**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 September 30, 2008





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
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)40
                East 52ndStreet, 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.


Yes x  No  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See
      the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filerþ
            
            Accelerated filer ̈
            
            Non-accelerated filer ̈





Smaller reporting
      company  ̈




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


Yes  ̈  No x





At
      November 10, 2008, 76,898,810 shares of common stock ($0.001 par value per
      share) were outstanding.





ANTHRACITE
      CAPITAL, INC.


FORM
      10-Q


INDEX





PART
                I – FINANCIAL INFORMATION
            PageItem
                1.
            Financial
                Statements
            4Consolidated
                Statements of Financial Condition (Unaudited)At
                September 30, 2008 and December 31, 2007
            4Consolidated
                Statements of Operations (Unaudited)For
                the Three and Nine Months Ended September 30, 2008 and
                2007
            5Consolidated
                Statement of Changes in Stockholders' Equity (Unaudited)For
                the Nine Months Ended September 30, 2008
            6Consolidated
                Statements of Cash Flows (Unaudited)For
                the Nine Months Ended September 30, 2008 and 2007
            7Notes
                to Consolidated Financial Statements (Unaudited)
            8Item
                2.
            Management's
                Discussion and Analysis of Financial Condition andResults
                of Operations
            41Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            75Item
                4.
            Controls
                and Procedures
            79Part
                II – OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            80Item
                1A.
            Risk
                Factors
            80Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            84Item
                5.
            Other
                Information
            85Item
                6.
            Exhibits
            85SIGNATURES
            86


2


**Cautionary
      Statement Regarding 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,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,”
“anticipate,” “current,” “intention,” “estimate,” “position,” “assume,”
“potential,” “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
      Capital, Inc. (the “Company”) 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
      the Company 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 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 the Company’s assets and liabilities;


(3)
      the
      amount and timing of any future margin calls and their impact on the Company's
      financial condition and liquidity;


(4)
      the
      Company's ability to meet its liquidity requirements to continue to fund its
      business operations, including its ability to renew the existing facilities
      or
      obtain replacement financing, to meet margin calls and amortization payments
      under the facilities;


(5)
      the
      relative and absolute investment performance and operations of BlackRock
      Financial Management, Inc. (“BlackRock”), the Company’s Manager;


(6)
      the
      impact of increased competition;


(7)
      the
      impact of future acquisitions or divestitures;


(8)
      the
      unfavorable resolution of legal proceedings;


(9)
      the
      impact of legislative and regulatory actions and reforms and regulatory,
      supervisory or enforcement actions of government agencies relating to the
      Company or BlackRock;


(10)
      terrorist activities and international hostilities, which may adversely affect
      the general economy, domestic and global financial and capital markets, specific
      industries, and the Company;


(11)
      the
      ability of BlackRock to attract and retain highly talented professionals;


(12)
      fluctuations in foreign currency exchange rates; and


(13)
      the
      impact of changes to tax legislation and, generally, the tax position of the
      Company.





The
      Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and
      the Company’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.


3


Part
      I –
FINANCIAL INFORMATION


Item
      1.  Financial
      Statements


**Anthracite
      Capital, Inc. and Subsidiaries**


**Consolidated
      Statements of Financial Condition (Unaudited)**


**(in
      thousands, except share data)**




September 30, 2008
              
              December 31, 2007**ASSETS**Cash
                  and cash equivalents
              
              
              
              
              $
              45,810
              
              
              
              
              $
              91,547Restricted
                  cash equivalents
              
              
              
              
              
              16,019
              
              
              
              
              
              32,105Securities
                  held-for-trading, at estimated fair value:Subordinated
                  commercial mortgage-backed securities (“CMBS”)
              
              $
              607,864
              
              
              
              
              $
              1,380Investment
                  grade CMBS
              
              
              1,005,630
              
              
              
              
              
              15,923Residential
                  mortgage-backed securities (“RMBS”)
              
              
              840
              
              
              
              
              
              901Total
                  securities held-for-trading
              
              
              
              
              
              1,614,334
              
              
              
              
              
              18,204Securities
                  available-for-sale, at estimated fair value:Subordinated
                  CMBS
              
              
              -
              
              
              
              
              
              1,026,773Investment
                  grade CMBS
              
              
              -
              
              
              
              
              
              1,230,075RMBS
              
              
              -
              
              
              
              
              
              9,282Total
                  securities available-for-sale
              
              
              
              
              
              -
              
              
              
              
              
              2,266,130Commercial
                  mortgage loans (net of loan loss reserve of $43,752 in
                  2008)
              
              
              
              
              
              897,955
              
              
              
              
              
              983,387Commercial
                  mortgage loan pools, at amortized cost
              
              
              
              
              
              1,223,630
              
              
              
              
              
              1,240,793Equity
                  investments
              
              
              
              
              
              136,545
              
              
              
              
              
              108,748Derivative
                  instruments, at estimated fair value
              
              
              
              
              
              495,032
              
              
              
              
              
              404,910Other
                  assets (includes $1,389 at estimated fair value in 2008)
              
              
              
              
              
              64,948
              
              
              
              
              
              101,886Total
                  Assets
              
              
              
              
              $
              4,494,273
              
              
              
              
              $
              5,247,710**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Liabilities:Borrowings:Secured
                  by pledge of subordinated CMBS
              
              $
              189,299
              
              
              
              
              $
              293,287Secured
                  by pledge of investment grade CMBS
              
              
              121,448
              
              
              
              
              
              207,829Secured
                  by pledge of commercial mortgage loans
              
              
              201,348
              
              
              
              
              
              244,476Secured
                  by pledge of equity investments
              
              
              30,000
              
              
              
              
              
              -Collateralized
                  debt obligations ("CDOs") (at estimated fair value in
                  2008)
              
              
              1,040,435
              
              
              
              
              
              1,823,328Senior
                  unsecured notes (at estimated fair value in 2008)
              
              
              47,305
              
              
              
              
              
              162,500Senior
                  unsecured convertible notes (at estimated fair value in
                  2008)
              
              
              58,744
              
              
              
              
              
              80,000Junior
                  unsecured notes (at estimated fair value in 2008)
              
              
              16,641
              
              
              
              
              
              73,103Junior
                  subordinated notes to subsidiary trusts issuing preferred
                securities
                  (at estimated fair value in 2008)
              
              
              37,056
              
              
              
              
              
              180,477Secured
                  by pledge of commercial mortgage loan pools
              
              
              1,205,628
              
              
              
              
              
              1,225,223Total
                  borrowings
              
              
              
              
              
              2,947,904
              
              
              
              
              
              4,290,223Payable
                  for investments purchased
              
              
              
              
              
              -
              
              
              
              
              
              4,693Distributions
                  payable
              
              
              
              
              
              26,784
              
              
              
              
              
              21,064Derivative
                  instruments, at estimated fair value
              
              
              
              
              
              523,898
              
              
              
              
              
              442,114Other
                  liabilities
              
              
              
              
              
              34,015
              
              
              
              
              
              38,245Total
                  Liabilities
              
              
              
              
              
              3,532,601
              
              
              
              
              
              4,796,339Commitments
                  and Contingencies12%
                  Series E-1 Cumulative Convertible Redeemable Preferred Stock, liquidation
                  preference $23,375
              
              
              
              
              
              23,275
              
              
              
              
              
              -12%
                  Series E-2 Cumulative Convertible Redeemable Preferred Stock, liquidation
                  preference $23,375
              
              
              
              
              
              23,275
              
              
              
              
              
              -Stockholders’
                  Equity:Preferred
                  stock, 100,000,000 shares authorized;
                9.375%
                  Series C Preferred Stock, liquidation preference $57,500
              
              
              
              
              
              55,435
              
              
              
              
              
              55,4358.25%
                  Series D Preferred Stock, liquidation preference $86,250
              
              
              
              
              
              83,259
              
              
              
              
              
              83,259Common
                  Stock, par value $0.001 per share; 400,000,000 shares authorized;
                  76,660,206 shares issued and outstanding in 2008; 63,263,998 shares
                  issued
                  and outstanding in 2007
              
              
              
              
              
              77
              
              
              
              
              
              63Additional
                  paid-in capital
              
              
              
              
              
              782,930
              
              
              
              
              
              691,071Retained
                  earnings (distributions in excess of earnings)
              
              
              
              
              
              24,073
              
              
              
              
              
              (122,738
              )Accumulated
                  other comprehensive loss (“OCI”)
              
              
              
              
              
              (30,652
              )
              
              
              
              
              (255,719
              )Total
                  Stockholders’ Equity
              
              
              
              
              
              915,122
              
              
              
              
              
              451,371Total
                  Liabilities, Mezzanine and Stockholders’ Equity
              
              
              
              
              $
              4,494,273
              
              
              
              
              $
              5,247,710




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


4


**Anthracite
      Capital, Inc. and Subsidiaries**


**Consolidated
      Statements of Operations (Unaudited)**


**(in
      thousands, except share and per share data)**





For the Three Months Ended
              September 30,
            
            For the Nine Months Ended
              September 30,2008
            
            2007
            
            2008
            
            2007Income:Interest
                from securities
            
            $
            53,387
            
            $
            49,560
            
            $
            156,261
            
            $
            147,195Interest
                from commercial mortgage loans
            
            
            22,674
            
            
            20,494
            
            
            69,506
            
            
            49,942Interest
                from commercial mortgage loan pools
            
            
            12,779
            
            
            12,985
            
            
            38,445
            
            
            39,119Earnings
                from equity investments
            
            
            3,067
            
            
            6,611
            
            
            2,510
            
            
            28,982Interest
                from cash and cash equivalents
            
            
            558
            
            
            1,784
            
            
            2,540
            
            
            3,648Total
                income
            
            
            92,465
            
            
            91,434
            
            
            269,262
            
            
            268,886Expenses:Interest
            
            
            56,652
            
            
            62,525
            
            
            164,189
            
            
            178,450Management
                and incentive fees
            
            
            3,432
            
            
            3,970
            
            
            22,591
            
            
            18,652General
                and administrative expense
            
            
            2,025
            
            
            1,624
            
            
            5,706
            
            
            4,448Total
                expenses
            
            
            62,109
            
            
            68,119
            
            
            192,486
            
            
            201,550Other
                gains (losses):Realized
                loss on securities and swaps held-for-trading, net
            
            
            (5,005
            )
            
            (4,435
            )
            
            (14,840
            )
            
            (4,063
            )Unrealized
                loss on securities held-for-trading
            
            
            (247,348
            )
            
            -
            
            
            (572,675
            )
            
            -Unrealized
                loss on swaps classified as held-for-trading
            
            
            (5,859
            )
            
            -
            
            
            (811
            )
            
            -Unrealized
                gain on liabilities
            
            
            261,723
            
            
            -
            
            
            667,980
            
            
            -Gain
                (loss) on sale of securities available-for-sale, net
            
            
            -
            
            
            (1,331
            )
            
            -
            
            
            5,576Dedesignation
                of derivative instruments
            
            
            (7,084
            )
            
            -
            
            
            (7,084
            )
            
            -Provision
                for loan losses
            
            
            (18,752
            )
            
            -
            
            
            (43,942
            )
            
            -Foreign
                currency gain (loss)
            
            
            7,273
            
            
            775
            
            
            (2,913
            )
            
            3,631Loss
                on impairment of assets
            
            
            -
            
            
            (2,938
            )
            
            -
            
            
            (7,036
            )Total
                other gains (losses)
            
            
            (15,052
            )
            
            (7,929
            )
            
            25,715
            
            
            (1,892
            )Net
                income
            
            
            15,304
            
            
            15,386
            
            
            102,491
            
            
            65,444Dividends
                on preferred stock
            
            
            4,529
            
            
            3,127
            
            
            12,738
            
            
            8,530Net
                income available to common stockholders
            
            $
            10,775
            
            $
            12,259
            
            $
            89,753
            
            $
            56,914Net
                income per common share, basic:
            
            $
            0.14
            
            $
            0.19
            
            $
            1.30
            
            $
            0.94Net
                income per common share, diluted:
            
            $
            0.14
            
            $
            0.19
            
            $
            1.23
            
            $
            0.94Weighted
                average number of shares outstanding:Basic
            
            
            74,365,259
            
            
            63,861,985
            
            
            69,099,689
            
            
            60,450,020Diluted
            
            
            74,748,560
            
            
            64,178,519
            
            
            81,724,651
            
            
            60,662,477Dividend
                declared per share of common stock
            
            $
            0.31
            
            $
            0.30
            
            $
            0.92
            
            $
            0.89





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


5


**Anthracite
      Capital, Inc. and Subsidiaries**


**Consolidated
      Statement of Changes in Stockholders' Equity (Unaudited)**


**For
      the Nine Months Ended September 30, 2008**


**(in
      thousands)**


Series
              
              Series
              
              
              
              Retained
                Earnings
              
              AccumulatedCommon
              
              C
              
              D
              
              Additional
              
              (Distributions
              
              Other
              
              
              
              TotalStock,
              
              Preferred
              
              Preferred
              
              Paid-In
              
              in Excess
              
              Comprehensive
              
              Comprehensive
              
              Stockholders'Par Value
              
              Stock
              
              Stock
              
              Capital
              
              of Earnings)
              
              Loss
              
              Income
              
              EquityBalance at January 1, 2008
              
              $
              63
              
              $
              55,435
              
              $
              83,259
              
              $
              691,071
              
              $
              (122,738
              )
              $
              (255,719
              )
              
              
              
              $
              451,371Cumulative effect of
                  adjustment from adoption of SFAS No. 159
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              122,988
              
              
              227,635
              
              
              
              
              
              350,623Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              102,491
              
              
              
              
              $
              102,
                  491
              
              
              102,
                  491Unrealized
                  loss on cash flow hedges
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,219
              )
              
              (6,219
              )
              
              (6,219
              )Reclassification
                  adjustments from cash flow hedges included in net income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,577
              
              
              4,577
              
              
              4,577Dedesigation
                  of cash flow hedges
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,084
              
              
              7,084
              
              
              7,084Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,010
              )
              
              (8,010
              )
              
              (8,010
              )Other
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,568
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              99,923Dividends
                  declared-common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (65,930
              )
              
              
              
              
              
              
              
              (65,930
              )Dividends
                  on preferred stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12,738
              )
              
              
              
              
              
              
              
              (12,738
              )Issuance
                  of common stock
              
              
              14
              
              
              
              
              
              
              
              
              91,859
              
              
              
              
              
              
              
              
              
              
              
              91,873Balance
                  at September 30, 2008
              
              $
              77
              
              $
              55,435
              
              $
              83,259
              
              $
              782,930
              
              $
              24,073
              
              $
              (30,652
              )
              
              
              
              $
              915,122





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


6


**Anthracite
      Capital, Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows (Unaudited)**


**(in
      thousands)**


For the Nine Months Ended
                September 30, 2008
              
              For the Nine Months Ended
                September 30, 2007Cash flows from operating activities:Net
                  income
              
              
              102,491
              
              $
              65,444Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Net
                  decrease in trading securities
              
              
              118
              
              
              6,709Sale
                  of trading securities
              
              
              -
              
              
              166,932Purchase
                  of securities held-for-trading
              
              
              (53,515
              )
              
              (42,668
              )Unrealized
                  loss on securities held-for-trading
              
              
              572,675
              
              
              -Unrealized
                  loss on swaps classified as held-for-trading
              
              
              811
              
              
              -Realized
                  loss (gain) on securities and swaps held-for-trading, net
              
              
              3,236
              
              
              (1,513
              )Unrealized
                  gain on liabilities
              
              
              (667,980
              )
              
              -Earnings
                  from subsidiary trust
              
              
              (317
              )
              
              (316
              )Distributions
                  from subsidiary trust
              
              
              316
              
              
              316Earnings
                  from equity investments
              
              
              (2,510
              )
              
              (28,982
              )Distributions
                  of earnings from equity investments
              
              
              3,599
              
              
              11,948Provision
                  for loan loss
              
              
              43,942
              
              
              -Discount
                  accretion, net
              
              
              (14,362
              )
              
              (9,010
              )Amortization
                  of finance costs
              
              
              2,505
              
              
              4,351Loss
                  on impairment of assets
              
              
              -
              
              
              7,036Unrealized
                  net foreign currency loss (gain)
              
              
              28,528
              
              
              (41,796
              )Non-cash
                  management and incentive fees
              
              
              11,934
              
              
              3,838(Disbursements)
                  proceeds from termination of interest rate swap agreements
              
              
              (17,101
              )
              
              17,737Amortization
                  of terminated interest rate swaps from OCI
              
              
              4,577
              
              
              928Dedesignation
                  of cash flow hedges
              
              
              7,084
              
              
              -Increase
                  in other assets
              
              
              (8,910
              )
              
              (11,074
              )(Decrease)
                  increase in other liabilities
              
              
              (6,287
              )
              
              6,903Net
                  cash provided by operating activities
              
              
              10,834
              
              
              156,783Cash
                  flows from investing activities:Purchase
                  of securities
              
              
              -
              
              
              (505,119
              )Proceeds
                  from sale of securities
              
              
              74,272
              
              
              591,360Principal
                  payments received on securities
              
              
              56,968
              
              
              58,857Funding
                  of commercial mortgage loans
              
              
              (2,286
              )
              
              (687,316
              )Repayments
                  received from commercial mortgage loans
              
              
              19,341
              
              
              275,127Repayments
                  received from commercial mortgage loan pools
              
              
              7,639
              
              
              14,835Decrease
                  in restricted cash equivalents
              
              
              16,086
              
              
              29,254Return
                  of capital from equity investments
              
              
              -
              
              
              25,000Investment
                  in equity investments
              
              
              (35,538
              )
              
              (38,555
              )Net
                  cash provided by (used in) investing activities
              
              
              136,482
              
              
              (236,557
              )Cash
                  flows from financing activities:(Decrease)
                  increase in borrowings under reverse repurchase agreements and
                  credit
                  facilities:Secured
                  by pledge of subordinated CMBS
              
              
              (102,998
              )
              
              230,100Secured
                  by pledge of investment grade CMBS
              
              
              (85,617
              )
              
              (480,927
              )Secured
                  by pledge of commercial mortgage loans
              
              
              (39,556
              )
              
              234,471Secured
                  by pledge of equity investments
              
              
              30,000
              
              
              -Secured
                  by pledge of securities held-for-trading
              
              
              -
              
              
              (127,249
              )Repayments
                  of borrowings secured by commercial mortgage loan pools
              
              
              (9,157
              )
              
              (16,065
              )Repayments
                  of collateralized debt obligations
              
              
              (44,885
              )
              
              (50,018
              )Issuance
                  of collateralized debt obligations
              
              
              -
              
              
              23,875Issuance
                  costs for collateralized debt obligations
              
              
              -
              
              
              (1,537
              )Issuance
                  of senior convertible debt
              
              
              -
              
              
              80,000Issuance
                  costs of senior convertible debt
              
              
              -
              
              
              (2,419
              )Issuance
                  of senior unsecured notes
              
              
              -
              
              
              87,500Issuance
                  costs of senior unsecured notes
              
              
              -
              
              
              (2,456
              )Issuance
                  of junior unsecured notes
              
              
              -
              
              
              68,557Issuance
                  costs of junior unsecured notes
              
              
              -
              
              
              (2,113
              )Dividends
                  paid on preferred stock
              
              
              (11,805
              )
              
              (7,344
              )Proceeds
                  from issuance of preferred stock, net of offering costs
              
              
              69,839
              
              
              83,267Proceeds
                  from issuance of common stock, net of offering costs
              
              
              59,327
              
              
              66,624Repurchase
                  of common stock
              
              
              -
              
              
              (12,000
              )Dividends
                  paid on common stock
              
              
              (61,141
              )
              
              (52,943
              )Net
                  cash (used in) provided by financing activities
              
              
              (195,993
              )
              
              119,323Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              2,940
              
              
              16,248Net
                  (decrease) increase in cash and cash equivalents
              
              
              (45,737
              )
              
              55,797Cash
                  and cash equivalents, beginning of period
              
              
              91,547
              
              
              66,388Cash
                  and cash equivalents, end of period
              
              $
              45,810
              
              $
              122,185





For the Nine Months Ended
              September 30, 2008
            
            For the Nine Months Ended
              September30, 2007Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            167,624
            
            $
            168,889Series
                E-3 preferred stock conversion
            
            $
            23,289
            
            $
            -Incentive
                fees paid by the issuance of common stock
            
            $
            9,257
            
            $
            5,250





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


7


**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 (collectively with its subsidiaries,
      the
      "Company"), was incorporated in Maryland in November 1997, commenced operations
      on March 24, 1998 and is organized as a real estate investment trust ("REIT").
      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 activities are investing in high yield commercial real estate debt
      and
      equity. 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 and
      equity.





The
      Company’s primary investment activities are conducted on a global basis in four
      investment sectors:


1)  Commercial
      Real Estate Debt Securities


2)  Commercial
      Real Estate Loans


3)  Commercial
      Real Estate Equity


4)  RMBS





The
      accompanying September 30, 2008 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, 2007 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
      the
      Company’s assets and long-term liabilities, credit analysis related to certain
      of the Company's securities, and estimates pertaining to credit performance
      related to CMBS and commercial real estate loans.




8




***Recent
      Accounting Developments***





*Fair
      Value Measurements*





In
      September 2006, the Financial Accounting Standards Board (the “FASB”) issued
      Statement of Financial Accounting Standards No. 157, *Fair
      Value Measurements* ("FAS
      157"). FAS 157 defines fair value, establishes a framework for measuring fair
      value and requires enhanced disclosures about fair value measurements. FAS
      157
      requires companies to disclose the fair value of their financial instruments
      according to a fair value hierarchy (i.e., Levels 1, 2 and 3, as defined).
      Additionally, companies are required to provide enhanced disclosure regarding
      instruments in the Level 3 category (which have inputs to the valuation
      techniques that are unobservable and require significant management judgment),
      including a reconciliation of the beginning and ending balances separately
      for
      each major category of assets and liabilities. FAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007
      and all interim periods within those fiscal years. The Company adopted FAS
      157
      as of January 1, 2008. FAS 157 did not materially affect how the Company
      determines fair value, but resulted in certain additional
      disclosures.





In
      October 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-3,*Determining
      the Fair Value of a Financial Asset When the Market for That Asset Is Not
      Active*(“FSP
      157-3”), which became effective upon issuance, including periods for which
      financial statements have not been issued.  FSP FAS 157-3 clarifies
      the application of FAS 157, which the Company adopted as of January 1, 2008,
      in
      a market that is not activeand
      provides an example to illustrate key considerations in the determination of
      the
      fair value of a financial asset when the market for that asset is not active.
      The key considerations illustrated in the FSP FAS 157-3 example include the
      use
      of an entity’s own assumptions about future cash flows and appropriately
      risk-adjusted discount rates, appropriate risk adjustments for nonperformance
      and liquidity risks, and the reliance that an entity should place on quotes
      that
      do not reflect the result of market transactions.The
      adoption by the Company of FSP FAS 157-3 did not have a material impact on
      its
      financial statements or its determination of fair values as of September 30,
      2008.





*Fair
      Value Accounting*





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ("FAS
      159"). FAS 159 permits entities to elect to measure eligible financial
      instruments at fair value. The unrealized gains and losses on items for which
      the fair value option has been elected will be reported in earnings. The
      decision to elect the fair value option is determined on an
      instrument-by-instrument basis, is applied to an entire instrument and is
      irrevocable. Assets and liabilities measured at fair value pursuant to the
      fair
      value option will be reported separately on the consolidated statement of
      financial condition from those instruments measured using another measurement
      attribute. FAS 159 is effective as of the beginning of the first fiscal year
      that begins after November 15, 2007. The Company adopted FAS 159 as of January
      1, 2008 and elected to apply the fair value option to the following financial
      assets and liabilities existing at the time of adoption:





(1)
            all
                securities which were previously accounted for as
                available-for-sale;


(2)
            investments
                in equity of subsidiary trusts;


(3)
            all
                unsecured long-term liabilities, consisting of all senior unsecured
                notes,
                senior unsecured convertiblenotes,
                junior unsecured notes and junior subordinated notes to subsidiary
                trust
                issuing preferred securities; and




9




(4)
      all
      CDO liabilities.





Upon
      adoption, with an adjustment to opening retained earnings, total stockholders'
      equity increased by $350,623, substantially all of which relates to applying
      the
      fair value option to the Company's long-term liabilities. The Company recorded
      all unamortized debt issuance costs relating to debt for which the Company
      elected the fair value option on January 1, 2008 as an adjustment to opening
      retained earnings. Subsequent to January 1, 2008, all changes in the estimated
      fair value of the Company's securities, CDO liabilities, senior unsecured notes,
      senior unsecured convertible notes, junior unsecured notes and junior
      subordinated notes are recorded in earnings.





*Disclosures
      about Derivative Instruments and Hedging Activities*





In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities* (“FAS
      161”). This statement amends and expands the disclosure requirements of SFAS No.
      133, *Accounting
      for Derivative Instruments and Hedging Activities* (“FAS
      133”). This statement requires qualitative disclosures about objectives and
      strategies for using derivatives, quantitative disclosures about fair value
      amounts of gains and losses on derivative instruments, and disclosures about
      credit-risk-related contingent features in derivative agreements. FAS 161 will
      be effective for the Company on January 1, 2009. Management is currently
      evaluating the effects that FAS 161 will have on the disclosures included in
      the
      Company’s consolidated financial statements.





*Reverse
      Repurchase Agreements*





In
      February 2008, the FASB issued FSP FAS 140-3, *Accounting
      for Transfers of Financial Assets and Repurchase Financing
      Transactions* ("FSP
      140-3"). FSP 140-3 addresses the accounting for the transfer of financial assets
      and a subsequent repurchase financing and shall be effective for financial
      statements issued for fiscal years beginning after November 15, 2008 and interim
      periods within those years. FSP 140-3 focuses on the circumstances that would
      permit a transferor and a transferee to separately evaluate the accounting
      for a
      transfer of a financial asset and a repurchase financing under SFAS No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishment of
      Liabilities* (“FAS
      140”).





FSP
      140-3
      states that a transfer of a financial asset and a repurchase agreement involving
      the transferred financial asset should be considered part of the same
      arrangement when the counterparties to the two transactions are the same unless
      certain criteria are met. The criteria in FSP 140-3 are intended to identify
      whether (1) there is a valid and distinct business or economic purpose for
      entering separately into the two transactions and (2) the repurchase financing
      does not result in the initial transferor regaining control over the previously
      transferred financial assets. The FASB has stated that FSP 140-3’s purpose is to
      limit diversity of practice in accounting for these situations, resulting in
      more consistent financial reporting. FSP 140-3 shall be applied prospectively
      to
      initial transfers and repurchase financings for which the initial transfer
      is
      executed on or after the beginning of the fiscal year in which FSP 140-3 is
      initially applied.





10




Currently,
      the Company records such assets and the related financing gross on its
      consolidated statement of financial condition, and the corresponding interest
      income and interest expense gross on its consolidated statement of operations.
      However, in a transaction in which securities are acquired from and financed
      under a repurchase agreement with the same counterparty, the acquisition may
      not
      qualify as a sale for the seller or a purchase for the Company under the
      provisions of FAS 140. In such cases, the seller may be required to continue
      to
      consolidate the assets sold to the Company, based on their continuing
      involvement with such investments. The Company has not completed its evaluation
      of the impact of FSP 140-3, but the Company may be precluded from presenting
      the
      assets gross on the Company's consolidated statement of financial condition
      and
      may be instead required to treat the Company's net investment in such assets
      as
      a derivative.  If it is determined that these transactions should be
      treated as 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 consolidated statement of operations.  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
      Company's consolidated financial statements. The Company's cash flows and
      liquidity would be unchanged, and the Company does not believe its REIT taxable
      income or REIT status would be affected. The Company believes stockholders'
      equity would not be materially affected.





