------------------------------------------------------------------------------------
<S>                   <C>             <C>           <C>        <C>            <C>               <C>
USD                   $2,182,518      $293,445      $96,962    $1,281,946     $3,854,871        $3,854,871
GBP                (pound)21,122 (pound)50,355            -             -  (pound)71,477          $132,143
EURO                (euro)52,259  (euro)91,022            -             -  (euro)143,281          $183,092
Indian Rupees                  -             -    Rs179,669             -      Rs179,669            $3,850
                  -------------------------------------------------------------------------------------------
Total USD
Equivalent            $2,288,346      $502,852     $100,812    $1,281,946     $4,173,956        $4,173,956
                  -------------------------------------------------------------------------------------------
(1) Includes the Company's investments in the Carbon Capital Funds at June 30, 2006.
</TABLE>

A summary of the Company's commercial real estate assets with estimated fair
values in local currencies at December 31, 2005 is as follows:
<TABLE>
<CAPTION>

                                                                                 Total           Total
                  Commercial Real  Commercial   Commercial     Commercial     Commercial        Commercial
                       Estate      Real Estate  Real Estate     Mortgage      Real Estate      Real Estate
                     Securities     Loans(1)       Equity      Loan Pools       Assets         Assets (USD)
                  -------------------------------------------------------------------------------------------
<S>                   <C>             <C>           <C>        <C>            <C>               <C>
USD                   $1,968,063      $295,499      $51,003    $1,292,407     $3,606,972        $3,606,972
GBP                (pound)16,334 (pound)33,139            -             -  (pound)49,473           $85,027
EURO                 (euro)7,809  (euro)61,642            -             -   (euro)69,451           $82,247
                  -------------------------------------------------------------------------------------------
Total USD
Equivalent            $2,005,383      $425,453      $51,003    $1,292,407     $3,774,246        $3,774,246
                  -------------------------------------------------------------------------------------------
(1) Includes the Company's investments in the Carbon Capital Funds at December 31, 2005.
</TABLE>

The Company has foreign currency rate exposure related to its non-U.S. dollar
denominated assets. The Company's primary currency exposures are to the Euro
and British pound. Changes in currency rates can adversely impact the estimated
fair value and earnings of the Company's non-U.S. holdings. The Company
mitigates this impact by utilizing local currency-denominated financing on its
foreign investments and foreign currency forward commitments to hedge the net
exposure. Foreign currency gain (loss) was $315 and $(344) for the six months
ended June 30, 2006 and 2005, respectively.

                                      29

<PAGE>


Commercial Real Estate Securities Portfolio Activity

The following table details the par, estimated fair value, adjusted purchase
price, and expected yield of the Company's commercial real estate assets
included in as well as outside its collateralized debt obligations ("CDO") at
June 30, 2006:

<TABLE>
<CAPTION>
                                                                               Adjusted
Commercial real estate                             Estimated       Dollar      Purchase      Dollar         Expected
securities outside CDOs                Par         Fair Value      Price        Price        Price            Yield
-----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>            <C>        <C>           <C>                <C>
Investment grade CMBS                  $133,735       $141,113       94.88      $150,769      102.26             4.58%
Investment grade real estate
investment trust ("REIT") debt           23,000         20,508       89.17        22,839       99.30             5.49%
CMBS rated BB+ to B                      90,113         96,983       87.41        94,982       85.91             8.02%
CMBS rated B- or lower                   48,053         14,693       30.58        14,000       29.13             6.76%
CDO Investments                         423,268        116,089       27.43       116,752       26.95            17.95%
CMBS Interest Only securities
("IOs")                               3,373,991         87,801        2.60        90,315        2.68             6.85%
Multifamily agency securities           404,571        396,190       97.93       413,876      102.30             4.98%
Commercial mortgage loan pools        1,216,744      1,281,946      105.36     1,281,946      105.36             4.14%
                               ----------------------------------------------------------------------------------------
Total commercial real estate
assets outside CDOs                   5,713,475      2,155,323       18.70     2,185,479       19.39             5.37%
                               ----------------------------------------------------------------------------------------

Commercial real estate loans and equity outside CDOs
-----------------------------------------------------------------------------------------------------------------------
Commercial real estate loans            267,609        295,010                   281,971
Commercial real estate                   90,122        100,812                    90,122
                               ----------------------------------------------------------------------------------------
Total commercial real estate
loans and equity outside CDOs           357,731        395,822                   372,093
                               ----------------------------------------------------------------------------------------

Commercial real estate assets included in CDOs
-----------------------------------------------------------------------------------------------------------------------
Investment grade CMBS                   624,231        607,887       97.38       578,173       92.62             7.64%
Investment grade REIT debt              204,255        205,860      100.79       206,658      101.18             6.06%
CMBS rated BB+ to B                     625,276        510,040       81.57       473,261       75.69             9.94%
CMBS rated B- or lower                  179,275         66,612       37.16        65,147       36.34             9.07%
Credit tenant lease                      24,059         24,570      102.13        24,720      102.75             3.64%
Commercial real estate loans            219,478        207,842       94.70       208,013       94.78             9.29%
                               ----------------------------------------------------------------------------------------
Total commercial real estate
assets included in CDOs               1,657,096      1,622,811       86.48     1,555,972       82.92             8.35%
                               ----------------------------------------------------------------------------------------
Total commercial real estate
assets                               $7,947,782     $4,173,956                $4,113,544
                               ========================================================================================
</TABLE>

                                      30

<PAGE>


The following table details the par, estimated fair value, adjusted purchase
price and expected yield of the Company's commercial real estate assets
included in as well as outside its CDOs at December 31, 2005:

<TABLE>
<CAPTION>
                                                                               Adjusted
Commercial real estate                             Estimated       Dollar      Purchase      Dollar         Expected
securities outside CDOs                Par         Fair Value      Price        Price        Price            Yield
-----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>            <C>        <C>           <C>                <C>
Investment grade CMBS                  $150,128       $151,889       96.22      $161,314      102.17             4.00%
Investment grade real estate
investment trust ("REIT") debt           23,000         21,828       94.90        22,828       99.25             5.49%
CMBS rated BB+ to B                     104,784         90,289       78.38        92,931       80.69             7.77%
CMBS rated B- or lower                  132,242         47,854       34.05        45,070       31.59             9.17%
CDO Investments                         423,349        124,549       29.42       112,577       26.59            17.29%
CMBS Interest Only securities
("IOs")                               3,505,646        103,363        2.95       103,120        2.94             6.58%
Multifamily agency securities           256,398        263,362      102.72       268,319      104.65             4.77%
Commercial mortgage loan pools        1,221,302      1,292,407      105.82     1,292,407      105.82             4.14%
                               ----------------------------------------------------------------------------------------
Total commercial real estate
securities outside CDOs               5,816,849      2,095,541       17.19     2,098,566       17.24             5.43%
                               ----------------------------------------------------------------------------------------

Commercial real estate loans and equity outside CDOs
-----------------------------------------------------------------------------------------------------------------------
Commercial real estate loans            368,433        405,782                   404,217
Commercial real estate                   50,704         51,004                    50,704
                               ----------------------------------------------------------------------------------------
Total commercial real estate            419,137        456,786                   454,921
loans and equity outside CDOs
                               ----------------------------------------------------------------------------------------

Commercial real estate securities included in CDOs
-----------------------------------------------------------------------------------------------------------------------
Investment grade CMBS                   375,502        377,291      100.48       354,561       94.42             7.37%
Investment grade REIT debt              223,445        233,939      104.70       226,583      101.40             6.15%
CMBS rated BB+ to B                     656,207        566,181       86.28       513,446       78.24             9.16%
Credit tenant lease                      24,317         24,837      102.14        24,995      102.79             5.68%
Commercial real estate loans             20,175         19,671       97.49        20,160       99.93             6.96%
                               ----------------------------------------------------------------------------------------
Total commercial real estate          1,299,647      1,221,919       94.02     1,139,745       87.70             8.17%
securities included in CDOs
                               ----------------------------------------------------------------------------------------
Total commercial real estate
securities                           $7,535,633     $3,774,246                $3,693,232
                               ========================================================================================
</TABLE>

During the six months ended June 30, 2006, the Company's commercial real estate
asset portfolio increased by approximately 11% from an estimated fair value of
$3,774,246 at December 31, 2005, compared with $4,173,956 at June 30, 2006.

The Company's CDO offerings allow the Company to match fund its commercial real
estate portfolio by issuing long-term debt to finance long-term assets. The CDO
debt is non-recourse to the Company;

                                      31

<PAGE>

therefore, the Company's losses are limited to its equity investment in the
CDO. The CDO debt is also hedged to protect the Company from an increase in
short-term interest rates. At June 30, 2006, over 83% of the estimated fair
value of the Company's subordinated CMBS is match funded in the Company's CDOs
in this manner.

The Company retained 100% of the equity of CDOs I, II, III and HY3 (each as
defined below) and recorded the transactions on its consolidated financial
statements as secured financing. The table below summarizes the Company's CDO
debt and collateral at June 30, 2006.
<TABLE>
<CAPTION>

                     Collateral at June 30, 2006             Debt at June 30, 2006
               ------------------------------------  ----------------------------------------------
                                                                         Weighted
                       Adjusted       Loss Adjusted   Adjusted Issue   Average Cost     Net
                    Purchase Price        Yield            Price         of Funds *   Spread
               ------------------------------------  ----------------------------------------------
<S>                      <C>               <C>          <C>               <C>           <C>
CDO I                    $432,836          9.32%        $406,662          7.02%         2.30%
CDO II                    319,123          7.91%         292,477**        5.76%         2.14%
CDO III                   378,103          7.28%         367,004**        4.83%         2.44%
CDO HY3                   431,287          8.66%         416,935**        6.33%         2.33%
---------------------------------------------------  ----------------------------------------------
Total                  $1,561,349          8.35%      $1,483,078          6.04%         2.32%
</TABLE>


*  Weighted Average Cost of Funds is the current cost of funds plus hedging
   expenses.
** The Company chose not to sell $10,000 of par of CDO II debt rated BB,
   $13,069 of par of CDO III debt rated BB and $47,000 par of CDO HY3 debt rated
   BB.


Securitizations

On July 26, 2005, the Company closed its fifth CDO ("CDO HY2") and issued
non-recourse liabilities with a face amount of $365,010. Senior investment
grade notes with a face amount of $240,134 were issued and sold in a private
placement. The Company retained the floating rate BBB- note, the below
investment grade notes and the preferred shares. The Company recorded CDO HY2
as a secured financing for accounting purposes and consolidated the assets,
liabilities, income and expenses of CDO HY2 until the sale of the floating rate
BBB- note in December 2005, at which point CDO HY2 qualified as a sale under
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No.
140").

                                      32
<PAGE>


The Company received cash proceeds of $244,212 as well as all of the retained
interests that had an estimated fair value of $105,025 at December 31, 2005.
The transaction raised investable proceeds of $56,226. The following table
summarizes the impact of this transaction on 2005 results:

Net realized gain related to sale of CDO HY2                          $16,523
Increase in accumulated other comprehensive income                      9,611
                                                                --------------
Total stockholders' equity impact                                     $26,134
                                                                ==============


Real Estate Credit Profile of Below Investment Grade CMBS

The Company divides its below investment grade CMBS investment activity into
two portfolios; Controlling Class CMBS and other below investment grade CMBS.
The Company considers the CMBS securities where it maintains the right to
influence the foreclosure/workout process on the underlying loans to be its
controlling class CMBS ("Controlling Class"). The distinction between the two
is in the rights the Company obtains with its investment in Controlling Class
CMBS. Controlling Class rights allow the Company to influence the workout
and/or disposition of defaults that occur in the underlying loans. These
securities absorb the first losses realized in the underlying loan pools. The
coupon payment on the non-rated security also can be reduced for special
servicer fees charged to the trust. The next highest rated security in the
structure then generally will have its rating withdrawn and will then be
non-rated. This non-rated security will become the first to absorb losses and
expenses from that point on. At June 30, 2006, the Company owns 25 different
trusts where it is in the first loss position and is designated as the
controlling class representative by owning the lowest rated or non-rated CMBS
class. The total par of the loans underlying these securities was $35,224,119.
At June 30, 2006, subordinated Controlling Class CMBS with a par of $775,466
were included on the Company's consolidated statement of financial condition.
Subordinated Controlling Class CMBS with a par of $753,043 were held as
collateral for CDOs HY1 and HY2.

