**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 March 31, 2008





OR





o
            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 o


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 o
            Non-accelerated
                filer o





Smaller
      reporting company o




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




Yes
o  No x





At
      May 2,
      2008, 68,938,283 shares of common stock ($0.001 par value per share) were
      outstanding.





ANTHRACITE
      CAPITAL, INC.


FORM
      10-Q


INDEX





PagePART
                I –
                FINANCIAL INFORMATIONItem
                1.
            Financial
                Statements
            4Consolidated
                Statements of Financial Condition (Unaudited) At March 31, 2008 and
                December 31, 2007
            4Consolidated
                Statements of Operations (Unaudited)For
                the Three Months Ended March 31, 2008 and 2007
            5Consolidated
                Statement of Changes in Stockholders' Equity (Unaudited)For
                the Three Months Ended March 31, 2008
            6Consolidated
                Statements of Cash Flows (Unaudited)For
                the Three Months Ended March 31, 2008 and 2007
            7Notes
                to Consolidated Financial Statements (Unaudited)
            9Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results
                of Operations
            35Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            63Item
                4.
            Controls
                and Procedures
            67Part
                II –
                OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            68Item
                1A.
            Risk
                Factors
            68Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            68Item
                6.
            Exhibits
            68SIGNATURES
            69







**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;


(3)
      the
      relative and absolute investment performance and operations of BlackRock
      Financial Management, Inc. (“BlackRock”), the Company’s Manager;


(4)
      the
      impact of increased competition;


(5)
      the
      impact of future acquisitions or divestitures;


(6)
      the
      unfavorable resolution of legal proceedings;


(7)
      the
      impact of legislative and regulatory actions and reforms and regulatory,
      supervisory or enforcement actions of government agencies relating to the
      Company or BlackRock;


(8)
      terrorist activities and international hostilities, which may adversely affect
      the general economy, domestic and global financial and capital markets, specific
      industries, and the Company;


(9)
      the
      ability of BlackRock to attract and retain highly talented professionals;


(10)
      fluctuations in foreign currency exchange rates; and


(11)
      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)**





March
                31, 2008
            
            December
                31, 2007**ASSETS**Cash
                and cash equivalents
            
            
            
            
            $
            65,649
            
            
            
            
            $
            91,547Restricted
                cash equivalents
            
            
            
            
            
            20,742
            
            
            
            
            
            32,105Securities
                held-for-trading, at estimated fair value:Subordinated
                commercial mortgage-backed securities ("CMBS")
            
            $
            808,510
            
            
            
            
            $
            1,380Investment
                grade CMBS
            
            
            1,072,749
            
            
            
            
            
            15,923Residential
                mortgage-backed securities (“RMBS”)
            
            
            1,009
            
            
            
            
            
            901Total
                securities held-for-trading
            
            
            
            
            
            1,882,268
            
            
            
            
            
            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 $25,000 in
                2008)
            
            
            
            
            
            999,163
            
            
            
            
            
            983,387Commercial
                mortgage loan pools, at amortized cost
            
            
            
            
            
            1,235,138
            
            
            
            
            
            1,240,793Equity
                investments
            
            
            
            
            
            108,853
            
            
            
            
            
            108,748Derivative
                instruments, at estimated fair value
            
            
            
            
            
            422,646
            
            
            
            
            
            404,910Other
                assets (includes $2,093 at estimated fair value in 2008)
            
            
            
            
            
            70,274
            
            
            
            
            
            101,886Total
                Assets
            
            
            
            
            $
            4,804,733
            
            
            
            
            $
            5,247,710**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Liabilities:Borrowings:Secured
                by pledge of subordinated CMBS
            
            $
            246,955
            
            
            
            
            $
            293,287Secured
                by pledge of investment grade CMBS
            
            
            227,939
            
            
            
            
            
            207,829Secured
                by pledge of commercial mortgage loans
            
            
            236,990
            
            
            
            
            
            244,476Collateralized
                debt obligations ("CDOs") (includes $1,216,289 at estimated fair
                value in
                2008)
            
            
            1,216,289
            
            
            
            
            
            1,823,328Senior
                unsecured notes (includes $80,864 at estimated fair value in
                2008)
            
            
            80,864
            
            
            
            
            
            162,500Senior
                convertible notes (includes $67,696 at estimated fair value in
                2008)
            
            
            67,696
            
            
            
            
            
            80,000Junior
                unsecured notes (includes $34,122 at estimated fair value in
                2008)
            
            
            34,122
            
            
            
            
            
            73,103Junior
                subordinated notes to subsidiary trusts issuing preferred securities
                (includes $68,986 at estimated fair value in 2008)
            
            
            68,986
            
            
            
            
            
            180,477Secured
                by pledge of commercial mortgage loan pools
            
            
            1,217,901
            
            
            
            
            
            1,225,223Total
                borrowings
            
            
            
            
            
            3,397,742
            
            
            
            
            
            4,290,223Payable
                for investments purchased
            
            
            
            
            
            -
            
            
            
            
            
            4,693Distributions
                payable
            
            
            
            
            
            21,522
            
            
            
            
            
            21,064Derivative
                instruments, at estimated fair value
            
            
            
            
            
            502,349
            
            
            
            
            
            442,114Other
                liabilities
            
            
            
            
            
            34,786
            
            
            
            
            
            38,245Total
                Liabilities
            
            
            
            
            
            3,956,399
            
            
            
            
            
            4,796,339Stockholders’
                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 sharesauthorized;64,791,761
                shares issued and outstanding in 2008;63,263,998
                shares issued and outstanding in 2007
            
            
            
            
            
            65
            
            
            
            
            
            63Additional
                paid-in capital
            
            
            
            
            
            700,960
            
            
            
            
            
            691,071Retained
                earnings (distributions in excess of earnings)
            
            
            
            
            
            9,134
            
            
            
            
            
            (122,738
            )Accumulated
                other comprehensive income (loss) (“OCI”)
            
            
            
            
            
            (519
            )
            
            
            
            
            (255,719
            )Total
                Stockholders’ Equity
            
            
            
            
            
            848,334
            
            
            
            
            
            451,371Total
                Liabilities and Stockholders’ Equity
            
            
            
            
            $
            4,804,733
            
            
            