*Investment
      Companies*





In
      June
      2007, the American Institute of Certified Public Accountants ("AICPA") issued
      Statement of Position ("SOP") 07-1, *Clarification
      of the Scope of the Audit and Accounting Guide Investment Companies and
      Accounting by Parent Companies and Equity Method Investors for Investments
      in
      Investment Companies* .
      This
      SOP provides guidance for determining whether an entity is within the scope
      of
      the AICPA Audit and Accounting Guide Investment Companies (the "Guide").
      Entities that are within the scope of the Guide are required, among other
      things, to carry their investments at fair value, with changes in fair value
      included in earnings. On February 14, 2008, the FASB decided to indefinitely
      defer the effective date of this SOP.





*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 (“VIE”) in which the
      Company is the primary beneficiary under FASB Interpretation No. 46 (revised), *Consolidation
      of Variable Interest Entities* (“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 intercompany
      balances and transactions have been eliminated in consolidation.





The
      Company considers the CMBS where it maintains the right to control the
      foreclosure/workout process on the underlying loans as controlling class CMBS
      ("Controlling Class"). 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. As a result, the Company does not
      consolidate these entities.




11




In
      April
      2008, the FASB voted to eliminate QSPEs from the guidance in FAS 140 and to
      remove the scope exception for QSPEs from FIN 46R. This will require that VIEs
      previously accounted for as QSPEs to be analyzed for consolidation according
      to
      FIN 46R. The FASB also proposed that an entity review VIEs at each reporting
      period to reconsider whether an entity is a VIE and to determine the primary
      beneficiary. While the revised standards have not been finalized and the Board’s
      proposals are subject to a public comment period, this change may affect the
      Company’s consolidated financial statements as the Company may be required to
      consolidate entities that had previously been determined to qualify as QSPEs.
      The FASB proposed that the amendments to FAS 140 and FIN 46R be effective for
      new and existing transactions for fiscal years and interim periods beginning
      after November 15, 2009. The Company will continue to evaluate the impact of
      these changes on its consolidated financial statements once these changes to
      current GAAP become finalized.




*Convertible
      Debt Instruments*




In
      May 2008, FSP APB 14-1, *Accounting
      for Convertible Debt Instruments That May Be Settled in Cash upon
      Conversion (Including Partial Cash Settlement)* (“FSP
      APB 14-1”) was issued. FSP APB 14-1 applies to convertible debt instruments
      that, by their stated terms, may be settled in cash (or other assets) upon
      conversion, including partial cash settlement of the conversion option. FSP
      APB
      14-1 requires bifurcation of the instrument into a debt component that is
      initially recorded at fair value and an equity component. The difference between
      the fair value of the debt component and the initial proceeds from issuance
      of
      the instrument is recorded as a component of equity. The liability component
      of
      the debt instrument is accreted to par using the effective yield method;
      accretion is reported as a component of interest expense. The equity component
      is not subsequently re-valued as long as it continues to qualify for equity
      treatment under EITF Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* .
      FSP APB
      14-1 is effective for financial statements issued for fiscal years and interim
      periods beginning after December 15, 2008. Early adoption is not permitted.
      The FSP is to be applied retrospectively to all past periods presented — even if
      the instrument has matured, converted, or otherwise been extinguished as of
      the
      FSP’s effective date. The Company is currently evaluating the impact of adopting
      FSP APB 14-1 on the consolidated financial statements.


12


**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 shares of common stock
      outstanding during the period. Diluted income per share is calculated using
      the
      weighted average number of shares of common stock outstanding during the period
      plus the additional dilutive effect of common stock equivalents. The dilutive
      effect of outstanding stock options is calculated using the treasury stock
      method, and the dilutive effect of senior unsecured convertible notes and
      cumulative convertible redeemable preferred stock is calculated using the "if
      converted" method.


For the Three Months Ended
                September 30,
              
              For the Nine Months Ended
                September 30,2008
              
              2007
              
              2008
              
              2007Numerator:Numerator
                  for basic earnings per share
              
              $
              10,775
              
              $
              12,259
              
              $
              89,753
              
              $
              56,914Interest
                  expense on convertible senior notes
              
              
              -
              
              
              -
              
              
              7,066
              
              
              -Dividends
                  on Series E convertible preferred stock
              
              
              -
              
              
              -
              
              
              3,343
              
              
              -Numerator
                  for diluted earnings per share
              
              $
              10,775
              
              $
              12,259
              
              $
              100,162
              
              $
              56,914Denominator:Denominator
                  for basic earnings per share—weighted average common shares
                  outstanding
              
              
              74,365,259
              
              
              63,861,985
              
              
              69,099,689
              
              
              60,450,020Dilutive
                  effect of stock options
              
              
              -
              
              
              1,048
              
              
              -
              
              
              2,133Assumed
                  conversion of convertible senior notes
              
              
              -
              
              
              -
              
              
              7,416,680
              
              
              -Assumed
                  conversion of Series E convertible preferred stock
              
              
              -
              
              
              -
              
              
              4,952,748
              
              
              -Dilutive
                  effect of stock based incentive fee
              
              
              383,301
              
              
              315,486
              
              
              255,534
              
              
              210,324Denominator
                  for diluted earnings per share—weighted average common shares outstanding
                  and common stock equivalents outstanding
              
              
              74,748,560
              
              
              64,178,519
              
              
              81,724,651
              
              
              60,662,477Basic
                  net income per weighted average common share:
              
              $
              0.14
              
              $
              0.19
              
              $
              1.30
              
              $
              0.94Diluted
                  net income per weighted average common share and common share
                  equivalents:
              
              $
              0.14
              
              $
              0.19
              
              $
              1.23
              
              $
              0.94




Total
      anti-dilutive stock options excluded from the calculation of diluted net income
      per share were 10,000 for the three and nine months ended September 30, 2008.
      Total anti-dilutive stock options excluded from the calculation of diluted
      net
      income per share were 1,362,151 for the three and nine months ended
      September  30,
      2007.




13




Total
      anti-dilutive shares related to convertible senior notes and Series E
      convertible preferred stock excluded from the calculation of diluted net income
      per share were 7,416,680 and 6,239,323, respectively, for the three months
      ended
      September 30, 2008.





**Note
      3  FAIR VALUE DISCLOSURES**





The
      Company adopted FAS 157 as of January 1, 2008, which requires, among other
      things, enhanced disclosures about financial instruments that are measured
      and
      reported at fair value. Financial instruments include the Company’s securities
      classified as held-for-trading, long-term liabilities as well as derivatives
      accounted for at fair value.





The
      degree of judgment utilized in measuring the fair value of financial instruments
      generally correlates to the level of pricing observability. Pricing
      observability is impacted by a number of factors, including the type of
      financial instrument, whether the financial instrument is new to the market
      and
      not yet established and the characteristics specific to the transaction.
      Financial instruments with readily available active quoted prices or for which
      fair value can be measured from actively quoted prices generally will have
      a
      higher degree of pricing observability and a lesser degree of judgment utilized
      in measuring fair value. Conversely, financial instruments rarely traded or
      not
      quoted will generally have less, or no, pricing observability and a higher
      degree of judgment utilized in measuring fair value.





FAS
      157
      establishes a hierarchal disclosure framework associated with the level of
      pricing observability utilized in measuring financial instruments at fair value.
      Instruments are categorized based on the lowest level input that is significant
      to the valuation. The three levels defined by the FAS 157 hierarchy are as
      follows:





Level
      1 –
Quoted prices are available in active markets for identical assets or
      liabilities at the reporting date. Level 1 assets include highly liquid cash
      instruments with quoted prices such as agency securities, listed equities and
      money market securities, as well as listed derivative instruments.




Level
      2 –
Pricing inputs other than quoted prices included within Level 1 that are
      observable for substantially the full term of the asset or liability, either
      directly or indirectly. Level 2 assets include quoted prices for similar assets
      or liabilities in active markets; quoted prices for identical or similar assets
      or liabilities that are not active; and inputs other than quoted prices that
      are
      observable, such as models or other valuation methodologies. Instruments which
      are generally included in this category are corporate bonds and loans, mortgage
      whole loans, municipal bonds and OTC derivatives. The Company has determined
      that the following instruments are Level 2: interest rate swaps, foreign
      currency swaps and foreign currency forward contracts.




Level
      3 –
Instruments that have little to no pricing observability as of the reported
      date.  These financial instruments do not have two-way markets and are
      measured using management’s best estimate of fair value, where the inputs into
      the determination of fair value require significant management judgment or
      estimation. Instruments in this category generally include assets and
      liabilities for which there is little, if any, current market activity. The
      Company’s investments in this category include investment grade CMBS,
      subordinated CMBS and all of the Company’s long-term liabilities. The fair
      values of certain assets are determined by references to index pricing. However,
      for certain assets, index prices for identical or similar assets are not
      available. In these cases and for CDO liabilities, management uses broker quotes
      as being indicative of fair values, but management ultimately determines the
      fair values recorded in the financial statements. Broker quotes are only
      indicative of fair value, and do not necessarily represent what the Company
      would receive in an actual trade for the applicable instrument. The Company
      has
      classified these assets and liabilities as Level 3 as of September 30, 2008
      due
      to the lack of current market activity. The Company believes that it may be
      appropriate to transfer these assets and liabilities to Level 2 in subsequent
      periods if market activity returns to normalized levels and observable inputs
      become available.


14





The
      Company’s assessment of the significance of a particular input to the fair value
      measurement in its entirety requires judgment and considers factors specific
      to
      the investment.





The
      following table summarizes the valuation of our financial instruments by the
      above FAS 157 pricing observability levels as of September 30, 2008. Assets
      and
      liabilities measured at fair value on a recurring basis are categorized below
      based upon the lowest level of significant input to the valuations.





Assets at Fair Value as of September 30, 2008Level 1
            
            Level
                2
            
            Level
                3
            
            TotalSubordinated
                CMBS
            
            $
            -
            
            $
            -
            
            $
            607,864
            
            $
            607,864Investment
                grade CMBS
            
            
            -
            
            
            -
            
            
            1,005,630
            
            
            1,005,630RMBS
            
            
            -
            
            
            -
            
            
            840
            
            
            840Derivative
                instruments
            
            
            -
            
            
            495,032
            
            
            -
            
            
            495,032Investments
                in equity of subsidiary trusts*
            
            
            -
            
            
            -
            
            
            1,389
            
            
            1,389Total
            
            $
            -
            
            $
            495,032
            
            $
            1,615,723
            
            $
            2,110,755


*
      Included as a component of other assets on the consolidated statements of
      financial condition.





Liabilities at Fair Value as of September 30, 2008Level 1
            
            Level
                2
            
            Level
                3
            
            TotalSenior
                unsecured notes
            
            $
            -
            
            $
            -
            
            $
            47,305
            
            $
            47,305Senior
                unsecured convertible notes
            
            
            -
            
            
            -
            
            
            58,744
            
            
            58,744Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            16,641
            
            
            16,641Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            37,056
            
            
            37,056CDOs
            
            
            -
            
            
            -
            
            
            1,040,435
            
            
            1,040,435Derivative
                instruments
            
            
            -
            
            
            523,898
            
            
            -
            
            
            523,898Total
            
            $
            -
            
            $
            523,898
            
            $
            1,200,181
            
            $
            1,724,079


15





The
      following table presents the changes in Level 3 assets for the three months
      ended September 30, 2008:





Subordinated
              CMBS
            
            Investment grade
              CMBS
            
            RMBS
            
            Junior
              subordinated
              notesBalance
                at July 1, 2008
            
            $
            797,327
            
            $
            1,104,751
            
            $
            973
            
            $
            2,210Net
                purchases (sales)
            
            
            (572
            )
            
            (483
            )
            
            (138
            )
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                (losses) included in earnings
            
            
            (177,242
            )
            
            (93,790
            )
            
            5
            
            
            (821
            )Losses
                included in OCI(1)
            
            
            (11,649
            )
            
            (4,848
            )
            
            -
            
            
            -Balance
                at September 30, 2008
            
            $
            607,864
            
            $
            1,005,630
            
            $
            840
            
            $
            1,389Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                atSeptember30, 2008(2)
            
            $
            (161,636
            )
            $
            (88,145
            )
            $
            (51
            )
            $
            (821
            )Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                atSeptember30, 2008(3)
            
            $
            (15,561
            )
            $
            (8,063
            )
            $
            -
            
            $
            -


(1) The
      Company has a foreign subsidiary that has the Euro as its functional currency.
      Gains (losses) in OCI represent the currency translation adjustments for this
      subsidiary.


(2) Recorded
      in “unrealized loss on securities-held-for trading” in the consolidated
      statement of operations.


(3) Recorded
      in “foreign currency gain (loss)” in the consolidated statement of
      operations.





The
      following table presents the changes in Level 3 assets for the nine months
      ended
      September 30, 2008:





Subordinated
              CMBS
            
            Investment
                grade
              CMBS
            
            RMBS
            
            Junior
              subordinated
              notesBalance
                at January 1, 2008
            
            $
            1,028,153
            
            $
            1,245,998
            
            $
            10,183
            
            $
            3,135Net
                purchases (sales)
            
            
            382
            
            
            (68,804
            )
            
            (9,420
            )
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                (losses) included in earnings
            
            
            (416,750
            )
            
            (170,043
            )
            
            77
            
            
            (1,746
            )Losses
                included in OCI(1)
            
            
            (3,921
            )
            
            (1,521
            )
            
            -
            
            
            -Balance
                at September 30, 2008
            
            $
            607,864
            
            $
            1,005,630
            
            $
            840
            
            $
            1,389Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                atSeptember30, 2008(2)
            
            $
            (407,017
            )
            $
            (167,694
            )
            $
            21
            
            $
            (1,746
            )Amount
                of total gains for the period included in earnings attributable to
                the
                change in unrealized gains or losses relating to assets still held
                atSeptember30, 2008(3)
            
            $
            (9,689
            )
            $
            (4,767
            )
            $
            -
            
            $
            -


16


(1) The
      Company has a foreign subsidiary that has the Euro as its functional currency.
      Gains (losses) in OCI represent the currency translation adjustments for this
      subsidiary.


(2) Recorded
      in “unrealized loss on securities-held-for trading” in the consolidated
      statement of operations.


(3) Recorded
      in “foreign currency gain (loss)” in the consolidated statement of
      operations.





The
      following table presents the changes in Level 3 liabilities for the three months
      ended September 30, 2008:


CDOs
              
              Senior
                unsecured
                notes
              
              Senior
                unsecured
                convertible
                notes
              
              Junior
                unsecured
                notes
              
              Junior
                subordinated
                notesBalance
                  at July 1, 2008
              
              $
              1,252,224
              
              $
              85,204
              
              $
              71,160
              
              $
              35,611
              
              $
              72,829Paydowns
              
              
              (1,282
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  transfers in (out)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Gains
                  included in earnings
              
              
              (165,475
              )
              
              (37,899
              )
              
              (12,416
              )
              
              (18,970
              )
              
              (35,773
              )Gains
                  included in OCI (1)
              
              
              (45,032
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Balance
                  at September 30, 2008
              
              $
              1,040,435
              
              $
              47,305
              
              $
              58,744
              
              $
              16,641
              
              $
              37,056Amount
                  of total losses for the period included in earnings attributable
                  to the
                  change in unrealized gains relating to liabilities still held at
                  September
                  30, 2008 (2)
              
              $
              (165,717
              )
              $
              (37,899
              )
              $
              (12,416
              )
              $
              (10,725
              )
              $
              (35,773
              )Amount
                  of total gains (losses) for the period included in earnings attributable
                  to the change in unrealized gains or losses relating to liabilities
                  still
                  held at September 30, 2008 (3)
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (8,245
              )
              $
              -


(1) The
      Company has a foreign subsidiary that has the Euro as its functional currency.
      Gains (losses) in OCI represent the currency translation adjustments for this
      subsidiary.


(2) Recorded
      in “unrealized gain on liabilities” in the consolidated statement of
      operations.


(3) Recorded
      in “foreign currency gain (loss)” in the consolidated statement of
      operations.


17





The
      following table presents the changes in Level 3 liabilities for the nine months
      ended September 30, 2008:





CDOs
            
            Senior
              unsecured
              notes
            
            Senior
              unsecured
              convertible
              notes
            
            Junior
              unsecured
              notes
            
            Junior
              subordinated
              notesBalance
                at January 1, 2008
            
            $
            1,598,502
            
            $
            114,473
            
            $
            70,186
            
            $
            44,833
            
            $
            103,312Paydowns
            
            
            (44,885
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                included in earnings
            
            
            (498,057
            )
            
            (67,168
            )
            
            (11,442
            )
            
            (28,192
            )
            
            (66,256
            )Gains
                included in OCI (1)
            
            
            (15,125
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at September 30, 2008
            
            $
            1,040,435
            
            $
            47,305
            
            $
            58,744
            
            $
            16,641
            
            $
            37,056Amount
                of total losses for the period included in earnings attributable
                to the
                change in unrealized gains or losses relating to liabilities still
                held at
                September 30, 2008 (2)
            
            
            (498,299
            )
            
            (67,168
            )
            
            (11,442
            )
            
            (25,322
            )
            
            (66,256
            )Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to liabilities
                still
                held at September 30, 2008 (3)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            (2,870
            )
            $
            -


(1) The
      Company has a foreign subsidiary that has the Euro as its functional currency.
      Gains (losses) in OCI represent the currency translation adjustments for this
      subsidiary.


(2) Recorded
      in “unrealized gain on liabilities” in the consolidated statement of
      operations.


(3) Recorded
      in “foreign currency gain (loss)” in the consolidated statement of
      operations.





***Assets
      measured at fair value on a nonrecurring basis***





Certain
      assets are measured at fair value on a nonrecurring basis, meaning that the
      instruments are not measured at fair value on an ongoing basis but are subject
      to fair value adjustments only in certain circumstances (for example, when
      there
      is evidence of impairment). The following table presents the asset carried
      on
      the consolidated statement of financial condition by caption and by level within
      the FAS 157 valuation hierarchy as of September 30, 2008, for which a
      nonrecurring change in fair value has been recorded during the nine months
      ended
      September 30, 2008:





Level 1
            
            Level 2
            
            Level 3
            
            Carrying
              ValueCommercial
                mortgage loans(1)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            45,997Total
                assets at fair value on a nonrecurring basis
            
            
            -
            
            
            -
            
            
            -
            
            
            45,997





(1)
            The
                Company recorded a provision for loan loss in the amount of $43,942
                for
                the nine months ended September 30, 2008. This provision relates
                to three
                loans with a principal balance of $90,580 and accrued interest of
                $190.


18





***Fair
      Value Option***





On
      January 1, 2008, the Company adopted FAS 159 which provides an option to elect
      fair value as an alternative measurement for selected financial assets or
      liabilities not previously recorded at fair value. The fair value option was
      elected for these assets and liabilities to align the measurement attributes
      of
      both the assets and liabilities while mitigating volatility in earnings from
      using different measurement attributes.





The
      following table presents information about the eligible instruments for which
      the Company elected the fair value option and for which a transition adjustment
      was recorded as of January 1, 2008:





Carrying Value
              at January 1,
              2008
            
            Transition
              Adjustment to
              Retained Earnings
              (Distributions in
              Excess of Earnings)
            
            Carrying Value at
              January 1, 2008 (After
              Adoption of FAS 159)Securities
                held-for-trading (1)
            
            $
            2,284,334
            
            $
            (227,635
            )
            $
            2,284,334Liability
                issuance costs
            
            
            35,137
            
            
            (35,137
            )
            
            -Senior
                unsecured notes
            
            
            (162,500
            )
            
            48,027
            
            
            (114,473
            )Senior
                unsecured convertible notes
            
            
            (80,000
            )
            
            9,814
            
            
            (70,186
            )Junior
                unsecured notes
            
            
            (73,103
            )
            
            28,269
            
            
            (44,834
            )Investments
                in equity of subsidiary trusts
            
            
            5,477
            
            
            (2,342
            )
            
            3,135Junior
                subordinated notes
            
            
            (180,477
            )
            
            77,165
            
            
            (103,312
            )CDOs
            
            
            (1,823,328
            )
            
            224,827
            
            
            (1,598,501
            )Cumulative
                effect of the adoption of the fair value option
            
            
            
            
            $
            122,988


(1)
      Prior
      to January 1, 2008, the majority of the Company’s securities were classified as
      available-for-sale and carried at fair value. Accordingly, the election of
      the
      fair value option for these securities did not change their carrying value
      and
      resulted in a reclassification from OCI to opening distributions in excess
      of
      earnings.





***Valuation***





Provided
      below is a summary of the valuation techniques employed with respect to
      financial instruments measured at fair value utilizing methodologies other
      than
      quoted prices in active markets:





Investments
      in mortgage backed securities and derivative instruments - The fair value of
      these assets is determined by reference to index pricing and market prices
      provided by certain dealers who make a market in these financial instruments,
      although such markets may not be active. Broker quotes are only indicative
      of
      fair value, and do not necessarily represent what the Company would receive
      in
      an actual trade for the applicable instrument. The Company performs additional
      analysis on prices received based on broker quotes.  This process
      includes analyzing the securities based on vintage year, rating and asset type
      and converting the price received to a spread.  The calculated spread
      is then compared to market information available for securities of similar
      type,
      vintage year and rating.  The Company utilizes this process to
      validate the prices received from brokers and adjustments are made as deemed
      necessary by management to capture current market information.


19





Collateralized
      debt obligations - The fair value of these liabilities are based on market
      prices provided by certain dealers who make a market in this sector, although
      such markets may be inactive. The dealers use models that considered, among
      other things, (i) anticipated cash flows, (ii) current market credit
      spreads, (iii) known and anticipated credit issues of underlying
      collateral, (iv) term and reinvestment period and (v) market
      transactions of similar bonds. The Company performs additional analysis on
      prices received from the brokers.  This process includes analyzing the
      securities based on vintage year, rating and asset type and converting the
      price
      received to a spread.  The calculated spread is then compared to
      market information available for securities of similar type, vintage year and
      rating. The Company utilizes this process to validate the prices received from
      brokers and adjustments are made as deemed necessary by management to capture
      current market information.





Senior
      unsecured convertible notes - The Company used the mid-point of a bid/ask price
      obtained from a dealer in this market. The bid/ask price represented the price
      the counterparty was willing to transact at on the measurement date of September
      30, 2008 understanding that it is an over-the-counter market that requires
      direct communication with the counterparty to execute the transaction. The
      counterparty utilizes a model to publish such price and consideration into
      such
      model include, among other things (i) anticipated cash flows,
      (ii) current market credit spreads and (iii)  market transactions of
      similar bonds.





Senior
      and junior unsecured notes and junior subordinated notes - The estimated fair
      values of these liabilities were developed based on the price obtained by the
      Company for the senior unsecured convertible notes. The senior unsecured
      convertible notes are senior to the unsecured and junior subordinated notes.
      The
      Company priced the senior unsecured convertible notes without the conversion
      option to obtain a straight bond price, converted that price to a spread to
      swap
      curve and then applied an additional spread to account for the fact that these
      liabilities were junior to the senior unsecured convertible notes. The Company
      was able to compare the change in implied spreads for these bonds to published
      spreads for CMBS securities which was deemed to be a reasonable comparison
      for
      these liabilities.





**Note
      4  SECURITIES HELD-FOR TRADING**




Upon
      adoption of FAS 159 as of January 1, 2008, the Company elected the fair value
      option for all of its securities that were previously classified as
      available-for-sale. As a result, all securities are now classified as
      held-for-trading. This reclassification adjustment did not result in a change
      to
      the Company’s intent as it relates to these securities. For the three and nine
      months ended September 30, 2008, respectively, $(247,348) and $(572,675) were
      recorded as unrealized loss on the securities and is included in loss on
      securities held-for-trading on the consolidated statements of operations. The
      estimated fair value of securities held-for-trading at September 30, 2008 is
      summarized as follows:


20




Security
                Description
            
            Estimated
              Fair
              ValueU.S.
                Dollar Denominated:CMBS:Investment
                grade CMBS
            
            $
            638,163Non-investment
                grade rated subordinated CMBS
            
            
            359,360Non-rated
                subordinated CMBS
            
            
            70,329CMBS
                interest only securities (“IOs”)
            
            
            4,424Credit
                tenant leases
            
            
            22,203Investment
                grade REIT debt
            
            
            201,735Multifamily
                agency securities
            
            
            354CDO
                investments - investment grade
            
            
            2,600CDO
                investments - non-investment grade
            
            
            27,187Total
                CMBS
            
            
            1,326,355RMBS:Residential
                CMOs
            
            
            428Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            412Total
                RMBS
            
            
            840Total
                U.S. dollar denominated
            
            
            1,327,195Non-U.S.
                Dollar Denominated:Investment
                grade CMBS
            
            
            136,151Non-investment
                grade rated subordinated CMBS
            
            
            124,531Non-rated
                subordinated CMBS
            
            
            26,457Total
                non-U.S. dollar denominated
            
            
            287,139Total
                securities held-for-trading
            
            $
            1,614,334





At
      September 30, 2008, an aggregate of $1,556,603 in estimated fair value of the
      Company's securities held-for-trading was pledged to secure its collateralized
      borrowings.





The
      CMBS
      held by the Company consist of subordinated securities collateralized by
      adjustable and fixed rate commercial and multifamily mortgage loans. The CMBS
      provide credit support to the more senior classes of the related commercial
      securitization. The Company generally does not own the senior classes of its
      below investment grade CMBS. Cash flows from the mortgages underlying the CMBS
      generally are allocated first to the senior classes, with the most senior class
      having a priority entitlement to cash flow. Then, any remaining cash flow is
      allocated generally among the other CMBS classes in order of their relative
      seniority. To the extent there are defaults and unrecoverable losses on the
      underlying mortgages, resulting in reduced cash flows, the most subordinated
      CMBS class will bear this loss first. To the extent there are losses in excess
      of the most subordinated class' stated entitlement to principal and interest,
      the remaining CMBS classes will bear such losses in order of their relative
      subordination.




21





At
      September 30, 2008, the anticipated reported yield based upon the adjusted
      cost
      of the Company's entire subordinated CMBS portfolio was 12.8% per annum. The
      anticipated reported yield of the Company's investment grade securities was
      7.2%. The Company's anticipated yields to maturity on its subordinated CMBS
      and
      other securities are based upon a number of assumptions that are subject to
      certain business and economic uncertainties and contingencies. Examples of
      these
      uncertainties include, among other things, the rate and timing of principal
      payments (including prepayments, repurchases, defaults, liquidations, and
      related expenses), the pass-through or coupon rate, and interest rate
      fluctuations. 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 that may alter these
      assumptions, no assurance can be given that the anticipated yields to maturity,
      discussed above and elsewhere in this report, will be achieved.