The Company's other below investment grade CMBS have more limited rights
associated with its ownership to influence the workout and/or disposition of
underlying loan defaults. The total par of the Company's other below investment
grade CMBS at June 30, 2006 was $167,251; the average credit protection, or
subordination level, of this portfolio is 2.67%.

The Company's investment in its subordinated Controlling Class CMBS by credit
rating category at June 30, 2006 is as follows:
<TABLE>
<CAPTION>
                                                                                      Weighted
                                                               Adjusted                Average
                                  Estimated      Dollar        Purchase      Dollar  Subordination
                       Par        Fair Value      Price          Price       Price      Level
                  ------------------------------------------------------------------------------------
<S>                  <C>            <C>           <C>           <C>           <C>        <C>
BB+                  $126,363       $110,416      87.38         $108,220      85.64      4.10%
BB                    138,155        115,954      83.93          101,869      73.73      3.15%
BB-                   130,039         99,047      76.17           94,458      72.64      3.42%
B+                     89,623         65,738      73.35           60,416      67.41      2.63%
</TABLE>

                                      33

<PAGE>
<TABLE>
<CAPTION>

<S>                    <C>            <C>         <C>             <C>         <C>        <C>
B                      69,378         46,253      66.67           40,564      58.47      2.05%
B-                     44,023         23,825      54.12           23,174      52.64      1.29%
CCC                     9,671          3,728      38.54            3,727      38.54      0.88%
NR                    168,214         46,638      29.51           47,941      28.50       n/a
                  ------------------------------------------------------------------------------------
Total                $775,466       $514,599      66.36         $480,369     61.95
</TABLE>

The Company's investment in its subordinated Controlling Class CMBS by credit
rating category at December 31, 2005 was as follows:

<TABLE>
<CAPTION>
                                                                                      Weighted
                                                               Adjusted                Average
                                  Estimated      Dollar        Purchase      Dollar  Subordination
                       Par        Fair Value      Price          Price       Price      Level
                  ------------------------------------------------------------------------------------
<S>                  <C>            <C>           <C>           <C>           <C>        <C>
BB+                    $139,541      $131,676      94.36        $120,541      86.38             5.64%
BB                       92,583        81,469      88.00          76,527      82.66             4.43%
BB-                     110,514        92,116      83.35          85,829      77.66             4.15%
B+                       79,564        56,651      71.20          52,828      66.40             2.60%
B                       132,247        84,201      63.37          77,784      58.82             2.81%
B-                       23,775        13,216      55.59          12,303      51.75             1.24%
NR                       96,626        27,777      28.75          25,727      26.63               n/a
                  ------------------------------------------------------------------------------------
Total                  $674,850      $487,106      72.18        $451,539      66.91
</TABLE>

As the portfolio matures and expected losses occur, subordination levels of the
lower rated classes of a CMBS investment will be reduced. This may cause the
lower rated classes to be downgraded, which would negatively affect their
estimated fair value and therefore the Company's net asset value. Reduced
estimated fair value would negatively affect the Company's ability to finance
any such securities that are not financed through a CDO or similar matched
funding vehicle. In some cases, securities held by the Company may be upgraded
to reflect seasoning of the underlying collateral and thus would increase the
estimated fair value of the securities. During the six months ended June 30,
2006, ten securities in six of the Company's Controlling Class CMBS were
upgraded by at least one rating agency and none were downgraded. Additionally,
at least one rating agency upgraded 46 of the Company's non-Controlling Class
commercial real estate securities. None were downgraded during the six months
ended June 30, 2006.

For all of the Company's Controlling Class securities, the Company follows a
policy of assigning estimated losses to specific loans as well as adding a
general loss assumption that is not loan specific. In performing continuing
credit reviews on the 25 Controlling Class trusts, the Company estimates that
specific losses totaling $423,100 related to principal of the underlying loans
will not be recoverable, of which $201,459 is expected to occur over the next
five years. The total loss estimate of $423,100 represents 1.20% of the total
current underlying loan pools at June 30, 2006. Additionally, the Company
assumes a constant default rate of approximately ten to forty basis points with
a 35% loss severity and a one-year recovery period. These estimates were
developed based on an analysis of individual loan characteristics and
prevailing market conditions at the time of origination. All estimated workout
expenses including special servicer fees are included in these assumptions.
These loss assumptions are

                                      34

<PAGE>

then used to compute a loss adjusted yield, which is then used to record
interest income on the Company's consolidated financial statements. If the loss
assumptions prove to be consistent with actual loss experience, the yield will
be consistent over the life of the security. As actual losses differ from the
original loss assumptions, yields are adjusted to reflect the updated
assumptions. In addition, a write down of the adjusted purchase price or write
up of loss adjusted yields of the security may be required. (See Item 3
-"Quantitative and Qualitative Disclosures About Market Risk" for more
information on the sensitivity of the Company's income and adjusted purchase
price to changes in credit experience.)

The Company considers delinquency information from the Lehman Brothers Conduit
Guide to be the most relevant benchmark to measure credit performance and
market conditions applicable to its Controlling Class CMBS holdings. The year
of issuance, or vintage year, is important, as older loan pools will tend to
have more delinquencies than newly underwritten loans. Comparable delinquency
statistics referenced by vintage year as a percentage of par outstanding at
June 30, 2006 are shown in the table below:

                         Underlying      Delinquencies       Lehman Brothers
         Vintage Year    Collateral       Outstanding         Conduit Guide
         -----------------------------------------------------------------------
            1998           $5,631,173            1.14%                   1.44%
            1999              622,718            1.53%                   1.46%
            2001              866,687            2.99%                   1.36%
            2002            1,154,537            0.31%                   0.57%
            2003            2,105,613            0.44%                   0.39%
            2004            6,582,916            0.11%                   0.25%
            2005           12,147,370            0.00%                   0.13%
            2006            6,113,105            0.00%                   0.01%
                     -----------------------------------------------------------
            Total         $35,224,119            0.34%                  0.42%*
* Weighted average based on current principal balance.

Delinquencies on the Company's CMBS collateral as a percent of principal are in
line with expectations and are consistent with comparable data provided in the
Lehman Brothers Conduit Guide. Future delinquencies and losses may cause par
reductions and cause the Company to conclude that a change in loss adjusted
yield is required along with a write down of the adjusted purchase price
through the income statement according to Emerging Issues Task Force Issue
99-20, Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets ("EITF 99-20").

The following table sets forth certain information relating to the aggregate
principal balance and payment status of delinquent mortgage loans underlying
the Controlling Class CMBS held by the Company at June 30, 2006.

                                      35

<PAGE>

 ------------------------------------------------- -----------------------------
                                                              June 30, 2006
 ------------------------------- ----------------- -------------- --------------
                                                     Number of          % of
                                     Principal         Loans         Collateral
 ------------------------------- ----------------- -------------- --------------
 Past due 30 days to 60 days              $892              3          0.01%
 ------------------------------- ----------------- -------------- --------------
 Past due 61 days to 90 days             8,491              3          0.02%
 ------------------------------- ----------------- -------------- --------------
 Past due 91 days or more               15,580             11          0.04%
 ------------------------------- ----------------- -------------- --------------
 Real estate owned ("REO")              90,849              9          0.26%
 ------------------------------- ----------------- -------------- --------------
 Foreclosure                             3,608              1          0.01%
 ------------------------------- ----------------- -------------- --------------
 Total delinquent                     $119,420             27          0.34%
 ------------------------------- ----------------- -------------- --------------
 Total principal balance           $35,224,119
 ------------------------------- ----------------- -------------- --------------

Of the 27 delinquent loans at June 30, 2006, nine loans were real estate owned
and being marketed for sale, one loan was in foreclosure and the remaining 17
loans were in some form of workout negotiations. The Controlling Class CMBS
owned by the Company have a delinquency rate of 0.34%, which is consistent with
industry averages. During the six months ended June 30, 2006, the underlying
collateral experienced early payoffs of $314,320, representing 0.89% of the
quarter-end pool balance. These loans were paid off at par with no loss. Pay
down proceeds are distributed to the highest rated CMBS class first and reduce
the percent of total underlying collateral represented by each rating category.
Aggregate losses related to the underlying collateral of $7,784 were realized
during the six months ended June 30, 2006. This brings cumulative realized
losses to $97,954, which is 23.2% of total estimated losses. These losses
include special servicer and other workout expenses. This experience to date is
in line with the Company's loss expectations. Realized losses and special
servicer expenses are expected to increase on the underlying loans as the
portfolio matures.

To the extent that realized losses differ from the Company's original loss
estimates, it may be necessary to reduce or increase the projected yield on the
applicable CMBS investment to better reflect such investment's expected
earnings net of expected losses, from the date of purchase. While realized
losses on individual assets may be higher or lower than original estimates, the
Company currently believes its aggregate loss estimates and yields remain
appropriate.

                                      36

<PAGE>


The Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of its
right to control the workout process for delinquent loans as early as possible.
The Company maintains diversification of credit exposures through its
underwriting process and can shift its focus in future investments by adjusting
the mix of loans in subsequent acquisitions. The comparative profiles of the
loans underlying the Company's CMBS by property type at June 30, 2006 and
December 31, 2005 are as follows:

                         June 30, 2006 Exposure    December 31, 2005 Exposure
     -------------------------------------------------------------------------
                                             % of                        % of
     Property Type         Loan Balance      Total        Loan Balance   Total
     -------------------------------------------------------------------------
     Retail                 $11,306,942      32.1%         $9,195,747   31.0%
     Office                  10,556,688       23.3          9,406,148    31.7
     Multifamily              8,214,265       30.0          6,874,450    23.2
     Industrial               2,462,166        7.0          2,060,953     7.0
     Lodging                  1,969,028        5.6          1,670,436     5.6
     Healthcare                 450,869        1.3            299,692     1.0
     Other                      264,181        0.7            160,923     0.5
                       -------------------------------------------------------
     Total                  $35,224,119       100%        $29,668,349    100%
                       =======================================================

At June 30, 2006, the estimated fair value of the Company's holdings of
subordinated Controlling Class CMBS is $34,229 higher than the adjusted cost
for these securities which consists of a gross unrealized gain of $47,765 and a
gross unrealized loss of $13,536. The adjusted purchase price of the Company's
subordinated Controlling Class CMBS portfolio at June 30, 2006 represents
approximately 61% of its par amount. The estimated fair value of the Company's
subordinated Controlling Class CMBS portfolio at June 30, 2006 represents
approximately 66% of its par amount. As the portfolio matures, the Company
expects to recoup the $13,536 of unrealized loss, provided that the credit
losses experienced are not greater than the credit losses assumed in the
projected cash flow analysis. At June 30, 2006, the Company believes there has
been no material deterioration in the credit quality of its portfolio below
current expectations.

The Company's interest income calculated in accordance with EITF 99-20 for its
CMBS is computed based upon a yield, which assumes credit losses will occur.
The yield to compute the Company's taxable income does not assume there would
be credit losses, as a loss can only be deducted for tax purposes when it has
occurred. This is the primary difference between the Company's income in
accordance with accounting principles generally accepted in the United States
of America ("GAAP") and taxable income. As a result, for the years 1998 through
June 30, 2006, the Company's GAAP income was approximately $37,300 lower than
the taxable income.