            
            $
            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 March 31,2008
              
              2007Income:Interest
                  from securities
              
              $
              52,269
              
              $
              48,180Interest
                  from commercial mortgage loans
              
              
              23,732
              
              
              11,166Interest
                  from commercial mortgage loan pools
              
              
              12,865
              
              
              13,132Earnings
                  from equity investments
              
              
              2,009
              
              
              9,956Interest
                  from cash and cash equivalents
              
              
              1,064
              
              
              924Total
                  income
              
              
              91,939
              
              
              83,358Expenses:Interest
              
              
              56,854
              
              
              55,839Management
                  and incentive fees
              
              
              14,218
              
              
              6,953General
                  and administrative expense
              
              
              1,815
              
              
              1,305Total
                  expenses
              
              
              72,887
              
              
              64,097Other
                  gains (losses):Realized
                  loss on securities and swaps held-for-trading, net
              
              
              (4,977
              )
              
              (17
              )Unrealized
                  loss on securities held-for-trading
              
              
              (369,780
              )
              
              -Unrealized
                  loss on swaps classified as held-for-trading
              
              
              (32,524
              )
              
              -Unrealized
                  gain on liabilities
              
              
              478,318
              
              
              -Gain
                  on sale of securities available-for-sale, net
              
              
              -
              
              
              6,750Provision
                  for loan loss
              
              
              (25,190
              )
              
              -Foreign
                  currency gain (loss)
              
              
              (8,041
              )
              
              1,484Loss
                  on impairment of assets
              
              
              -
              
              
              (1,198
              )Total
                  other gains
              
              
              37,806
              
              
              7,019Net
                  income
              
              
              56,858
              
              
              26,280Dividends
                  on preferred stock
              
              
              (3,127
              )
              
              (2,277
              )Net
                  income available to common stockholders
              
              $
              53,731
              
              $
              24,003Net
                  income per common share, basic:
              
              $
              0.85
              
              $
              0.41Net
                  income per common share, diluted:
              
              $
              0.79
              
              $
              0.41Weighted
                  average number of shares outstanding:Basic
              
              
              63,417,576
              
              
              57,853,694Diluted
              
              
              71,136,517
              
              
              58,139,455Dividend
                  declared per share of common stock
              
              $
              0.30
              
              $
              0.29




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 Three Months Ended March 31, 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)
            
            Income (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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            97,578
            
            
            253,045
            
            
            
            
            
            350,623Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            56,858
            
            
            
            
            $
            56,858
            
            
            56,858Unrealized
                loss on cash flow hedges
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,371
            )
            
            (7,371
            )
            
            (7,371)Reclassification
                adjustments from cash flow hedges included in net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            409
            
            
            409
            
            
            409Foreign
                currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            9,117
            
            
            9,117
            
            
            9,117Other
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,155Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            59,013Dividends
                declared-common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (19,437
            )
            
            
            
            
            
            
            
            (19,437)Dividends
                on preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,127
            )
            
            
            
            
            
            
            
            (3,127)Issuance
                of common stock
            
            
            2
            
            
            
            
            
            
            
            
            9,889
            
            
            
            
            
            
            
            
            
            
            
            9,891Balance
                at March 31, 2008
            
            $
            65
            
            $
            55,435
            
            $
            83,259
            
            $
            700,960
            
            $
            9,134
            
            $
            (519
            )
            
            
            
            $
            848,334




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 Three
                Months
                  Ended
                March
                  31, 2008
              
              For
                  the Three
                Months
                  Ended
                March
                  31, 2007Cash
                  flows from operating activities:Net
                  income
              
              $
              56,858
              
              $
              26,280Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Net
                  decrease in trading securities
              
              
              4,599
              
              
              132,076Purchase
                  of securities held-for-trading
              
              
              (53,515
              )Unrealized
                  loss on securities held-for-trading
              
              
              369,780
              
              
              -Unrealized
                  loss on swaps classified as held-for-trading
              
              
              32,524
              
              
              -Net
                  (gain) on swaps held-for-trading
              
              
              (610
              )
              
              -Unrealized
                  gain on liabilities
              
              
              (478,318
              )
              
              -Net
                  loss (gain) on sale of securities
              
              
              5,587
              
              
              (6,733
              )Earnings
                  from subsidiary trust
              
              
              (105
              )
              
              (103
              )Distributions
                  from subsidiary trust
              
              
              105
              
              
              105Earnings
                  from equity investments
              
              
              (2,009
              )
              
              (9,956
              )Distributions
                  of earnings from equity investments
              
              
              1,904
              
              
              3,637Provision
                  for loan loss
              
              
              25,190
              
              
              -(Discount)
                  premium amortization, net
              
              
              (5,977
              )
              
              265Loss
                  on impairment of assets
              
              
              -
              
              
              1,198Unrealized
                  net foreign currency loss (gain)
              
              
              5,141
              
              
              (1,506
              )Non-cash
                  management and incentive fees
              
              
              3,562
              
              
              709(Disbursements)
                  proceeds from termination of interest rate swap agreements
              
              
              (12,755
              )
              
              1,693(Increase)
                  decrease in other assets
              
              
              (6,800
              )
              
              1,366(Decrease)
                  increase in other liabilities
              
              
              (6,784
              )
              
              15,738Net
                  cash (used in) provided by operating activities
              
              
              (61,623
              )
              
              164,769Cash
                  flows from investing activities:Purchase
                  of securities
              
              
              -
              
              
              (125,060
              )Proceeds
                  from sale of securities
              
              
              74,272
              
              
              48,984Principal
                  payments received on securities
              
              
              33,892
              
              
              14,504Funding
                  of commercial mortgage loans
              
              
              -
              
              
              (194,509
              )Repayments
                  received from commercial mortgage loans
              
              
              7,768
              
              
              9,478Repayments
                  received from commercial mortgage loan pools
              
              
              2,575
              
              
              10,064Decrease
                  in restricted cash equivalents
              
              
              11,363
              
              
              51,174Investment
                  in equity investments
              
              
              (3,300
              )
              
              (23,009
              )Net
                  cash provided by (used in) investing activities
              
              
              126,570
              
              
              (208,374
              )Cash
                  flows from financing activities:Net
                  decrease in borrowings under reverse repurchase agreementsand
                  credit facilities
              