**Note
      5**   **COMMERCIAL
      MORTGAGE LOANS**





The
      following table summarizes the Company’s commercial real estate loan portfolio
      by property type at September 30, 2008 and December 31, 2007:





Loan Outstanding
            
            WeightedSeptember 30, 2008
            
            December 31, 2007
            
            Average YieldProperty Type
            
            Amount
            
            %
            
            Amount
            
            %
            
            2008
            
            2007U.S.Retail
            
            $
            52,533
            
            
            5.9
            %
            $
            52,209
            
            
            5.3
            %
            
            9.6
            %
            
            9.6
            %Office
            
            
            45,393
            
            
            5.1
            
            
            45,640
            
            
            4.6
            
            
            10.3
            
            
            10.3Multifamily(1)
            
            
            170,463
            
            
            19.0
            
            
            174,873
            
            
            17.8
            
            
            9.9
            
            
            9.7Storage
            
            
            32,080
            
            
            3.6
            
            
            32,307
            
            
            3.3
            
            
            9.1
            
            
            9.1Land(2)
            
            
            -
            
            
            -
            
            
            25,000
            
            
            2.5
            
            
            -
            
            
            9.6Hotel
            
            
            12,387
            
            
            1.4
            
            
            12,208
            
            
            1.2
            
            
            13.0
            
            
            10.9Other
                Mixed Use
            
            
            3,996
            
            
            0.4
            
            
            3,983
            
            
            0.5
            
            
            8.5
            
            
            8.5Total
                U.S.
            
            
            316,852
            
            
            35.4
            
            
            346,220
            
            
            35.2
            
            
            9.9
            
            
            9.7Non-U.S.Retail
            
            
            259,983
            
            
            29.0
            
            
            278,669
            
            
            28.3
            
            
            9.0
            
            
            8.9Office(3)
            
            
            212,950
            
            
            23.6
            
            
            238,691
            
            
            24.3
            
            
            9.2
            
            
            8.8Multifamily
            
            
            39,145
            
            
            4.3
            
            
            41,403
            
            
            4.2
            
            
            8.8
            
            
            8.6Storage
            
            
            45,974
            
            
            5.1
            
            
            51,272
            
            
            5.2
            
            
            9.2
            
            
            9.5Industrial
            
            
            15,340
            
            
            1.7
            
            
            17,274
            
            
            1.8
            
            
            10.3
            
            
            10.6Hotel
            
            
            3,407
            
            
            0.4
            
            
            5,016
            
            
            0.5
            
            
            10.7
            
            
            10.1Other
                Mixed Use
            
            
            4,304
            
            
            0.5
            
            
            4,842
            
            
            0.5
            
            
            10.3
            
            
            9.0Total
                Non-U.S.
            
            
            581,103
            
            
            64.6
            
            
            637,167
            
            
            64.8
            
            
            9.1
            
            
            8.9Total
            
            $
            897,955
            
            
            100.00
            %
            $
            983,387
            
            
            100.00
            %
            
            9.4
            %
            
            9.2
            %





22





(1) Net
      of a
      loan loss reserve of $5,000 at September 30, 2008.


(2) Net
      of a
      loan loss reserve of $25,000 at September 30, 2008.


(3) Net of a
      loan loss reserve of $13,752 at September 30, 2008.





As
      of
      September 30, 2008, the Company’s loans had the following maturity
      characteristics:





Year of initial
              maturity *
            
            Number of
              loans maturing
            
            Current
              carrying value
            
            % of total2008
            
            
            1
            
            $
            32,000
            
            
            3.6
            %2009
            
            
            -
            
            
            -
            
            
            -2010
            
            
            3
            
            
            24,818
            
            
            2.82011
            
            
            15
            
            
            279,476
            
            
            31.12012
            
            
            17
            
            
            228,218
            
            
            25.4Thereafter
            
            
            23
            
            
            333,443
            
            
            37.1Total
            
            
            59
            
            $
            897,955
            
            
            100.0
            %*
                Does not include potential extension options.





Activity
      for the nine months ended September 30, 2008 was as follows:





Book ValueBalance
                at December 31, 2007
            
            $
            983,387Investments
                in commercial mortgage loans
            
            
            2,286Proceeds
                from repayment of mortgage loans
            
            
            (19,341
            )Provision
                for loan loss
            
            
            (43,752
            )Foreign
                currency translation
            
            
            (30,239
            )Discount
                accretion, net
            
            
            5,614Balance
                at September 30, 2008
            
            $
            897,955





The
      Company recorded a provision for loan losses of $18,752 and $43,942 for the
      three and nine months ended September 30, 2008, respectively. This provision
      relates to three loans with an aggregate principal balance of $90,580 and
      accrued interest of $190. The first is a $25,000 loan secured by land in
      California which required a provision totaling $25,190 (includes accrued
      interest of $190). The second is a $20,500 mezzanine loan secured by a 1,802
      unit apartment complex located in New York City which required a provision
      totaling $5,000. The third loan is a €32,094 ($45,080) junior mezzanine loan
      secured by a portfolio of office buildings in the Netherlands which required
      a
      provision totaling €9,790 ($13,752). The loans are in various stages of
      resolution and due to the estimated reduction in value of the underlying
      collateral below the principal balance of the loans, the Company believes the
      full collectibility of the loans is not probable.


23





Changes
      in the reserve for possible loan losses were as follows:





Provision
                for possible loan losses, December 31, 2007
            
            $
            -Provision
                for loan losses
            
            
            43,942Reserve
                for possible loan losses, September 30, 2008
            
            $
            43,942





During
      the third quarter of 2008, one of the Company’s mezzanine loans with a carrying
      value of $32,000 (€22,781) defaulted. The borrower executed a standstill
      agreement which is being extended to allow time to conclude an extension
      agreement. As of September 30, 2008, the Company concluded that a loan loss
      reserve is not necessary because the value of the underlying collateral is
      greater than the principal balance of the loan. As such, the Company believes
      the collectibility of the loan is probable. At September 30, 2008, all other
      commercial real estate loans owned directly by the Company are performing
      according to their terms or have been appropriately reserved.





**Note
      6**   **COMMERCIAL
      MORTGAGE LOAN POOLS**





During
      the second quarter of 2004, the Company acquired subordinated CMBS in a trust
      representing a Controlling Class interest. The Company 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 QSPE and FIN 46R required the Company to
      consolidate the assets, liabilities 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 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.





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 would result in an impairment recorded on
      the
      consolidated statement of operations. An increase in estimated cash flows will
      increase the amount of interest income recorded in future periods.





**Note
      7**   **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 is required
      under EITF 99-20 if the updated yield is lower than the current accrual yield
      and the security has an estimated fair value less than its adjusted purchase
      price. The Company carries these securities at their estimated fair value on
      its
      consolidated statements of financial condition.


24





For
      the
      nine months ended September 30, 2008, changes in timing of assumed credit loss
      and prepayments on the Company’s 2005 through 2007 vintage Controlling Class
      CMBS required an impairment totaling $456,620.





For
      the
      nine months ended September 30, 2007, changes in timing of assumed credit loss
      and prepayments on three CMBS required an impairment totaling $4,468. Also,
      the
      Company increased its underlying loss expectations for one below investment
      grade European CMBS during the nine months ended September 30, 2007, resulting
      in an additional impairment of $1,321. In addition, the Company incurred a
      charge of $1,247 related to the mark to market of its remaining high credit
      quality securities because similar securities were sold at a loss during the
      third quarter of 2007.





As
      a
      result of the adoption of FAS 159 on January 1, 2008, the Company will no longer
      be required to make an adjustment to OCI in stockholder’s equity for
      other-than-temporary impairment because the changes in fair value are recorded
      in the statement of operations. However, because the Company records interest
      income as a separate line item in the consolidated statements of operations,
      the
      Company does assess securities for other-than-temporary impairment in order
      to
      adjust the amount of interest income recorded on such securities.





**Note
      8  EQUITY INVESTMENTS**





The
      following table is a summary of the Company’s equity investments for the nine
      months ended September 30, 2008:





Carbon I
            
            Carbon II
            
            Dynamic India
              Fund IV *
            
            AHR JV
            
            AHR Int’l
              JV
            
            TotalBalance
                at December 31, 2007
            
            $
            1,636
            
            $
            97,762
            
            $
            9,350
            
            $
            -
            
            $
            -
            
            $
            108,748Contributions
                to investments
            
            
            -
            
            
            -
            
            
            -
            
            
            1,351
            
            
            30,886
            
            
            32,237Equity
                earnings
            
            
            75
            
            
            1,372
            
            
            -
            
            
            (367
            )
            
            1,430
            
            
            2,510Foreign
                currency translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,351
            )
            
            (3,351
            )Distributions
                of earnings
            
            
            -
            
            
            (3,206
            )
            
            -
            
            
            -
            
            
            (393
            )
            
            (3,599
            )Balance
                at September 30, 2008
            
            $
            1,711
            
            $
            95,928
            
            $
            9,350
            
            $
            984
            
            $
            28,572
            
            $
            136,545


*
      The
      Company neither controls nor has significant influence over the Dynamic India
      Fund IV and accounts for this investment using the cost method of accounting.
      The Company invested $3,300 in the Dynamic India Fund IV in the fourth quarter
      of 2007 that did not settle until the first quarter of 2008.


25





At
      September 30, 2008, the Company owned approximately 20% of Carbon Capital,
      Inc.
      (“Carbon I”). The Company also owned approximately 26% of Carbon Capital II,
      Inc. (“Carbon II”, and collectively with Carbon I, the “Carbon Capital Funds”).
      The Company has pledged its interest in Carbon II as collateral under a
      revolving credit agreement (see Note 9 for further details). The Carbon Capital
      Funds are private commercial real estate income opportunity funds managed by
      the
      Manager (see Note 12 of the consolidated financial statements).





The
      Company entered into a $50,000 commitment on July 20, 2001 to acquire shares
      of
      Carbon I. On July 12, 2005, the investment period expired and Carbon I is in
      liquidation.





The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II. The final obligation to fund capital of $13,346 was called on July
      13, 2007.





On
      December 22, 2005, the Company entered into an $11,000 commitment to indirectly
      acquire shares of Dynamic India Fund IV. At September 30, 2008, the Company’s
      capital commitment was $11,000, of which $9,350 had been drawn.





The
      Company is committed to invest up to $5,000, for up to a 10% interest, in
      Anthracite JV LLC (“AHR JV”). AHR JV invests in U.S. CMBS rated higher than BB.
      As of September 30, 2008, the Company had invested $1,351 in AHR JV. The other
      member in AHR JV is managed by or otherwise associated with an affiliate of
      Credit Suisse. AHR JV is managed by the Manager (see Note 12 of the consolidated
      financial statements).





On
      June
      26, 2008, the Company invested $30,886 in RECP Anthracite International JV
      Limited (“AHR International JV”). AHR International JV invests in investments
      backed by non-U.S. real estate assets and is managed by the Manager (see Note
      12
      of the consolidated financial statements). The Company will invest on a
      deal-by-deal basis and has no committed capital obligation. The Company is
      utilizing the joint venture structure to increase its capacity to invest in
      larger and more diverse transactions given the current market’s elevated level
      of risk. The other shareholder in AHR International JV is managed by or
      otherwise associated with an affiliate of Credit Suisse.


26





**Note
      9**   **BORROWINGS**





Certain
      information with respect to the Company's borrowings at September 30, 2008
      is
      summarized as follows:


Borrowing Type
              
              Market Value
              
              Adjusted
                Issuance
                Price
              
              Weighted
                Average
                Borrowing
                Rate
              
              Weighted Average
                Remaining
                Maturity
              
              Estimated Fair
                Value of
                Assets PledgedCredit
                  facilities (1)
              
              $
              546,704
              
              $
              546,704
              
              
              5.55
              %
              
              1.17
                  years
              
              $
              902,291Commercial
                  mortgage loan pools
              
              
              1,201,019
              
              
              1,201,019
              
              
              4.00
              %
              
              4.18
                  years
              
              
              1,223,630CDOs
                  (2)
              
              
              1,040,435
              
              
              1,764,303
              
              
              4.67
              %
              
              5.19
                  years
              
              
              1,896,427Senior
                  unsecured notes (2)
              
              
              47,305
              
              
              162,500
              
              
              7.59
              %
              
              8.82
                  years
              
              
              UnsecuredJunior
                  unsecured notes (2)
              
              
              16,641
              
              
              70,233
              
              
              6.56
              %
              
              13.84 years
              
              
              UnsecuredSenior
                  unsecured convertible notes (2)
              
              
              58,744
              
              
              80,000
              
              
              11.75
              %
              
              19.18
                  years
              
              
              UnsecuredJunior
                  subordinated notes (2)
              
              
              37,056
              
              
              180,477
              
              
              7.64
              %
              
              27.61
                  years
              
              
              UnsecuredTotal
                  Borrowings
              
              $
              2,947,904
              
              $
              4,005,236
              
              
              5.03
              %
              
              5.78
                  years


(1) Includes
      $ 4,610 of borrowings under facilities related to commercial mortgage loan
      pools.


(2) As a
      result of the adoption of FAS 159 on January 1, 2008, the Company records the
      above liabilities at fair value. Changes in fair value are recorded in
      unrealized gain (loss) on liabilities on the consolidated statement of
      operations. For the nine months ended September 30, 2008, the Company recorded
      an unrealized gain of $667,980 due to the reduction of the fair value of such
      liabilities.




At
      September 30, 2008, the Company's borrowings had the following remaining
      maturities, at amortized cost:




Borrowing Type
            
            Within
              30 days
            
            31 to 59
              days
            
            60 days
              to less
              than 1
              year
            
            1 year to
              3 years
            
            3 years
              to 5
              years
            
            Over 5
              years
            
            TotalCredit
                facilities (1)
            
            $
            0
            
            $
            -
            
            $
            257,405
            
            $
            289,299
            
            $
            -
            
            $
            -
            
            $
            546,704Commercial
                mortgage loan pools(2)
            
            
            6,054
            
            
            5,866
            
            
            333,448
            
            
            102,892
            
            
            43,396
            
            
            709,363
            
            $
            1,201,019CDOs(2)
            
            
            829
            
            
            319
            
            
            52,075
            
            
            222,710
            
            
            775,967
            
            
            712,403
            
            
            1,764,303Senior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            162,500
            
            $
            162,500Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            70,233
            
            $
            70,233Senior
                unsecured convertible notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            80,000
            
            
            80,000Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            180,477
            
            $
            180,477Total
                Borrowings
            
            $
            6,883
            
            $
            6,185
            
            $
            642,928
            
            $
            614,901
            
            $
            819,363
            
            $
            1,914,976
            
            $
            4,005,236


(1)
            Includes
                $4,610 of borrowings under facilities related to commercial mortgage
                loan
                pools.


(2)
            Commercial
                mortgage loan pools and CDOs are non-recourse borrowings and payments
                for
                these borrowings are supported solely by the cash flows from the
                assets in
                these structures.




*Reverse
      Repurchase Agreements and Credit Facilities*





As
      credit
      market conditions have permitted, the Company has entered into short-term
      reverse repurchase agreements to finance securities that are not financed under
      its credit facilities or CDOs. The reverse repurchase agreements bear interest
      at a LIBOR-based variable rate. At September 30, 2008, the Company did not
      have
      any reverse repurchase agreements outstanding. At December 31, 2007, the Company
      had $80,119 of reverse repurchase agreements outstanding.





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 value of pledged assets would require the Company to provide
      additional collateral or fund margin calls. See Note 15 to the consolidated
      financial statements for additional discussion of the Company’s exposure to
      potential margin calls.


27





The
      Company’s credit facilities have been used to replace reverse repurchase
      agreement borrowings and to finance the acquisition of mortgage-backed
      securities and commercial real estate loans. Outstanding borrowings bear
      interest at a variable rate. The following table summarizes the Company’s credit
      facilities at September 30, 2008 and December 31, 2007:





September 30, 2008
            
            December 31, 2007Maturity
              Date
            
            Facility
              Amount
            
            Total
              Borrowings
            
            Unused
              Borrowing
              Capacity
            
            Facility
              Amount
            
            Total
              Borrowings
            
            Unused
              Borrowing
              CapacityBank
                of America, N.A. (1)(5)
            
            
            9/18/10
            
            $
            275,000
            
            $
            141,694
            
            $
            133,306
            
            $
            275,000
            
            $
            211,088
            
            $
            63,912Deutsche
                Bank AG, Cayman Islands Branch (2)
            
            
            7/08/10
            
            
            92,166
            
            
            92,166
            
            
            -
            
            
            200,000
            
            
            174,186
            
            
            25,814Bank
                of America, N.A.(3)
            
            
            9/18/10
            
            
            100,000
            
            
            55,439
            
            
            44,561
            
            
            100,000
            
            
            87,706
            
            
            12,294Morgan
                Stanley Bank (3) (4)
            
            
            2/07/09
            
            
            300,000
            
            
            227,405
            
            
            72,595
            
            
            300,000
            
            
            198,621
            
            
            101,379BlackRock
                HoldCo 2, Inc. (1)
            
            
            3/06/09
            
            
            53,624
            
            
            30,000
            
            
            23,624
            
            
            -
            
            
            -
            
            
            -$
            820,790
            
            $
            546,704
            
            $
            274,086
            
            $
            875,000
            
            $
            671,601
            
            $
            203,399


(1) USD
      only.


(2) Multicurrency
      (USD and Non-USD).


(3) Non-USD
      only.


(4) Can be
      increased by an additional $15,000 based on the change in exchange rates of
      the
      non-U.S. dollar loans. _However, any amounts drawn under this provision must
      be
      repaid in ninety days.


(5) Includes
      $4,610 of borrowings under facilities related to commercial mortgage loan
      pools.





As
      further detailed below, the Company is subject to financial covenants in its
      credit facilities. For the quarter ended September 30, 2008, the Company is
      not
      aware of any instances of non-compliance with these covenants.





On
      December 28, 2007, the Company received a waiver from its compliance with the
      tangible net worth covenant at December 31, 2007 from Bank of America, N.A.,
      the
      lender under a $100,000 multicurrency secured credit facility. Without the
      waiver, the Company would have been required to maintain tangible net worth
      of
      at least $520,416 at December 31, 2007 pursuant to the covenant. On January
      25,
      2008, this lender agreed to amend the covenant so that the Company would be
      required to maintain tangible net worth at the end of each fiscal quarter of
      not
      less than the sum of (i) $400,000 plus (ii) an amount equal to 75% of any equity
      proceeds received by the Company on or after July 20, 2007.


28





On
      February 15, 2008, Morgan Stanley Bank extended its $300,000 non-USD facility
      until February 7, 2009. In connection with the extension, certain financial
      covenants were added or modified so that: (i) the Company is required to have
      a
      minimum debt service coverage ratio (as defined in the related guaranty) of
      1.4
      to 1.0 for any calendar quarter, (ii) on any date, the Company's tangible net
      worth shall not decline 20% or more from its tangible net worth as of the last
      business day in the third month preceding such date, (iii) on any date, the
      Company's tangible net worth shall not decline 40% or more from its tangible
      net
      worth as of the last business day in the twelfth month preceding such date,
      (iv)
      on any date, the Company's tangible net worth shall not be less than the sum
      of
      $400,000 plus 75% of any equity offering proceeds received from and after
      February 15, 2008, (v) at all times, the ratio of the Company's total recourse
      indebtedness to tangible net worth shall not be greater than 3:1, (vi) on any
      date the Company's liquid assets (as defined in the related guaranty) shall
      not
      at any time be less than 5% of its mark-to-market indebtedness (mark-to-market
      indebtedness is defined under the related guaranty generally to mean short-term
      liabilities that have a margin call feature and as of September 30, 2008
      amounted to $546,704) and (vii) cumulative income cannot be less than one dollar
      for two consecutive quarters. Morgan Stanley Bank can require the Company to
      fund margin calls in the event the lender determines the value of the underlying
      assets have declined in value. The Company has commenced discussions with Morgan
      Stanley Bank to extend the maturity date of the facility beyond February 7,
      2009.





On
      July
      8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
      credit facility until July 8, 2010. In connection with the extension, certain
      financial covenants were added or modified to conform to the covenants in the
      Morgan Stanley Bank facility described above. In addition, the Company
      separately agreed with Deutsche Bank AG, Cayman Islands Branch, that to the
      extent the Company from time to time agrees to covenants that are more
      restrictive than those in the Deutsche Bank agreement, the covenants in the
      Deutsche Bank agreement will automatically be deemed to be modified to match
      the
      restrictions in such more restrictive covenants, subject to limited exceptions.
      The amended agreement also provides that the Company’s failure to procure an
      extension of any of its existing facilities with Bank of America, N.A. and
      Morgan Stanley Bank as of the 30th day before the maturity date (or the 15th
      day
      before the maturity date if the Company demonstrates to the satisfaction of
      Deutsche Bank that it is negotiating a bona fide commitment to extend or replace
      such facility) would constitute an event of default under such agreement;
      however, any such failure would not be deemed to constitute an event of default
      if the Company demonstrates to the satisfaction of Deutsche Bank that it has
      sufficient liquid assets, as defined under such agreement, to pay down the
      multicurrency repurchase agreement when due. Under the terms of the extension
      agreement, no additional borrowings are permitted under the facility. In
      addition, monthly amortization payments of approximately $1,600 are required
      under the facility. The monthly amortization payment can be increased or
      decreased based on a monthly repricing of all the assets that collaterize the
      credit facility.





On
      August
      7, 2008, Bank of America, N.A. extended its USD and non-USD facilities until
      September 18, 2010. In connection with the extension, certain financial
      covenants were added or modified to conform to more restrictive covenants
      contained in other credit facilities. Also in connection with the extension,
      the
      Company (i) is required to make amortization payments totaling $31,000 on
      various dates through September 30, 2008, and (ii) is required to make monthly
      installment payments of $2,250 commencing October 15, 2008 until March 15,
      2010
      under the non-USD facility and $2,250 per month commencing April 15,
      2010 and ending at maturity under the USD facility. Bank of America, N.A,
      can require the Company to fund margin calls in the event the lender determines
      the value of the underlying collateral has declined.





To
      satisfy a margin call of $11,582 made in October 2008 by Bank of America under
      its credit facilities, the Company agreed with Bank of America to increase
      the
      Company's monthly installment payments from $2,250 to $3,250 commencing November
      15, 2008 through March 15, 2010 under its non-USD facility and commencing April
      15, 2010 through September 18, 2010 under its USD facility.


29





On
      February 29, 2008, the Company entered into a binding loan commitment letter
      (the "Commitment Letter") with BlackRock HoldCo 2, Inc. ("HoldCo 2"), pursuant
      to the terms of which HoldCo 2 or its affiliates (together, the "Lender")
      committed to provide a revolving credit loan facility (the "BlackRock Facility")
      to the Company for general working capital purposes. HoldCo 2 is a wholly-owned
      subsidiary of BlackRock, Inc., the parent of BlackRock Financial Management,
      Inc., the Manager of the Company.





On
      March
      7, 2008, the Company and HoldCo 2 entered into the BlackRock Facility. The
      BlackRock Facility has a term of 364 days with two 364-day extension periods,
      subject to the Lender's approval. The BlackRock Facility is collateralized
      by a
      pledge of equity shares that the Company holds in Carbon II. The maximum
      principal amount of the BlackRock Facility is the lesser of $60,000 or a number
      determined in accordance with a borrowing base calculation equal to 60% of
      the
      fair market value of the shares of Carbon II that are pledged to secure the
      BlackRock Facility. At September 30, 2008, based on the value of the Carbon
      II
      shares on a mark-to-market basis, the maximum principal amount of the BlackRock
      Facility has declined to $53,624 and the Company has remaining unused borrowing
      capacity of $23,624. As of October 31, 2008, unused borrowing capacity from
      the
      BlackRock Facility declined to $16,835 due to a decline in the fair market
      value
      of the shares of Carbon II that are pledged to secure the BlackRock
      Facility.





The
      BlackRock Facility bears interest at a variable rate equal to LIBOR plus 2.5%.
      The fee letter, dated February 29, 2008, between the Company and HoldCo 2,
      sets
      forth certain terms with respect to fees. Amounts borrowed under the BlackRock
      Facility may be repaid and reborrowed from time to time. The Company, however,
      has agreed to use commercially reasonable efforts to obtain other financing
      to
      replace the BlackRock Facility and reduce the outstanding balance.





The
      terms
      of the BlackRock Facility give the Lender the option to purchase from the
      Company the shares of Carbon II that serve as collateral for the BlackRock
      Facility, up to the BlackRock Facility commitment amount, at a price equal
      to
      the fair market value (as determined by the terms of the BlackRock Facility
      agreement) of those shares, unless the Company elects to prepay outstanding
      loans under the BlackRock Facility in an amount equal to the Lender's desired
      share purchase amount and reduce the BlackRock Facility's commitment amount
      accordingly, which may require termination of the BlackRock Facility. Upon
      the
      consummation of the purchase, the BlackRock Facility’s commitment amount shall
      be reduced by the share purchase amount and the share purchase amount paid
      shall
      be applied to repay any outstanding loans under the BlackRock Facility as if
      the
      Company had prepaid the loans. The balance of the share amount available after
      such repayment, if any, shall be paid to the Company.





On
      April
      8, 2008, the Company repaid $52,500 to HoldCo 2, representing all
      then-outstanding borrowings under the BlackRock Facility. On July 28, 2008,
      the
      Company reborrowed $30,000 under the BlackRock Facility which was still
      outstanding at September 30, 2008.





Failure
      to meet a margin call or required amortization payment under any of the five
      aforementioned facilities would constitute an event of default under the
      applicable facility. An event of default would allow the lender to accelerate
      all facility obligations under such agreement.


30




Each
      of
      the five facilities contains cross default provisions that provide that any
      default by the Company under any loan, guaranty or similar agreement that
      permits acceleration of the balance due under such agreement would constitute
      an
      event of default under such facility.





**Note
      10**   **CONVERTIBLE
      REDEEMABLE PREFERRED STOCK**





On
      April
      4, 2008, the Company issued $70,125 of 12% Series E-1 Cumulative Convertible
      Redeemable Preferred Stock, 12% Series E-2 Cumulative Convertible Redeemable
      Preferred Stock and 12% Series E-3 Cumulative Convertible Redeemable Preferred
      Stock (collectively, the “Series E Preferred Stock”). Net proceeds to the
      Company were $69,839. Dividends are payable on the Series E Preferred Stock
      at a
      12% coupon and the holder has the right to convert the preferred stock into
      common stock at $7.49 per share (a 12% premium to the closing price of the
      Company's common stock on March 28, 2008, the pricing date).







On
      or
      after April 4, 2012, each holder of Series E-1 Preferred Stock has the right
      to
      require, at its option, the Company to repurchase all of such holder's shares
      of
      Series E-1 Preferred Stock, in whole but not in part, for cash, at a repurchase
      price equal to the liquidation preference of $1,000 per share, plus all
      accumulated but unpaid dividends thereon.







On
      or
      after April 4, 2013, each holder of Series E-2 Preferred Stock has the right
      to
      require, at its option, the Company to repurchase all of such holder's shares
      of
      Series E-2 Preferred Stock, in whole but not in part, for cash, at a repurchase
      price equal to the liquidation preference of $1,000 per share, plus all
      accumulated but unpaid dividends thereon.





On
      June
      20, 2008, the holder of the outstanding 12% Series E-3 Cumulative Convertible
      Redeemable Preferred Stock exercised its right to convert its shares into
      3,119,661 shares of common stock.





The
      holder is a subsidiary of a fund managed by an affiliate of Credit Suisse.
      Whenever dividends on the Series E Preferred Stock are in arrears for six or
      more quarterly periods (whether or not consecutive), then the holder, together
      with the holders of the Company's Series C and Series D Preferred Stock which
      rank equally with the Series E Preferred Stock, shall be entitled to elect
      a
      total of two additional directors to the Company’s Board of Directors in
      addition to the one director appointed to the Board at consummation of this
      transaction.