Commercial Real Estate Loan Activity

The Company's commercial real estate loan portfolio generally emphasizes larger
transactions located in metropolitan markets, as compared to the typical loan
in the CMBS portfolio.

                                      37

<PAGE>

The following table summarizes the Company's commercial real estate loan
portfolio by property type at June 30, 2006 and December 31, 2005:
<TABLE>
<CAPTION>

                         Carrying Value
                       --------------------------------------------    Weighted Average
                           June 30, 2006       December 31, 2005            Yield
---------------------- --------------------- ---------------------- --------------------
  Property Type           Amount        %       Amount        %        2006       2005
---------------------- ----------- --------- ----------- ---------- --------- ----------
<S>                       <C>          <C>       <C>          <C>        <C>        <C>
Office                    $131,722     30.2%     $94,432      25.8%      8.7%       8.9%
Retail                     124,608      28.6      76,502       20.9       8.3        7.3
Hotel                       54,186      12.4      79,840       21.8       9.1        8.6
Residential                 50,733      11.6      57,466       15.7       9.0        8.6
Industrial                  36,742       8.5       2,423        0.7       8.0        8.1
Storage                     32,768       7.5      32,913        9.0       9.1        9.1
Other Mixed Use              4,959       1.2       2,230        0.6       7.8        8.1
Communication Tower              -         -      20,000        5.5         -        9.4
                       ----------- --------- ----------- ---------- --------- ----------
Total                     $435,713    100.0%    $365,806     100.0%      8.6%       8.5%
                       ----------- --------- ----------- ---------- --------- ----------
</TABLE>

Included in the chart above are non-U.S. dollar denominated commercial real
estate loans with a carrying value of $209,406 and $129,951 at June 30, 2006
and December 31, 2005, respectively. The Company finances its non-U.S. dollar
denominated loans by borrowing in the applicable local currency and hedging the
un-financed portion.

During the six months ended June 30, 2006, the Company purchased $35,600 U.S.
dollar denominated commercial real estate loans with a total principal balance
of $40,000, two British pound denominated commercial real estate loans with a
total cost of (pound)21,835 ($38,982) and a principal balance of (pound)22,389
and three Euro denominated commercial real estate loans for a total cost of
(euro)39,186 ($49,801) and with a principal balance totaling (euro)39,586.
During the six months ended June 30, 2006, the Company experienced repayments
in the aggregate amount of $65,980.

The average yields on the Company's commercial real estate loans for the
quarters ended June 30, 2006 and 2005 were as follows:

                                                       For the quarters ended
                                                              June 30,
                                                        2006           2005
                                                     -------------------------
Fixed-rate commercial real estate loans                9.1%           9.5%
Floating-rate commercial real estate loans             8.1%           8.1%
All commercial real estate loans                       8.5%           8.7%

Also included in commercial real estate loans are the Company's investments in
the Carbon Capital Funds. The annualized yield on the Carbon Capital Funds was
23.7% for the quarter ended June 30, 2006 as compared with 18.8% for the
quarter ended June 30, 2005. The increase in the annualized yield is primarily
attributable to prepayment penalties received on underlying assets in Carbon
Capital II. For the quarter ended June 30, 2006, Carbon Capital II acquired
$143,541 of commercial mortgage loans and received repayments of $34,567. As
loans are repaid, Carbon Capital II has redeployed capital into acquisitions of
additional loans for

                                      38

<PAGE>


the portfolio. The Carbon Capital I investment period has
expired and as repayments occur, capital will be returned to investors.

The Company's investments in the Carbon Capital Funds are as follows:

                           June 30, 2006         December 31, 2005
                           --------------------- -------------------------
Carbon Capital I                 $ 3,265                $18,458
Carbon Capital II                 63,874                 41,185
                           --------------------- -------------------------
                                 $67,139                $59,643
                           ===================== =========================

At June 30, 2006, all commercial real estate loans owned directly by the
Company were performing in line with expectations. The Company's investment in
Carbon Capital II includes a $28,300 mezzanine loan which defaulted during July
2006. The underlying property is a hotel located in the South Beach area of
Miami, Florida. Based on the credit analysis performed by Carbon Capital II, a
loan loss reserve is not necessary at this time. To the extent a loan loss
reserve becomes necessary, the Company would incur 26% of the loss, which
represents the Company's pro rata share of Carbon II. All other commercial real
estate loans in the Carbon Capital Funds are performing as expected.

Commercial Real Estate

As previously announced, the Company invests in BlackRock Diamond Property Fund
("BlackRock Diamond"). BlackRock Diamond is an open-end fund that applies
value-added strategies to a portfolio of commercial real estate properties. For
the quarter ended June 30, 2006, the Company recorded $6,155 of income
consisting of $282 of current income and $5,873 of unrealized gains on the
underlying portfolio assets. For the six months ended June 30, 2006, the
Company recorded $11,697 of income consisting of $652 of current income and
$11,045 of unrealized gains on the underlying portfolio assets. To date, the
Company has invested an aggregate of $86,272, which represents a 25.5% interest
in BlackRock Diamond and has remaining capital commitments totaling $13,728. At
June 30, 2006, BlackRock Diamond's portfolio consists of nineteen assets with a
total market value of approximately $460,400. BlackRock Diamond is managed by a
subsidiary of the Company's Manager and all financial information was reported
by BlackRock Diamond.

As previously reported, the Company purchased a defaulted loan from a
Controlling Class CMBS trust during the first quarter of 2006. The loan was
secured by a first mortgage on a multi-family property in Texas. Subsequent to
the loan purchase, the Company foreclosed on the loan and acquired title to the
property in the process. The Company sold the property during the second
quarter of 2006 and recorded a gain from discontinued operations of $1,366 on
the consolidated statement of operations.

The Company has an investment in a commercial real estate development fund
located in India. Total capital committed is $11,000, of which $3,850 has been
drawn. The entity conducts its operations in the local currency, Indian Rupees.

Critical Accounting Estimates

                                      39

<PAGE>

Management's discussion and analysis of financial condition and results of
operations are based on the amounts reported in the Company's consolidated
financial statements. These financial statements are prepared in accordance
with GAAP. In preparing the financial statements, management is required to
make various judgments, estimates and assumptions that affect the reported
amounts. Changes in these estimates and assumptions could have a material
effect on the Company's consolidated financial statements. The following is a
summary of the Company's accounting policies that are the most affected by
management judgments, estimates and assumptions:

Securities Available-for-sale

The Company has designated certain investments in mortgage-backed securities,
mortgage-related securities and certain other securities as available-for-sale.
Securities available-for-sale are carried at estimated fair value with the net
unrealized gains or losses reported as a component of accumulated other
comprehensive income (loss) in stockholders' equity. Many of these investments
are relatively illiquid, and management must estimate their values. In making
these estimates, management generally utilizes market prices provided by
dealers who make markets in these securities, but may, under certain
circumstances, adjust these valuations based on management's judgment. Changes
in the valuations do not affect the Company's reported net income or cash
flows, but impact stockholders' equity and, accordingly, book value per share.

Management must also assess whether unrealized losses on securities reflect a
decline in value that is other than temporary, and, accordingly, write the
impaired security down to its fair value, through earnings. Significant
judgment by management is required in this analysis, which includes, but is not
limited to, making assumptions regarding the collectability of the principal
and interest, net of related expenses, on the underlying loans.

Income on these securities is recognized based upon a number of assumptions
that are subject to uncertainties and contingencies. Examples of these
assumptions include, among other things, the rate and timing of principal
payments (including prepayments, repurchases, defaults and liquidations), the
pass-through or coupon rate and interest rate fluctuations. Additional factors
that may affect the Company's reported interest income on its mortgage
securities include interest payment shortfalls due to delinquencies on the
underlying mortgage loans, the timing and magnitude of credit losses on the
mortgage loans underlying the securities that are a result of the general
condition of the real estate market (including competition for tenants and
their related credit quality) and changes in market rental rates. These
uncertainties and contingencies are difficult to predict and are subject to
future events that may alter the assumptions.

The Company recognizes interest income from its purchased beneficial interests
in securitized financial interests ("beneficial interests") (other than
beneficial interests of high credit quality, sufficiently collateralized to
ensure that the possibility of credit loss is remote, or that cannot
contractually be prepaid or otherwise settled in such a way that the Company
would not recover substantially all of its recorded investment) in accordance
with EITF 99-20. Accordingly, on a quarterly basis, when changes in estimated
cash flows from the cash flows previously estimated occur due to actual
prepayment and credit loss experience, the Company calculates a revised yield
based on the current amortized cost of the investment

                                      40

<PAGE>

(including any other-than-temporary impairments recognized to date) and the
revised cash flows. The revised yield is then applied prospectively to
recognize interest income.

For other mortgage-backed and related mortgage securities, the Company accounts
for interest income under SFAS No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases ("SFAS No. 91"), using the effective yield method which includes the
amortization of discount or premium arising at the time of purchase and the
stated or coupon interest payments.

Impairment - Securities

In accordance with SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS No. 115"), when the estimated fair value of the
security classified as available-for-sale has been below amortized cost for a
significant period of time and the Company concludes that it no longer has the
ability or intent to hold the security for the period of time over which the
Company expects the values to recover to amortized cost, the investment is
written down to its fair value. The resulting charge is included in income, and
a new cost basis is established. Additionally, for certain securities, when
changes in estimated cash flows from the cash flows previously estimated occur
due to actual prepayment and credit loss experience, and the present value of
the revised cash flows using the current expected yield is less than the
present value of the previously estimated remaining cash flows (adjusted for
cash receipts during the intervening period), an other-than-temporary
impairment is deemed to have occurred. Accordingly, the security is written
down to fair value with the resulting change being included in income, and a
new cost basis established. In both instances, the original discount or premium
is written off when the new cost basis is established.

After taking into account the effect of an impairment charge, income is
recognized under EITF 99-20 or SFAS No. 91, as applicable, using the market
yield for the security used in establishing the write-down.

Variable Interest Entities

The consolidated financial statements include the financial statements of the
Company and its subsidiaries, which are wholly-owned or controlled by the
Company or entities which are variable interest entities ("VIEs") in which the
Company is the primary beneficiary under FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (revised December 2003) ("FIN
46R"). FIN 46R requires a VIE to be consolidated by its primary beneficiary.
The primary beneficiary is the party that absorbs the majority of the VIE's
anticipated losses and/or the majority of the expected returns. All significant
inter-company balances and transactions have been eliminated in consolidation.

The Company has analyzed the governing pooling and servicing agreements for
each of its Controlling Class CMBS and believes that the terms are industry
standard and are consistent with the qualifying special-purpose entity ("QSPE")
criteria. However, there is uncertainty with respect to QSPE treatment due to
ongoing review by accounting standard setters, potential actions by various
parties involved with the QSPE, as well as varying and evolving interpretations
of the QSPE criteria under SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities ("SFAS

                                      41

<PAGE>

No. 140"). Additionally, the accounting standard setters continue to review the
FIN 46R provisions related to the computations used to determine the primary
beneficiary of a VIE. Future guidance from the accounting standard setters may
require the Company to consolidate CMBS trusts in which the Company has
invested.

Mortgage Loans

The Company purchases and originates commercial mortgage loans to be held as
long-term investments. The Company also has investments in the Carbon Capital
Funds that invest in commercial mortgage loans and are managed by the Manager.
Management periodically evaluates each loan for possible impairment. Impairment
is indicated when it is deemed probable that the Company will not be able to
collect all amounts due according to the contractual terms of the loan. If a
loan was determined to be impaired, the Company will establish a reserve for
probable losses and a corresponding charge to earnings. Given the nature of the
Company's loan portfolio and the underlying commercial real estate collateral,
significant judgment of management is required in determining impairment and
the resulting loan loss allowance, which includes but is not limited to making
assumptions regarding the value of the real estate that secures the mortgage
loan. To date, the Company has determined that no loan loss allowances have
been necessary on the loans in its portfolio or held by the Carbon Capital
Funds.