              
              (50,610
              )
              
              (36,630
              )Repayments
                  of borrowings secured by commercial mortgage loan pools
              
              
              (3,945
              )
              
              (10,140
              )Repayments
                  of collateralized debt obligations
              
              
              (23,435
              )
              
              (851
              )Issuance
                  of collateralized debt obligations
              
              
              -
              
              
              11,476Issuance
                  costs for collateralized debt obligations
              
              
              -
              
              
              (838
              )Dividends
                  paid on preferred stock
              
              
              (3,128
              )
              
              (1,348
              )Proceeds
                  from issuance of preferred stock, net of offering costs
              
              
              -
              
              
              83,306Proceeds
                  from issuance of common stock, net of offering costs
              
              
              7,773
              
              
              1,548Dividends
                  paid on common stock
              
              
              (18,979
              )
              
              (16,772
              )Net
                  cash (used in) provided by financing activities
              
              
              (92,324
              )
              
              29,751Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              1,479
              
              
              1,282Net
                  decrease in cash and cash equivalents
              
              
              (25,898
              )
              
              (12,572
              )Cash
                  and cash equivalents, beginning of period
              
              
              91,547
              
              
              66,388Cash
                  and cash equivalents, end of period
              
              $
              65,649
              
              $
              53,816
  7
  For the Three
                  Months Ended March 31, 2008
              
              
              For the Three
                Months Ended
                March 31, 2007Supplemental
                disclosure of cash flow information:Cash
                  paid for interest
              
              $
              60,001
              
              $
              52,910Investments
                  purchased not settled
              
              
              -
              
              $
              54,562Commercial
                  mortgage loans purchased not settled
              
              
              -
              
              $
              21,358Supplemental
                  disclosure of non-cash activities:Non-cash
                  transfer of securities available-for-sale to trading
              
              $
              2,266,130
              
              
              -Incentive
                  fees paid by the issuance of common stock
              
              $
              2,116
              
              $
              4,433




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


8


**Anthracite
      Capital, Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements (Unaudited)**


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





**Note
      1** **ORGANIZATION
      AND SIGNIFICANT ACCOUNTING POLICIES**





Anthracite
      Capital, Inc., a Maryland corporation, and subsidiaries (collectively, the
      "Company") was incorporated in Maryland in November of 1997 and 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 ongoing investment activities primarily encompass three core
      investment activities:


1)  Commercial
      Real Estate Securities


2)  Commercial
      Real Estate Loans


3)  Commercial
      Real Estate Equity





The
      accompanying March 31, 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 and
      credit analysis related to certain of the Company's securities, and estimates
      pertaining to credit performance related to CMBS and commercial real estate
      loans.


9





***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.





*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 convertible notes, junior unsecured notes and junior subordinated notes;
      and


(4)
      all
      CDO liabilities and related interest rate swaps.





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 available-for-sale securities, CDO liabilities
      and
      related interest rate swaps, senior unsecured notes, senior 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 agreement. 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.




10


*Reverse
      Repurchase Agreements*





In
      February 2008, the FASB issued FASB Staff Position ("FSP") FAS 140-3, *Accounting
      for Transfers of Financial Assets and Repurchase Financing
      Transactions* ("FSP
      140-3"). This FSP 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. The FSP 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 Securing of Financial Assets and Extinguishment of
      Liabilities* (“FAS
      140”).





This
      FSP
      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 the FSP 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 this FSP's purpose is
      to
      limit diversity of practice in accounting for these situations, resulting in
      more consistent financial reporting. This FSP 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 this FSP is
      initially applied.





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 from the seller's perspective 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
      this
      FSP, 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 investments in derivatives, the derivative instruments entered into by the
      Company to hedge the Company's interest rate exposure with respect to the
      borrowings under the associated repurchase agreements may no longer qualify
      for
      hedge accounting, and would then, as with the underlying asset transactions,
      also be marked to market through the 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, liquidity
      and ability to pay a dividend would be unchanged, and the Company does not
      believe its REIT taxable income or REIT status would be affected. The Company
      believes stockholders' equity would not be materially affected. At March 31,
      2008, the Company has identified securities held-for-trading with a fair value
      of approximately $120,228 which had been purchased from and financed with
      reverse repurchase agreements totaling approximately $113,735 with the same
      counterparty since their purchase.  If the Company were required to change
      the current accounting treatment for these transactions at March 31, 2008 to
      that required by this FSP, total assets and total liabilities would be reduced
      by approximately $113,735.




11


*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. However, there is uncertainty with
      respect to QSPE treatment due to ongoing review by accounting standard setters,
      potential actions by various parties involved with the QSPE, as well as varying
      and evolving interpretations of the QSPE criteria under FAS 140. Future guidance
      from the accounting standard setters may require the Company to consolidate
      CMBS
      trusts in which the Company has invested.




**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 convertible senior notes is calculated using
      the "if converted" method.


12




For the Three Months Ended March 31,2008
              
              2007Numerator:Numerator
                  for basic earnings per share
              
              $
              53,731
              
              $
              24,003Interest
                  expense on convertible senior notes
              
              
              2,313
              
              
              -Numerator
                  for diluted earnings per share
              
              $
              56,044
              
              $
              24,003Denominator:Denominator
                  for basic earnings per share—weighted averagecommon
                  shares outstanding
              
              
              63,417,576
              
              
              57,853,694Dilutive
                  effect of stock options
              
              
              -
              
              
              3,032Assumed
                  conversion of convertible senior notes
              
              
              7,416,680
              
              
              -Dilutive
                  effect of stock based incentive fee
              
              
              302,261
              
              
              282,729Denominator
                  for diluted earnings per share—weighted average common shares outstanding
                  and common stock equivalents outstanding
              
              
              71,136,517
              
              
              58,139,455Basic
                  net income per weighted average common share:
              
              $
              0.85
              
              $
              0.41Diluted
                  net income per weighted average common share and common share
                  equivalents:
              
              $
              0.79
              
              $
              0.41




Total
      anti-dilutive stock options excluded from the calculation of diluted net income
      per share were 21,550 and 1,380,151 for the three months ended March 31, 2008
      and 2007, respectively.




**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, available-for-sale 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.
      The three broad 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.