**Note
      11**   **COMMON
      STOCK**





The
      following table summarizes Common Stock issued by the Company for the nine
      months ended September 30, 2008, net of offering costs:





Shares
            
            Net
                ProceedsDividend
                Reinvestment and Stock Purchase Plan
            
            
            152,332
            
            $
            1,071Sales
                agency agreement
            
            
            5,226,800
            
            
            35,012Management
                and incentive fees*
            
            
            1,065,818
            
            
            7,013Incentive
                fee – stock based*
            
            
            316,320
            
            
            2,116Series
                E-3 preferred stock conversion
            
            
            3,119,661
            
            
            23,289Private
                transaction (see details below)
            
            
            3,494,021
            
            
            23,244Director
                compensation
            
            
            21,256
            
            
            128Total
            
            
            13,396,208
            
            $
            91,873


*See
      Note
      12 to the consolidated financial statements, Transactions with the Manager
      and
      Certain Other Parties, for a further description of the Company’s Management
      Agreement.


31





In
      conjunction with the Company’s issuance of the Series E Preferred Stock on April
      4, 2008, the Company also issued 3,494,021 shares of Common Stock, for $6.69
      per
      share, resulting in net proceeds of $23,244.





On
      March
      12, 2008, the Company declared dividends to its common stockholders of $0.30
      per
      share, which were paid on April 30, 2008 to stockholders of record on March
      30,
      2008. For U.S. federal income tax purposes, the dividends are expected to be
      ordinary income to the Company’s stockholders.





On
      May
      15, 2008, the Company declared dividends to its common stockholders of $0.31
      per
      share, which were paid on July 31, 2008 to stockholders of record on June 30,
      2008. For U.S. federal income tax purposes, the dividends are expected to be
      ordinary income to the Company’s stockholders.





On
      September 10, 2008, the Company declared dividends to its common stockholders
      of
      $0.31 per share, which were paid on October 31, 2008 to stockholders of record
      on September 30, 2008. For U.S. federal income tax purposes, the dividends
      are
      expected to be ordinary income to the Company’s stockholders.





**Note
      12**   **TRANSACTIONS
      WITH THE MANAGER AND CERTAIN OTHER PARTIES**





The
      Company has a Management Agreement, an administrative services agreement and
      an
      accounting services agreement with the Manager, the employer of certain
      directors and all of the officers of the Company, under which the Manager and
      the Company’s officers manage the Company’s day-to-day investment operations,
      subject to the direction and oversight of the Company’s Board of Directors.
      Pursuant to the Management Agreement and these other agreements, the Manager
      and
      the Company’s officers formulate investment strategies, arrange for the
      acquisition of assets, arrange for financing, monitor the performance of the
      Company’s assets and provide certain other advisory, administrative and
      managerial services in connection with the operations of the Company.





On
      March
      31, 2008, the Company’s unaffiliated directors approved an amended investment
      advisory agreement with the Manager. The amended Management Agreement will
      expire on March 31, 2009, unless extended. For the full one-year term of the
      renewed contract, the Manager has agreed to receive 100% of the management
      fees
      and any incentive fees in the Company's Common Stock. The stock issued to the
      Manager under this plan will be restricted from sale until six months after
      it
      is received.


32





Other
      significant changes pursuant to the amended Management Agreement include a
      reduction in the quarterly base management fee from 0.50% of stockholders'
      equity to 0.375% for the first $400 million in average total stockholders'
      equity; 0.3125% for the next $400 million of average total stockholders' equity
      and 0.25% for the average total stockholders' equity in excess of $800 million.
      Under the terms of the prior Management Agreement, the Company paid the Manager
      a base management fee equal to 0.5% of the quarterly average total stockholders’
equity for the applicable quarter. The amended Management Agreement continues
      to
      provide that the Company will grant the Manager Common Stock equal to one-half
      of one percent (0.5%) of the total number of shares of the Company's Common
      Stock outstanding as of a specified date in the fourth quarter of each
      year.





The
      amended Management Agreement also provides for the Manager to receive a
      quarterly incentive fee equal to 25% of the amount by which the applicable
      quarter’s Operating Earnings (as defined in the Management Agreement) of the
      Company (before incentive fee) plus realized gains, net foreign currency gains
      and decreases in expense associated with reversals of credit impairments on
      commercial mortgage loans; less realized losses, net foreign currency losses
      and
      increases in expense associated with credit impairments on commercial mortgage
      loans exceeds the weighted average issue price per share of the Company's Common
      Stock ($10.76 per common share at September 30, 2008) multiplied by the ten-year
      Treasury note rate plus 4.0% per annum (expressed as a quarterly percentage),
      multiplied by the weighted average number of shares of the Company's Common
      Stock outstanding during the applicable quarterly period. The Management
      Agreement continues to provide that the incentive fee payable to the Manager
      shall be subject to a rolling four-quarter high watermark.





Under
      the
      terms of the prior Management Agreement, the Manager was 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 Company’s Common Stock. Additionally, up to 30% of the
      incentive fees earned in 2007 or after were paid in shares of the Company’s
      Common Stock subject to certain provisions under a compensatory deferred stock
      plan approved by the stockholders of the Company in 2007.





The
      following is a summary of management and incentive fees incurred for the three
      and nine months ended September 30, 2008 and 2007:





For the Three Months Ended
            
            For the Nine Months EndedSeptember 30,
            
            September 30,2008
            
            2007
            
            2008
            
            2007Management
                fee
            
            $
            3,050
            
            $
            3,473
            
            $
            9,286
            
            $
            10,862Incentive
                fee
            
            
            -
            
            
            -
            
            
            11,879
            
            
            5,645Incentive
                fee - stock based
            
            
            382
            
            
            497
            
            
            1,426
            
            
            2,145Total
                management and incentive fees
            
            $
            3,432
            
            $
            3,970
            
            $
            22,591
            
            $
            18,652




33


At
      September 30, 2008 and 2007, management and incentive fees of $11,077 and
      $5,434, respectively, remain 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 $(175) and $75 for certain expenses (accrual
      adjustments) during the three and nine months ended September 30, 2008 and
      $184
      and $486 for the three and nine months ended September 30, 2007,
      respectively.





The
      Company also has administration and accounting services agreements with the
      Manager. Under the terms of the administration services agreement, the Manager
      provides financial reporting, audit coordination and accounting oversight
      services to the Company. Under the terms of the accounting services agreement,
      the Manager provides investment accounting services to the Company. For the
      three and nine months ended September 30, 2008, the Company recorded
      administration and investment accounting service fees of $250 and $735,
      respectively, which are included in general and administrative expense on the
      accompanying consolidated statements of operations. For the three and nine
      months ended September 30, 2007, the Company recorded administration and
      investment accounting service fees of $181 and $544, respectively, which are
      included in general and administrative expense on the accompanying consolidated
      statements of operations.





The
      special servicer on 33 of the Company's 39 Controlling Class trusts is Midland
      Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of The
      PNC
      Financial Services Group, Inc. (“PNC Bank”). Midland therefore may be presumed
      to be an affiliate of the Manager. The Company's fees for Midland’s services are
      at market rates.





On
      March
      7, 2008, the Company entered into a credit facility with a subsidiary of
      BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
      BlackRock Financial Management, Inc. (See Note 9).





During
      2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
      I, a private commercial real estate income opportunity fund managed by the
      Manager. The Company’s investment in Carbon I at September 30, 2008 was $1,711.
      The Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon I. At September 30, 2008, the
      Company owned approximately 20% of the outstanding shares of Carbon I.





The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II, a private commercial real estate income opportunity fund managed
      by
      the Manager. The Company’s investment in Carbon II at September 30, 2008 was
      $95,928. The Company does not incur any additional management or incentive
      fees
      to the Manager related to its investment in Carbon II. On September 30, 2008,
      the Company owned approximately 26% of the outstanding shares of Carbon
      II.





The
      Company is committed to invest up to $5,000, for up to a 10% interest, in
      Anthracite JV LLC (“AHR JV”). AHR JV invests in U.S. CMBS rated higher than BB.
      As of September 30, 2008, the Company had invested $1,351 in AHR JV. AHR JV
      is
      managed by the Manager. The other member in AHR JV is managed by or otherwise
      associated with an affiliate of Credit Suisse.





On
      June
      26, 2008, the Company invested $30,886 in RECP Anthracite International JV
      Limited (“AHR International JV”). AHR International JV invests in investments
      backed by non-U.S. real estate assets and is managed by the Manager. The Company
      will invest on a deal-by-deal basis and has no committed capital obligation.
      The
      other shareholder in AHR International JV is managed by or otherwise associated
      with an affiliate of Credit Suisse.


34


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 September 30, 2008, the Installment Payment would be $2,000
      payable over two years. The Company is not required to accrue for this
      contingent liability because it is not probable.





**Note
      13 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES**




The
      Company accounts for its derivative investments under FAS 133, 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 in 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 OCI and are recognized in the consolidated statement of operations
      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, credit
      facilities and the floating rate debt of its CDOs. On the date in which the
      derivative contract is entered into, 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. Such deposits are recorded as a component of either
      other assets, other liabilities or restricted cash. Should the counterparty
      fail
      to return deposits paid, the Company would be at risk for the estimated fair
      value of that asset. At September 30, 2008, the balance of such net deposits
      pledged to counterparties as collateral under these agreements totaled $20,266
      and is recorded as a component of other assets on the consolidated statement
      of
      financial condition.




35


At
      September 30, 2008, the Company had interest rate swaps with notional amounts
      aggregating $88,493 designated as cash flow hedges of borrowings under credit
      facilities. Cash flow hedges with an estimated fair value of $229 were included
      in derivative assets in the consolidated statement of financial condition and
      cash flow hedges with an estimated fair value of $307 were included in
      derivative liabilities in the consolidated statement of financial condition.
      For
      the three months ended September 30, 2008, the net change in the estimated
      fair
      value of the interest rate swaps was a decrease of $1,780, of which $769 was
      deemed ineffective and is included as an increase of interest expense and $1,011
      was recorded as a reduction of OCI. For the nine months ended September 30,
      2008, the net change in the estimated fair value of the interest rate swaps
      was
      a decrease of $5,685, of which $534 was deemed ineffective and is included
      as a
      decrease of interest expense and $6,219 was recorded as a reduction of OCI.
      At
      September 30, 2008, the $88,493 of notional swaps designated as cash flow hedges
      had a weighted average remaining term of 3.2 years.




During
      the nine months ended September 30, 2008, the Company terminated five of its
      interest rate swaps with a notional amount of $168,500 that were designated
      as
      cash flow hedges of borrowings under reverse repurchase agreements and credit
      facilities. Prior to the dedesignation discussed below, the Company expected
      to
      reclassify the $18,253 loss in value from OCI to interest expense over
      approximately 7.6 years, which was the weighted average remaining term of the
      swaps at the time they were closed out.





During
      the third quarter of 2008, the Company extended two of its credit facilities.
      In
      connection with the extension of the credit facilities, there was a reduction
      in
      the balance of the Company’s 90-day repurchase agreements and the forecasted
      transactions related to certain balances in OCI for interest rate swaps that
      had
      been hedging 90-day repurchase agreements were no longer probable of occurring.
      As a result, the Company reclassified $(7,084) out of OCI which is included
      in
      dedesignation of derivative instruments on the consolidated statements of
      operations. This amount was previously being reclassified to interest expense
      over the weighted average remaining term of the swaps at the time the swaps
      were
      closed. At September 30, 2008, the Company had, in aggregate, $12,209 of net
      losses related to terminated swaps recorded in OCI. For the quarter ended
      September 30, 2008, $639 was reclassified as an increase to interest expense
      and
      $2,557 is expected to be reclassified as an increase to interest expense over
      the next twelve months.





In
      connection with the adoption of FAS 159 on January 1, 2008, the Company
      dedesignated CDO interest rate swaps with notional amounts aggregating $875,548
      as trading derivatives. The Company will reclassify the $25,410 loss in value
      from OCI to interest expense over 8.3 years. For the quarter ended September
      30,
      2008, $1,238 was reclassified as an increase to interest expense and $5,204
      will
      be reclassified as an increase to interest expense over the next twelve
      months.




At
      September 30, 2008, the Company had interest rate swaps with notional amounts
      aggregating $1,209,731 designated as trading derivatives. Trading derivatives
      with an estimated fair value of $497 were included in derivative assets on
      the
      consolidated statement of financial condition and trading derivatives with
      an
      estimated fair value of $30,295 were included in derivative liabilities on
      the
      consolidated statement of financial condition. For the nine months ended
      September 30, 2008, the change in estimated fair value for these trading
      derivatives was a decrease of $1,426 which is included as a component of gain
      (loss) on securities held-for-trading on the consolidated statement of
      operations. At September 30, 2008, the $1,209,731 notional of swaps designated
      as trading derivatives had a weighted average remaining term of 5.0 years.


36




At
      September 30, 2008, the Company had a forward LIBOR cap with a notional amount
      of $85,000 and an estimated fair value at September 30, 2008, of $277 which
      is
      included in derivative assets, and the change in estimated fair value related
      to
      this derivative of $18 and $82 for the three and nine months ended September
      30,
      2008, respectively is included as a component of gain (loss) in securities
      held-for-trading on the consolidated statement of operations.




***Foreign
      Currency***




The
      U.S.
      dollar is considered the functional currency for certain of the Company’s
      international subsidiaries. Foreign currency transaction gains or losses are
      recognized in the period incurred and are included in foreign currency gain
      (loss) in the consolidated statement of operations. Gains and losses on foreign
      currency forward commitments are included in foreign currency gain (loss) in
      the
      consolidated statements of operations. These contracts are recorded at their
      estimated fair value at September 30, 2008 and are included in derivative
      instruments on the consolidated statement of financial conditions. The Company
      recorded foreign currency gains (losses) of $7,273 and $(2,913) for the three
      and nine months ended September 30, 2008 and $775 and $3,631 for the three
      and
      nine months ended September 30, 2007, respectively.





Foreign
      currency agreements at September 30, 2008 consisted of the
      following:





Estimated Fair
              Value
            
            Unamortized
              Cost
            
            Weighted Average
              Remaining TermCurrency
                swaps
            
            $
            (15,474
            )
            $
            -
            
            
            7.7
                yearsCDO
                currency swaps
            
            $
            13,437
            
            $
            -
            
            
            9.1
                yearsForwards
            
            $
            2,770
            
            $
            -
            
            
            49
                days




Consistent
      with SFAS No. 52, *Foreign
      Currency Translation* (“FAS
      52”), FAS 133 allows hedging of the foreign currency risk of a net investment
      in
      a foreign operation. The Company may use foreign currency forward contracts
      to
      manage the foreign exchange risk associated with the Company’s investment in its
      non-U.S. dollar functional currency foreign subsidiary. In accordance with
      FAS
      52, the Company records the change in the carrying amount of this investment
      in
      the cumulative translation adjustment account within OCI. For the nine months
      ended September 30, 2008, the foreign currency translation loss included in
      accumulated OCI was $8,010. Simultaneously, the effective portion of the hedge
      of this exposure is also recorded in the cumulative translation adjustment
      account and any ineffective portion of net investment hedges is recorded in
      income.


37





**Note
      14 NET INTEREST INCOME**





The
      following is a presentation of the Company’s net interest income for the three
      and nine months ended September 30, 2008 and 2007:


For the Three Months
              Ended September 30,
            
            For the Nine Months
              Ended September 30,2008
            
            2007
            
            2008
            
            2007Interest
                Income:Interest
                from securities
            
            $
            53,387
            
            $
            49,560
            
            $
            156,261
            
            $
            147,195Interest
                from commercial mortgage loans
            
            
            22,674
            
            
            20,494
            
            
            69,506
            
            
            49,942Interest
                from commercial mortgage loan pools
            
            
            12,779
            
            
            12,985
            
            
            38,445
            
            
            39,119Interest
                from cash and cash equivalents
            
            
            558
            
            
            1,784
            
            
            2,540
            
            
            3,648Total
                interest income
            
            
            89,398
            
            
            84,823
            
            
            266,752
            
            
            239,904Interest
                Expense:Interest
                – securities
            
            
            56,652
            
            
            62,525
            
            
            164,189
            
            
            178,450Total
                interest expense
            
            
            56,652
            
            
            62,525
            
            
            164,189
            
            
            178,450Net
                interest income
            
            $
            32,746
            
            $
            22,298
            
            $
            102,563
            
            $
            61,454





**Note
      15 CURRENT AND SUBSEQUENT EVENTS IN THE CREDIT MARKETS**





The
      Company does not currently know the full extent to which the current market
      disruption will affect it or the markets in which it operates, and the Company
      is unable to predict its length or ultimate severity. The
      values of real estate debt securities and loans are subject to changes in credit
      spreads. Credit spreads measure the yield demanded on debt securities and loans
      by the market based on credit relative to a specific benchmark. The ongoing
      weaknesses in the subprime mortgage sector and in the broader mortgage market
      have resulted in reduced liquidity and demand for mortgage-backed securities
      and
      have caused the credit spreads to widen substantially since the beginning of
      2007. Under these conditions, the values of real estate securities and loans
      have declined, and such decline has resulted in margin calls. The Company’s
      credit facilities (including its repurchase agreements) allow the lender, to
      varying degrees, to revalue the collateral to values that the lender considers
      to reflect market value. If a lender determines that the value of the collateral
      has decreased, it may initiate a margin call requiring the Company to repay
      a
      portion of the outstanding borrowings to cover the decrease or to post
      additional collateral with minimal notice.





During
      2007, the Company paid $82,570 related to margin calls. During the period from
      January 1, 2008 through November 10, 2008, the Company paid $189,352 ($84,733
      since July 1, 2008) related to margin calls and
      amortization payments (including payments the Company made to lenders upon
      their
      determination that the value of collateral declined and fixed payments the
      Company made to lenders pursuant to the terms of the facilities) .
      Of the
      $84,733 paid since July 1, 2008, $41,223 represented contractual payments
      negotiated upon the extension of two of the Company’s credit facilities. The
      Company will fund an additional margin call of approximately $6,600 on November
      11, 2008. It
      has
      also agreed to make increased monthly installment payments to one of its lenders
      in full satisfaction of a margin call of $11,582 originally scheduled to be
      paid
      in October 2008.


38





Additional
      margin calls as a result of the widening of credit spreads or otherwise could
      harm the Company’s liquidity, results of operations, financial condition and
      business prospects in a number of ways. In order to obtain cash to satisfy
      a
      margin call and
      absent other capital resources becoming available ,
      the
      Company would be required to liquidate assets at a disadvantageous time, which
      would cause the Company to incur losses and consequently adversely affect the
      Company’s results of operations and financial condition. Posting additional
      collateral would decrease available cash limiting the Company’s ability to
      satisfy other obligations, including future margin calls or to make additional
      investments. In addition, the Company may need to hold increased levels of
      cash
      or cash equivalents in anticipation of potential margin calls which could also
      limit the Company’s ability to make additional investments. If the Company did
      not have sufficient cash available or was unable to sell sufficient assets
      to
      satisfy margin calls, the Company would be in default under its facilities
      which
      would trigger cross default provisions in each of the Company’s five credit
      facilities. In such an event, the Company would be required to repay outstanding
      indebtedness under its credit facilities immediately. (As of September 30,
      2008,
      the Company had $546,704 of indebtedness outstanding under its credit
      facilities.) Absent other capital resources becoming available, the Company
      will
      not have sufficient liquid assets to repay such indebtedness and will be unable
      to fund its operations and continue its business.





The
      aforementioned market factors could adversely affect one or more of the
      Company's credit facilities (including repurchase agreement) counterparties
      which provide funding for the Company's portfolio and thereby could cause one
      or
      more of the Company's counterparties to be unwilling or unable to provide the
      Company with additional financing or to extend current credit facilities on
      the
      maturity date. If one or more of the Company's counterparties were unwilling
      or
      unable to extend the current credit facilities at the maturity date and the
      Company were unable to replace such facilities, the Company’s liquidity would be
      reduced, which could have a material adverse effect on the Company's financial
      condition and business. The Company could be forced to sell its investments
      at a
      time when prices are depressed, which could adversely affect the Company's
      ability to comply with REIT asset and income tests and maintain its
      qualification as a REIT. Moreover, the Company may not be able to sell those
      investments at all under current market conditions. In addition, the failure
      to
      extend certain of the Company’s credit facilities as
      of the
      30th day before the maturity date (or the 15th day before the maturity date
      if
      the Company demonstrates to the satisfaction of Deutsche Bank AG, Cayman Islands
      Branch that it is negotiating a bona fide commitment to extend or replace such
      facility)will constitute an event of default under the Company’s credit
      facility with Deutsche Bank AG.





If
      one or
      more major market participants that provide financing for mortgage-backed or
      other fixed income securities fails or decides to withdraw from the market,
      it
      could negatively affect the marketability of all fixed income securities,
      including the value of the securities in the Company's portfolio, thus reducing
      the Company's liquidity. In addition, distribution requirements under the REIT
      provisions of the Code limit the Company's ability to retain earnings and
      thereby replenish or increase capital for its operations thereby further
      reducing the Company’s liquidity.





To
      date,
      the credit performance of the majority of the Company's investments remains
      consistent both with the Company's expectations and with the broader commercial
      real estate finance industry experience; nevertheless, during the first nine
      months of 2008, the capital markets have been marking down the value of all
      credit-sensitive securities regardless of performance.


In
      addition to the covenants under the Company’s secured facilities, certain of the
      Company’s seven CDOs contain compliance tests which, if violated, could trigger
      a diversion of cash flows from the Company to bondholders. The Company's first
      three CDOs contain certain interest coverage and overcollateralization tests.
      At
      September 30, 2008, all such tests are passing by a wide margin. The Company’s
      three CDOs designated as its high yield (“HY”) series do not have any compliance
      tests. The Euro-denominated CDO's ("Euro CDO") most significant test is the
      weighted average rating test which is affected by credit rating agency
      downgrades to underlying CDO collateral. The Company can actively manage the
      Euro CDO collateral pool to maintain compliance with those tests. At September
      30, 2008, the Company is meeting all such tests.


39





During
      the first nine months of 2008, the Company raised $35,012 of capital by issuing
      common shares under its sales agency agreement. On April 4, 2008, in a privately
      negotiated transaction, the Company issued $70,125 of Series E Preferred Stock
      and 3,494,021 shares of Common Stock, resulting in combined net proceeds of
      $93,128. The Company repaid $52,500 of its loan from HoldCo 2 on April 8, 2008.
      On July 28, 2008, the Company subsequently reborrowed $30,000 from HoldCo
      2.





In
      the
      event of a further reduction in market liquidity, the Company’s short-term (one
      year or less) liquidity needs will be met primarily with $45,810 of unrestricted
      cash and cash equivalents (of which $20,501 must be retained under the
      provisions of the Company’s financial debt covenants and would not be available
      to fund operations) held as of September 30, 2008, potential common stock
      issuances under the Company’s sales agency agreement, and $23,624 of unused
      borrowing capacity from HoldCo 2 as of September 30, 2008. As of October 31,
      2008, unused borrowing capacity from the BlackRock Facility declined to $16,835
      due to a decline in the fair market value of the shares of Carbon II that are
      pledged to secure the BlackRock Facility.





The
      Company believes it has sufficient sources of liquidity to fund operations
      for
      the next twelve months (November 1, 2008 to October 31, 2009). This analysis
      is
      based on a number of assumptions. The following are the most
      critical:





1)
            The
                Company will be successful in renewing the facility with Morgan Stanley
                Bank prior to January 23, 2009 and will have no amortization payments
                under the terms of the renewal.


2)
            The
                Company will have sufficient available cash to meet its periodic
                loan
                amortization payments to Deutsche Bank and Bank of America, N.A.


3)
            The
                Company does not receive any significant margin calls from its
                lenders.


4)
            The
                Company will be successful in renewing the facility with HoldCo 2
                prior to
                March 6, 2009 and will not have any required paydowns under the terms
                of
                the renewal.





Based
      on
      current projections of cash for the next twelve months, the Company expects
      it will have cash resources to pay quarterly
      cash dividends on its common stock at the current rate for the
      dividend typically payable in the first quarter of 2009 and, if the Company
      raises additional capital, obtains additional financing and/or receives cash
      proceeds from the future sale of assets or asset repayments, thereafter. 
However, no decision has been made by the Company with respect to the
      declaration or payment of any future dividend, including the rate or time
      of declaration and payment of any such dividend.  The Company may
      consider payment of dividends on its common stock all or partially in
      common stock and intends to continue to comply with REIT dividend
      requirements.





The
      Company's ability to meet its long-term (greater than twelve months) liquidity
      requirements is also subject to obtaining additional long-term 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.


40


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





All
      currency figures expressed herein are expressed in thousands, except share
      and
      per share amounts.





***I.***  ***General***





Anthracite
      Capital, Inc., a Maryland corporation (collectively with its subsidiaries,
      the
      "Company"), is a specialty finance company that invests in commercial real
      estate assets on a global basis. The Company commenced operations on March
      24,
      1998 and is organized as a real estate investment trust ("REIT"). 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
      activities are investing in high yielding commercial real estate debt and
      equity. 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 and
      equity.





The
      Company's primary investment activities are conducted on a global basis in
      four
      investment sectors:


1)
            Commercial
                Real Estate Debt Securities


2)
            Commercial
                Real Estate Loans


3)
            Commercial
                Real Estate Equity


4)
            RMBS





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). Commercial real estate loans and equity
      provide attractive risk adjusted returns over shorter periods of time through
      strategic investments in specific property types or regions. The Company may
      consider investing in RMBS given their current relative value and
      liquidity.





The
      Company's common stock, par value $0.001 per share ("Common Stock"), is traded
      on the New York Stock Exchange ("NYSE") under the symbol "AHR". The Company's
      primary long-term objective is to generate sufficient earnings to support a
      dividend at a level which provides an attractive return to stockholders. 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 and projected hedging costs.





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 more than $1.27 trillion of assets under management at September
      30, 2008. The Manager provides an operating platform that incorporates
      significant asset origination, risk management, and operational capabilities.





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.


41





The
      following table illustrates the mix of the Company’s asset types at September
      30, 2008 and December 31, 2007:





Carrying Value atSeptember 30, 2008
            
            December 31, 2007Amount
            
            %
            
            Amount
            
            %Commercial
                real estate securities(1)
            
            $
            1,614,478
            
            
            41.7
            %
            $
            2,274,151
            
            
            49.3
            %Commercial
                real estate loans(2)
            
            
            1,024,166
            
            
            26.4
            
            
            1,082,785
            
            
            23.5Commercial
                mortgage loan pools(3)
            
            
            1,223,630
            
            
            31.6
            
            
            1,240,793
            
            
            26.9Commercial
                real estate equity(4)
            
            
            9,350
            
            
            0.3
            
            
            9,350
            
            
            0.2Total
                commercial real estate assets
            
            
            3,871,624
            
            
            100.0
            
            
            4,607,079
            
            
            99.9Residential
                mortgage-backed securities
            
            
            840
            
            
            -
            
            
            10,183
            
            
            0.1Total
            
            $
            3,872,464
            
            
            100.0
            %
            $
            4,617,262
            
            
            100.0
            %


(1)
            Includes
                equity investment in AHR JV.


(2)
            Includes
                equity investments in the Carbon Capital funds and AHR International
                JV.


(3)
            Represents
                a Controlling Class CMBS that is consolidated for accounting purposes.
                See
                Note 6 of the consolidated financial
                statements.


(4)
            Represents
                equity investment in Dynamic India Fund
                IV.