Equity Investments

For those investments in real estate entities where the Company does not
control the investee, or is not the primary beneficiary of a VIE, but can exert
significant influence over the financial and operating policies of the
investee, the Company uses the equity method of accounting. The Company
recognizes its share of each investee's income or loss, and reduces its
investment balance by distributions received. The Company owns an equity method
investment in BlackRock Diamond, a privately held REIT that maintains its
financial records on a fair value basis. The Company has retained such
accounting relative to its investment in this REIT pursuant to EITF Issue
85-12, Retention of Specialized Accounting for Investments in Consolidation.

Derivative Instruments

The Company utilizes various hedging instruments (derivatives) to hedge
interest rate and foreign currency exposures or to modify the interest rate or
foreign currency characteristics of related Company investments. All
derivatives are carried at fair value, generally estimated by management based
on valuations provided by the counterparty to the derivative contract. For
accounting purposes, the Company's management must decide whether to designate
these derivatives as either a hedge of an asset or liability, securities
available-for-sale, securities held-for-trading, or foreign currency exposure.
This designation decision affects the manner in which the changes in the fair
value of the derivatives are reported.

Securitizations

When the Company sells assets in securitizations, it can retain certain
tranches which are considered

                                      42

<PAGE>

retained interests in the securitization. Gain or loss on the sale of assets
depends in part on the previous carrying amount of the financial assets
securitized, allocated between the assets sold and the retained interests based
on their relative fair value at the date of securitization. To obtain fair
values, quoted market prices are used. Gain or loss on securitizations of
financial assets is reported as a component of sale of securities
available-for-sale on the consolidated statement of operations. Retained
interests are carried at estimated fair value on the consolidated statement of
financial condition. Adjustments to estimated fair value for retained interests
classified as securities available-for-sale are included in accumulated other
comprehensive income on the consolidated statement of financial condition.

                                      43

<PAGE>


II.  Results of Operations

Net income available to common stockholders for the three and six months ended
June 30, 2006 was $16,353 or $0.29 per share (basic and diluted) and $35,146 or
$0.62 per share (basic and diluted), respectively. Net income available to
common stockholders for the three and six months ended June 30, 2005 was $9,701
or $0.18 per share (basic and diluted) and $24,069 or $0.45 per share (basic
and diluted), respectively. Net income available to common stockholders
increased to $0.62 per share for the six months ended June 30, 2006 as compared
to $0.45 per share for the six months ended June 30, 2005.

Interest Income: The following tables set forth information regarding the total
amount of income from certain of the Company's interest-earning assets.
<TABLE>
<CAPTION>

                                                      For the Three Months Ended                   Variance
                                                               June 30,
                                                        2006               2005               Amount          %
                                                 ------------------- ----------------- --- ------------- ------------
<S>                                                     <C>                 <C>                <C>            <C>
Commercial real estate securities                       $41,847             $33,602            $8,245         24.5%
Commercial mortgage loan pools                           13,287              13,605             (318)         (2.3)
Commercial real estate loans                              8,973               4,937             4,036          81.8
Residential mortgage-backed securities ("RMBS")           3,080               2,691               389          14.4
Cash and cash equivalents                                   580                 266               314         118.0
                                                 ------------------- ----------------- --- ------------- ------------
Total interest income                                   $67,767             $55,101           $12,666         23.0%
                                                 =================== ================= === ============= ============


                                                       For the Six Months Ended                    Variance
                                                              June 30,
                                                        2006               2005               Amount          %
                                                 ------------------- ----------------- --- ------------- ------------
Commercial real estate securities                       $79,638             $66,233           $13,405         20.2%
Commercial mortgage loan pools                           26,513              27,157             (644)         (2.4)
Commercial real estate loans                             16,989              10,281             6,708          65.2
RMBS                                                      6,110               5,571               539           9.7
Cash and cash equivalents                                   918                 503               415          82.5
                                                 ------------------- ----------------- --- ------------- ------------
Total interest income                                  $130,168            $109,745           $20,423         18.6%
                                                 =================== ================= === ============= ============
</TABLE>

                                      44

<PAGE>


The following table reconciles interest income and total income for the three
and six months ended June 30, 2006 and 2005.

<TABLE>
<CAPTION>
                                             For the Three Months Ended June 30,                    Variance
                                                   2006                 2005             Amount                 %
                                          ----------------------------------------------------------------------------------
<S>                                                 <C>               <C>                <C>                    <C>
Interest Income                                     $67,767           $55,101            $12,666                23.0%
Earnings from BlackRock Diamond                       6,155                 -              6,155                  n/a
Earnings from the Carbon Capital I                        8             1,732            (1,726)               (99.5)
Earnings from the Carbon Capital II                   3,511             1,292              2,219                171.7
                                          ----------------------------------------------------------------------------------
Total Income                                        $77,441           $58,125             19,316                33.2%
                                          ==================================================================================


                                              For the Six Months Ended June 30,                     Variance
                                                    2006                2005             Amount                %
                                           ---------------------------------------------------------------------------------
Interest Income                                    $130,168          $109,745           $20,423                 18.6%
Earnings from BlackRock Diamond Property
Fund ("BlackRock Diamond")                           11,697                 -            11,697                   n/a
Earnings from the Carbon Capital I                      714             3,424           (2,710)               (79.1)%
Earnings from the Carbon Capital II                   6,605             2,205             4,400                199.5%
Earnings from real estate joint ventures                  -                59              (59)              (100.0)%
                                           ---------------------------------------------------------------------------------
Total Income                                       $149,184          $115,433          (33,751)                 29.2%
                                           =================================================================================
</TABLE>


For the three and six months ended June 30, 2006, interest income increased
$12,666 and $20,423, or 23.0% and 18.6%, from the same three and six month
periods in 2005. The Company continued to increase its investments in
commercial real estate securities and loans, resulting in an increase of
$13,405, or 20.2%, and $6,708, or 65.2%, respectively, for the six months ended
June 30, 2006. Income from BlackRock Diamond was $6,155 and $11,697 for the
three and six months ended June 30, 2006, respectively. The Company began
investing in BlackRock Diamond in the fourth quarter of 2005, as a result,
there was no income related to BlackRock Diamond for the three and six months
ended June 30, 2005. BlackRock Diamond maintains its financial records on a
fair value basis. The Company has retained such accounting in its consolidated
financial statements pursuant to EITF Issue 85-12, Retention of Specialized
Accounting for Investments in Consolidation. For the three and six months ended
June 30, 2006, income from Carbon I decreased $(1,726), or (99.5)%, and
$(2,710), or (79.1)%, from the same three and six month periods in 2005. The
decrease in Carbon I income is attributable to Carbon I's investment period
expiring on July 12, 2004 and the subsequent pay down of its assets. For the
three and

                                      45

<PAGE>

six months ended June 30, 2005, income from Carbon II increased $2,219, or
171.7%, and 4,400, or 199.5%, from the same three and six month periods in
2005. The increase in Carbon II income is primarily attributable to the
investment of additional capital in 2006 and prepayment penalties received on
its underlying commercial real estate loans.


Interest Expense: The following table sets forth information regarding the
total amount of interest expense from certain of the Company's borrowings and
cash flow hedges.

<TABLE>
<CAPTION>
                                         For the Three Months Ended              Variance
                                                  June 30,
                                            2006            2005          Amount           %
                                       --------------- --------------- ------------- ---------------
<S>                                         <C>             <C>            <C>                <C>
Collateralized debt obligations             $18,580         $16,018        $2,562             16.0%
Commercial real estate securities             9,280           3,377         5,903             174.8
Commercial mortgage loan pools*              12,612          12,745         (133)             (1.0)
Commercial real estate loans                  3,023           1,275         1,748             137.1
RMBS                                          3,748           2,396         1,352              56.4
Junior subordinated notes - net               3,439               -         3,439               n/a
Cash flow hedges                                636           1,626         (990)            (60.9)
Hedge ineffectiveness**                          40           1,533       (1,493)            (97.4)
                                       --------------- --------------- ------------- ---------------
Total Interest Expense                      $51,358         $38,970       $12,388             31.8%
                                       =============== =============== ============= ===============


                                          For the Six Months Ended               Variance
                                                  June 30,
                                            2006            2005          Amount           %
                                       --------------- --------------- ------------- ---------------
Collateralized debt obligations             $34,714         $31,766         2,948              9.2%
Commercial real estate securities            17,356           5,964        11,392             191.0
Commercial mortgage loan pools*              25,278          25,525         (247)             (1.0)
Commercial real estate loans                  5,988           2,496         3,492             139.9
RMBS                                          7,343           4,525         2,818              62.3
Junior subordinated notes - net               5,659               -         5,659               n/a
Cash flow hedges                              2,119           3,926       (1,807)            (46.0)
Hedge ineffectiveness**                       (575)           1,272       (1,847)           (145.2)
                                       --------------- --------------- ------------- ---------------
Total Interest Expense                      $97,882         $75,474       $22,408             29.7%
                                       =============== =============== ============= ===============
</TABLE>


                                      46

<PAGE>

* Includes $35 and $81 of interest expense for the three and six months ended
June 30, 2006 from short-term financings of securities related to the
consolidation of commercial mortgage loan pools. Includes $13 and $17 of
interest expense for the three and six months ended June 30, 2005 from
short-term financings of securities related to the consolidation of commercial
mortgage loan pools.

**See Note 12 of the consolidated financial statements, Derivative Instruments
and Hedging Activities, for a further description of the Company's hedge
ineffectiveness.

For the three and six months ended June 30, 2006, interest expense increased
$12,388, or 31.8%, and $22,408, or 29.7%, from the same three and six month
periods in 2005. Interest expense related to CDOs increased $2,562, or 16.0%,
and $2,948, or 9.2%, for the three and six months ended June 30, 2006 and 2005,
respectively, primarily due to the issuance of CDO HY3. The financing of
additional commercial real estate securities and commercial real estate loans
along with higher short-term borrowing rates increased interest expense
$11,392, 191.0%, and $3,492, or 139.9%, respectively, for the same six month
period of 2005. For the three and sixth months ended June 30, 2006, the
issuance of $175,000 of trust preferred securities since the fourth quarter of
2005 increased interest expense $3,439 and 5,659, respectively. Cash flow hedge
expense decreased $990, or 60.9%, and $1,807, or 46.0%, for the three and six
months ended June 2006 and 2005, respectively. This decrease is due to the cash
flow hedges offsetting higher short-term interest rates on commercial real
estate securities and loans.

Net Interest Margin and Net Interest Spread from the Portfolio: The Company
considers its portfolio to consist of securities available-for-sale, securities
held-for-trading, commercial mortgage loans, and cash and cash equivalents
because these assets relate to its core strategy of acquiring and originating
high yield loans and securities backed by commercial real estate, while at the
same time maintaining a portfolio of investment grade securities to enhance the
Company's liquidity.

Net interest margin from the portfolio is annualized net interest income
divided by the average estimated fair value of interest-earning assets. Net
interest income is total interest income less interest expense relating to
collateralized borrowings. Net interest spread equals the yield on average
assets for the period less the average cost of funds for the period. The yield
on average assets is interest income divided by average amortized cost of
interest earning assets. The average cost of funds is interest expense from the
portfolio divided by average outstanding collateralized borrowings.