13




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, currency swaps
      and foreign currency forward commitments.




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, management uses broker quotes as being indicative
      of
      fair values. Management also uses broker quotes for CDO liabilities. 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 March
      31,
      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.





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 March 31, 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 March 31, 2008Level
                1
            
            Level
                2
            
            Level
                3
            
            TotalSubordinated
                CMBS
            
            $
            -
            
            $
            -
            
            $
            808,510
            
            $
            808,510Investment
                grade CMBS
            
            
            -
            
            
            -
            
            
            1,072,749
            
            
            1,072,749RMBS
            
            
            -
            
            
            -
            
            
            1,009
            
            
            1,009Derivative
                instruments
            
            
            -
            
            
            422,646
            
            
            -
            
            
            422,646Investments
                in Equity of Subsidiary Trusts*
            
            
            
            
            
            
            
            
            2,093
            
            
            2,093Total
            
            $
            -
            
            $
            422,646
            
            $
            1,884,361
            
            $
            2,307,007


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





Liabilities
                at Fair Value as of March 31, 2008Level
                1
            
            Level
                2
            
            Level
                3
            
            TotalSenior
                unsecured notes
            
            $
            -
            
            $
            -
            
            $
            80,864
            
            $
            80,864Senior
                convertible notes
            
            
            -
            
            
            -
            
            
            67,696
            
            
            67,696Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            34,122
            
            
            34,122Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            68,986
            
            
            68,986CDOs
            
            
            -
            
            
            -
            
            
            1,216,289
            
            
            1,216,289Derivative
                instruments
            
            
            -
            
            
            502,349
            
            
            -
            
            
            502,349Total
            
            $
            -
            
            $
            502,349
            
            $
            1,467,957
            
            $
            1,907,306




14





The
      following table presents the changes in Level 3 assets for the three months
      ended March 31, 2008:


CMBS
            
            Investment grade
              CMBS
            
            RMBS
            
            Investments in
              Equity of
              Subsidiary
              TrustsBalance
                at January 1, 2008
            
            $
            1,028,153
            
            $
            1,245,998
            
            $
            10,183
            
            $
            3,135Net
                purchases (sales)
            
            
            2,824
            
            
            (53,841
            )
            
            (9,223
            )
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Losses
                included in earnings
            
            
            (230,935
            )
            
            (122,138
            )
            
            49
            
            
            (1,042
            )Gains
                included in OCI(1)
            
            
            8,468
            
            
            2,730Balance
                at March 31, 2008
            
            $
            808,510
            
            $
            1,072,749
            
            $
            1,009
            
            $
            2,093Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                at March 31, 2008(2)
            
            $
            (238,005
            )
            $
            (127,068
            )
            $
            49
            
            $
            (1,042
            )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
                at March 31, 2008(3)
            
            $
            7,070
            
            $
            4,930
            
            $
            -
            
            $
            -




(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 March 31, 2008:





CDOs
            
            Senior
              unsecured
              notes
            
            Senior
              convertible
              notes
            
            Junior
              unsecured
              notes
            
            Trust
              preferredBalance
                at January 1, 2008
            
            $
            1,598,502
            
            $
            114,473
            
            $
            70,186
            
            $
            44,833
            
            $
            103,312Paydowns
            
            
            (23,435
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                included in earnings
            
            
            (391,057
            )
            
            (33,609
            )
            
            (2,490
            )
            
            (10,711
            )
            
            (34,326
            )Losses
                included in OCI(1)
            
            
            32,279
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at March 31, 2008
            
            $
            1,216,289
            
            $
            80,864
            
            $
            67,696
            
            $
            34,122
            
            $
            68,986Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                at March 31, 2008(2)
            
            $
            (391,057
            )
            $
            (33,609
            )
            $
            (2,490
            )
            $
            (16,836
            )
            $
            (34,326
            )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
                at March 31, 2008(3)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            6,125
            
            $
            -




15


(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.





***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
            )
            $
            2,284,334CDO
                interest rate swaps (1)
            
            
            (25,410
            )
            
            (25,410
            )
            
            (25,410
            )Liability
                issuance costs
            
            
            35,137
            
            
            (35,137
            )
            
            -Senior
                unsecured notes
            
            
            (162,500
            )
            
            48,027
            
            
            (114,473
            )Senior
                convertible notes
            
            
            (80,000
            )
            
            9,814
            
            
            (70,186
            )Junior
                unsecured notes
            
            
            (73,103
            )
            
            28,269
            
            
            (44,834
            )Investments
                in equity ofsubsidiary
                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
            
            
            
            
            $
            97,578




(1)
      Prior
      to January 1, 2008, the Company’s CDO interest rate swaps and 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 swaps
      and securities did not change their carrying value and resulted in a
      reclassification from accumulated OCI to opening distributions in excess of
      earnings.


16





***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 March 31, 2008, for which a nonrecurring
      change in fair value has been recorded during the quarter ended March 31,
      2008:




Level
                1
            
            Level
                2
            
            Level
                3
            
            Carrying
                ValueCommercial
                mortgage loan
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Total
                assets at fair value on a nonrecurring basis
            
            
            -
            
            
            -
            
            
            -
            
            
            -





(1)
            The
                Company recorded a provision for loan loss in the amount of $25,190
                for
                the three months ended March 31, 2008. This provision relates to
                one loan
                with a principal balance of $25,000 and accrued interest of $190.
                This
                charge resulted in one loan that was identified as impaired and for
                which
                the fair value was zero at March 31,
                2008.





***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.  We utilize this process to validate the
      prices received from brokers.





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 and
      adjustments are made as deemed necessary by management to capture market
      information available.





Senior
      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 March 31,
      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.