During
      the nine months ended September 30, 2008, the Company purchased $53,515 of
      non-U.S. dollar denominated securities in order to continue to increase
      geographic diversification. Also during the first nine months of 2008, the
      Company sold the majority of its remaining multifamily agency securities and
      CMBS IOs to increase its liquidity position. In addition, the dislocation in
      the
      capital markets during 2008 caused CMBS spreads to widen significantly. This
      development resulted in a significant decline in the market value of the
      Company’s CMBS portfolio during the nine months ended September 30,
      2008.


42


**Summary
      of Commercial Real Estate Assets by Local Currency**





A
      summary
      of the Company’s commercial real estate assets with estimated fair values in
      local currencies at September 30, 2008 is as follows:


Commercial
                Real Estate
                Securities(2)
              
              Commercial
                Real Estate
                Loans (1)
              
              Commercial
                Real Estate
                Equity
              
              Commercial
                Mortgage Loan
                Pools
              
              Total
                Commercial
                Real Estate
                Assets
              
              Total
                Commercial
                Real Estate
                Assets (USD)
              
              % of
                TotalUSD
              
              $
              1,327,339
              
              $
              414,490
              
              
              -
              
              $
              1,223,630
              
              $
              2,965,459
              
              $
              2,965,459
              
              
              76.6
              %GBP
              
              £
              22,824
              
              £
              43,975
              
              
              -
              
              
              -
              
              £
              66,799
              
              
              119,066
              
              
              3.1
              %EURO
              
              €
              97,724
              
              €
              358,813
              
              
              -
              
              
              -
              
              €
              456,537
              
              
              641,273
              
              
              16.6
              %Canadian
                  Dollars
              
              
              C$77,045
              
              
              C$6,281
              
              
              -
              
              
              -
              
              
              C$83,326
              
              
              78,373
              
              
              2.0
              %Japanese
                  Yen
              
              ¥
              3,898,669
              
              
              -
              
              
              -
              
              
              -
              
              ¥
              3,898,669
              
              
              36,723
              
              
              0.9
              %Swiss
                  Francs
              
              
              -
              
              
              CHF
                  23,972
              
              
              -
              
              
              -
              
              
              CHF
                  23,972
              
              
              21,380
              
              
              0.6
              %Indian
                  Rupees
              
              
              -
              
              
              -
              
              
              Rs
                  434,308
              
              
              -
              
              
              Rs
                  434,308
              
              
              9,350
              
              
              0.2
              %Total
                  USD Equivalent
              
              $
              1,614,478
              
              $
              1,024,166
              
              $
              9,350
              
              $
              1,223,630
              
              $
              3,871,624
              
              $
              3,871,624
              
              
              100.0
              %


(1)
            Includes
                the Company’s investments in the Carbon Capital Funds of $97,639 and AHR
                International JV of $28,572 at September 30,
                2008.


(2)
            Includes
                the Company’s investment in AHR JV of $984 at September 30,
                2008.





A
      summary
      of the Company’s commercial real estate assets with estimated fair values in
      local currencies at December 31, 2007 is as follows:


Commercial
                Real Estate
                Securities
              
              Commercial
                Real Estate
                Loans (1)
              
              Commercial
                Real Estate
                Equity
              
              Commercial
                Mortgage
                Loan Pools
              
              Total
                Commercial
                Real Estate
                Assets
              
              Total
                Commercial
                Real Estate
                Assets (USD)
              
              % of
                TotalUSD
              
              $
              1,881,328
              
              $
              445,618
              
              $
              -
              
              $
              1,240,793
              
              $
              3,567,739
              
              $
              3,567,739
              
              
              77.4
              %GBP
              
              £
              35,247
              
              £
              45,944
              
              
              -
              
              
              -
              
              
              £81,191
              
              
              161,618
              
              
              3.5
              %Euro
              
              €
              131,645
              
              €
              354,458
              
              
              -
              
              
              -
              
              
              €486,103
              
              
              710,707
              
              
              15.4
              %Canadian
                  Dollars
              
              
              C$89,805
              
              
              C$6,249
              
              
              -
              
              
              -
              
              
              C$96,054
              
              
              97,324
              
              
              2.1
              %Japanese
                  Yen
              
              ¥
              4,378,759
              
              
              -
              
              
              -
              
              
              -
              
              
              ¥4,378,759
              
              
              39,196
              
              
              0.9
              %Swiss
                  Francs
              
              
              -
              
              
              CHF23,939
              
              
              -
              
              
              -
              
              
              CHF23,939
              
              
              21,145
              
              
              0.5
              %Indian
                  Rupees
              
              
              -
              
              
              -
              
              
              Rs 368,483
              
              
              -
              
              
              Rs 368,483
              
              
              9,350
              
              
              0.2
              %Total
                  USD Equivalent
              
              $
              2,274,151
              
              $
              1,082,785
              
              $
              9,350
              
              $
              1,240,793
              
              $
              4,607,079
              
              $
              4,607,079
              
              
              100.0
              %


(1) Includes
      the Company's investments of $99,398 in the Carbon Capital Funds at December
      31,
      2007.


43





The
      Company has foreign currency rate exposure related to its non-U.S. dollar
      denominated assets. The Company’s primary foreign currency exposures are the
      Euro, British pound and Canadian dollar. Changes in currency rates can adversely
      impact the estimated fair value and earnings of the Company’s non-U.S. dollar
      investments. The Company mitigates this impact by utilizing local
      currency-denominated financing on its foreign investments and foreign currency
      forward contracts and swaps to hedge the net exposure.





**Commercial
      Real Estate Assets Portfolio Activity**





The
      following table details the par value, carrying value, adjusted purchase price,
      and expected yield of the Company’s commercial real estate securities included
      in as well as outside of the Company’s CDOs at September 30, 2008. The dollar
      price (“Dollar Price”) represents the estimated fair value or adjusted purchase
      price of a security, respectively, relative to its par value.





Commercial
                real estate securities outside CDOs
            
            Par
            
            Carrying
              Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Expected
              YieldInvestment
                grade CMBS
            
            $
            205,776
            
            $
            127,026
            
            $
            61.73
            
            $
            174,342
            
            $
            84.72
            
            
            7.54
            %Investment
                grade REIT debt
            
            
            121
            
            
            116
            
            
            95.51
            
            
            123
            
            
            101.41
            
            
            5.27CMBS
                rated BB+ to B
            
            
            551,008
            
            
            161,252
            
            
            29.26
            
            
            220,319
            
            
            39.98
            
            
            9.60CMBS
                rated B- or lower
            
            
            512,802
            
            
            94,106
            
            
            18.16
            
            
            109,385
            
            
            21.07
            
            
            14.00CDO
                Investments
            
            
            329,718
            
            
            27,186
            
            
            8.25
            
            
            17,384
            
            
            5.41
            
            
            66.62CMBS
                Interest Only securities (“IOs”)
            
            
            88,686
            
            
            4,425
            
            
            4.99
            
            
            1,873
            
            
            2.11
            
            
            22.45Multifamily
                agency securities
            
            
            347
            
            
            354
            
            
            102.00
            
            
            516
            
            
            148.66
            
            
            6.75Total
                commercial real estate assets outside CDOs
            
            
            1,688,458
            
            
            414,465
            
            
            24.49
            
            
            524,392
            
            
            30.98
            
            
            11.81Commercial
                real estate loans and equity outside CDOsCommercial
                real estate loans
            
            
            588,652
            
            
            577,957
            
            
            
            
            
            579,789Commercial
                mortgage loan pools
            
            
            1,189,528
            
            
            1,223,630
            
            
            102.87
            
            
            1,223,630
            
            
            102.87
            
            
            4.15Commercial
                real estate
            
            
            9,350
            
            
            9,350
            
            
            
            
            
            9,350Total
                commercial real estate loans and equity outside CDOs
            
            
            1,787,530
            
            
            1,810,937
            
            
            102.87
            
            
            1,812,769
            
            
            102.87Commercial
                real estate assets included in CDOsInvestment
                grade CMBS
            
            
            797,569
            
            
            647,288
            
            
            81.16
            
            
            734,888
            
            
            92.14
            
            
            7.58Investment
                grade REIT debt
            
            
            210,624
            
            
            201,619
            
            
            95.72
            
            
            211,697
            
            
            100.51
            
            
            5.48CMBS
                rated BB+ to B
            
            
            583,464
            
            
            290,222
            
            
            49.72
            
            
            384,578
            
            
            65.91
            
            
            11.18CMBS
                rated B- or lower
            
            
            199,962
            
            
            36,080
            
            
            18.04
            
            
            45,439
            
            
            22.72
            
            
            17.56CDO
                Investments
            
            
            4,000
            
            
            2,600
            
            
            65.00
            
            
            2,600
            
            
            65.00
            
            
            7.81Credit
                tenant lease
            
            
            22,795
            
            
            22,203
            
            
            97.40
            
            
            23,406
            
            
            102.68
            
            
            5.66Commercial
                real estate loans
            
            
            457,745
            
            
            446,210
            
            
            97.48
            
            
            430,885
            
            
            92.12
            
            
            8.97Total
                commercial real estate assets included in CDOs
            
            
            2,276,159
            
            
            1,646,222
            
            
            72.32
            
            
            1,833,493
            
            
            80.15
            
            
            8.63
            %Total
                commercial real estate assets
            
            $
            5,752,147
            
            $
            3,871,624
            
            
            
            
            $
            2,947,024


44





The
      following table details the par, carrying value, adjusted purchase price and
      expected yield of the Company’s commercial real estate assets included in as
      well as outside of the Company’s CDOs at December 31, 2007:




Commercial
                real estate securities outside CDOs
            
            Par
            
            Carrying
              Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Expected
              YieldInvestment
                grade CMBS
            
            $
            179,638
            
            $
            149,856
            
            $
            83.42
            
            $
            158,216
            
            $
            88.07
            
            
            6.56
            %Investment
                grade REIT debt
            
            
            23,121
            
            
            20,034
            
            
            86.65
            
            
            22,995
            
            
            99.45
            
            
            5.49CMBS
                rated BB+ to B
            
            
            546,299
            
            
            316,210
            
            
            57.88
            
            
            417,204
            
            
            76.37
            
            
            8.71CMBS
                rated B- or lower
            
            
            513,189
            
            
            144,797
            
            
            28.21
            
            
            166,381
            
            
            32.42
            
            
            10.73CDO
                Investments
            
            
            347,807
            
            
            46,241
            
            
            13.30
            
            
            63,987
            
            
            18.40
            
            
            20.56CMBS
                IOs
            
            
            818,670
            
            
            15,915
            
            
            1.94
            
            
            14,725
            
            
            1.80
            
            
            8.80Multifamily
                agency securities
            
            
            35,955
            
            
            37,123
            
            
            103.25
            
            
            36,815
            
            
            102.39
            
            
            5.37Total
                commercial real estate assets outside CDOs
            
            
            2,464,679
            
            
            730,176
            
            
            29.61
            
            
            880,323
            
            
            35.70
            
            
            9.34Commercial
                real estate loans and equity outside CDOsCommercial
                real estate loans
            
            
            531,516
            
            
            618,328
            
            
            
            
            
            601,144Commercial
                mortgage loan pools
            
            
            1,174,659
            
            
            1,240,793
            
            
            105.63
            
            
            1,240,793
            
            
            105.63
            
            
            4.15Commercial
                real estate
            
            
            9,350
            
            
            9,350
            
            
            
            
            
            9,350Total
                commercial real estate loans and equity outside CDOs
            
            
            1,715,525
            
            
            1,868,471
            
            
            105.63
            
            
            1,851,287
            
            
            105.63
            
            
            4.15Commercial
                real estate assets included in CDOsInvestment
                grade CMBS
            
            
            801,748
            
            
            768,671
            
            
            95.87
            
            
            759,524
            
            
            94.73
            
            
            7.09Investment
                grade REIT debt
            
            
            223,324
            
            
            226,060
            
            
            101.23
            
            
            224,608
            
            
            100.57
            
            
            5.85CMBS
                rated BB+ to B
            
            
            627,550
            
            
            466,564
            
            
            74.35
            
            
            486,162
            
            
            77.47
            
            
            10.01CMBS
                rated B- or lower
            
            
            193,155
            
            
            54,342
            
            
            28.13
            
            
            68,693
            
            
            35.56
            
            
            14.98CDO
                Investments
            
            
            4,000
            
            
            3,390
            
            
            84.75
            
            
            3,483
            
            
            87.07
            
            
            7.79Credit
                tenant lease
            
            
            23,235
            
            
            24,949
            
            
            107.38
            
            
            23,867
            
            
            102.72
            
            
            5.66Commercial
                real estate loans
            
            
            476,782
            
            
            464,456
            
            
            97.41
            
            
            434,364
            
            
            91.10
            
            
            8.73Total
                commercial real estate assets included in CDOs
            
            
            2,349,794
            
            
            2,008,432
            
            
            85.47
            
            
            2,000,701
            
            
            85.14
            
            
            8.28
            %Total
                commercial real estate assets
            
            $
            6,529,998
            
            $
            4,607,079
            
            
            
            
            $
            4,732,311


45





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; 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 September 30, 2008,
      56% of the estimated fair value of the Company’s subordinated CMBS was match
      funded in the Company's CDOs in this manner. The Company retained 100% of the
      equity of CDOs I, II, III, HY3 and Euro (each as defined below) and recorded
      the
      transactions on its consolidated financial statements as secured
      financing.





The
      table
      below summarizes the Company’s CDO collateral and debt at September 30,
      2008.


Collateral at September 30, 2008
              
              Debt at September 30, 2008Adjusted
                Purchase Price
              
              Loss
                Adjusted Yield
              
              Adjusted Issue
                Price
              
              Weighted
                Average Cost
                of Funds *
              
              Net
                SpreadCDO
                  I
              
              $
              446,067
              
              
              8.44
              %
              $
              384,579
              
              
              7.71
              %
              
              0.73
              %CDO
                  II
              
              
              294,145
              
              
              8.17
              %
              
              262,111
              
              
              6.00
              %
              
              2.17
              %CDO
                  III
              
              
              368,956
              
              
              7.32
              %
              
              375,162
              
              
              4.76
              %
              
              2.56
              %CDO
                  HY3
              
              
              320,853
              
              
              11.11
              %
              
              372,325
              
              
              5.91
              %
              
              5.20
              %Euro
                  CDO
              
              
              413,322
              
              
              8.55
              %
              
              370,126
              
              
              5.84
              %
              
              2.71
              %Total
                  **
              
              $
              1,843,343
              
              
              8.66
              %
              $
              1,764,303
              
              
              6.06
              %
              
              2.60
              %


*
      Weighted average cost of funds is the current cost of funds plus hedging
      expenses.


**
      The
      Company chose not to sell $12,500 of par of Euro CDO debt rated
      BB.


46





**Real
      Estate Credit Profile of Below Investment Grade CMBS**





The
      Company views its below investment grade CMBS investment activity as 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 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 be downgraded
      to non-rated and become the first to absorb losses and expenses from that point
      on. At September 30, 2008, the Company owned 39 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 $57,668,750. At September 30, 2008, subordinated
      Controlling Class CMBS with a par of $1,557,973 were included on the Company’s
      consolidated statement of financial condition and subordinated Controlling
      Class
      CMBS with a par of $750,623 were held as collateral by CDO HY1 and CDO HY2
      (each
      as defined below).





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 September 30, 2008 was $287,912; the average credit protection, or
      subordination level, of this portfolio was 1.01%.




47


The
      Company’s investment in its subordinated Controlling Class CMBS securities by
      credit rating category at September 30, 2008 was as follows:





Par
            
            Estimated
              Fair
              Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Weighted
              Average
              Subordination
              LevelBB+
            
            $
            249,067
            
            $
            96,773
            
            $
            38.86
            
            $
            112,014
            
            $
            45.33
            
            
            4.31
            %BB
            
            
            182,788
            
            
            62,053
            
            
            33.80
            
            
            81,930
            
            
            44.82
            
            
            3.39
            %BB-
            
            
            182,768
            
            
            75,941
            
            
            41.45
            
            
            88,945
            
            
            48.67
            
            
            5.15
            %B+
            
            
            98,967
            
            
            28,337
            
            
            28.47
            
            
            35,835
            
            
            36.21
            
            
            2.33
            %B
            
            
            124,438
            
            
            37,496
            
            
            30.02
            
            
            44,292
            
            
            35.59
            
            
            1.99
            %B-
            
            
            110,861
            
            
            25,000
            
            
            22.37
            
            
            31,636
            
            
            28.54
            
            
            1.41
            %CCC+
            
            
            37,594
            
            
            7,443
            
            
            19.80
            
            
            9,811
            
            
            26.10
            
            
            1.02
            %CCC
            
            
            39,806
            
            
            8,576
            
            
            21.54
            
            
            12,105
            
            
            30.41
            
            
            0.81
            %NR
            
            
            531,684
            
            
            76,152
            
            
            14.26
            
            
            90,932
            
            
            17.10
            
            
            n/aTotal
            
            $
            1,557,973
            
            $
            417,771
            
            $
            26.69
            
            $
            507,500
            
            $
            32.59





The
      Company’s investment in its subordinated Controlling Class CMBS securities by
      credit rating category at December 31, 2007 was as follows:





Par
            
            Estimated Fair
              Value
            
            Dollar
              Price
            
            Adjusted
              Purchase Price
            
            Dollar
              Price
            
            Weighted
              Average
              Subordination
              LevelBB+
            
            $
            277,946
            
            $
            189,351
            
            $
            68.13
            
            $
            228,054
            
            $
            82.05
            
            
            3.59
            %BB
            
            
            191,808
            
            
            117,702
            
            
            61.36
            
            
            154,916
            
            
            80.77
            
            
            2.55
            %BB-
            
            
            192,875
            
            
            121,665
            
            
            63.08
            
            
            137,092
            
            
            71.08
            
            
            4.33
            %B+
            
            
            103,352
            
            
            55,664
            
            
            53.86
            
            
            67,214
            
            
            65.03
            
            
            2.15
            %B
            
            
            140,275
            
            
            71,947
            
            
            51.29
            
            
            83,949
            
            
            59.85
            
            
            1.76
            %B-
            
            
            123,683
            
            
            49,817
            
            
            40.28
            
            
            63,282
            
            
            51.17
            
            
            1.29
            %CCC
            
            
            22,313
            
            
            6,293
            
            
            28.21
            
            
            7,814
            
            
            35.01
            
            
            0.88
            %NR
            
            
            533,920
            
            
            118,473
            
            
            22.19
            
            
            139,714
            
            
            26.17
            
            
            n/aTotal
            
            $
            1,586,172
            
            $
            730,912
            
            $
            46.08
            
            $
            882,035
            
            $
            55.61





During
      the nine months ended September 30, 2008, the loan pools were paid down by
      $2,610,685. 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.


48


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 book 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 nine months ended September
      30, 2008, five securities in one of the Company’s Controlling Class CMBS were
      upgraded by at least one rating agency and twenty eight securities in one
      Controlling Class CMBS were downgraded. Additionally, at least one rating agency
      upgraded sixteen of the Company’s non-Controlling Class commercial real estate
      securities and downgraded twelve.





As
      part
      of its underwriting process, the Company assumes a certain amount of loans
      will
      incur losses over time. In performing continuing credit reviews on the 39
      Controlling Class trusts, the Company estimates that specific losses totaling
      $857,492 related to principal of the underlying loans will not be recoverable,
      of which $410,489  is
      expected to occur over the next five years. The total loss estimate of $857,492
      represents 1.49% of the total underlying loan pools.





The
      Company considers delinquency information from the Barclays Capital 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. The Company owns Controlling
      Class CMBS issued in 1998, 1999, and 2001 through 2007. Comparable delinquency
      statistics referenced by vintage year as a percentage of par outstanding at
      September 30, 2008 are shown in the table below:





Vintage
              Year
            
            Underlying
              Collateral
            
            Delinquencies
              Outstanding
            
            Barclays Capital
              Conduit Guide1998
            
            $
            1,235,068
            
            
            5.23
            %
            
            5.39
            %1999
            
            
            491,250
            
            
            2.84
            %
            
            0.92
            %2001
            
            
            808,996
            
            
            1.68
            %
            
            1.32
            %2002
            
            
            917,122
            
            
            0.62
            %
            
            0.72
            %2003
            
            
            1,720,895
            
            
            1.92
            %
            
            0.61
            %2004
            
            
            6,202,813
            
            
            0.65
            %
            
            0.51
            %2005
            
            
            11,799,815
            
            
            1.11
            %
            
            0.61
            %2006
            
            
            13,638,598
            
            
            1.04
            %
            
            0.65
            %2007
            
            
            20,854,193
            
            
            0.62
            %
            
            0.42
            %Total
            
            $
            57,668,750
            
            
            0.99
            %
            
            0.66
            %*


*
      Weighted average based on current principal balance.





Delinquencies
      on the Company’s CMBS collateral as a percent of principal are in line with
      expectations. While the Company’s portfolio under-performed relative to the
      market in the first nine months of 2008, the absolute amount of the
      delinquencies experienced by the Company remains low. See “Item 3 - Quantitative
      and Qualitative Disclosures About Market Risks” for a detailed discussion of how
      delinquencies and loan losses affect the Company.




49


The
      following table sets forth certain information related to the aggregate
      principal balance and payment status of delinquent commercial mortgage loans
      underlying the Controlling Class CMBS held by the Company at September 30,
      2008:





September 30, 2008Principal
            
            Number
              of
              Loans
            
            % of
              CollateralPast
                due 30 days to 59 days
            
            $
            238,007
            
            
            18
            
            
            0.41
            %Past
                due 60 days to 89 days
            
            
            12,247
            
            
            5
            
            
            0.02
            %Past
                due 90 days or more
            
            
            221,614
            
            
            38
            
            
            0.39
            %Real
                Estate owned
            
            
            52,945
            
            
            12
            
            
            0.08
            %Foreclosure
            
            
            48,044
            
            
            2
            
            
            0.09
            %Total
                Delinquent
            
            
            572,857
            
            
            75
            
            
            0.99
            %Total
                Collateral Balance
            
            $
            57,668,750
            
            
            4,487





Of
      the 75
      delinquent loans at September 30,
      2008, 12 loans were real estate owned and being marketed for sale, 2 loans
      were
      in foreclosure and the remaining 61 loans were in some form of workout
      negotiations. The Controlling Class CMBS owned by the Company have a delinquency
      rate of 0.99%. During 2008, the underlying collateral experienced early payoffs
      of $2,610,685 representing 4.52% of the quarter-end pool balance. These loans
      were paid off at par with no loss. Aggregate losses related to the underlying
      collateral of $16,088 were realized during the nine months ended September 30,
      2008. This brings cumulative realized losses to $142,992, which is 14.53% 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.


50


The
      Company manages its credit risk through disciplined underwriting,
      diversification, active monitoring of loan performance and exercise of its
      right
      to influence 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 profile of the loans underlying the
      Company’s CMBS by property type at September 30, 2008 was as
      follows:





September 30, 2008
              ExposureProperty
              Type
            
            Collateral
              Balance
            
            % of
              TotalOffice
            
            $
            19,699,645
            
            
            34.16
            %Retail
            
            
            16,400,992
            
            
            28.44
            %Multifamily
            
            
            12,335,346
            
            
            21.39
            %Industrial
            
            
            4,394,359
            
            
            7.62
            %Lodging
            
            
            4,031,046
            
            
            6.99
            %Healthcare
            
            
            322,945
            
            
            0.56
            %Other
            
            
            484,417
            
            
            0.84
            %Total
            
            $
            57,668,750
            
            
            100.0
            %





At
      September 30, 2008, the estimated fair value of the Company’s holdings of
      subordinated Controlling Class CMBS was $89,729 lower than the adjusted cost
      for
      these securities, which consisted of a gross unrealized gain of $5,533 and
      a
      gross unrealized loss of $95,262. The adjusted purchase price of the Company’s
      subordinated Controlling Class CMBS portfolio at September 30, 2008 represents
      approximately 32.6% of its par amount. The estimated fair value of the Company’s
      subordinated Controlling Class CMBS portfolio at September 30, 2008 represented
      approximately 26.8% of its par amount. As the portfolio matures, the Company
      expects to recoup the $96,375 of unrealized loss, provided that the credit
      losses experienced are not greater than the credit losses assumed in the
      projected cash flow analysis. At September 30, 2008, the Company believed 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 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”) 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.




51


**Commercial
      Real Estate Loan Activity**





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





During
      the nine months ended September 30, 2008, the Company funded an additional
      $2,286 for a commercial real estate loan. The Company received repayments of
      commercial real estate loans in the aggregate amount of $19,341.





The
      Company recorded a provision for loan losses of $18,752 and $43,942 for the
      three and nine months ended September 30, 2008, respectively. This provision
      relates to three loans with an aggregate principal balance of $90,580 and
      accrued interest of $190. The loans are in various stages of resolution and
      due
      to the estimated reduction in value of the underlying collateral below the
      principal balance of the loans, the Company believes the full collectibility
      of
      the loans are not probable.





The
      Company invests in the Carbon Capital Funds which also invest in commercial
      real
      estate loans. For the three and nine months ended September 30, 2008,
      respectively, the Company recorded $1,972 and $1,447 of earnings related to
      the
      Carbon Capital Funds. Carbon II increased its investment in U.S. commercial
      real
      estate loans by funding an additional investment of $636 during 2008. Paydowns
      in the Carbon Capital Funds during 2008 totaled $72,626. As loans are repaid
      or
      sold, Carbon II has redeployed capital into acquisitions of additional loans
      for
      the portfolio. The Carbon I investment period has expired.





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





September 30,
              2008
            
            December 31,
              2007Carbon
                I
            
            $
            1,711
            
            $
            1,636Carbon
                II
            
            
            95,928
            
            
            97,762$
            97,639
            
            $
            99,398





As
      of
      September 30, 2008, Carbon II has three loans collateralized by three assets
      located in Florida that are in various stages of resolution. The properties
      consist of one hotel and two multifamily properties. Carbon II took title to
      one
      of the multifamily properties during 2007. During the nine months ended
      September 30, 2008, Carbon II increased its loan loss reserves for two loans
      by
      $2,574. At September 30, 2008, the total loan loss reserve for these loans
      was
      $4,413. For the property owned, Carbon II recognized impairments of $1,281
      and
      $5,181 for the nine months ended September 30, 2008 and 2007,
      respectively.





During
      the first quarter of 2008, a $17,700 loan secured by four Class-A office
      buildings in Manhattan totaling three million square feet of space defaulted
      at
      maturity in February 2008. The loan has been restructured, modified and
      extended.  However, Carbon II established a loan loss reserve of $17,700
      during the second quarter of 2008 based upon management's assessment of the
      probability of recovery.


52


During
      the second quarter of 2008, a $60,000 first leasehold mortgage on a 43.9 acre
      tract of land in Las Vegas, zoned for commercial use, went into default. Carbon
      II owns fifty percent of the mortgage. Carbon II is engaged in workout
      discussions, and other alternatives are being explored. Carbon II believes
      a
      loan loss reserve is not necessary at September 30, 2008.





During
      the third quarter of 2008, a first mortgage secured by a building in New York
      City defaulted. Carbon II is exploring its alternatives including a foreclosure
      of the real estate. Carbon II believes a loan loss reserve is not necessary
      at
      September 30, 2008. All other commercial real estate loans in Carbon II are
      performing according to their terms.





**Commercial
      Real Estate**





The
      Company has an indirect investment in a commercial real estate development
      fund
      located in India. At September 30, 2008, the Company’s capital commitment was
      $11,000, of which $9,350 had been drawn. The entity conducts its operations
      in
      the local currency, Indian Rupees.