The following chart describes the interest income, interest expense, net
interest margin, average yield, cost of funds and net interest spread for the
Company's portfolio. The following interest income and interest expense amounts
exclude income and expense related to hedge ineffectiveness, and the gross-up
effect of the consolidation of a VIE that includes commercial mortgage loan
pools. The Company believes interest income and expense excluding the effects
of these items better reflects the Company's net interest margin and net
interest spread from the portfolio.


                                       47

<PAGE>

                             For the Three Months          For the Six Months
                                Ended June 30,               Ended June 30,
                           2006            2005           2006            2005
                      --------------- -------------- -------------- ------------
Interest income           $55,190        $42,369        $104,972         $84,465
Interest expense          $38,740        $24,705        $73,261          $48,805
Net interest margin        2.23%          3.07%          2.22%            3.14%
Average yield              7.50%          7.36%          7.36%            7.43%
Cost of funds              6.11%          5.31%          6.11%            5.27%
Net interest spread        1.38%          2.05%          1.25%            2.17%


                                       48

<PAGE>


Other Expenses: Expenses other than interest expense consist primarily of
management fees and general and administrative expenses. The table below
summarizes those expenses for the three and six months ended June 30, 2006 and
2005.

<TABLE>
<CAPTION>
                                          For the Three Months Ended
                                                   June 30,                            Variance
                                            2006               2005               Amount          %
                                     ------------------- ----------------- --- ------------- ------------
<S>                                          <C>                 <C>                 <C>          <C>
Management fee                               $3,109              $2,661              $448         16.8%
Incentive fee                                 1,538                   -             1,538           n/a
Incentive fee - stock based                     856                   -               856           n/a
General and administrative expense            1,135                 938               197          21.0
                                     ------------------- ----------------- --- ------------- ------------
Total other expenses                         $6,638              $3,599            $3,039         84.4%
                                     =================== ================= === ============= ============

                                           For the Six Months Ended                    Variance
                                                   June 30,
                                            2006               2005               Amount          %
                                     ------------------- ----------------- --- ------------- ------------
Management fee                               $6,160              $5,420              $740         13.7%
Incentive fee                                 2,708                   -             2,708           n/a
Incentive fee - stock based                     856                   -               856           n/a
General and administrative expense            2,238               1,758               480          27.3
                                     ------------------- ----------------- --- ------------- ------------
Total other expenses                        $11,962              $6,998            $4,964         70.9%
                                     =================== ================= === ============= ============
</TABLE>

Management fees are based on 2% of average quarterly stockholders' equity. The
increase of $448 and $740 or 16.8% and 13.7% for the three and six months ended
June 30, 2006, respectively, is due to the increase in the Company's
stockholders' equity. The Manager earned an incentive fee of $1,538 and $2,708
for the three and six months ended June 30, 2006, respectively, as the Company
achieved the necessary performance goals specified in the Management Agreement.
The $856 of expense is the accrual for the stock based incentive fee that was
approved by the Company's Board of Directors in February 2006. See Note 11 of
the consolidated financial statements, Transactions with Affiliates, for
further discussion of the Company's Management Agreement.

General and administrative expense is comprised of accounting agent fees,
custodial agent fees, directors' fees, fees for professional services,
insurance premiums, broken deal expenses, and due diligence costs. The increase
in general and administrative expense for the six months ended June 30, 2006 is
primarily attributable to the Company's increased professional fees and costs
associated with the Company's increased non-U.S. investment activity.

Other Gains (Losses): Gains (losses) on securities available-for-sale were
$(60) and $57 for the six months ended June 30, 2006 and 2005, respectively.
Gains (losses) on securities held-for-trading were $2,315 and $(2,678) for the
six months ended June 30, 2006 and 2005, respectively. Foreign currency gains
(losses) were $315 and $(344) for the six months ended June 30, 2006 and 2005,
respectively, which represent the net impact of the Company's foreign currency
exposure for the applicable quarters. The losses on impairment of assets of
$5,434 and $3,231 for the six months ended June 30, 2006 and 2005,
respectively, were related to the Company's write down of certain

                                      49

<PAGE>

CMBS as required by EITF 99-20. See Note 4 of the consolidated financial
statements, Impairment - CMBS, for further discussion of impairments.

Income from Discontinued Operations: The Company purchased a defaulted loan
from a Controlling Class CMBS trust during the first quarter of 2006. The
Company sold the property during the second quarter of 2006 and recorded a gain
from discontinued operations of $1,366 on the consolidated statement of
operations.

Dividends Declared: On May 18, 2006, the Company declared distributions to its
stockholders of $0.29 per share, payable on July 31, 2006 to stockholders of
record on June 30, 2006.

Changes in Financial Condition

Securities Available-for-sale: The Company's securities available-for-sale,
which are carried at estimated fair value, included the following at June 30,
2006 and December 31, 2005:
<TABLE>
<CAPTION>

                                                 June 30, 2006                     December 31,
                                                   Estimated                      2005 Estimated
                                                     Fair                              Fair
                Security Description                Value          Percentage          Value            Percentage
  --------------------------------------------- ---------------- --------------- ----------------- ----------------
<S>                                                     <C>                <C>           <C>                  <C>
  Commercial mortgage-backed securities:
  CMBS IOs                                              $87,801            3.6%          $103,363             5.0%
  Investment grade CMBS                                 729,713            30.1           509,835             24.5
  Non-investment grade rated subordinated
  securities                                            638,152            26.3           675,995             32.5
  Non-rated subordinated securities                      48,385             2.0            26,411              1.3
  Credit tenant leases                                   24,570             1.0            24,837              1.2
  Investment grade REIT debt                            226,368             9.3           255,767             12.3
  Multifamily agency securities                         396,190            16.4           263,362             12.7
  CDO investments                                       116,088             4.8           124,549              6.0
                                                ---------------- --------------- ----------------- ----------------
       Total CMBS                                     2,267,267            93.5         1,984,119             95.5
                                                ---------------- --------------- ----------------- ----------------

  Single-family RMBS:
  Agency adjustable rate securities                       2,027            0.1             76,491              3.7
  Residential CMOs                                      140,334            5.8                725              0.1
  Hybrid adjustable rate mortgages                       13,390            0.6             15,601              0.7
                                                ---------------- --------------- ----------------- ----------------
       Total RMBS                                       155,751            6.5             92,817              4.5
                                                ---------------- --------------- ----------------- ----------------

                                                ---------------- --------------- ----------------- ----------------
  Total securities available-for-sale                $2,423,018          100.0%        $2,076,936           100.0%
                                                ================ =============== ================= ================
</TABLE>

                                      50

<PAGE>

During the six months ended June 30, 2006, the Company purchased $506,068 of
securities available-for-sale. In addition, the Company received principal
payments of $24,666 related to securities available-for-sale.

Borrowings: At June 30, 2006 and December 31, 2005, the Company's debt
consisted of line-of-credit borrowings, CDO debt, junior subordinated notes,
term loans and reverse repurchase agreements, collateralized by a pledge of
most of the Company's securities available-for-sale, securities
held-for-trading, and its commercial mortgage loans. The Company's financial
flexibility is affected by its ability to renew or replace on a continuous
basis its maturing short-term borrowings. At June 30, 2006 and December 31,
2005, the Company has obtained financing in amounts and at interest rates
consistent with the Company's short-term financing objectives.

Under the credit facilities, and the reverse repurchase agreements, the lender
retains the right to mark the underlying collateral to estimated fair value. A
reduction in the estimated fair value of its pledged assets would require the
Company to provide additional collateral or fund margin calls. From time to
time, the Company expects that it will be required to provide such additional
collateral or fund margin calls.

The following table sets forth information regarding the Company's borrowings:
<TABLE>
<CAPTION>

                                                            For the Six Months Ended
                                                                 June 30, 2006
                                        -----------------------------------------------------------------
                                              June 30,
                                                2006              Maximum              Range of
                                              Balance             Balance             Maturities
                                        --------------------- ---------------- --------------------------
<S>                                               <C>              <C>             <C>
CDO debt*                                         $1,483,078       $1,483,078      5.4 to 10.2 years
Commercial mortgage loan pools                     1,261,989        1,294,058      2.5 to 12.5 years
Reverse repurchase agreements                        895,236        1,079,980        3 to 184 days
Credit facilities                                    208,272          317,490    122 days to 2.2 years
Junior subordinated notes                            180,477          180,477        29.6 years**
                                        ---------------------
Total borrowings                                  $4,029,052
                                        ---------------------
</TABLE>

* Disclosed as adjusted issue price. Total par of the Company's CDO debt at
June 30, 2006 was $1,495,110.
** $77,380 of the Company's junior subordinated notes can be redeemed at par
beginning in October 2010, $51,550 can be redeemed at par beginning in March
2011 and $51,547 can be redeemed at par beginning in April 2011.

Hedging Instruments: From time to time, the Company may reduce its exposure to
market interest rates by entering into various financial instruments that
adjust portfolio duration. These financial instruments are intended to mitigate
the effect of changes in interest rates on the estimated fair value of the
Company's assets and the cost of borrowing.

                                      51


<PAGE>


Interest rate hedging instruments at June 30, 2006 and December 31, 2005
consisted of the following:
<TABLE>
<CAPTION>
                                                              At June 30, 2006
                           -----------------------------------------------------------------------------------
                             Notional Value     Estimated Fair    Unamortized Cost   Average Remaining Term
                                                     Value                                  (years)
                           -----------------------------------------------------------------------------------
<S>                              <C>                <C>                    <C>                  <C>
Cash flow hedges                 $647,900           $26,330                $-                   7.33
CDO cash flow hedges              904,908            35,642                 -                   7.69
Trading swaps                     100,000             6,145                 -                   5.47
CDO timing swaps                  223,445                78                 -                   6.57
CDO LIBOR cap                      85,000               369             1,407                   6.90

                                                          At December 31, 2005
                           -----------------------------------------------------------------------------------
                             Notional Value     Estimated Fair    Unamortized Cost   Average Remaining Term
                                                     Value                                  (years)
                           -----------------------------------------------------------------------------------
Cash flow hedges                 $500,350            $6,234                $-                   8.42
CDO cash flow hedges              701,603            10,616                 -                   7.51
Trading swaps                     133,000             4,032                 -                   6.83
CDO timing swaps                  223,445              (37)                 -                   7.08
CDO LIBOR cap                      85,000             1,419             1,407                   7.40
</TABLE>

Capital Resources and Liquidity

The Company requires capital to fund its investment activities and operating
expenses. The Company believes it has sufficient access to capital resources to
fund its existing business plan. The Company's capital sources include cash
flow from operations, borrowings under reverse repurchase agreements, credit
facilities, CDOs, junior subordinated notes and the issuance of preferred and
common equity securities.

The distribution requirements under the REIT provisions of the United States
Internal Revenue Code of 1986, as amended (the "Code") limit the Company's
ability to retain earnings and thereby replenish or increase capital committed
to its operations. However, the Company believes that its access to significant
capital resources and financing will enable the Company to meet current and
anticipated capital requirements.

The Company believes that its existing sources of funds will be adequate for
purposes of meeting its short- and long-term liquidity needs. The Company's
ability to meet its long-term (i.e., beyond one year) liquidity requirements is
subject to obtaining additional debt and equity financing. Any decision by the
Company's lenders and investors to provide the Company with financing will
depend upon a number of factors, such as the Company's compliance with the
terms of its existing credit arrangements, the Company's financial performance,
industry or market trends, the general availability of and rates applicable to
financing transactions, such lenders' and investors' resources and policies
concerning the terms under which they make capital commitments and the relative
attractiveness of alternative investment or lending opportunities.