17





Senior
      and junior unsecured notes and trust preferred - The estimated fair value of
      these liabilities were developed based on the price obtained by the Company
      for
      the senior convertible notes. The senior convertible notes are senior to the
      unsecured and trust preferred securities. The Company priced the senior
      convertible bond without the conversion option to obtain a straight bond price,
      converted that price to a spread to swaps and then applied an additional spread
      to account for the fact that these liabilities were junior to those notes.
      The
      Company was able to compare the change in the 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.  As of December 31, 2007, most of the
      Company’s securities were classified as securities available-for-sale; however,
      in accordance with FAS 159, the election of the fair value option for all of
      the
      Company’s securities resulted in these investments being classified as trading
      securities as of January 1, 2008. This reclassification adjustment did not
      result in a change to the Company’s intent as it relates to these securities.
      For the three months ended March 31, 2008, $(369,780) was recorded as unrealized
      loss on the securities and is included in gain (loss) on securities
      held-for-trading on the consolidated statement of operations. The estimated
      fair
      value of securities held-for-trading at March 31, 2008 is summarized as
      follows:




Security
                Description
            
            Estimated
              Fair
              ValueU.S.
                Dollar Denominated:CMBS:Investment
                grade CMBS
            
            $
            641,539Non-investment
                grade rated subordinated CMBS
            
            
            441,693Non-rated
                subordinated CMBS
            
            
            91,684CMBS
                interest only securities (“IOs”)
            
            
            3,115Credit
                tenant leases
            
            
            24,133Investment
                grade REIT debt
            
            
            219,801Multifamily
                agency securities
            
            
            359CDO
                investments - investment grade
            
            
            2,880CDO
                investments - non-investment grade
            
            
            37,927Total
                CMBS
            
            
            1,463,131RMBS:Residential
                CMOs
            
            
            587Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            422Total
                RMBS
            
            
            1,009Total
                U.S. dollar denominated
            
            
            1,464,140Non-U.S.
                Dollar Denominated:Investment
                grade CMBS
            
            
            180,922Non-investment
                grade rated subordinated CMBS
            
            
            206,702Non-rated
                subordinated CMBS
            
            
            30,504Total
                non-U.S. dollar denominated
            
            
            418,128Total
                securities held-for-trading
            
            $
            1,882,268




18





At
      March
      31, 2008, an aggregate of $1,831,170 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.





At
      March
      31, 2008, the anticipated reported yield based upon the adjusted cost of the
      Company's entire subordinated CMBS portfolio was 10.6% per annum. The
      anticipated reported yield of the Company's investment grade securities was
      6.9%. 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.




19


**Note
      5**   **SECURITIES
      AVAILABLE-FOR-SALE**





Upon
      adoption of FAS 159 as of January 1, 2008, the Company elected the fair value
      option for all of its securities.  The election of the fair value option
      for all of the Company’s securities results in these investments being
      classified as trading securities as of January 1, 2008 and to record all changes
      in fair value are recorded in the statement of operations. The amortized cost
      and estimated fair value of U.S. dollar denominated and non-U.S. dollar
      denominated securities available-for-sale at December 31, 2007 are summarized
      as
      follows:





Security
                Description
            
            Amortized
              Cost
            
            Gross
                Unrealized Gain
            
            Gross
              Unrealized
              Loss
            
            Estimated
              Fair
              ValueU.S.
                Dollar Denominated:Commercial
                real estate securities:Investment
                grade CMBS
            
            $
            743,790
            
            $
            32,475
            
            $
            (25,192
            )
            $
            751,073Non-investment
                grade rated subordinatedCMBS
            
            
            761,103
            
            
            24,255
            
            
            (155,670
            )
            
            629,688Non-rated
                subordinated CMBS
            
            
            130,940
            
            
            1,331
            
            
            (22,719
            )
            
            109,552Credit
                tenant leases
            
            
            23,867
            
            
            1,082
            
            
            -
            
            
            24,949CMBS
                IOs
            
            
            14,725
            
            
            1,190
            
            
            -
            
            
            15,915Investment
                grade REIT debt
            
            
            247,602
            
            
            3,664
            
            
            (5,171
            )
            
            246,095Multifamily
                agency securities
            
            
            36,815
            
            
            547
            
            
            (239
            )
            
            37,123CDO
                investments
            
            
            67,470
            
            
            20,711
            
            
            (38,551
            )
            
            49,630Total
                CMBS
            
            
            2,026,312
            
            
            85,255
            
            
            (247,542
            )
            
            1,864,025RMBS:Agency
                adjustable rate securities
            
            
            1,196
            
            
            -
            
            
            (3
            )
            
            1,193Residential
                CMOs
            
            
            76
            
            
            79
            
            
            -
            
            
            155Hybrid
                adjustable rate mortgages ("ARMs")
            
            
            7,991
            
            
            -
            
            
            (57
            )
            
            7,934Total
                RMBS
            
            
            9,263
            
            
            79
            
            
            (60
            )
            
            9,282Total
                U.S. dollar denominated
            
            
            2,035,575
            
            
            85,334
            
            
            (247,602
            )
            
            1,873,307Non-U.S.
                Dollar Denominated:Investment
                grade CMBS
            
            
            153,384
            
            
            2,837
            
            
            (4,689
            )
            
            151,532Non-investment
                grade rated subordinatedCMBS
            
            
            217,046
            
            
            6,406
            
            
            (11,018
            )
            
            212,434Non-rated
                subordinated CMBS
            
            
            27,772
            
            
            1,211
            
            
            (126
            )
            
            28,857Total
                non-U.S. dollar denominated
            
            
            398,202
            
            
            10,454
            
            
            (15,833
            )
            
            392,823Total
                securities available-for-sale
            
            $
            2,433,777
            
            $
            95,788
            
            $
            (263,435
            )
            $
            2,266,130





At
      December 31, 2007, an aggregate of $2,209,820 in estimated fair value of the
      Company's securities available-for-sale was pledged to secure its collateralized
      borrowings.




20


**Note
      6** **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. Prior to the adoption
      of
      FAS 159, an impairment charge was required under EITF 99-20 if the updated
      yield
      was lower than the current accrual yield and the security had a market value
      less than its adjusted purchase price. The Company carries these securities
      at
      their estimated fair value on its consolidated statements of financial
      condition.





For
      the
      three months ended March 31, 2007, the Company had fifteen CMBS that required
      an
      aggregate impairment charge of $1,198. The decline in the updated yields that
      caused the impairments is not related to increases in losses but rather changes
      in the timing of credit losses and prepayments.





As
      a
      result of the adoption of FAS 159 on January 1, 2008, the Company will no longer
      assess securities elected under the fair value option for other-


than-temporary
      impairment because the changes in fair value are recorded in the statement
      of
      operations rather than as an adjustment to accumulated


other
      comprehensive income (loss) in stockholders’ equity.