53





***II.***  ***Results
      of Operations***





***Interest
      Income:*** The
      following tables set forth information regarding interest income from certain
      of
      the Company’s interest-earning assets.





For the three months ended
              September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated incomeCommercial
                real estate securities
            
            $
            43,809
            
            $
            43,016
            
            $
            793
            
            
            1.9
            %Commercial
                real estate loans
            
            
            8,267
            
            
            8,933
            
            
            (666
            )
            
            (7.5
            )Commercial
                mortgage loan pools
            
            
            12,779
            
            
            12,985
            
            
            (206
            )
            
            (1.6
            )Residential
                mortgage-backed securities
            
            
            13
            
            
            128
            
            
            (115
            )
            
            (90.1
            )Cash
                and cash equivalents
            
            
            195
            
            
            1,242
            
            
            (1,047
            )
            
            (84.3
            )Total
                U.S. interest income
            
            
            65,063
            
            
            66,304
            
            
            (1,241
            )
            
            (1.9
            )Non-U.S
                dollar denominated incomeCommercial
                real estate securities
            
            
            9,564
            
            
            6,415
            
            
            3,149
            
            
            49.1Commercial
                real estate loans
            
            
            14,408
            
            
            11,562
            
            
            2,846
            
            
            24.6Cash
                and cash equivalents
            
            
            363
            
            
            542
            
            
            (179
            )
            
            (33.0
            )Total
                non-U.S. dollar denominated interest income
            
            
            24,335
            
            
            18,519
            
            
            5,816
            
            
            31.4Total
                Interest Income
            
            $
            89,398
            
            $
            84,823
            
            $
            4,575
            
            
            5.4
            %





For the nine months ended
              September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated incomeCommercial
                real estate securities
            
            $
            128,529
            
            $
            128,999
            
            $
            (470
            )
            
            (0.4
            )%Commercial
                real estate loans
            
            
            24,635
            
            
            22,530
            
            
            2,105
            
            
            9.3Commercial
                mortgage loan pools
            
            
            38,445
            
            
            39,119
            
            
            (674
            )
            
            (1.7
            )Residential
                mortgage-backed securities
            
            
            88
            
            
            3,868
            
            
            (3,780
            )
            
            (97.7
            )Cash
                and cash equivalents
            
            
            1,581
            
            
            2,316
            
            
            (735
            )
            
            (31.7
            )Total
                U.S. interest income
            
            
            193,278
            
            
            196,833
            
            
            (3,555
            )
            
            (1.8
            )Non-U.S
                dollar denominated incomeCommercial
                real estate securities
            
            
            27,644
            
            
            14,326
            
            
            13,318
            
            
            93.0Commercial
                real estate loans
            
            
            44,871
            
            
            27,413
            
            
            17,458
            
            
            63.7Cash
                and cash equivalents
            
            
            959
            
            
            1,332
            
            
            (373
            )
            
            (28.0
            )Total
                non-U.S. dollar denominated interest income
            
            
            73,474
            
            
            43,071
            
            
            30,397
            
            
            70.6Total
                Interest Income
            
            $
            266,752
            
            $
            239,904
            
            $
            26,848
            
            
            11.2
            %




54





*U.S.
      dollar denominated income*





For
      the
      three and nine months ended September 30, 2008 versus 2007, interest income
      from
      U.S. assets decreased $1,241, or 1.9% and $3,555, or 1.8%. During
      the third quarter of 2007, the Company sold most of its multifamily agency
      securities and IOs which decreased interest income by approximately $4.0 million
      for the three months ended September 30, 2008. Off setting this decline was an
      increase in interest income related to commercial real estate securities due
      to
      higher yields resulting from the application of EITF 99-20. Interest
      income on commercial real estate loans for the three months ended September
      30,
      2008 versus 2007 decreased $666 or 7.5%, due primarily to non-accrual status
      of
      a $25,000 loan (see Note 5). During the second half of 2007 and the first
      quarter of 2008, the Company sold most of its residential mortgage backed
      securities portfolio. As a result, interest income declined $115, or 90.1%
      for
      the three months ended September 30, 2008 and $3,780, or 97.7%, for the nine
      months ended September 30, 2008.





*Non-U.S.
      dollar denominated income*





For
      the
      three and nine months ended September 30, 2008 versus 2007, interest income
      from
      non-U.S. assets increased $5,816, or 31.4% and $30,397, or 70.6%. During 2007,
      the Company continued to increase its investment in non-U.S. dollar commercial
      real estate assets. As a result, 2008 interest income from non-U.S. commercial
      real estate securities and loans increased due to the full year impact of
      holding such securities. The Company increased its investments outside the
      U.S.
      in order to provide geographic diversification for its portfolio.





The
      following table reconciles interest income and total income for the three months
      ended September 30, 2008 and 2007:





For the three months ended
              September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Interest
                Income
            
            $
            89,398
            
            $
            84,823
            
            $
            4,575
            
            
            5.4
            %Earnings
                from JVs
            
            
            1,095
            
            
            -
            
            
            1,095
            
            
            n/aEarnings
                from Carbon II
            
            
            1,972
            
            
            2,268
            
            
            (296
            )
            
            (13.1
            )Earnings
                from Carbon I
            
            
            -
            
            
            (47
            )
            
            47
            
            
            100.0Earnings
                from BlackRock
              Diamond
                Property Fund, Inc.
            
            
            -
            
            
            4,390
            
            
            (4,390
            )
            
            (100.0
            )Total
                Income
            
            $
            92,465
            
            $
            91,434
            
            $
            1,031
            
            
            1.1
            %





For the nine months ended
              September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Interest
                Income
            
            $
            266,752
            
            $
            239,904
            
            
            26,848
            
            
            11.2
            %Earnings
                from JVs
            
            
            1,063
            
            
            -
            
            
            1,063
            
            
            n/aEarnings
                from Carbon II
            
            
            1,372
            
            
            9,380
            
            
            (8,008
            )
            
            (85.4
            )Earnings
                from Carbon I
            
            
            75
            
            
            812
            
            
            (737
            )
            
            (90.8
            )Earnings
                from BlackRock
              Diamond
                Property Fund, Inc.
            
            
            -
            
            
            18,790
            
            
            (18,790
            )
            
            (100.0
            )Total
                Income
            
            $
            269,262
            
            $
            268,886
            
            
            376
            
            
            0.1
            %




55





The
      Company fully redeemed its interest in the BlackRock Diamond Property Fund,
      Inc.
      by September 30, 2007. Therefore, the three and nine months ended September
      30,
      2008 show no activity for this investment. For the nine months ended September
      30, 2008, earnings from Carbon II declined $8,008 or 85.4%. The decline is
      primarily the result of Carbon II establishing a loan loss reserve of $17,700,
      the entire face amount of the loan. The Company owns 26% of Carbon II, resulting
      in a $4,602 decline in income.





***Interest
      Expense*** **:** The
      following tables sets forth information regarding the total amount of interest
      expense from certain of the Company’s borrowings and cash flow hedges for the
      three and nine months ended September 30, 2008 and 2007.





For the three months ended
              September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated interest expenseCollateralized
                debt obligations
            
            $
            18,109
            
            $
            22,905
            
            $
            (4,796
            )
            
            (20.9
            )%Commercial
                real estate securities
            
            
            2,727
            
            
            6,021
            
            
            (3,294
            )
            
            (54.7
            )Commercial
                real estate loans
            
            
            929
            
            
            1,625
            
            
            (696
            )
            
            (42.8
            )Commercial
                mortgage loan pools
            
            
            12,089
            
            
            12,353
            
            
            (264
            )
            
            (2.1
            )Residential
                mortgage-backed securities
            
            
            -
            
            
            778
            
            
            (778
            )
            
            (100.0
            )Senior
                unsecured convertible notes
            
            
            2,383
            
            
            794
            
            
            1,589
            
            
            200.0Senior
                unsecured notes
            
            
            3,072
            
            
            3,226
            
            
            (154
            )
            
            (4.8
            )Junior
                subordinated notes
            
            
            3,354
            
            
            3,396
            
            
            (42
            )
            
            (1.2
            )Equity
                investments
            
            
            287
            
            
            331
            
            
            (44
            )
            
            (13.3
            )Cash
                flow hedges
            
            
            276
            
            
            (181
            )
            
            457
            
            
            (252.5
            )Hedge
                ineffectiveness*
            
            
            770
            
            
            106
            
            
            664
            
            
            626.4Total
                U.S. Interest Expense
            
            
            43,996
            
            
            51,354
            
            
            (7,358
            )
            
            (14.3
            )Non-U.S.
                dollar denominated interest expenseEuro
                CDO
            
            
            5,880
            
            
            4,950
            
            
            930
            
            
            18.8Commercial
                real estate securities
            
            
            3,082
            
            
            1,971
            
            
            1,111
            
            
            56.4Commercial
                real estate loans
            
            
            2,260
            
            
            3,055
            
            
            (795
            )
            
            (26.0
            )Junior
                subordinated notes
            
            
            1,434
            
            
            1,195
            
            
            239
            
            
            20.0Total
                Non- U.S. Interest Expense
            
            
            12,656
            
            
            11,171
            
            
            1,485
            
            
            13.3Total
                Interest Expense
            
            $
            56,652
            
            $
            62,525
            
            $
            (5,873
            )
            
            (9.4
            )%




56





For the nine months ended
              September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated interest expenseCollateralized
                debt obligations
            
            $
            51,830
            
            $
            68,238
            
            $
            (16,408
            )
            
            (24.1
            )%Commercial
                real estate securities
            
            
            8,453
            
            
            22,983
            
            
            (14,530
            )
            
            (63.2
            )Commercial
                real estate loans
            
            
            3,203
            
            
            3,636
            
            
            (433
            )
            
            (11.9
            )Commercial
                mortgage loan pools
            
            
            36,480
            
            
            37,233
            
            
            (753
            )
            
            (2.0
            )Residential
                mortgage-backed securities
            
            
            45
            
            
            5,841
            
            
            (5,796
            )
            
            (99.2
            )Senior
                unsecured convertible notes
            
            
            7,066
            
            
            794
            
            
            6,272
            
            
            789.9Senior
                unsecured notes
            
            
            9,147
            
            
            6,432
            
            
            2,715
            
            
            42.2Junior
                subordinated notes
            
            
            9,949
            
            
            10,115
            
            
            (166
            )
            
            (1.6
            )Equity
                investments
            
            
            500
            
            
            331
            
            
            169
            
            
            51.1Cash
                flow hedges
            
            
            1,159
            
            
            (1,040
            )
            
            2,199
            
            
            (211.4
            )Hedge
                ineffectiveness*
            
            
            (534
            )
            
            163
            
            
            (697
            )
            
            (427.6
            )Total
                U.S. Interest Expense
            
            
            127,298
            
            
            154,726
            
            
            (27,428
            )
            
            17.7Non-U.S.
                dollar denominated interest expenseEuro
                CDO
            
            
            16,578
            
            
            13,041
            
            
            3,537
            
            
            27.1Commercial
                real estate securities
            
            
            9,271
            
            
            2,857
            
            
            6,414
            
            
            224.5Commercial
                real estate loans
            
            
            6,838
            
            
            5,684
            
            
            1,154
            
            
            20.3Junior
                subordinated notes
            
            
            4,204
            
            
            2,142
            
            
            2,062
            
            
            96.3Total
                Non- U.S. Interest Expense
            
            
            36,891
            
            
            23,724
            
            
            13,167
            
            
            55.5Total
                Interest Expense
            
            $
            164,189
            
            $
            178,450
            
            $
            (14,261
            )
            
            (8.0
            )%


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





*U.S
      dollar denominated interest expense*





For
      the
      three and nine months ended September 30, 2008 versus 2007, U.S. dollar interest
      expense decreased $7,358, or 14.3%, and $27,428, or 17.7%, respectively. The
      Company sold most of its residential mortgage backed securities portfolio during
      the second half of 2007 and the first quarter of 2008. As a result, related
      interest expense declined $778, or 100.0%, for the three months ended September
      30, 2008 and $5,796, or 99.2%, for the nine months ended September 30, 2008.
      This was offset by the issuance of convertible notes in August and September
      of
      2007 and senior unsecured notes in May of 2007.





For
      the
      three and nine months ended September 30, 2008 versus September 30, 2007, U.S.
      dollar interest expense related to collateralized debt obligations declined
      $4,796, or 20.9%, and $16,408, or 24.1%, respectively. The decline was caused
      primarily by an income statement reclassification. Due to the redesignation
      of
      CDO interest rate swaps to trading derivatives as of January 1, 2008, interest
      expense related to CDO swaps is classified in realized gain (loss) and is no
      longer included in interest expense. For the three and nine months ended
      September 30, 2008, $(4,872) and $(11,604), respectively, were included in
      realized gain (loss). Also as a result of the redesignation, $2,813 of swap
      cost
      amortization was included in CDO interest expense in 2008.




57


*Non-U.S.
      dollar denominated interest expense*





For
      the
      three and nine months ended September 30, 2008 versus 2007, non-U.S. dollar
      interest expense increased $1,485, or 13.3%, and increased $13,167, or 55.5%,
      respectively. The increase was due primarily to increased purchases of non-U.S.
      dollar securities and loans during 2007. Also during the second quarter of
      2007,
      the Company issued €50,000 junior subordinated notes. As a result, related
      interest expense increased $2,062, or 96.3%, for the nine months ended September
      30, 2008.





***Net
      Interest Margin and Net Interest Spread from the Portfolio:*** The
      Company considers its interest generating portfolio to consist of its securities
      held-for-trading, securities available-for-sale for 2007, 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. The Company's equity investments, which include the
      Carbon Capital Funds, also generate a significant portion of the Company's
      income.





The
      Company believes interest income and expense related to these assets excluding
      the effects of hedge ineffectiveness and the consolidation of a variable
      interest entity pursuant to FIN 46R better reflect the Company's net interest
      margin and net interest spread from its portfolio. Adjusted interest income
      and
      adjusted interest expense are better indicators for both management and
      investors of the Company's financial performance over time.





The
      following charts reconcile interest income and expense to adjusted interest
      income and adjusted interest expense.





For the three months
              ended September 30,
            
            For the nine months
              ended September 30,2008
            
            2007
            
            2008
            
            2007Interest
                income
            
            $
            89,398
            
            $
            84,823
            
            $
            266,752
            
            $
            239,904Interest
                expense related to the consolidation of commercial mortgage loan
                pools
            
            
            (12,089
            )
            
            (12,353
            )
            
            (36,480
            )
            
            (37,233
            )Short
                term interest expense related to commercial
              mortgage
                loan pools
            
            
            33
            
            
            94
            
            
            153
            
            
            266Adjusted
                interest income
            
            
            77,342
            
            $
            72,564
            
            
            230,425
            
            $
            202,937




58





For the three months
              ended September 30,
            
            For the nine months
              ended September 30,2008
            
            2007
            
            2008
            
            2007Interest expense
            
            $
            56,652
            
            $
            62,525
            
            $
            164,189
            
            $
            178,450Interest
                expense related to the consolidation of commercial mortgage loan
                pools
            
            
            (12,089
            )
            
            (12,353
            )
            
            (36,480
            )
            
            (37,233
            )Short
                term interest expense related to commercial
              mortgage
                loan pools
            
            
            33
            
            
            94
            
            
            153
            
            
            266Hedge
                ineffectiveness
            
            
            (770
            )
            
            (106
            )
            
            534
            
            
            (163
            )Adjusted
                interest expense
            
            $
            43,826
            
            $
            50,160
            
            $
            128,396
            
            $
            141,320





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 related 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 includes the adjusted interest income, adjusted interest
      expense, net interest margin and net interest spread for the Company's
      portfolio. The interest income and interest expense amounts exclude income
      and
      expense related to hedge ineffectiveness, and the gross-up effect of the
      consolidation of a variable interest entity (“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.





For the three months
              ended September 30,
            
            For the nine months
              ended September 30,2008
            
            2007
            
            2008
            
            2007Adjusted
                interest income
            
            $
            77,342
            
            $
            72,564
            
            $
            230,425
            
            $
            202,937Adjusted
                interest expense
            
            $
            43,826
            
            $
            50,160
            
            $
            128,396
            
            $
            141,320Adjusted
                net interest income ratiosNet
                interest margin
            
            
            4.7
            %
            
            2.5
            %
            
            4.6
            %
            
            2.4
            %Average
                yield
            
            
            10.9
            %
            
            8.2
            %
            
            10.3
            %
            
            7.8
            %Cost
                of funds
            
            
            6.1
            %
            
            6.1
            %
            
            5.8
            %
            
            6.0
            %Net
                interest spread
            
            
            4.8
            %
            
            2.1
            %
            
            4.5
            %
            
            1.8
            %Ratios
                including income from equity investmentsNet
                interest margin
            
            
            4.9
            %
            
            3.1
            %
            
            4.5
            %
            
            3.3
            %Average
                yield
            
            
            10.9
            %
            
            8.5
            %
            
            10.0
            %
            
            8.5
            %Cost
                of funds
            
            
            6.1
            %
            
            6.1
            %
            
            5.8
            %
            
            6.0
            %Net
                interest spread
            
            
            4.8
            %
            
            2.5
            %
            
            4.1
            %
            
            2.4
            %




59





***Other
      Expenses:*** Expenses
      other than interest expense consist primarily of management fees, incentive
      fees
      and general and administrative expenses. The table below summarizes those
      expenses for the three and nine months ended September 30, 2008 and 2007,
      respectively.





For the three months
              ended September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Management fee
            
            $
            3,050
            
            $
            3,473
            
            $
            (423
            )
            
            (12.1
            )%Incentive
                fee – stock based
            
            
            382
            
            
            497
            
            
            (115
            )
            
            (23.1
            )General
                and administrative expense
            
            
            2,025
            
            
            1,624
            
            
            401
            
            
            24.7Total
                other expenses
            
            $
            5,457
            
            $
            5,594
            
            $
            (137
            )
            
            (2.4
            )%





For the nine months
              ended September 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Management
                fee
            
            $
            9,286
            
            $
            10,862
            
            $
            (1,576
            )
            
            (14.5
            )%Incentive
                fee
            
            
            11,879
            
            
            5,645
            
            
            6,234
            
            
            110.4Incentive
                fee – stock based
            
            
            1,426
            
            
            2,145
            
            
            (719
            )
            
            (33.5
            )General
                and administrative expense
            
            
            5,706
            
            
            4,448
            
            
            1,258
            
            
            28.3Total
                other expenses
            
            $
            28,297
            
            $
            23,100
            
            $
            5,197
            
            
            22.5
            %





The
      Company’s amended Management Agreement includes a change in the quarterly base
      management fee from 0.50% of stockholders' equity for the quarter ended June
      30,
      2008 to 0.375% for the first $400 million in average total stockholders' equity,
      0.3125% for the next $400 million of average total stockholders' equity and
      0.25% for the average total stockholders' equity in excess of $800 million.
      The
      decrease in incentive fee – stock based of $115 and $719 for the three and nine
      months ended September 30, 2008, respectively, was due to the decline in the
      market price of the Common Stock. The fee is based on the number of shares
      of
      Common Stock outstanding as of year end. The Company accrues the incentive
      fee –
stock based expense each quarter based on the shares outstanding at the end
      of
      the quarter.





General
      and administrative expense is comprised of accounting agent fees, custodial
      agent fees, directors' fees and expenses, fees for professional services,
      insurance premiums, broken deal expenses, and due diligence costs. The increase
      in general and administrative expenses for the three months ended September
      30,
      2008 was due to $454 of professional fees associated with capital raising
      activities offset partially by a decrease in due diligence costs due to a
      decline in investment activity. The increase in general and administrative
      expense for the nine months ended September 30, 2008 was primarily attributable
      to increased professional fees, insurance costs and director fees.





***Other
      Gains (Losses):*** **** Upon
      the
      adoption of FAS 159 on January 1, 2008, the changes in the estimated fair value
      of the Company’s trading securities, long-term liabilities, and certain interest
      swaps are recorded in earnings. The gain of $72,570 for the nine months ended
      September 30, 2008 was comprised of realized losses of $(14,840), unrealized
      losses on securities and swaps of $(573,486) and losses from the dedesignation
      of derivative instruments of $(7,084), offset by unrealized gains on liabilities
      of $667,980. Foreign currency gains (loss) were $(2,913) and $3,631 for the
      nine
      months ended September 30, 2008 and 2007. Included in accumulated other
      comprehensive loss was a $(8,010) loss on foreign currency translation. As
      a
      result, the Company’s foreign currency exposure for the nine months ended
      September 30, 2008 resulted in a net economic loss of $(10,923). The provision
      for loan losses for the nine months ended September 30, 2008 totaled $(43,942)
      and was related to three loans in various stages of resolution. The losses
      on
      impairment of assets of $(7,036) for the nine month period ended September
      30,
      2007 was related to the Company’s write down of certain CMBS as required by EITF
      99-20.


60


***Dividends
      Declared:***





On
      March
      12, 2008, the Company declared distributions to its holders of Common Stock
      of
      $0.30 per share, which were paid on April 30, 2008 to stockholders of record
      on
      March 30, 2008.





On
      May
      15, 2008, the Company declared dividends to its holders of Common Stock of
      $0.31
      per share, which were paid on July 31, 2008 to stockholders of record on June
      30, 2008.





On
      September 10, 2008, the Company declared dividends to its common stockholders
      of
      $0.31 per share, payable on October 31, 2008 to stockholders of record on
      September 30, 2008. For U.S. federal income tax purposes, all dividends paid
      in
      2008 are expected to be ordinary income to the Company’s
      stockholders.





***Changes
      in Financial Condition***





*Securities
      held-for-trading:* The
      Company's securities held-for-trading, which are carried at estimated fair
      value, included the following at September 30, 2008 and December 31,
      2007:





U.S. dollar denominated securities
            
            September
              30, 2008
              Estimated
              Fair
              Value
            
            Percentage
            
            December
              31, 2007
              Estimated
              Fair
              Value (1)
            
            PercentageCommercial mortgage-backed
                securities:CMBS
                IOs
            
            $
            4,424
            
            
            0.3
            %
            $
            15,915
            
            
            0.7
            %Investment
                grade CMBS
            
            
            638,163
            
            
            39.6
            
            
            766,996
            
            
            33.6Non-investment
                grade rated subordinated securities
            
            
            359,360
            
            
            22.2
            
            
            630,139
            
            
            27.6Non-rated
                subordinated securities
            
            
            70,329
            
            
            4.4
            
            
            110,481
            
            
            4.8Credit
                tenant lease
            
            
            22,203
            
            
            1.4
            
            
            24,949
            
            
            1.1Investment
                grade REIT debt
            
            
            201,735
            
            
            12.5
            
            
            246,095
            
            
            10.8Multifamily
                agency securities
            
            
            354
            
            
            -
            
            
            37,123
            
            
            1.6CDO
                investments
            
            
            29,787
            
            
            1.8
            
            
            49,630
            
            
            2.2Total
                CMBS
            
            
            1,326,355
            
            
            82.1
            
            
            1,881,328
            
            
            82.4Residential
                mortgage-backed securities:Agency
                adjustable rate securities
            
            
            -
            
            
            -
            
            
            1,193
            
            
            0.1Residential
                CMOs
            
            
            428
            
            
            -
            
            
            627
            
            
            -Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            412
            
            
            -
            
            
            8,363
            
            
            0.4Total
                RMBS
            
            
            840
            
            
            0.1
            
            
            10,183
            
            
            0.5Total
                U.S. dollar denominatedsecurities
            
            
            1,327,195
            
            
            82.2
            
            
            1,891,511
            
            
            82.9




61





Non-U.S. dollar denominated securitiesCommercial
                mortgage-backed securities:Investment
                grade CMBS
            
            
            136,151
            
            
            8.4
            
            
            151,532
            
            
            6.6Non-investment
                grade rated subordinated securities
            
            
            124,531
            
            
            7.7
            
            
            212,433
            
            
            9.3Non-rated
                subordinated securities
            
            
            26,457
            
            
            1.6
            
            
            28,858
            
            
            1.2Total
                Non-U.S. dollar denominated securities
            
            
            287,139
            
            
            17.8
            
            
            392,823
            
            
            17.1Total
                securities
            
            $
            1,614,334
            
            
            100.0
            %
            $
            2,284,334
            
            
            100.0
            %


(1)
            Includes
                securities available-for-sale at December 31, 2007, reclassified
                to
                securities held-for-trading in the first quarter of
                2008.





During
      the first nine months of 2008 the Company purchased $53,515 of non-U.S. dollar
      denominated securities in order to continue to increase geographic
      diversification of its portfolio. Also, during the first nine months of 2008,
      the Company sold the majority of its remaining multifamily agency securities
      and
      CMBS IOs to increase its liquidity position. In addition, the dislocation in
      the
      capital markets during 2008 caused CMBS spreads to widen significantly. This
      development resulted in a significant decline in the market value of the
      Company’s U.S. CMBS portfolio during the first quarter of 2008.





*Borrowings:* ****** At
      September 30, 2008 and December 31, 2007, the Company's debt consisted of credit
      facilities, CDOs, senior unsecured notes, senior unsecured convertible notes,
      junior unsecured notes, junior subordinated notes, reverse repurchase
      agreements, and commercial mortgage loans pools collateralized by a pledge
      of
      most of the Company's commercial real estate assets. The Company's financial
      flexibility is affected by its ability to renew or replace on a continuous
      basis
      its maturing short-term borrowings. At September 30, 2008 and December 31,
      2007,
      the Company had obtained financing in amounts and at interest rates consistent
      with the Company's short-term financing objectives.





Under
      the
      Company's credit facilities and reverse repurchase agreements the lenders retain
      the right to mark the underlying collateral to estimated fair value. A reduction
      in the value of 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.


62


The
      following table sets forth information regarding the Company's
      borrowings:





September 30, 2008Market
              Value
            
            Adjusted
              Issuance Price
            
            Maximum
              Balance
            
            Range of
              MaturitiesCDO debt*
            
            $
            1,040,435
            
            $
            1,764,303
            
            $
            1,803,315
            
            
            3.3
                to 6.5 yearsCommercial
                mortgage loan pools
            
            
            1,201,019
            
            
            1,201,019
            
            
            1,201,019
            
            
            0.3 to 10.2 yearsCredit
                facilities
            
            
            546,704
            
            
            546,704
            
            
            613,570
            
            
            0.4
                to 2.2 yearsSenior
                unsecured convertible notes
            
            
            58,744
            
            
            80,000
            
            
            80,000
            
            
            19.18
                yearsSenior
                unsecured notes**
            
            
            47,305
            
            
            162,500
            
            
            162,500
            
            
            8.82
                yearsJunior
                unsecured notes
            
            
            16,641
            
            
            70,233
            
            
            70,233
            
            
            13.59
                yearsJunior
                subordinated notes***
            
            
            37,056
            
            
            180,477
            
            
            180,477
            
            
            27.36
                yearsTotal
            
            $
            2,947,904
            
            $
            4,005,236


*
      Disclosed as adjusted issue price. Total par of the Company’s CDO debt at
      September 30, 2008 was $1,764,303.