Certain information with respect to the Company's borrowings at June 30, 2006
is summarized as follows:

                                      52

<PAGE>
<TABLE>
<CAPTION>

                                Reverse                 Commercial   Collateralized      Trust         Total
                              Repurchase     Credit      Mortgage          Debt         Preferred   Collateralized
                              Agreements   Facilities   Loan Pools     Obligations     Securities     Borrowings
                             ------------ ------------ ------------- ---------------- ------------- ----------------
<S>                             <C>          <C>         <C>              <C>            <C>            <C>
Outstanding borrowings          $895,236     $208,272    $1,261,989       $1,483,078     $180,477       $4,029,052
Weighted average
    borrowing rate                 5.27%        5.11%         3.79%            6.04%        7.64%            5.07%
Weighted average remaining
    maturity                     25 days   1.53 years    6.33 years       7.37 years  29.60 years       5.01 years
Estimated fair value of
    assets pledged              $948,602     $277,168    $1,281,946       $1,628,189            -       $4,135,905

</TABLE>


<TABLE>
<CAPTION>
At June 30, 2006, the Company's borrowings had the following remaining maturities:


                                Reverse                 Commercial   Collateralized      Trust         Total
                              Repurchase     Credit      Mortgage          Debt         Preferred   Collateralized
                              Agreements   Facilities   Loan Pools     Obligations     Securities     Borrowings
                             ------------ ------------ ------------- ---------------- ------------- ----------------
<S>                           <C>                <C>           <C>              <C>          <C>        <C>
Within 30 days                  $861,520           $-            $-               $-           $-         $861,520
31 to 59 days                     22,164            -             -                -            -           22,164
60 days to less than 1                                            -                -            -
    year                          11,552       39,772                                                       51,324
1 year to 3 years                      -      168,500             -                -            -          168,500
3 years to 5 years                     -            -             -                -            -                -
Over 5 years                           -            -     1,261,989        1,483,078      180,477        2,925,544
                             ---------------------------------------------------------------------------------------
                                $895,236     $208,272    $1,261,989       $1,483,078     $180,477       $4,029,052
                             =======================================================================================
</TABLE>

* At June 30, 2006, collateralized debt obligations are comprised of $418,809
of CDO debt with a weighted average remaining maturity of 5.79 years, $292,358
of CDO debt with a weighted average remaining maturity of 6.16 years, $367,007
of CDO debt with a weighted average remaining maturity of 6.89 years, and
$416,935 of CDO debt with a weighted average remaining maturity of 10.18 years.

Credit Facilities

At June 30, 2006, $127,308 of the Company's $200,000 committed multicurrency
credit facility with Deutsche Bank, AG was available for future borrowings and
$10,523 of the Company's $75,000 committed credit facility with Greenwich
Capital, Inc. was similarly available.

On February 16, 2006, the Company entered into a $200,000 committed non-U.S.
dollar credit facility with Morgan Stanley Mortgage Servicing, Inc. which
matures in February 2008. Outstanding borrowings under this credit facility
bear interest at a LIBOR based variable rate. At June 30, 2006, $164,369 was
available for future borrowings under this facility.

On March 17, 2006, the Company entered into a $100,000 committed non-U.S.
dollar credit facility with Bank of America, N.A. which matures in September
2008. Outstanding borrowings under this credit facility bear interest at a
LIBOR based variable rate. At June 30, 2006, $65,162 was available for future
borrowings under this facility.

                                      53

<PAGE>

The Company is subject to various covenants in its credit facilities, including
maintaining a minimum net worth measured on GAAP of $400,000, a recourse
debt-to-equity of 3.0 to 1, a minimum cash requirement based upon certain
debt-to-equity ratios, a minimum recourse debt service coverage ratio of 1.75
and a minimum liquidity reserve of $10,000. At June 30, 2006, the Company was
in compliance with all covenants in its credit facilities.


CDOs

Issuance of secured term debt is generally done through a CDO offering. This
entails creating a special purpose entity that holds assets used to secure the
payments required of the debt issued. Asset cash flows generally are matched
with the debt service requirements over their respective lives and an interest
rate swap is used to match the fixed or floating rate nature of the coupon
payments where necessary. This type of transaction is usually referred to as
"match funding" or "term financing" the assets. There is no mark to market
requirement in this structure and the debt cannot be called or terminated by
the bondholders. Furthermore, the debt issued is non-recourse to the issuer;
and therefore permanent reductions in value do not affect the liquidity of the
Company. However, since the Company expects to earn a positive spread between
the income generated by the assets and the expense of the debt issued, a
permanent impairment of any of the assets would negatively affect the spread
over time.

On May 23, 2006, the Company closed its sixth CDO issuance ("CDO HY3")
resulting in the issuance of $417,000 of non-recourse debt to investors. The
debt is secured by a portfolio of CMBS and subordinated commercial real estate
loans. This debt, rated AAA through BBB-, was privately placed, and the Company
retained additional CDO debt rated BB and 100% of the preferred shares issued
by the CDO.

In accordance with the terms of this offering, the Company is expected to
contribute to the CDO up to $50,000 of additional CMBS during a ramp-up period
ending in October 2006. The additional CMBS will be contributed at face value.
The debt issuance match funded existing Company assets that were contributed to
the CDO at closing as well as the assets to be purchased during the ramp-up
period, with long-term liabilities. The Company accounts for this transaction
as a financing. All debt placed has legal final maturity of May 2051 but an
assumed weighted average life of 8.1 years. Including interest rate hedges,
this debt had a cost of funds of approximately 6.3% for the second quarter of
2006 after issuance expenses. The Company used the net proceeds of the offering
to pay down existing debt on the CDO collateral. At June 30, 2006,
approximately 83% of the Company's subordinated CMBS is match funded in CDOs.

Trust Preferred

On September 26, 2005, the Company issued $75,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust I, a Delaware
statutory trust ("Trust I"). The trust preferred securities have a thirty-year
term ending October 30, 2035 with interest at a fixed rate of 7.497% for the
first ten years and at a floating rate of three-month LIBOR plus 2.9%
thereafter. The trust preferred securities can be redeemed at par by the
Company beginning in October 2010. Trust I

                                      54

<PAGE>

issued $2,380 aggregate liquidation amount of common securities, representing
100% of the voting common stock of Trust I to the Company for a purchase price
of $2,380. The Company realized net proceeds from this offering of
approximately $72,618.

On January 31, 2006, the Company issued $50,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust II, a Delaware
statutory trust ("Trust II"). The trust preferred securities have a thirty-year
term ending April 30, 2036 with interest at a fixed rate of 7.73% for the first
ten years and at a floating rate of three-month LIBOR plus 2.7% thereafter. The
trust preferred securities can be redeemed at par by the Company beginning in
April 2011. Trust II issued $1,550 aggregate liquidation amount of common
securities, representing 100% of the voting common stock of Trust II to the
Company for a purchase price of $1,550. The Company realized net proceeds from
this offering of approximately $48,491.

On March 16, 2006, the Company issued $50,000 of trust preferred securities
through its wholly owned subsidiary, Anthracite Capital Trust III, a Delaware
statutory trust ("Trust III"). The trust preferred securities have a
thirty-year term ending March 15, 2036 with interest at a fixed rate of 7.77%
for the first ten years and at a floating rate of three-month LIBOR plus 2.7%
thereafter. The trust preferred securities can be redeemed at par by the
Company beginning in March 2011. Trust III issued $1,547 aggregate liquidation
amount of common securities, representing 100% of the voting common stock of
Trust III to the Company for a purchase price of $1,547. The Company realized
net proceeds from this offering of approximately $48,435.

Equity Issuances

For the six months ended June 30, 2006, the Company issued 590,216 shares of
its Common Stock, par value $0.001 per share (the "Common Stock"), under its
Dividend Reinvestment and Stock Purchase Plan (the "Dividend Reinvestment
Plan"). Net proceeds to the Company were approximately $6,270. For the six
months ended June 30, 2005, the Company issued 7,706 shares of its Common Stock
under its Dividend Reinvestment Plan. Net proceeds to the Company were
approximately $91.

Off Balance Sheet Arrangements

The Company's ownership of the subordinated classes of CMBS from a single
issuer gives it the right to influence the foreclosure/workout process on the
underlying loans ("Controlling Class CMBS"). FIN 46(R)-5 has certain scope
exceptions, one of which provides that an enterprise that holds a variable
interest in a qualifying special-purpose entity ("QSPE") does not consolidate
that entity unless that enterprise has the unilateral ability to cause the
entity to liquidate. SFAS No. 140 provides the requirements for an entity to be
considered a QSPE. To maintain the QSPE exception, the trust must continue to
meet the QSPE criteria both initially and in subsequent periods. A trust's QSPE
status can be impacted in future periods by activities by its transferors or
other involved parties, including the manner in which certain servicing
activities are performed. To the extent its CMBS investments were issued by a
trust that meets the requirements to be considered a QSPE, the Company records
the investments at the purchase price paid. To the extent the underlying trusts
are not QSPEs the Company follows the guidance set forth in FIN 46(R)-5 as the
trusts would be considered VIEs.

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<PAGE>

The Company has analyzed the governing pooling and servicing agreements for
each of its Controlling Class CMBS and believes that the terms are industry
standard and are consistent with the QSPE criteria. However, there is
uncertainty with respect to QSPE treatment due to ongoing review by accounting
standard setters, potential actions by various parties involved with the QSPE,
as discussed above, as well as varying and evolving interpretations of the QSPE
criteria under SFAS No. 140. Additionally, the accounting standard setters
continue to review the FIN 46(R)-5 provisions related to the computations used
to determine the primary beneficiary of a VIE. Future guidance from the
accounting standard setters may require the Company to consolidate CMBS trusts
in which the Company has invested.

At June 30, 2006, the Company owned securities of 25 Controlling Class CMBS
trusts with a par of $1,001,704. The total current par amount of CMBS issued by
the 25 trusts was $35,224,118. One of the Company's 25 Controlling Class trusts
does not qualify as a QSPE and has been consolidated by the Company.

The Company's maximum exposure to loss as a result of its investment in these
VIEs totaled $686,024 and $565,231 at June 30, 2006 and December 31, 2005,
respectively.

In addition, the Company has completed two securizations that qualify as QSPEs
under SFAS No. 140. Through CDO HY1 and HY2 the Company issued non-recourse
liabilities secured by commercial related assets including portions of 17
Controlling Class CMBS. Should future guidance from the accounting standard
setters determine that Controlling Class CMBS are not QSPE's, the Company would
be required to consolidate the assets, liabilities, income and expense of CDO
HY1 and CDO HY2.

The Company's total maximum exposure to loss as a result of its investments in
CDOs HY1 and HY2 at June 30, 2006 and December 31, 2005, respectively, is
$113,089 and 109,003.

At June 30, 2006, the Company also owns non-investment debt and preferred
securities in LEAFs CMBS I Ltd ("Leaf"), a QSPE under SFAS No. 140. Leaf issued
non-recourse liabilities secured by investment grade commercial real estate
securities.

At June 30, 2006 and December 31, 2005, the Company's total maximum exposure to
loss as a result of its investment in Leaf is $3,664 and $3,573, respectively.

Cash Flows

Cash provided by operating activities is net income adjusted for certain
non-cash items and changes in assets and liabilities including the Company's
trading securities. Operating activities provided (used) cash flows of $76,143
and $(30,307) during the six months ended June 30, 2006 and 2005, respectively.
Operating cash flow is affected by the purchase and sale of fixed income
securities classified as trading securities. Proceeds received from repayment
of these securities also increase operating cash flows. During 2006 the Company
received $22,509 of repayments related to these securities, whereas in 2005 the
Company purchased $58,862 of fixed income securities classified as trading. In
addition, in 2006 the Company closed interest rate swaps classified as a cash
flow hedges and received cash of $15,107.