**Note
      7** **COMMERCIAL
      MORTGAGE LOAN POOLS**





During
      the second quarter of 2004, the Company acquired in a subordinated CMBS in
      a
      trust 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 charge recorded
      on the consolidated statement of operations. An increase in estimated cash
      flows
      will increase the amount of interest income recorded in future periods.




21


**Note
      8** **COMMERCIAL
      MORTGAGE LOANS**





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


Loan
                    Outstanding
                
                Weighted
                  AverageMarch
                    31, 2008
                
                
                December
                    31, 2007
                
                YieldProperty
                    Type
                
                Amount
                
                %
                
                
                Amount
                
                %
                
                2008
                
                2007U.S.Retail
                
                $
                52,152
                
                
                5.2
                %
                
                $
                52,209
                
                
                5.3
                %
                
                9.6
                %
                
                9.6
                %Office
                
                
                45,574
                
                
                4.6
                
                
                
                45,640
                
                
                4.6
                
                
                10.3
                
                
                10.3Multifamily
                
                
                175,092
                
                
                17.5
                
                
                
                174,873
                
                
                17.8
                
                
                9.9
                
                
                9.7Storage
                
                
                32,220
                
                
                3.2
                
                
                
                32,307
                
                
                3.3
                
                
                9.1
                
                
                9.1Land
                
                
                -
                
                
                -
                
                
                
                25,000
                
                
                2.5
                
                
                -
                
                
                9.6Hotel
                
                
                12,149
                
                
                1.2
                
                
                
                12,208
                
                
                1.2
                
                
                10.4
                
                
                10.9Other
                    Mixed Use
                
                
                3,983
                
                
                0.4
                
                
                
                3,983
                
                
                0.5
                
                
                8.5
                
                
                8.5Total
                    U.S.
                
                
                321,170
                
                
                32.1
                
                
                
                346,220
                
                
                35.2
                
                
                9.8
                
                
                9.7Non-U.S.Retail
                
                
                298,795
                
                
                29.9
                
                
                
                278,669
                
                
                28.3
                
                
                8.7
                
                
                8.9Office
                
                
                257,768
                
                
                25.8
                
                
                
                238,691
                
                
                24.3
                
                
                8.4
                
                
                8.8Multifamily
                
                
                44,318
                
                
                4.4
                
                
                
                41,403
                
                
                4.2
                
                
                8.4
                
                
                8.6Storage
                
                
                50,789
                
                
                5.1
                
                
                
                51,272
                
                
                5.2
                
                
                9.2
                
                
                9.5Industrial
                
                
                17,174
                
                
                1.7
                
                
                
                17,274
                
                
                1.8
                
                
                10.3
                
                
                10.6Hotel
                
                
                4,169
                
                
                0.4
                
                
                
                5,016
                
                
                0.5
                
                
                10.0
                
                
                10.1Other
                    Mixed Use
                
                
                4,980
                
                
                0.6
                
                
                
                4,842
                
                
                0.5
                
                
                9.0
                
                
                9.0Total
                    Non -.S.
                
                
                677,993
                
                
                67.9
                
                
                
                637,167
                
                
                64.8
                
                
                8.7
                
                
                8.9Total
                
                $
                999,163
                
                
                100.0
                %
                
                $
                983,387
                
                
                100.0
                %
                
                9.1
                %
                
                9.2
                %


The
      Company finances its non-U.S. dollar denominated loans by borrowing in the
      applicable local currency and hedging the un-financed portion.





Activity
      for the three months ended March 31, 2008 was as follows:





Book
                ValueBalance
                at December 31, 2007
            
            $
            983,387Investments
                in commercial mortgage loans
            
            
            -Proceeds
                from repayment of mortgage loans
            
            
            (7,768
            )Provision
                for loan loss
            
            
            (25,000
            )Foreign
                currency and discount accretion
            
            
            48,544Balance
                at March 31, 2008
            
            $
            999,163





The
      Company recorded a provision for loan losses of $25,190 for the three months
      ended March 31, 2008. This provision relates to one loan with a principal
      balance of $25,000 and accrued interest of $190. The loan is in default and
      due
      to the reduction in value of the underlying collateral below the principal
      balance of the loan, the Company believes the collectibility of the loan is
      not
      probable.





22


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





Provision
                for possible loan losses, December 31, 2007
            
            $
            -Provision
                for loan losses
            
            
            25,190Reserve
                for possible loan losses, March 31, 2008
            
            $
            25,190





**Note
      9 EQUITY INVESTMENTS**





The
      following table is a summary of the Company’s equity investments for the three
      months ended March 31, 2008:





Carbon
                I
            
            Carbon
                II
            
            Dynamic
                India
              Fund
                IV *
            
            TotalBalance
                atDecember
                31, 2007
            
            $
            1,636
            
            $
            97,762
            
            $
            9,350
            
            $
            108,748Equity
                earnings
            
            
            71
            
            
            1,938
            
            
            -
            
            
            2,009Distributions
                of earnings
            
            
            -
            
            
            (1,904
            )
            
            -
            
            
            (1,904
            )Balance
                atMarch
                31, 2008
            
            $
            1,707
            
            $
            97,796
            
            $
            9,350
            
            $
            108,853


*
      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.





At
      March
      31, 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”).
      Collectively, the Carbon Capital Funds are private commercial real estate income
      opportunity funds managed by the Manager (see Note 13 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 as repayments
      occur, capital will be returned to Carbon I’s investors.





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.





As
      of
      March 31, 2008 Carbon II has three assets located in Florida that are in various
      stages of resolution. The properties consist on one hotel and two multifamily
      properties. Carbon II took title to one of the multifamily properties during
      2007. During the three months ended March 31, 2008, Carbon II increased its
      loan
      loss reserves for the two loans by $498. At March 31, 2008 the total loan loss
      reserve for these loans is $3,830. For the property owned, Carbon II established
      an impairment charge of $5,181 during 2007.





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.
      The borrower defaulted at maturity in February 2008. The loan has been
      restructured, modified and extended to allow for an orderly liquidation of
      the
      collateral.  Interest to the Carbon II position will be paid, to the extent
      available, from available cash flow.  Carbon II believes a loan loss
      reserve is not necessary at March 31, 2008.