**
      The
      senior unsecured notes can be redeemed at par by the Company beginning April
      2012.


***
      The
      junior subordinated notes can be redeemed at par by the Company beginning in
      October 2010.





At
      September 30, 2008, the Company's borrowings had the following weighted average
      yields and range of interest rates and yields:





Lines
                of Credit
            
            Collateralized
              Debt
              Obligations
            
            Commercial
              MortgageLoan Pools
            
            Junior
              Subordinated
              Notes
            
            Senior
              Unsecured
              Notes
            
            Junior
              Unsecured
              Notes
            
            Convertible
              Debt
            
            Total
              BorrowingsWeighted
                average yield
            
            
            5.55
            %
            
            5.71
            %
            
            4.00
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            5.48
            %Interest
                RateFixed
            
            
            -
            %
            
            6.79
            %
            
            4.00
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            6.16
            %Floating
            
            
            5.55
            %
            
            3.86
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            4.26
            %Effective
                YieldFixed
            
            
            -
            %
            
            7.23
            %
            
            4.00
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            6.43
            %Floating
            
            
            5.55
            %
            
            3.86
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            4.26
            %





The
      table
      above does not present interest payments on the Company’s borrowings. Disclosure
      of interest payments has been omitted because certain borrowings require
      variable rate interest payments. The Company’s total interest payments for the
      nine months ended September 30, 2008 were $167,624.





***Hedging
      Instruments:*** The
      Company may modify 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 and
      foreign exchange rates on the value of the Company's liabilities and the cost
      of
      borrowing.


63







Interest
      rate hedging instruments at September 30, 2008 and December 31, 2007 consisted
      of the following:





At September 30, 2008Notional Value
            
            Estimated Fair
              Value
            
            Unamortized
              Cost
            
            Weighted Average
              Remaining Term
              (years)Cash flow
                hedges
            
            $
            88,493
            
            $
            (78
            )
            $
            (1,612
            )
            
            3.2Trading
                swaps
            
            
            76,187
            
            
            (395
            )
            
            -
            
            
            3.0CDO
                trading swaps
            
            
            1,133.544
            
            
            (29,403
            )
            
            -
            
            
            5.1CDO
                LIBOR cap
            
            
            85,000
            
            
            277
            
            
            1,407
            
            
            4.6





At December 31, 2007Notional Value
            
            Estimated Fair
              Value
            
            Unamortized
              Cost
            
            Weighted Average
              Remaining Term
              (years)Cash
                flow hedges
            
            $
            231,500
            
            $
            (12,646
            )
            $
            (1,612
            )
            
            6.7CDO
                cash flow hedges
            
            
            875,548
            
            
            (25,410
            )
            
            -
            
            
            6.2Trading
                swaps
            
            
            1,218,619
            
            
            (1,296
            )
            
            -
            
            
            4.2CDO
                trading swaps
            
            
            279,527
            
            
            5
            
            
            -
            
            
            4.7CDO
                LIBOR cap
            
            
            85,000
            
            
            195
            
            
            1,407
            
            
            5.4





Foreign
      currency agreements at September 30, 2008 and December 31, 2007 consisted of
      the
      following:


At September 30, 2008Estimated Fair
                Value
              
              Unamortized
                Cost
              
              Weighted Average
                Remaining TermCurrency
                  swaps
              
              $
              (15,474
              )
              $
              -
              
              
              7.7
                  yearsCDO
                  currency swaps
              
              
              13,437
              
              
              -
              
              
              9.1
                  yearsForwards
              
              
              2,770
              
              
              -
              
              
              49
                  days


At December 31, 2007Estimated Fair
                Value
              
              Unamortized
                Cost
              
              Weighted Average
                Remaining TermCurrency swaps
              
              $
              (12,060
              )
              $
              -
              
              
              8.6 yearsCDO
                  currency swaps
              
              
              9,967
              
              
              -
              
              
              9.9
                  yearsForwards
              
              
              4,041
              
              
              -
              
              
              23
                  days


64





**Capital
      Resources and Liquidity**





The
      Company does not currently know the full extent to which the current market
      disruption will affect it or the markets in which it operates, and the Company
      is unable to predict its length or ultimate severity. The values of real estate
      debt securities and loans are subject to changes in credit spreads. Credit
      spreads measure the yield demanded on debt securities and loans by the market
      based on credit relative to a specific benchmark. The ongoing weaknesses in
      the
      subprime mortgage sector and in the broader mortgage market have resulted in
      reduced liquidity and demand for mortgage-backed securities and have caused
      the
      credit spreads to widen substantially since the beginning of 2007. Under these
      conditions, the values of real estate securities and loans have declined, and
      such decline has resulted in margin calls. The Company’s credit facilities
      (including its repurchase agreements) allow the lender, to varying degrees,
      to
      revalue the collateral to values that the lender considers to reflect market
      value. If a lender determines that the value of the collateral has decreased,
      it
      may initiate a margin call requiring the Company to repay a portion of the
      outstanding borrowings to cover the decrease or to post additional collateral
      with minimal notice.





During
      2007, the Company paid $82,570 related to margin calls. During the period from
      January 1, 2008 through November 10, 2008, the Company paid $189,352 ($84,733
      since July 1, 2008) related to margin calls and
      amortization payments (including payments the Company made to lenders upon
      their
      determination that the value of collateral declined and fixed payments the
      Company made to lenders pursuant to the terms of the facilities) .
      Of the
      $84,733 paid since July 1, 2008, $41,223 represented contractual payments
      negotiated upon the extension of two of the Company’s credit facilities. The
      Company will fund an additional margin call of approximately $6,600 on November
      11, 2008. It
      has
      also agreed to make increased monthly installment payments to one of its lenders
      in full satisfaction of a margin call of $11,582 originally scheduled to be
      paid
      in October 2008.





Additional
      margin calls as a result of the widening of credit spreads or otherwise could
      harm the Company’s liquidity, results of operations, financial condition and
      business prospects in a number of ways. In order to obtain cash to satisfy
      a
      margin call and
      absent other capital resources becoming available ,
      the
      Company would be required to liquidate assets at a disadvantageous time, which
      would cause the Company to incur losses and consequently adversely affect the
      Company’s results of operations and financial condition. Posting additional
      collateral would decrease available cash limiting the Company’s ability to
      satisfy other obligations, including future margin calls or to make additional
      investments. In addition, the Company may need to hold increased levels of
      cash
      or cash equivalents in anticipation of potential margin calls which could also
      limit the Company’s ability to make additional investments. If the Company did
      not have sufficient cash available or was unable to sell sufficient assets
      to
      satisfy margin calls, the Company would be in default under its facilities
      which
      would trigger cross default provisions in each of the Company’s five credit
      facilities. In such an event, the Company would be required to repay outstanding
      indebtedness under its credit facilities immediately. (As of September 30,
      2008,
      the Company had $546,704 of indebtedness outstanding under its credit
      facilities.) Absent other capital resources becoming available, the Company
      will
      not have sufficient liquid assets to repay such indebtedness and will be unable
      to fund its operations and continue its business.





The
      aforementioned market factors could adversely affect one or more of the
      Company's credit facilities (including repurchase agreement) counterparties
      which provide funding for the Company's portfolio and thereby could cause one
      or
      more of the Company's counterparties to be unwilling or unable to provide the
      Company with additional financing or to extend current credit facilities on
      the
      maturity date. If one or more of the Company's counterparties were unwilling
      or
      unable to extend the current credit facilities at the maturity date and the
      Company were unable to replace such facilities, the Company’s liquidity would be
      reduced, which could have a material adverse effect on the Company's financial
      condition and business. The Company could be forced to sell its investments
      at a
      time when prices are depressed, which could adversely affect the Company's
      ability to comply with REIT asset and income tests and maintain its
      qualification as a REIT. Moreover, the Company may not be able to sell those
      investments at all under current market conditions. In addition, the failure
      to
      extend certain of the Company’s credit facilities as
      of the
      30th day before the maturity date (or the 15th day before the maturity date
      if
      the Company demonstrates to the satisfaction of Deutsche Bank AG, Cayman Islands
      Branch that it is negotiating a bona fide commitment to extend or replace such
      facility) will constitute an event of default under the Company’s credit
      facility with Deutsche Bank AG.


65





If
      one or
      more major market participants that provide financing for mortgage-backed or
      other fixed income securities fails or decides to withdraw from the market,
      it
      could negatively affect the marketability of all fixed income securities,
      including the value of the securities in the Company's portfolio, thus reducing
      the Company's liquidity. In addition, distribution requirements under the REIT
      provisions of the Code limit the Company's ability to retain earnings and
      thereby replenish or increase capital for its operations thereby further
      reducing the Company’s liquidity.





To
      date,
      the credit performance of the majority of the Company's investments remains
      consistent both with the Company's expectations and with the broader commercial
      real estate finance industry experience; nevertheless, during the first nine
      months of 2008, the capital markets have been marking down the value of all
      credit-sensitive securities regardless of performance.





In
      addition to the covenants under the Company’s secured facilities, certain of the
      Company’s seven CDOs contain compliance tests which, if violated, could trigger
      a diversion of cash flows from the Company to bondholders. The Company's first
      three CDOs contain certain interest coverage and overcollateralization tests.
      At
      September 30, 2008, all such tests are passing by a wide margin. The Company’s
      three CDOs designated as its high yield (“HY”) series do not have any compliance
      tests. The Euro CDO’s most significant test is the weighted average rating test
      which is affected by credit rating agency downgrades to underlying CDO
      collateral. The Company can actively manage the Euro CDO collateral pool to
      maintain compliance with this test. At September 30, 2008, the Company is
      meeting all such tests.





During
      the first nine months of 2008, the Company raised $35,012 of capital by issuing
      common shares under its sales agency agreement. On April 4, 2008, in a privately
      negotiated transaction, the Company issued $70,125 of Series E Preferred Stock
      and 3,494,021 shares of Common Stock, resulting in combined net proceeds of
      $93,128. The Company repaid $52,500 of its loan from HoldCo 2 on April 8, 2008.
      On July 28, 2008, the Company subsequently reborrowed $30,000 from HoldCo
      2.





In
      the
      event of a further reduction in market liquidity, the Company’s short-term (one
      year or less) liquidity needs will be met primarily with $45,810 of unrestricted
      cash and cash equivalents (of which $20,501 must be retained under the
      provisions of the Company’s financial debt covenants and would not be available
      to fund operations) held as of September 30, 2008, potential common stock
      issuances under the Company’s sales agency agreement, and $23,624 of unused
      borrowing capacity from HoldCo 2 as of September 30, 2008. As of October 31,
      2008, unused borrowing capacity from the BlackRock Facility declined to $16,835
      due to a decline in the fair market value of the shares of Carbon II that are
      pledged to secure the BlackRock Facility.


66





The
      Company believes it has sufficient sources of liquidity to fund operations
      for
      the next twelve months (November 1, 2008 to October 31, 2009). This analysis
      is
      based on a number of assumptions. The following are the most
      critical:





1)
            The
                Company will be successful in renewing the facility with Morgan Stanley
                Bank prior to January 23, 2009 and will have no amortization payments
                under the terms of the renewal.


2)
            The
                Company will have sufficient available cash to meet its periodic
                loan
                amortization payments to Deutsche Bank and Bank of America, N.A.


3)
            The
                Company does not receive any significant margin calls from its
                lenders.


4)
            The
                Company will be successful in renewing the facility with HoldCo 2
                prior to
                March 6, 2009 and will not have any required paydowns under the terms
                of
                the renewal.





Based
      on
      current projections of cash for the next twelve months, the Company expects
      it will have cash resources to pay quarterly
      cash dividends on its common stock at the current rate for the
      dividend typically payable in the first quarter of 2009 and, if the Company
      raises additional capital, obtains additional financing and/or receives cash
      proceeds from the future sale of assets or asset repayments, thereafter. 
However, no decision has been made by the Company with respect to the
      declaration or payment of any future dividend, including the rate or time
      of declaration and payment of any such dividend.  The Company may
      consider payment of dividends on its common stock all or partially in
      common stock and intends to continue to comply with REIT dividend
      requirements.





The
      Company's ability to meet its long-term (greater than twelve months) liquidity
      requirements is also subject to obtaining additional long-term 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.





At
      September 30, 2008, the Company's borrowings had the following remaining
      maturities:


Borrowing Type
              
              Within
                30 days
              
              31 to 59
                days
              
              60 days
                to less
                than 1
                year
              
              1 year to
                3 years
              
              3 years
                to 5
                years
              
              Over 5
                years
              
              TotalCredit
                  facilities
              
              $
              -
              
              $
              -
              
              $
              257,405
              
              $
              289,299
              
              $
              -
              
              $
              -
              
              $
              546,704Commercial
                  mortgage loan pools(1)
              
              
              6,054
              
              
              5,866
              
              
              333,448
              
              
              102,892
              
              
              43,396
              
              
              709,363
              
              
              1,201,019CDOs(1)
              
              
              829
              
              
              319
              
              
              52,075
              
              
              222,710
              
              
              775,967
              
              
              712,403
              
              
              1,764,303Senior
                  unsecured notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              162,500
              
              
              162.500Junior
                  unsecured notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              70,233
              
              
              70,233Senior
                  unsecured convertible notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              80,000
              
              
              80,000Junior
                  subordinated notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              180,477
              
              
              180,477Total
                  Borrowings
              
              $
              6,883
              
              $
              6,185
              
              $
              642,928
              
              $
              614,901
              
              $
              819,363
              
              $
              1,914,976
              
              $
              4,005,236


(1) Commercial mortgage loan
      pools and CDOs are non-recourse borrowings and payments for these borrowings
      are
      supported solely by the cash flows from the assets in these
      structures.




67




*Credit
      Facilities and Reverse Repurchase Agreements*


As
        credit
        market conditions have permitted, the Company has entered into short-term
        reverse repurchase agreements to finance securities that are not financed
        under
        its credit facilities or CDOs. The reverse repurchase agreements bear interest
        at a LIBOR-based variable rate. At September 30, 2008, the Company did not
        have
        any reverse repurchase agreements outstanding. At December 31, 2007, the
        Company
        had $80,119 of reverse repurchase agreements outstanding.
 
 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 value of pledged assets would require the Company to provide
        additional collateral or fund margin calls. See Note 15 to the consolidated
        financial statements for additional discussion of the Company’s exposure to
        potential margin calls.
 
 The
        Company’s credit facilities have been used to replace reverse repurchase
        agreement borrowings and to finance the acquisition of mortgage-backed
        securities and commercial real estate loans. Outstanding borrowings bear
        interest at a variable rate.
  As
        further detailed below, the Company is subject to financial covenants in
        its
        credit facilities. For the quarter ended September 30, 2008, the Company
        is not
        aware of any instances of non-compliance with these
        covenants.





On
      December 28, 2007, the Company received a waiver from its compliance with the
      tangible net worth covenant at December 31, 2007 from Bank of America, N.A.,
      the
      lender under a $100,000 multicurrency secured credit facility. Without the
      waiver, the Company would have been required to maintain tangible net worth
      of
      at least $520,416 at December 31, 2007 pursuant to the covenant. On January
      25,
      2008, this lender agreed to amend the covenant so that the Company would be
      required to maintain tangible net worth at the end of each fiscal quarter of
      not
      less than the sum of (i) $400,000 plus (ii) an amount equal to 75% of any equity
      proceeds received by the Company on or after July 20, 2007.





On
      February 15, 2008, Morgan Stanley Bank extended its $300,000 non-USD facility
      until February 7, 2009. In connection with the extension, certain financial
      covenants were added or modified so that: (i) the Company is required to have
      a
      minimum debt service coverage ratio (as defined in the related guaranty) of
      1.4
      to 1.0 for any calendar quarter, (ii) on any date, the Company's tangible net
      worth shall not decline 20% or more from its tangible net worth as of the last
      business day in the third month preceding such date, (iii) on any date, the
      Company's tangible net worth shall not decline 40% or more from its tangible
      net
      worth as of the last business day in the twelfth month preceding such date,
      (iv)
      on any date, the Company's tangible net worth shall not be less than the sum
      of
      $400,000 plus 75% of any equity offering proceeds received from and after
      February 15, 2008, (v) at all times, the ratio of the Company's total recourse
      indebtedness to tangible net worth shall not be greater than 3:1, (vi) on any
      date the Company's liquid assets (as defined in the related guaranty) shall
      not
      at any time be less than 5% of its mark-to-market indebtedness (mark-to-market
      indebtedness is defined under the related guaranty generally to mean short-term
      liabilities that have a margin call feature and as of September 30, 2008
      amounted to $546,704) and (vii) cumulative income cannot be less than one dollar
      for two consecutive quarters. Morgan Stanley Bank can require the Company to
      fund margin calls in the event the lender determines the value of the underlying
      assets have declined in value. The Company has commenced discussions with Morgan
      Stanley Bank to extend the maturity date of the facility beyond February 7,
      2009.





On
      July
      8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
      credit facility until July 8, 2010. In connection with the extension, certain
      financial covenants were added or modified to conform to the covenants in the
      Morgan Stanley Bank facility described above. In addition, the Company
      separately agreed with Deutsche Bank AG, Cayman Islands Branch, that to the
      extent the Company from time to time agrees to covenants that are more
      restrictive than those in the Deutsche Bank agreement, the covenants in the
      Deutsche Bank agreement will automatically be deemed to be modified to match
      the
      restrictions in such more restrictive covenants, subject to limited exceptions.
      The amended agreement also provides that the Company’s failure to
      procure an extension of any of its existing facilities with Bank of America,
      N.A. and Morgan Stanley Bank as of the 30th day before the maturity date (or
      the
      15th day before the maturity date if the Company demonstrates to the
      satisfaction of Deutsche Bank that it is negotiating a bona fide commitment
      to
      extend or replace such facility) would
      constitute an event of default under such agreement; however, any such failure
      would not be deemed to constitute an event of default if the Company
      demonstrates to the satisfaction of Deutsche Bank that it has sufficient liquid
      assets, as defined under such agreement, to pay down the multicurrency
      repurchase agreement when due. Under the terms of the extension agreements,
      no
      additional borrowings are permitted under the facility. In addition, monthly
      amortization payments of approximately $1,600 are required under the facility.
      The monthly amortization payment can be increased or decreased based on a
      monthly repricing of all the assets that collaterize the credit
      facility.


68





On
      August
      7, 2008, Bank of America, N.A. extended its USD and non-USD facilities until
      September 18, 2010. In connection with the extension, certain financial
      covenants were added or modified to conform to more restrictive covenants
      contained in other credit facilities. Also in connection with the extension,
      the
      Company is (i) required to make amortization payments totaling $31,000 on
      various dates through September 30, 2008, and (ii) is required to make monthly
      installment payments of $2,250 commencing October 15, 2008 until March 15,
      2010
      under the non-USD facility and $2,250 per month commencing April 15, 2010 and
      ending at maturity under the USD facility. Bank of America, N.A, can require
      the
      Company to fund margin calls in the event the lender determines the value of
      the
      underlying collateral has declined.





To
      satisfy a margin call of $11,582 made in October 2008 by Bank of America under
      its credit facilities, the Company agreed with Bank of America to increase
      the
      Company's monthly installment payments from $2,250 to $3,250 commencing November
      15, 2008 through March 15, 2010 under its non-USD facility and commencing April
      15, 2010 through September 18, 2010 under its USD facility.





On
      February 29, 2008, the Company entered into a binding loan commitment letter
      (the "Commitment Letter") with BlackRock HoldCo 2, Inc. ("HoldCo 2"), pursuant
      to the terms of which HoldCo 2 or its affiliates (together, the "Lender")
      committed to provide a revolving credit loan facility (the "BlackRock Facility")
      to the Company for general working capital purposes. HoldCo 2 is a wholly-owned
      subsidiary of BlackRock, Inc., the parent of BlackRock Financial Management,
      Inc., the Manager of the Company.





On
      March
      7, 2008, the Company and HoldCo 2 entered into the BlackRock Facility. The
      BlackRock Facility has a term of 364 days with two 364-day extension periods,
      subject to the Lender's approval. The BlackRock Facility is collateralized
      by a
      pledge of equity shares that the Company holds in Carbon II. The principal
      amount of the BlackRock Facility is the lesser of $60,000 or a number determined
      in accordance with a borrowing base calculation equal to 60% of the fair market
      value of the shares of Carbon II that are pledged to secure the BlackRock
      Facility. At September 30, 2008, based on the value of the Carbon II shares
      on a
      mark-to-market basis, the maximum principal amount of the BlackRock Facility
      has
      declined to $53,624 and the Company has remaining unused borrowing capacity
      of
      $23,624. As of October 31, 2008, unused borrowing capacity from the BlackRock
      Facility declined to $16,835 due to a decline in the fair market value of the
      shares of Carbon II that are pledged to secure the BlackRock
      Facility.





The
      BlackRock Facility bears interest at a variable rate equal to LIBOR plus 2.5%.
      The fee letter, dated February 29, 2008, between the Company and HoldCo 2,
      sets
      forth certain terms with respect to fees.


69


Amounts
      borrowed under the BlackRock Facility may be repaid and reborrowed from time
      to
      time. The Company, however, has agreed to use commercially reasonable efforts
      to
      obtain other financing to replace the BlackRock Facility and reduce the
      outstanding balance.





The
      terms
      of the BlackRock Facility give the Lender the option to purchase from the
      Company the shares of Carbon II that serve as collateral for the BlackRock
      Facility, up to the BlackRock Facility commitment amount, at a price equal
      to
      the fair market value (as determined by the terms of the BlackRock Facility
      agreement) of those shares, unless the Company elects to prepay outstanding
      loans under the BlackRock Facility in an amount equal to the Lender's desired
      share purchase amount and reduce the BlackRock Facility's commitment amount
      accordingly, which may require termination of the BlackRock Facility. Upon
      the
      consummation of the purchase, the BlackRock Facility’s commitment amount shall
      be reduced by the share purchase amount and the share purchase amount paid
      shall
      be applied to repay any outstanding loans under the BlackRock Facility as if
      the
      Company had prepaid the loans. The balance of the share amount available after
      such repayment, if any, shall be paid to the Company





On
      April
      8, 2008, the Company repaid $52,500 to HoldCo 2, representing all
      then-outstanding borrowings under the facility. On July 28, 2008, the Company
      reborrowed $30,000 under the BlackRock Facility which was still outstanding
      at
      September 30, 2008.





Failure
      to meet a margin call or required amortization payment under any of the five
      aforementioned facilities would constitute an event of default under the
      applicable facility. An event of default would allow the lender to accelerate
      all facility obligations under such agreement.





Each
      of
      the five facilities contains cross default provisions that provide that any
      default by the Company under any loan guaranty or similar agreement that permits
      acceleration of the balance due under such agreement would constitute an event
      of default under all such facilities.





*Preferred
      Equity Issuance*





On
      April
      4, 2008, the Company issued $70,125 of Series E Cumulative Convertible
      Redeemable Preferred Stock. Net proceeds were $69,839. Dividends are payable
      on
      the three new series of convertible preferred stock at a 12% coupon and the
      holder has the right to convert the preferred stock into common stock at $7.49
      per share (a 12% premium to the closing price of the Company's common stock
      on
      March 28, 2008, the pricing date).





On
        or
        after April 4, 2012, each holder of Series E-1 Preferred Stock has the right
        to
        require, at its option, the Company to repurchase all of such holder's shares
        of
        Series E-1 Preferred Stock, in whole but not in part, for cash, at a repurchase
        price equal to the liquidation preference of $1,000 per share, plus all
        accumulated but unpaid dividends thereon.
  On
        or
        after April 4, 2013, each holder of Series E-2 Preferred Stock has the right
        to
        require, at its option, the Company to repurchase all of such holder's shares
        of
        Series E-2 Preferred Stock, in whole but not in part, for cash, at a repurchase
        price equal to the liquidation preference of $1,000 per share, plus all
        accumulated but unpaid dividends thereon.


On
      June
      20, 2008, the holder of the outstanding 12% Series E-3 Cumulative Convertible
      Redeemable Preferred Stock exercised its right to convert its shares into
      3,119,661 shares of common stock.





The
      holder is a subsidiary of a fund managed by an affiliate of Credit Suisse.
Whenever
      dividends on the Series E Preferred Stock are in arrears for six or more
      quarterly periods (whether or not consecutive), then the holder, together with
      the holders of the Company's Series C and Series D Preferred Stock which rank
      equally with the Series E Preferred Stock, shall be entitled to elect a total
      of
      two additional directors to the Company’s Board of Directors in addition to the
      one director appointed to the Board at consummation of this
      transaction.


70





*Common
      Equity Issuances*





The
      following table summarizes Common Stock issued by the Company for the nine
      months ended September 30, 2008, net of offering costs:





Shares
            
            Net ProceedsDividend
                Reinvestment and Stock Purchase Plan
            
            
            152,332
            
            $
            1,071Sales
                agency agreement
            
            
            5,226,800
            
            
            35,012Management
                and incentive fees*
            
            
            1,065,818
            
            
            7,013Incentive
                fee – stock based*
            
            
            316,320
            
            
            2,116Series
                E-3 preferred stock conversion
            
            
            3,119,661
            
            
            23,289Private
                transaction (see details below)
            
            
            3,494,021
            
            
            23,244Director
                compensation
            
            
            21,256
            
            
            128Total
            
            
            13,396,208
            
            $
            91,873


*See
      Note
      12 to the consolidated financial statements, Transactions with the Manager
      and
      Certain Other Parties, for a further description of the Company’s Management
      Agreement.





In
      conjunction with the Company’s issuance of the Series E Preferred Stock on April
      4, 2008, the Company also issued 3,494,021 shares of Common Stock, for $6.69
      per
      share, resulting in net proceeds of $23,244.





*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"). FASB Staff Position FIN 46(R)-5, *Implicit
      Variable Interests under FASB Interpretation No. 46* ("FIN
      46(R)-5") has certain scope exceptions, one of which provides that an enterprise
      that holds a variable interest in a QSPE does not consolidate that entity unless
      that enterprise has the unilateral ability to cause the entity to liquidate.
      FAS
      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.





At
      September 30, 2008 the Company owned securities of 39 Controlling Class CMBS
      trusts with a par of $1,853,307. The total par amount of CMBS issued by the
      39
      trusts was $67,532,074. One of the Company's 39 Controlling Class trusts does
      not qualify as a QSPE and has been consolidated by the Company (see Note 6
      of
      the consolidated financial statements).


71


The
      Company's maximum exposure to loss as a result of its investment in these QSPEs
      totaled $741,193 and $1,126,442 at September 30, 2008 and December 31, 2007,
      respectively.





In
      addition, the Company has completed two securitizations that qualify as QSPEs
      under FAS 140. Through CDO HY1 and CDO HY2 the Company issued non-recourse
      liabilities secured by commercial related assets including portions of 17
      Controlling Class CMBS. Should future guidance from the standard setters
      determine that Controlling Class CMBS are not QSPEs, 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 investment in CDO
      HY1 and CDO HY2 at September 30, 2008 and December 31, 2007 was $15,593 and
      $61,206, respectively.





The
      Company also owns non-investment grade debt and preferred securities in LEAFs
      CMBS I Ltd ("Leaf"), a QSPE under FAS 140. Leaf issued non-recourse liabilities
      secured by investment grade commercial real estate securities. At September
      30,
      2008 and December 31, 2007, the Company's total maximum exposure to loss as
      a
      result of its investment in Leaf was $4,841 and $6,264,
      respectively.




*Cash
      Flows*





Cash
      provided by operating activities is net income adjusted for certain non-cash
      items and changes in operating assets and liabilities including the Company's
      trading securities. Operating activities used cash flows of $10,834 and $156,783
      for the nine months ended September 30, 2008 and 2007, respectively. Operating
      cash flow is affected by the purchase and sale of fixed income securities
      classified as trading securities. Proceeds received from the sale and repayment
      of trading securities also increased operating cash flows. Net cash from trading
      securities was an outflow of $53,515 and an inflow of $130,973 for the nine
      months ended September 30, 2008 and 2007, respectively. Also, during the first
      nine months of 2008, the Company terminated interest rate swaps which resulted
      in an outflow of $17,101, while during the same period of 2007, it was an inflow
      of $17,737.