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<PAGE>

The Company's investing cash flow consists primarily of the purchase, sale, and
repayments on securities activities available for sale, commercial loan pools,
commercial mortgage loans and equity investments. The Company's investing
activities used cash flows of $553,599 and $147,120 during the six months ended
June 30, 2006 and 2005, respectively. The variance in investing cash flows is
primarily attributable to significant purchases of securities and commercial
mortgage loans.

Financing cash flows consist primarily of borrowings, CDO and junior
subordinated note issuances, common and preferred stock offerings offset by
dividends on common and preferred stock and repayments of borrowings. The
Company's financing activities provided cash flows $468,111 and $166,923 during
the six months ended June 30, 2006 and 2005, respectively. The increase in
financing cash flows in 2006 was primarily attributable to issuance of
collateralized debt obligations as well as the issuance of junior subordinated
notes.

The Company's ability to execute its business strategy depends to a significant
degree on its ability to obtain additional capital. Factors which could affect
the Company's access to the capital markets, or the costs of such capital,
include changes in interest rates, general economic conditions and perception
in the capital markets of the Company's business, covenants under the Company's
current and future credit facilities, results of operations, leverage,
financial conditions and business prospects. Consequently, there can be no
assurance that the Company will be able to effectively fund future growth.
Except as discussed herein, management is not aware of any other trends,
events, commitments or uncertainties that may have a significant effect on
liquidity.

Contingent Liability

During 2000, the Company completed the acquisition of CORE Cap, Inc. At the
time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE
Cap, Inc.'s external advisor) $12,500 over a ten-year period ("Installment
Payment") to purchase the right to manage the Core Cap, Inc. assets under the
existing management contract ("GMAC Contract"). The GMAC Contract had to be
terminated in order to allow the Company to complete the merger, as the
Company's management agreement with the Manager did not provide for multiple
managers. As a result the Manager offered to buy-out the GMAC Contract as the
Manager estimated it would receive incremental fees above and beyond the
Installment Payment, and thus was willing to pay for, and separately negotiate,
the termination of the GMAC Contract. Accordingly, the value of the Installment
Payment was not considered in the Company's allocation of its purchase price to
the net assets acquired in the acquisition of CORE Cap, Inc. The Company agreed
that should the Management Agreement with its Manager be terminated, not
renewed or not extended for any reason other than for cause, the Company would
pay to the Manager an amount equal to the Installment Payment less the sum of
all payments made by the Manager to GMAC. At June 30, 2006, the Installment
Payment would be $4,000 payable over four years. The Company does not accrue
for this contingent liability.

Transactions with Affiliates

The Company has a Management Agreement with the Manager, a majority owned
indirect subsidiary of

                                      57

<PAGE>

The PNC Financial Services Group, Inc. and the employer of certain directors
and all of the officers of the Company, under which the Manager manages the
Company's day-to-day operations, subject to the direction and oversight of the
Company's Board of Directors. Pursuant to the Management Agreement, the Manager
formulates investment strategies, arranges for the acquisition of assets,
arranges for financing, monitors the performance of the Company's assets and
provides certain other advisory and managerial services in connection with the
operations of the Company. For performing these services, the Company pays the
Manager a base management fee equal to 2.0% of the quarterly average total
stockholders' equity for the applicable quarter.

To provide an incentive, the Manager is entitled to receive an incentive fee
equal to 25% of the amount by which the rolling four-quarter GAAP net income
before the incentive fee exceeds the greater of 8.5% or 400 basis points over
the ten-year Treasury note multiplied by the adjusted per share issue price of
the common stock ($11.35 per common share at June 30, 2006).

The Company's unaffiliated directors approved an extension of the Management
Agreement to March 31, 2007 at the Board of Directors' February 2006 meeting.
Additionally, pursuant to a resolution of the Company's Board of Directors
adopted at the February 2006 meeting, 30% of the incentive fees earned in 2005
or after may be paid in shares of the Company's Common Stock subject to certain
provisions. The Board of Directors also authorized a stock based incentive plan
where one half of one percent of common shares outstanding will be paid to the
Manager in 2006. The Company recognized an expense of $856 related to the
deferred shares of Common Stock to be issued under the stock-based incentive
plan.

The Company incurred $3,109 and $6,160 in base management fees in accordance
with the terms of the Management Agreement for the three and six months ended
June 30, 2006, respectively, and $2,661 and $5,240 for the three and six months
ended June 30, 2005, respectively. The Company incurred $1,538 and $2,708 in
incentive fees for the three and six months ended June 30, 2006. The Company
did not incur incentive fees for the three and six months ended June 30, 2005.
At June 30, 2006 and 2005, respectively, management and incentive fees of
$4,422 and $2,477 are payable to the Manager and are included on the
accompanying consolidated statement of financial condition as a component of
other liabilities. In accordance with the provisions of the Management
Agreement, the Company recorded reimbursements to the Manager of $100 and $200
for certain expenses incurred on behalf of the Company for the three and six
months ended June 30, 2006, respectively, and $40 and $80 for the three and six
months ended June 30, 2005, respectively, which are included in general and
administrative expense on the accompanying consolidated statements of
operations.

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<PAGE>

The Company has administration and investment accounting agreements with the
Manager. Under the terms of the administration agreement, the Manager provides
financial reporting, audit coordination and accounting oversight services to
the Company. Under the terms of the investment accounting agreement, the
Manager provides investment accounting services to the Company. For the six
months ended June 30, 2006 and 2005, the Company recorded administration and
investment accounting fees of $140 and $115 respectively, which are included in
general and administrative expense on the accompanying consolidated statements
of operations.

The special servicer on 20 of the Company's 25 Controlling Class trusts is
Midland Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of
PNC Bank, and therefore an affiliate of the Manager. The Company's fees for
Midland's services are at market rates.

The Company has a $100,000 commitment to acquire shares of BlackRock Diamond.
BlackRock Diamond is a private REIT managed by BlackRock Realty Advisors, Inc.,
a subsidiary of the Manager. At June 30, 2006, 86.3% of the commitment has been
called and the Company owned approximately 25.5% of BlackRock Diamond. The
Company does not incur any additional management or incentive fees to the
Manager as a result of its investment in BlackRock Diamond. The Company's
investment in BlackRock Diamond at June 30, 2006 was $96,962. The Company's
unaffiliated directors approved this transaction in September 2005.

During 2001, the Company entered into a $50,000 commitment to acquire shares in
Carbon I, a private commercial real estate income opportunity fund managed by
the Manager. The Carbon I investment period ended on July 12, 2004 and the
Company's investment in Carbon I at June 30, 2006 was $3,265. The Company does
not incur any additional management or incentive fees to the Manager as a
result of its investment in Carbon I. On June 30, 2006, the Company owned
approximately 20% of the outstanding shares in Carbon I. The Company's
unaffiliated directors approved this transaction in July 2001.

The Company entered into an aggregate commitment of $100,000 to acquire shares
in Carbon II., a private commercial real estate income opportunity fund managed
by the Manager. At June 30, 2006, the Company's investment in Carbon II was
$63,874 and the Company's remaining commitment to Carbon II is $39,472. The
Company does not incur any additional management or incentive fees to the
Manager as a result of its investment in Carbon II. The Company's unaffiliated
directors approved this transaction in September 2004.


REIT Status: The Company has elected to be taxed as a REIT and therefore must
comply with the provisions of the Code with respect thereto. Accordingly, the
Company generally will not be subject to U.S. federal income tax to the extent
of its distributions to stockholders and as long as certain asset, income and
stock ownership tests are met. The Company may, however, be subject to tax at
corporate rates or at excise tax rates on net income or capital gains not
distributed.

During the first quarter, the Company and certain subsidiaries elected to have
the subsidiaries treated as taxable REIT subsidiaries. This election permits
the subsidiaries to enter into activities related to foreign investments that
may not have constituted qualifying assets generating qualifying income for the
REIT tests.

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<PAGE>


ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

Market Risk: Market risk includes the exposure to loss resulting from changes
in interest rates, credit curve spreads, foreign currency exchange rates,
commodity prices and equity prices. The primary market risks to which the
Company is exposed are interest rate risk and credit curve risk. Interest rate
risk is highly sensitive to many factors, including governmental, monetary and
tax policies, domestic and international economic and political considerations
and other factors beyond the control of the Company. Credit curve risk is
highly sensitive to the dynamics of the markets for commercial mortgage
securities and other loans and securities held by the Company. Excessive supply
of these assets combined with reduced demand will cause the market to require a
higher yield. This demand for higher yield will cause the market to use a
higher spread over the U.S. Treasury securities yield curve, or other benchmark
interest rates, to value these assets. Changes in the general level of the U.S.
Treasury yield curve can have significant effects on the estimated fair value
of the Company's portfolio.

The majority of the Company's assets are fixed-rate securities valued based on
a market credit spread to U.S. Treasuries. As U.S. Treasury securities are
priced to a higher yield and/or the spread to U.S. Treasuries used to price the
Company's assets is increased, the estimated fair value of the Company's
portfolio may decline. Conversely, as U.S. Treasury securities are priced to a
lower yield and/or the spread to U.S. Treasuries used to price the Company's
assets is decreased, the estimated fair value of the Company's portfolio may
increase. Changes in the estimated fair value of the Company's portfolio may
affect the Company's net income or cash flow directly through their impact on
unrealized gains or losses on securities held-for-trading or indirectly through
their impact on the Company's ability to borrow. Changes in the level of the
U.S. Treasury yield curve can also affect, among other things, the prepayment
assumptions used to value certain of the Company's securities and the Company's
ability to realize gains from the sale of such assets. In addition, changes in
the general level of the LIBOR money market rates can affect the Company's net
interest income. At June 30, 2006, all of the Company's liabilities outside of
the CDOs are floating rate based on a market spread to LIBOR. As the level of
LIBOR increases or decreases, the Company's interest expense will move in the
same direction.

The Company may utilize a variety of financial instruments, including interest
rate swaps, caps, floors and other interest rate exchange contracts, in order
to limit the effects of fluctuations in interest rates on its operations. The
use of these types of derivatives to hedge interest-earning assets and/or
interest-bearing liabilities carries certain risks, including the risk that
losses on a hedge position will reduce the funds available for payments to
holders of securities and that such losses may exceed the amount invested in
such instruments. A hedge may not perform its intended purpose of offsetting
losses or rising interest rates. Moreover, with respect to certain of the
instruments used as hedges, the Company is exposed to the risk that the
counterparties with which the Company trades may cease making markets and
quoting prices in such instruments, which may render the Company unable to
enter into an offsetting transaction with respect to an open position. If the
Company anticipates that the income from any such hedging transaction will not
be qualifying income for REIT income purposes, the Company may conduct part or
all of its hedging activities through a to-be-formed

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<PAGE>

corporate subsidiary that is fully subject to federal corporate income
taxation. The profitability of the Company may be adversely affected during any
period as a result of changing interest rates.

The Company monitors and manages interest rate risk based on a method that
takes into consideration the interest rate sensitivity of the Company's assets
and liabilities, including its preferred stock. The Company's objective is to
acquire assets and match fund the purchase so that interest rate risk
associated with financing these assets is reduced or eliminated. The primary
risks associated with acquiring and financing these assets under 30-day
repurchase agreements and committed borrowing facilities are mark-to-market
risk and short-term rate risk. Certain secured financing arrangements provide
for an advance rate based upon a percentage of the estimated fair value of the
asset being financed. Market movements that cause asset values to decline would
require a margin call or a cash payment to maintain the relationship between
asset value and amount borrowed. A cash flow based CDO is an example of a
secured financing vehicle that does not require a mark-to-market to establish
or maintain a level of financing. When financed assets are subject to a
mark-to-market margin call, the Company carefully monitors the interest rate
sensitivity of those assets. The duration of the assets financed which are
subject to a mark-to-market margin call was 2.3 years based on net asset value
at June 30, 2006. This means that a 100 basis point increase in interest rates
would cause a margin call of approximately $10,000.