23


Subsequent
      to March 31, 2008, Carbon II experienced an additional loan default.  A
      modification and extension of this loan is being negotiated.  All other
      commercial real estate loans in the Carbon Capital Funds are performing as
      expected.





On
      December 22, 2005, the Company entered into an $11,000 commitment to indirectly
      acquire shares of Dynamic India Fund IV. At March 31, 2008, the Company’s
      capital committed was $11,000, of which $9,350 had been drawn.




**Note
      10** **BORROWINGS**





The
      Company's borrowings consist of reverse repurchase agreements, credit
      facilities, CDOs, senior unsecured notes, senior convertible debt, junior
      unsecured notes, trust preferred securities, and commercial mortgage loan
      pools.





Certain
      information with respect to the Company's borrowings at March 31, 2008 is
      summarized as follows:




Borrowing
                  Type
              
              Market
                  Value
                of
                  Borrowings
              
              Amortized
                Cost
                  of
                Borrowings
              
              Weighted
                Average
                Borrowing
                Rate
              
              Weighted
                  Average
                Remaining
                Maturity
              
              Estimated
                  Fair
                Value
                  of Assets
                PledgedReverse
                  repurchase agreements
              
              $
              4,515
              
              $
              4,515
              
              
              3.76
              %
              
              11
                  days
              
              $
              8,161Credit
                  facilities (1)
              
              
              712,127
              
              
              712,127
              
              
              4.86
              %
              
              343
                  days
              
              
              1,002,638Commercial
                  mortgage loan pools
              
              
              1,213,143
              
              
              1,213,143
              
              
              4.00
              %
              
              4.66
                  years
              
              
              1,235,138CDOs
                  (2)
              
              
              1,216,289
              
              
              1,832,449
              
              
              5.65
              %
              
              5.33
                  years
              
              
              1,772,477Senior
                  unsecured notes (2)
              
              
              80,864
              
              
              162,500
              
              
              7.59
              %
              
              9.1
                  years
              
              
              -Junior
                  unsecured notes (2)
              
              
              34,122
              
              
              79,227
              
              
              6.56
              %
              
              14.1
                  years
              
              
              -Senior
                  convertible notes (2)
              
              
              67,696
              
              
              80,000
              
              
              11.75
              %
              
              19.4
                  years
              
              
              -Junior
                  subordinated notes (2)
              
              
              68,986
              
              
              180,477
              
              
              7.64
              %
              
              27.9
                  years
              
              
              -Total
                  Borrowings
              
              $
              3,397,742
              
              $
              4,264,438
              
              
              5.34
              %
              
              5.93
                  years
              
              $
              4,018,414




(1) Includes
      $4,758 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 on liabilities on the consolidated statement of operations.
      For
      the three months ended March 31, 2008, $478,318 was recorded as a result of
      a
      reduction in the fair value of such liabilities.




At
      March
      31, 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
            
            TotalReverse
                repurchase agreements
            
            $
            4,515
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            4,515Credit
                facilities
            
            
            -
            
            
            -
            
            
            537,968
            
            
            174,159
            
            
            -
            
            
            -
            
            
            712,127Commercial
                mortgage loan pools
            
            
            2,135
            
            
            2,074
            
            
            379,026
            
            
            116,649
            
            
            63,884
            
            
            649,375
            
            
            1,213,143CDOs
            
            
            6,727
            
            
            13,359
            
            
            40,982
            
            
            140,719
            
            
            739,196
            
            
            891,466
            
            
            1,832,449Senior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            162,500
            
            
            162,500Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            79,227
            
            
            79,227Senior
                convertible notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            80,000
            
            
            80,000Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            180,477
            
            
            180,477Total
                Borrowings
            
            $
            13,377
            
            $
            15,433
            
            $
            957,976
            
            $
            431,527
            
            $
            803,080
            
            $
            2,043,045
            
            $
            4,264,438




24


*Reverse
      Repurchase Agreements and Credit Facilities*





The
      Company has entered into reverse repurchase agreements to finance most of its
      securities that are not financed under its credit facilities or CDOs. The
      reverse repurchase agreements bear interest at a LIBOR-based variable
      rate.





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. From time to time, the Company
      may
      be required to provide additional collateral or fund margin calls. See “Item 3 -
      Quantitative and Qualitative Disclosures About Market Risk” for a discussion of
      the Company’s exposure to potential margin calls.





The
      Company’s credit facilities can be used to replace existing 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 March 31, 2008 and December 31, 2007:




March
                  31, 2008
              
              December
                  31, 2007Maturity
                  Date
              
              Facility
                  Amount
              
              Total
                  Borrowings
              
              Unused
                  Borrowing Capacity
              
              Facility
                  Amount
              
              Total
                  Borrowings
              
              Unused
                  Borrowing CapacityBank
                  of America, N.A.(1)
              
              
              9/18/09
              
              $
              275,000
              
              $
              170,843
              
              $
              104,157
              
              $
              275,000
              
              $
              211,088
              
              $
              63,912Deutsche
                  Bank AG, Cayman Islands Branch(2)
              
              
              12/20/08
              
              
              200,000
              
              
              141,478
              
              
              58,522
              
              
              200,000
              
              
              174,186
              
              
              25,814Bank
                  of America, N.A.(3)
              
              
              9/17/08
              
              
              100,000
              
              
              87,292
              
              
              12,708
              
              
              100,000
              
              
              87,706
              
              
              12,294Morgan
                  Stanley Bank(3)
                  (4)
              
              
              2/07/09
              
              
              300,000
              
              
              260,014
              
              
              39,986
              
              
              300,000
              
              
              198,621
              
              
              101,379BlackRock
                  HoldCo 2, Inc.(1)
                  (5)
              
              
              3/06/09
              
              
              60,000
              
              
              52,500
              
              
              7,500
              
              
              -
              
              
              -
              
              
              -$
              935,000
              
              $
              712,127
              
              $
              222,873
              
              $
              875,000
              
              $
              671,601
              
              $
              203,399




(1) USD
      only


(2) Multicurrency


(3) Non-USD
      only


(4) Can be
      increased up to $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 prepaid
      in
      ninety days.