Net
      cash
      provided by investing activities consists primarily of purchases, sales, and
      repayments on securities, commercial loan pools, commercial mortgage loans
      and
      equity investments. The Company's investing activities provided cash flows
      of
      $136,482 and used cash flows of $236,557 during the nine months ended September
      30, 2008 and 2007, respectively. The variance in investing cash flows is
      primarily attributable to purchases of securities and funding of commercial
      mortgage loans. During the nine months ended September 30, 2008 and September
      30, 2007, net cash used to fund commercial loans was $2,286 and $687,316,
      respectively. Purchases of securities during the nine months ended September
      30,
      2008 of $53,515 are classified as operating activities due to the adoption
      of
      FAS 159, versus purchases of securities during the nine months ended September
      30, 2007 of which $505,119 were classified as investing activities prior to
      the
      adoption of FAS 159.


72


Net
      cash
      from financing activities was an outflow of $195,993 for the nine months ended
      September 30, 2008 versus a cash inflow of $119,323 for the nine months ended
      September 30, 2007, primarily due to margin calls on reverse repurchase
      agreements and credit facilities during the first quarter of 2008, net of
      preferred and common stock issuances. During the nine months ended September
      30,
      2008 and September 30, 2007, net cash provided by the issuances of common and
      preferred stock was $129,166 and $149,891, respectively. Also, during the nine
      months ended September 30, 2007, the company issued senior unsecured notes
      and
      junior secured notes which raised $229,069 of cash in the
      aggregate.





**Transactions
      with the Manager and Certain Other Parties**




The
      Company has a Management Agreement, an administrative services agreement and
      an
      accounting services agreement with the Manager, the employer of certain
      directors and all of the officers of the Company, under which the Manager and
      the Company’s officers manage the Company’s day-to-day investment operations,
      subject to the direction and oversight of the Company’s Board of Directors.
      Pursuant to the Management Agreement and other agreements, the Manager and
      the
      Company’s officers formulate investment strategies, arrange for the acquisition
      of assets, arrange for financing, monitor the performance of the Company’s
      assets and provide certain other advisory, administrative and managerial
      services in connection with the operations of the Company.





The
      following is a summary of management and incentive fees incurred for the three
      and nine months ended September 30, 2008 and 2007:





For the Three Months
              Ended September 30,
            
            For the Nine Months
              Ended September 30,2008
            
            2007
            
            2008
            
            2007Management
                fee
            
            $
            3,050
            
            $
            3,473
            
            $
            9,286
            
            $
            10,862Incentive
                fee
            
            
            -
            
            
            -
            
            
            11,879
            
            
            5,645Incentive
                fee – stock based
            
            
            382
            
            
            497
            
            
            1,426
            
            
            2,145Total
                management and incentive fees
            
            $
            3,432
            
            $
            3,970
            
            $
            22,591
            
            $
            18,652





At
      September 30, 2008 and 2007, management and incentive fees of $11,077 and
      $5,434, respectively, remain payable to the Manager and are included on the
      accompanying consolidated statements of financial condition as a component
      of
      other liabilities.





In
      accordance with the provisions of the Management Agreement, the Company recorded
      $(175) and $75 for certain expenses (accrual adjustments) recognized during
      the
      three and nine months ended September 30, 2008, respectively, and $184 and
      $486
      for the three and nine months ended September 30, 2007,
      respectively.





The
      Company also has administration and accounting services agreements with the
      Manager. Under the terms of the administration services agreement, the Manager
      provides financial reporting, audit coordination and accounting oversight
      services to the Company. Under the terms of the accounting services agreement,
      the Manager provides investment accounting services to the Company. For the
      three and nine months ended September 30, 2008, the Company recorded
      administration and investment accounting service fees of $250 and $735,
      respectively, which are included in general and administrative expense on the
      accompanying consolidated statements of operations. For the three and nine
      months ended September 30, 2007, the Company recorded administration and
      investment accounting service fees of $181 and $544, respectively, which are
      included in general and administrative expense on the accompanying consolidated
      statements of operations.


73


The
      special servicer on 33 of the Company's 39 Controlling Class trusts is Midland
      Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of PNC
      Bank.
      Midland therefore may be presumed to be an affiliate of the Manager. The
      Company's fees for Midland’s services are at market rates.





On
      March
      7, 2008, the Company entered into a credit facility with a subsidiary of
      BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
      BlackRock Financial Management, Inc. (See Note 12).





During
      2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
      I, a private commercial real estate income opportunity fund managed by the
      Manager. The Company’s investment in Carbon I at September 30, 2008 was $1,711.
      The Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon I. At September 30, 2008, the
      Company owned approximately 20% of the outstanding shares of Carbon I.





The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II, a private commercial real estate income opportunity fund managed
      by
      the Manager. The Company’s investment in Carbon II at September 30, 2008 was
      $95,928. The Company does not incur any additional management or incentive
      fees
      to the Manager related to its investment in Carbon II. At September 30,
      2008, the Company owned approximately 26% of the outstanding shares of Carbon
      II.




The
      Company is committed to invest up to $5,000, for up to a 10% interest, in
      Anthracite JV LLC (“AHR JV”). AHR JV invests in U.S. CMBS rated higher than BB.
      As of September 30, 2008, the Company had invested $1,351 in AHR JV. AHR JV
      is
      managed by the Manager. The other member in AHR JV is managed by or otherwise
      associated with an affiliate of Credit Suisse.





On
      June
      26, 2008, the Company invested $30,886 in RECP Anthracite International JV
      Limited (“AHR International JV”). AHR International JV invests in investments
      backed by non-U.S. real estate assets and is managed by the Manager. The Company
      will invest on a deal-by-deal basis and has no committed capital obligation.
      The
      other shareholder in AHR International JV is managed by or otherwise associated
      with an affiliate of Credit Suisse.


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 September 30, 2008, the Installment Payment would be
        $2,000
        payable over two years. The Company is not required to accrue for this
        contingent liability because it is not probable.


**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.


Certain
      of the Company’s subsidiaries have elected to be 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.




**Critical
        Accounting Estimates**
 
 See
        the
        discussion of the Company's Critical Accounting Estimates in the Company's
        Annual Report on Form 10-K for the year ended December 31,
        2007.


74


**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, credit curve spread risk and foreign currency 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
      spread risk is highly sensitive to the dynamics of the markets for commercial
      real estate 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. Treasury securities. 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 increases, 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 decreases, 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 September 30, 2008, all of the Company's short-term
      collateralized 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 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.


75





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 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. 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. The primary risks associated with
      acquiring and financing assets under reverse 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. 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 1.5 years based on net asset value at September 30, 2008. This means
      that a 100 basis point increase in interest rates would cause a margin call
      of
      approximately $14,000.





The
      Company also 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
      September 30, 2008, economic duration for the Company's entire portfolio was
      2.6
      years. This implies that for each 100 basis points of change in interest rates
      the Company's economic value will change by approximately 2.6%, or $24,000.
      However, the duration of the Company’s portfolio not financed with match funded
      debt is 1.5 years. This means that a 100 basis point increase in interest rates
      or credit spreads would cause a margin call of approximately
      $14,000.





Net
      interest income 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.





Regarding
      the table below, all changes in net interest income 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 September 30,
      2008. Actual results could differ significantly from these estimates.





**Projected Percentage Change In Net**
              **Interest Income Per Share Given LIBOR**
              **Movements**Change in LIBOR,
              +/- Basis Points
            
            Projected Change
              in Earnings per
              Share-200
            
            $
            0.02-100
            
            $
            0.01-50
            
            $
            0.01Base
                Case+50
            
            $
            (0.01
            )+100
            
            $
            (0.01
            )+200
            
            $
            (0.02
            )


76





***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 U.S. economy, 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 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 yields on
      higher rated securities (B or higher) are generally sensitive to changes in
      timing of projected losses and prepayments rather than the severity of the
      losses themselves. The yields on the lowest rated securities (B- or lower)
      are
      more sensitive to the severity of losses and the resulting impact on future
      cash
      flows.





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. 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 estimated loss 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.


77


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. 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 by approximately $0.45
      per share of Common Stock per year. A significant acceleration of the timing
      of
      these losses would cause the Company's net income to decrease.





***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 matching 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, British pound and Canadian dollar. 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 financings on its foreign investments and foreign currency
      forward commitments and swaps to hedge the net exposure.




78


**ITEM
      4.**  CONTROLS
      AND PROCEDURES





The
      Company, under the direction and with the participation of its management,
      including the Chief Executive Officer and the Chief Financial Officer, evaluated
      the effectiveness of the Company's disclosure controls and procedures (as
      defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
      (the "Exchange Act")) as of the end of the period covered by this report. Based
      on that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that the Company's disclosure controls and procedures were effective
      at September 30, 2008.





No
      change
      in internal control over financial reporting (as defined in Rule 13a-15(f)
      under
      the Exchange Act) occurred during the quarter ended September 30, 2008 that
      has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.


79







**Part
      II – OTHER INFORMATION**





ITEM
                1.
              Legal
                  Proceedings





At
      September 30, 2008, there were no pending legal proceedings in which the Company
      was a defendant or of which any of its property was subject.





ITEM
              1A.
            Risk
                Factors


All
        currency figures expressed herein are expressed in thousands.


***An
      increase in the amount of margin calls may negatively affect the Company's
      financial condition, results of operations and business. If the Company were
      unable to fund margin calls in a timely manner, its business would be materially
      adversely affected.***




The
      values of real estate securities and loans are subject to changes in credit
      spreads. Credit spreads measure the yield demanded on securities and loans
      by
      the market based on their credit relative to a specific benchmark. The ongoing
      weaknesses in the subprime mortgage sector and in the broader mortgage market
      have resulted in reduced liquidity for and demand mortgage-backed securities
      and
      have caused credit spreads to widen substantially since the beginning of 2007.
      Under these conditions, the values of real estate securities and loans have
      declined, and such decline has resulted in margin calls. The Company does not
      currently know the full extent to which the current market disruption will
      affect it or the markets in which it operates, and it is unable to predict
      the
      length or ultimate severity of the disruption.




The
      Company's credit facilities, some of which are repurchase agreements, allow
      the
      lender, to varying degrees, to revalue the collateral to values that the lender
      considers to reflect market value. If a lender determines that the value of
      the
      collateral has decreased, it may initiate a margin call requiring the Company
      to
      post additional collateral to cover the decrease or to repay a portion of the
      outstanding borrowing with minimal notice. During 2007, the Company paid $82,570
      related to margin calls. During the period from January 1, 2008 through November
      10, 2008, the Company paid $189,352 ($84,733 since July 1, 2008) related to
      margin calls and amortization payments (including payments the Company made
      to
      lenders upon their determination that the value of collateral declined and
      fixed
      payments the Company made to lenders pursuant to the terms of the facilities).
      The Company will fund an additional margin call of approximately $6,600 on
      November 11, 2008. It has also agreed to make increased monthly installment
      payments to one of its lenders in full satisfaction of a margin call of $11,582
      originally scheduled to be paid in October 2008.


80





Additional
      margin calls as a result of the widening of credit spreads or otherwise could
      harm the Company's liquidity, results of operations, financial condition and
      business prospects in a number of ways. In order to obtain cash to satisfy
      a
      margin call and absent other capital resources becoming available, the Company
      would be required to liquidate assets at a disadvantageous time, which would
      cause it to incur further losses and consequently adversely affect its results
      of operations and financial condition. Posting additional collateral would
      decrease the Company's cash available or ability to make other, higher yielding
      investments (thereby decreasing its return on equity) or to satisfy other
      obligations, including future margin calls. In addition, in periods of increased
      market volatility, such as currently exists, the Company may need to hold
      increased levels of cash or cash equivalents in anticipation of potential margin
      calls, which would decrease amounts available to invest in its business.
      Further, in light of market conditions or other factors, the Company may be
      unable to sell sufficient assets or take other actions to satisfy margin calls
      within the timeframes required by the applicable counterparties. If the Company
      were unable to satisfy margin calls within the timeframes required by the
      applicable counterparties, it would be in default under such facilities, which
      would, subject to applicable grace periods, trigger cross default and cross
      acceleration provisions in all of its facilities. In addition, under certain
      of
      the Company's facilities, a material adverse change in its business, operations,
      financial condition or other specified item constitutes an event of default,
      which would also trigger such provisions. In such an event, the Company would
      be
      required to repay all outstanding indebtedness under its credit facilities
      immediately. At September 30, 2008, the Company had $706,450 of recourse
      indebtedness outstanding, including $546,704 outstanding under its credit
      facilities. If all outstanding indebtedness under the Company's credit
      facilities or a substantial portion of the Company's recourse indebtedness
      were
      to become immediately due, the Company would not have sufficient liquid assets
      available to repay such indebtedness and, absent other capital resources
      becoming available to it, the Company will be unable to continue to fund its
      operations and continue its business.




***If
      the Company's lenders terminate or fail to renew any of its credit facilities,
      the Company may not be able to continue to fund its business.***




As
      of
      September 30, 2008, borrowings under the Company's credit facilities, some
      of
      which are repurchase agreements, totaled $546,704. These facilities contain
      various representations and warranties, covenants, conditions and events of
      default that if breached, not satisfied, or triggered could result in
      termination of the facilities. Moreover, the current market turmoil and
      tightening of credit will continue to have a significant effect on the Company's
      ability to extend the term of its existing credit facilities or obtain
      sufficient funds to repay any amounts outstanding under the credit facilities
      before they expire, either from one or more replacement financing arrangements
      or an alternative debt or equity financing. Consequently, if one or more of
      these facilities were to terminate prior to its expected maturity date or if
      any
      such facility were not renewed, the Company's liquidity position could be
      materially adversely affected, and it may not be able to satisfy its outstanding
      loan commitments, originate new loans or continue to fund its operations.




The
      Company's $300,000 credit facility with Morgan Stanley Bank (the "MS facility")
      expires on February 7, 2009. As of September 30, 2008, the amount outstanding
      under the MS facility was $227,405. The Company may not be able to extend the
      term of the MS facility when it expires, and may have to find an alternative
      source of financing. Alternative sources of financing may be more expensive,
      contain more onerous terms or simply may not be available. If the Company is
      unable to extend the MS facility and fails to repay the amount outstanding,
      it
      will default under the facility, and may not be able to continue to fund its
      operations.




In
      addition, one of the Company's credit facilities provide that failure to extend
      certain of the Company's existing credit facilities, including the MS facility,
      thirty days (or fifteen days under certain circumstances) prior to the maturity
      date, which includes any subsequently extended maturity date, will constitute
      an
      event of default and would cause all outstanding indebtedness under the
      Company's credit facilities to become immediately due.


81




***Difficult
      conditions in the financial markets have adversely affected the Company's
      financial condition, results of operation and business, and market conditions
      may not improve in the near future.***




The
      capital and credit markets have been experiencing extreme volatility and
      disruption for more than a year. In recent weeks, the volatility and disruption
      have reached unprecedented levels. In response to the financial crises, on
      October 3, 2008, President Bush signed the Emergency Economic Stabilization
      Act
      of 2008 (EESA) into law. Pursuant to the EESA, the U.S. Treasury has the
      authority to, among other things, purchase up to $700 billion of mortgage-backed
      and other securities from financial institutions under the Troubled Assets
      Relief Program (TARP) for the purpose of stabilizing the financial markets.
      The
      Federal Government, Federal Reserve and other governmental and regulatory bodies
      have taken or are considering taking other actions to address the financial
      crisis. Despite substantial efforts by the U.S. and other governments to restore
      confidence and reopen sources of credit, it still remains unknown whether
      conditions will improve in the near future or the extent to which such
      government actions will affect the Company.




The
      Company does not currently know the full extent to which this market disruption
      will affect it or the market in which it operates, and it is unable to predict
      the length or ultimate severity of the financial crisis. If the challenging
      conditions continue, the Company may experience further tightening of liquidity,
      additional impairments, increased margin calls and additional challenges in
      raising capital and obtaining investment financing. Moreover, if current market
      conditions continue or deteriorate further, the Company could experience a
      rapid
      and significant deterioration of its business and its results of operation
      and
      its financial condition could be materially adversely affected. A prolonged
      economic slowdown could also impair the performance of the Company's investments
      and harm its financial condition, increase its funding costs, limit its access
      to the capital markets or result in a decision by lenders not to extend credit
      to the Company. As a result, investors in the Company's securities could lose
      some or all of their investment in the Company.




***Some
      of the Company's investments may be recorded at fair value as determined in
      good
      faith by the Manager and, as a result, there will be uncertainty as to the
      value
      of these investments.***




Some
      of
      the Company's portfolio investments may be in the form of assets that are not
      actively traded. The fair value of securities and other investments that are
      not
      actively traded may not be readily determinable. The Company values these
      investments at least quarterly at fair value as determined in good faith by
      the
      Manager, and the unrealized gains or losses are recorded in earnings. Because
      such valuations by the Company are inherently uncertain, may fluctuate over
      short periods of time, and may be based on estimates, the Company's
      determinations of fair value of its investments may differ materially from
      the
      values that the Company ultimately realizes upon their disposal.




A
      decline
      in the market value of the Company's assets may adversely affect the Company
      in
      instances in which the Company has borrowed money based on the market value
      of
      those assets. If the market value of those assets declines (in certain cases
      with respect to illiquid securities, in the sole determination of the lender),
      the lender may require the Company to post additional collateral to support
      the
      loan. For a discussion of the risk related to margin calls, see"—An increase in
      the amount of margin calls may negatively affect the Company's financial
      condition, results of operations and business. If the Company were unable to
      fund margin calls in a timely manner, its business would be materially adversely
      affected" above.


82




***The
      Company's investments may be illiquid and their value may decrease, which could
      adversely affect the Company's business.***




Many
      of
      the Company's assets are illiquid. Illiquidity may result from the absence
      of an
      established market for the investments as well as the legal or contractual
      restrictions on their resale. It may also result from the decline in value
      of
      properties or assets securing these investments. Illiquid investments typically
      experience greater price volatility, as a ready market does not exist, and
      can
      be more difficult to value. Many of the Company's assets, which have little,
      if
      any, current market activity, have been valued based primarily on broker quotes.
      Such third-party pricing for illiquid investments may be more subjective than
      for more liquid investments. The ongoing dislocation in the trading markets
      has
      made it extremely difficult for the Company to sell many of its assets. If
      the
      Company is required to liquidate all or a portion of its illiquid investments
      quickly, it may realize significant losses or may not be able to sell some
      or
      all of such investments at all. As a result, the Company's ability to vary
      its
      portfolio in response to changes in economic and other conditions may be
      relatively limited, and its results of operation, financial condition and
      business could be materially adversely affected.




***Conflicts
      of interest of the Manager may result in decisions that do not fully reflect
      stockholders' best interests.***




The
      Company and the Manager have some common officers and directors, which may
      present conflicts of interest in the Company's dealings with the Manager and
      its
      affiliates, including the Company's purchase of assets originated by such
      affiliates.




The
      Manager and its employees may engage in other business activities that could
      reduce the time and effort spent on the management of the Company. The Manager
      also provides services to REITs not affiliated with the Company. As a result,
      there may be a conflict of interest between the operations of the Manager and
      its affiliates in the acquisition and disposition of commercial real estate
      assets. In addition, the Manager and its affiliates may from time to time
      purchase commercial real estate assets for their own account and may purchase
      or
      sell assets from or to the Company. For example, BlackRock Realty Advisors,
      Inc., a subsidiary of the Manager, provides real estate equity and other real
      estate related products and services in a variety of strategies to its
      institutional investor client base. In doing so, it purchases real estate on
      behalf of its clients that may underlie the real estate loans and securities
      the
      Company acquires, and consequently depending on the factual circumstances
      involved, there may be conflicts between the Company and those clients. Such
      conflicts may result in decisions and allocations of commercial real estate
      assets by the Manager, or decisions by the Manager's affiliates, that are not
      in
      the Company's best interests.




Although
      the Company has adopted investment guidelines, these guidelines give the Manager
      significant discretion in investing. The Company's investment and operating
      policies and the strategies that the Manager uses to implement those policies
      may be changed at any time without the consent of stockholders.


83




Conflicts
      of interest could also arise in transactions where the Company borrows from
      affiliates of the Manager. In March 2008, the Company entered into a revolving
      credit loan facility (the "BlackRock Facility") with a wholly owned subsidiary
      of BlackRock, Inc., the parent of the Manager. The BlackRock Facility is
      collateralized by a pledge of equity shares that the Company holds in Carbon
      Capital II, Inc., a private commercial real estate income opportunity fund
      managed by the Manager. As of September 30, 2008, the Company had $30,000
      outstanding under the BlackRock Facility.




See
      also
      the risk factors set forth in Part I, “Item 1A. Risk Factors” in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2007, filed with
      the
      SEC on March 16, 2008.





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





(a)
      During the nine months ended September 30, 2008, the Company issued
      1,403,394 unregistered shares of Common Stock with an aggregate value of
      $9,261 as follows:





·
            On
                March 28, 2008, 316,320 unregistered shares of Common Stock with an
                aggregate value of $2,116 were issued to BlackRock Financial Management,
                Inc., the manager of the Company (the "Manager"), under the Company's
                2006
                Stock Award and Incentive Plan (the "Plan") and pursuant to the provision
                of the Amended and Restated Investment Advisory Agreement, dated
                as of
                March 15, 2007, between the Company and the Manager (the "2007 Management
                Agreement") requiring the Company to grant to the Manager a number
                of
                shares of Common Stock equal to one-half of one percent (0.5%) of
                the
                total number of shares of Common Stock outstanding as of December 31
                of each year in which the 2007 Management Agreement is in effect;





·
            On
                June 3, 2008, 424,425 unregistered shares of Common Stock with
                an aggregate value of $3,163 were issued to the Manager under the
                Anthracite Capital, Inc. 2008 Manager Equity Plan and pursuant to
                the 2007
                Management Agreement providing that 30% of the Manager's incentive
                fees
                earned under the 2007 Management Agreement shall be paid in shares
                of the
                Common Stock subject to certain provisions under the Management Agreement
                and the Plan and pursuant to a consent of the Nominating and Corporate
                Governance Committee; and





·
            On
                August 25, 2008, 641,393 unregistered shares of Common Stock with an
                aggregate value of $3,854 were issued to the Manager under the Anthracite
                Capital, Inc. 2008 Manager Equity Plan as quarterly payments in shares
                of
                Common Stock of the base management fee and incentive fee to the
                Manager
                under the Amended and Restated Investment Advisory Agreement, dated
                as of
                March 31, 2008, between the Company and the Manager (the "Management
                Agreement"). For the full one-year term of the Management Agreement,
                the
                Manager has agreed that 100% of the base management fee and incentive
                fee
                earned shall be payable in shares of Common Stock.





·
            On
                August 25, 2008, 21,256 unregistered shares of Common Stock with an
                aggregate value of $128 were issued to directors of the Company not
                employed by the manager under the Plan as quarterly payment of an
                annual
                retainer.




84




The
      issuances of Common Stock described above were made in reliance upon the
      exemption from registration under Section 4(2) of the Securities
      Act.





ITEM
      5.
      Other Information





Departure
      of Director





The
      Company previously disclosed under Item 5.02 of the Current Report on Form
      8-K
      filed by the Company on September 16, 2008 Jeffrey C. Keil’s intention to retire
      from the Company’s board of directors effective December 11, 2008. On November
      9, 2008, Mr. Keil informed the Company that his retirement will be effective
      November 14, 2008. Mr. Keil’s retirement and the effective date of his
      retirement did not result from a disagreement with the Company on any matter
      relating to the Company’s operations, policies or practices. Mr. Keil is the
      Chairman of the Company’s Audit Committee and a member of the Company’s
      Compensation Committee.





ITEM
      6.
      Exhibits





Exhibit
                No.
            
            Description10.1
            
            Amendment
                No. 2, dated as of July 8, 2008, to Guaranty, dated as of December
                23,
                2004 and amended as of February 27, 2007, between the Company, as
                guarantor, and Deutsche Bank AG, Cayman Islands Branch, as buyer
                (incorporated by reference to Exhibit 10.1 to the Company's Current
                Report
                on Form 8-K, filed on July 14, 2008)10.2
            
            Amendment
                No. 2, dated as of July 8, 2008, to Master Repurchase Agreement and
                Annex
                I to Master Repurchase Agreement Supplemental Terms and Conditions,
                dated
                as of December 23, 2004, between Anthracite Funding, LLC, as seller,
                and
                Deutsche Bank AG, Cayman Islands Branch, as buyer (incorporated by
                reference to Exhibit 10.2 to the Company's Current Report on Form
                8-K,
                filed on July 14, 2008)10.3
            
            Amendment,
                Agreement and Waiver, dated as of August 7, 2008, in respect of the
                Credit
                Agreement, dated as of March 17, 2006, as amended, restated, supplemented
                or otherwise modified, by and among AHR Capital BOFA Limited, as
                a
                borrower, each of the borrowers from time to time party thereto,
                Anthracite Capital, Inc., as borrower agent, and Bank of America,
                N.A., as
                lender (incorporated by reference to Exhibit 10.1 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended June 30, 2008,
                filed
                on August 11, 2008)10.4
            
            Amendment
                and Agreement, dated as of August 7, 2008, in respect of the Master
                Repurchase Agreement, dated as of July 20, 2007, as amended, restated,
                supplemented or otherwise modified, by and among Anthracite Capital
                BOFA
                Funding LLC, as seller, Bank of America, N.A. and Bank of America
                Mortgage
                Capital Corporation, as buyers, and Bank of America, N.A., as agent
                for
                the buyers (incorporated by reference to Exhibit 10.2 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended June 30, 2008,
                filed
                on August 11, 2008)10.5
            
            Amended
                and Restated Guaranty, dated as of August 7, 2008, by Anthracite
                Capital,
                Inc. for the benefit of Bank of America, N.A. and Bank of America
                Mortgage
                Capital Corporation (incorporated by reference to Exhibit 10.3 to
                the
                Company's Quarterly Report on Form 10-Q for the quarter ended June
                30,
                2008, filed on August 11, 2008)10.6
            
            Amended
                and Restated Parent Guaranty, dated as of August 7, 2008, by Anthracite
                Capital, Inc. in favor of Bank of America, N.A. (incorporated by
                reference
                to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
                the quarter ended June 30, 2008, filed on August 11,
                2008)10.7
            
            First
                Amendment, dated as of September 10, 2008, to Sales Agreement, dated
                as of
                June 4, 2008, among Brinson Patrick Securities Corporation, Anthracite
                Capital, Inc. and BlackRock Financial Management, Inc. as to Sections
                1.2
                and 4.1(g) only (incorporated by reference to Exhibit 10.1 to the
                Company's Current Report on Form 8-K, filed on September 16,
                2008)12
            
            Computation
                of Ratio of Earnings to Combined Fixed Charges and Preferred Stock
                Dividends31.1
            
            Exchange
                Act Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer31.2
            
            Exchange
                Act Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer32.1
            
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002


85





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:
                November 10, 2008
            By:
            /s/
                Christopher A. MilnerName:
                Christopher A. MilnerTitle:
                Chief Executive OfficerDated:
                November 10, 2008
            By:
            /s/
                James J. LillisName:
                James J. LillisTitle:
                Chief Financial Officer


86