Earnings per share sensitivity to changes in interest rates is analyzed using
the assumptions that interest rates, as defined by the LIBOR curve, increase or
decrease and that the yield curves of the LIBOR rate shocks will be parallel to
each other. Estimated fair value in this scenario is calculated using the
assumption that the U.S. Treasury yield curve remains constant even though
changes in both long-term and short-term interest rates can occur
simultaneously.

Regarding the table below, all changes in income and value are measured as
percentage changes from the respective values calculated in the scenario
labeled as "Base Case." The base interest rate scenario assumes interest rates
at June 30, 2006. Actual results could differ significantly from these
estimates.

                   Projected Percentage Change In
                        Earnings Per Share
                      Given LIBOR Movements
          Change in LIBOR,             Projected Change in
          +/- Basis Points              Earnings per Share
     --------------------------      -------------------------
             -200                             $0.160
             -100                             $0.008
              -50                             $0.004
             Base Case
              +50                           $(0.004)
             +100                           $(0.008)
             +200                           $(0.160)



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<PAGE>

The Company's GAAP book value incorporates the estimated fair value of the
Company's interest bearing assets but it does not incorporate the estimated
fair value of the Company's interest bearing fixed rate liabilities and
preferred stock. The fixed-rate liabilities and preferred stock generally will
reduce the actual interest rate risk of the Company from an economic
perspective even though changes in the estimated fair value of these
liabilities are not reflected in the Company's reported book value. The Company
focuses on economic risk in managing its sensitivity to interest rates and
maintains an economic duration within a band of 2.0 to 5.0 years. At June 30,
2006, economic duration for the Company's entire portfolio was 2.5 years. This
implies that for each 100 basis points of change in interest rates the
Company's economic value will change by approximately 2.5%. At June 30, 2006,
the Company estimates its economic value, or net asset value of its common
stock to be $530,943.

A reconciliation of the economic duration of the Company to the duration of the
reported book value of the Company's common stock is as follows:

Duration - GAAP book value at June 30, 2006                              8.0
Less:
        Duration contribution of CDO I liabilities                      (1.3)
        Duration contribution of CDO II liabilities                     (1.1)
        Duration contribution of CDO III liabilities                    (1.0)
        Duration contribution of CDO HY3 liabilities                    (0.8)
        Duration contribution of Series C Preferred Stock               (0.2)
        Duration contribution of Junior subordinated notes              (1.1)
                                                                    ----------
Economic duration at June 30, 2006                                       2.5
                                                                    ==========

The GAAP book value of the Company's common stock is $9.86 per share. As
indicated in the table above a 100 basis point change in interest rates will
change reported book value by approximately 8.0%, or $50,000. As indicated
above, approximately $10,000 of that change would be required to meet margin
calls in the event rates rise by 100 basis points.

Credit Risk: The Company's portfolios of commercial real estate assets are
subject to a high degree of credit risk. Credit risk is the exposure to loss
from loan defaults. Default rates are subject to a wide variety of factors,
including, but not limited to, property performance, property management,
supply/demand factors, construction trends, consumer behavior, regional
economics, interest rates, the strength of the global economies, and other
factors beyond the control of the Company.

All loans are subject to a certain probability of default. Before acquiring a
Controlling Class security, the Company will perform an analysis of the quality
of all of the loans proposed. As a result of this analysis, loans with
unacceptable risk profiles are either removed from the proposed pool or the
Company receives a price adjustment. The Company underwrites its Controlling
Class CMBS investments assuming the underlying loans will suffer a certain
dollar amount of defaults and these defaults will lead to some level of
realized losses. Loss adjusted yields are computed based on these assumptions
and applied to each class of security supported by the cash flow on the
underlying loans. The most significant variables affecting loss adjusted yields
include, but are not limited to, the

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<PAGE>

number of defaults, the severity of loss that occurs subsequent to a default
and the timing of the actual loss. The different rating levels of CMBS will
react differently to changes in these assumptions. The lowest rated securities
(B- or lower) are generally more sensitive to changes in timing of actual
losses. The higher rated securities (B or higher) are more sensitive to the
severity of losses and timing of cashflows.

The Company generally assumes that all of the principal of a non-rated security
and a significant portion, if not all, of CCC and a portion of B- rated
securities will not be recoverable over time. The loss adjusted yields of these
classes reflect that assumption; therefore, the timing of when the total loss
of principal occurs is the most important assumption in determining value. The
interest coupon generated by a security will cease when there is a total loss
of its principal regardless of whether that principal is paid. Therefore,
timing is of paramount importance because the longer the principal balance
remains outstanding, the more interest coupon the holder receives; which
results in a larger economic return. Alternatively, if principal is lost faster
than originally assumed, there is less opportunity to receive interest coupon;
which results in a lower or possibly negative return.

If actual principal losses on the underlying loans exceed assumptions, the
higher rated securities will be affected more significantly as a loss of
principal may not have been assumed. The Company generally assumes that all
principal will be recovered by classes rated B or higher. The Company manages
credit risk through the underwriting process, establishing loss assumptions and
careful monitoring of loan performance. After the securities have been
acquired, the Company monitors the performance of the loans, as well as
external factors that may affect their value.

Factors that indicate a higher loss severity or acceleration of the timing of
an expected loss will cause a reduction in the expected yield and therefore
reduce the earnings of the Company. Furthermore, the Company may be required to
write down a portion of the adjusted purchase price of the affected assets
through its consolidated statements of operations.

For purposes of illustration, a doubling of the losses in the Company's
Controlling Class CMBS, without a significant acceleration of those losses,
would reduce GAAP income going forward by approximately $0.72 per share of
Common Stock per year and cause a significant write down at the time the loss
assumption is changed. The amount of the write down depends on several factors,
including which securities are most affected at the time of the write down, but
is estimated to be in the range of $0.14 to $0.34 per share based on a doubling
of expected losses. A significant acceleration of the timing of these losses
would cause the Company's net income to decrease. The Company's exposure to a
write down is mitigated by the fact that most of these assets are financed on a
non-recourse basis in the Company's CDOs, where a significant portion of the
risk of loss is transferred to the CDO bondholders. At June 30, 2006,
securities with a total estimated fair value of $1,664,277 are collateralizing
the CDO borrowings of $1,531,183; therefore, the Company's preferred equity
interest in its four consolidated CDOs is $133,094 ($2.33 per share). In
accordance with GAAP, the Company's CDO borrowings are not marked-to-market,
however, the economic value of the Company's CDO borrowings will change in
response to changes in interest rates and/or credit spreads.

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<PAGE>


Asset and Liability Management: Asset and liability management is concerned
with the timing and magnitude of the re-pricing and/or maturing of assets and
liabilities. It is the Company's objective to attempt to control risks
associated with interest rate movements. In general, management's strategy is
to match the term of the Company's liabilities as closely as possible with the
expected holding period of the Company's assets. This is less important for
those assets in the Company's portfolio considered liquid, as there is a very
stable market for the financing of these securities.

Other methods for evaluating interest rate risk, such as interest rate
sensitivity "gap" (defined as the difference between interest-earning assets
and interest-bearing liabilities maturing or re-pricing within a given time
period), are used but are considered of lesser significance in the daily
management of the Company's portfolio. Management considers this relationship
when reviewing the Company's hedging strategies. Because different types of
assets and liabilities with the same or similar maturities react differently to
changes in overall market rates or conditions, changes in interest rates may
affect the Company's net interest income positively or negatively even if the
Company were to be perfectly matched in each maturity category.

Currency Risk: The Company has foreign currency rate exposures related to
certain CMBS and commercial real estate loans. The Company's principal currency
exposures are to the Euro and British pound. Changes in currency rates can
adversely impact the fair values and earnings of the Company's non-U.S.
holdings. The Company mitigates this impact by utilizing local
currency-denominated financing on its foreign investments and foreign currency
forward commitments to hedge the net exposure.

During the first quarter, the Company and certain subsidiaries elected to have
the subsidiaries treated as taxable REIT subsidiaries. This election permits
the subsidiaries to enter into activities related to foreign investments that
may not have constituted qualifying assets generating qualifying income for the
REIT tests.

                                      64


<PAGE>

ITEM 4.       Controls and Procedures

           Under the direction of the Company's Chief Executive Officer and
           Chief Financial Officer, the Company's management evaluated the
           effectiveness of its disclosure controls and procedures at June 30,
           2006. Based on this evaluation, the Company's Chief Executive
           Officer and Chief Financial Officer have concluded that the
           Company's disclosure controls and procedures were effective at June
           30, 2006.

           No change in internal control over financial reporting occurred
           during the quarter ended June 30, 2006 that has materially affected,
           or is reasonably likely to materially affect, such internal control
           over financial reporting.

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<PAGE>


Part II - OTHER INFORMATION

Item 1.      Legal Proceedings

At June 30, 2006 there were no pending legal proceedings of which the Company
was a defendant or of which any of its properties were subject.

Item 1A.   Risk Factors

Certain factors may have a material adverse effect on the Company's business,
financial condition and results of operations. For discussion of the Company's
potential risks, refer to Part I, "Item 1A., Risk Factors", included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005 as
filed with the U.S. Securities and Exchange Commission on March 16, 2006.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Submission of Matters to a Vote of Security Holders

At the annual meeting of the Company's stockholders on May 18, 2006, the
Company's stockholders approved (1) the election of Scott M. Amero, Ralph. L.
Schlosstein and Deborah J. Lucas to the Board of Directors of the Company, (2)
the 2006 Stock Award and Incentive Plan and (3) the ratification of the
appointment by the Board of Directors of the Company of Deloitte & Touche LLP
as the Company's independent auditors. The Company's stockholders did not
approve a stockholder proposal relating to the compensation of the management
of the Company.

The result of the vote is as follows:

          Election of Scott M. Amero

For:                                                                  41,649,198
Withheld:                                                              7,907,364

          Election of Ralph L. Schlosstein

For:                                                                  43,681,778
Withheld:                                                              7,874,784



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<PAGE>



          Election of Deborah J. Lucas

 For:                                                                 47,611,340
Withheld:                                                              3,945,222

          2006 Stock Award and Incentive Plan

For:                                                                  30,358,629
Against:                                                               4,192,823
Abstaining:                                                              444,451

          Ratification of Deloitte & Touche LLP

For:                                                                  50,811,246
Against:                                                                 512,333
Abstaining:                                                              232,983

         Stockholder proposal relating to the compensation of management

For:                                                                   3,193,618
Against:                                                              31,289,228
Abstaining:                                                              513,047


The terms of the following other directors of the Company continued after the
meeting: Hugh R. Frater, Donald G. Drapkin, Carl F. Geuther, Jeffrey C. Keil
and Leon T. Kendall.

Item 5.     Other Information

None.

Item 6.     Exhibits

Exhibit No.             Description
-----------             -----------

       10.1       Letter agreement, dated as of July 1, 2006 to Master
                  Repurchase Agreement, dated as of July 8, 2002 between the
                  Registrant, as seller, and Greenwich Capital Financial
                  Products, Inc., as buyer.
       24.1       Power of Attorney (included on signature page hereto)
       31.1       Certification of Chief Executive Officer
       31.2       Certification of Chief Financial Officer
       32.1       Section 1350 Certification of Chief Executive Officer and
                  Chief Financial Officer

                                      67

<PAGE>


                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.




                                            ANTHRACITE CAPITAL, INC.



Dated:  August 9, 2006                      By: /s/ Christopher A. Milner
                                                -------------------------
                                                Name: Christopher A. Milner
                                                Title: Chief Executive Officer
                                                (duly authorized representative)




Dated:  August 9, 2006                      By: /s/ James J. Lillis
                                                 -----------------------------
                                                Name: James J. Lillis
                                                Title: Chief Financial Officer


                                      68