(5) Repaid
      in full on April 8, 2008.





The
      Company is subject to financial covenants in its credit facilities.





On
      October 22, 2007, the Company notified Deutsche Bank AG, Cayman Islands Branch
      that it had elected to extend the $200,000 credit facility for one year and
      the
      new maturity date will be December 20, 2008. In connection with this extension,
      the Company is required to amortize the loan by 50% in June 2008 and by 25%
      in
      September 2008. The remaining 25% is due in December 2008.


25




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 this extension, certain financial
      covenants were added or modified so that: (i) the Company is required to have
      a
      minimum debt service coverage ratio 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 indebtedness to tangible net worth shall not be greater
      than 3:1 and (vi) 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 (as defined in the related guaranty), subject to certain exceptions
      before March 31, 2008. Mark-to-market indebtedness is generally defined under
      the related guaranty to mean short-term liabilities that have a margin call
      feature. The aforementioned covenants are the most restrictive financial
      covenants the Company is subject to at March 31, 2008.





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 "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 Facility. The Facility has
      a
      term of 364 days with two 364-day extension periods, subject to the Lender's
      approval. The Facility is collateralized by a pledge of equity shares that
      the
      Company holds in Carbon II. The principal amount of the Facility is the lesser
      of $60,000 or a number determined in accordance with a borrowing base
      calculation equal to 60% of the value of the shares of Carbon II that are
      pledged to secure the Facility.





The
      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 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 Facility and reduce the outstanding
      balance.


26





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





Outstanding
      borrowings at March 31, 2008 under the Facility totaled $52,500 and were repaid
      in full on April 8, 2008.





For
      the
      quarter ended March 31, 2008, the Company was in compliance with all covenants.




**Note
      11** **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 $70,069. Dividends are payable on the convertible
      preferred stock at a 12% coupon and the purchaser 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).




**Note
      12** **COMMON
      STOCK**





The
      following table summarizes Common Stock issued by the Company for the three
      months ended March 31, 2008, net of offering costs:





Shares
            
            Net ProceedsDividend
                Reinvestment Plan
            
            
            37,060
            
            $
            262Sales
                agency agreement
            
            
            1,174,383
            
            
            7,513Incentive
                fee –
                stock based*
            
            
            316,320
            
            
            2,116Total
            
            
            1,527,763
            
            $
            9,891


*
      See
      Note 13 to the consolidated financial statements, Transactions with Affiliates,
      for a further description of the Company’s Management Agreement.





On
      March
      12, 2008, the Company declared dividends to its common stockholders of $0.30
      per
      share, payable 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.





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, resulting
      in
      net proceeds of $23,356.




27




**Note
      13** **TRANSACTIONS
      WITH AFFILIATES**





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
      fee
      and any incentive fee 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.





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 2.0% 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 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 ($11.33 per common share at March 31,
      2008). Additionally, up to 30% of the incentive fees earned in 2007 or after
      was
      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 Board of Directors also authorized a stock based incentive plan
      where one-half of one percent of common shares outstanding as of December 31st
      is paid to the Manager.


28





The
      following is a summary of management and incentive fees incurred for the three
      months ended March 31, 2008 and 2007:




For the Three Months EndedMarch 31, 2008
            
            March 31, 2007Management
                fee
            
            $
            3,275
            
            $
            3,520Incentive
                fee
            
            
            10,544
            
            
            2,724Incentive
                fee- stock based
            
            
            399
            
            
            709Total
                management and incentive fees
            
            $
            14,218
            
            $
            6,953





At
      March
      31, 2008 and 2007, management and incentive fees of $13,366 and $11,248,
      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 reimbursements to the Manager of $125 and $117 for certain
      expenses incurred on behalf of the Company during the three months ended March
      31, 2008 and 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 months ended March 31, 2008 and 2007, the Company recorded administration
      and investment accounting service fees of $255 and $181, 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”), and therefore a related party of
      the Manager. The Company's fees for Midland’s services are at market rates.





On
      March
      7, 2008, the Company entered into a $60,000 credit facility with a subsidiary
      of
      BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
      BlackRock Financial Management, Inc. The facility has a term of 364 days with
      two 364-day extension periods, subject to lender approval. The facility is
      collateralized by a pledge of the Company’s investment in Carbon II and gives
      the lender the option to purchase the Carbon II investment at fair market value
      (as determined by the terms of the agreement) from the Company. Outstanding
      borrowings at March 31, 2008 under this facility totaled $52,500 and were repaid
      in full on April 8, 2008.





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 March 31, 2008 was $1,707. The
      Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon I. At March 31, 2008, the Company
      owned approximately 20% of the outstanding shares of Carbon I.


29





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 March 31, 2008 was
      $97,796. The Company does not incur any additional management or incentive
      fees
      to the Manager related to its investment in Carbon II. On March 31, 2008, the
      Company owned approximately 26% of the outstanding shares of Carbon
      II.





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 March 31, 2008, the Installment Payment would be $3,000
      payable over three years. The Company is not required to accrue for this
      contingent liability because it is not probable.





**Note
      14 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, 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 March 31, 2008, the balance of such net deposits pledged
      to counterparties as collateral under these agreements totaled $4,925 and was
      included in restricted cash on the Company’s consolidated balance sheet.




30




At
      March
      31, 2008, the Company had interest rate swaps with notional amounts aggregating
      $110,500 designated as cash flow hedges of borrowings under reverse repurchase
      agreements, credit facilities and the floating rate debt of its CDOs. Cash
      flow
      hedges with an estimated fair value of $5,980 are included in derivative
      liabilities in the consolidated statement of financial condition. For the three
      months ended March 31, 2008, the net change in the estimated fair value of
      the
      interest rate swaps was a decrease of $7,450, of which $79 was deemed
      ineffective and is included as an increase of interest expense and $7,371 was
      recorded as a reduction of OCI. At March 31, 2008, the $110,500 notional of
      swaps designated as cash flow hedges had a weighted average remaining term
      of
      3.9 years.





During
      the three months ended March 31, 2008, the Company terminated four of its
      interest rate swaps with a notional amount of $121,000 that were designated
      as
      cash flow hedges of borrowings under reverse repurchase agreements and credit
      facilities. The Company will reclassify the $14,117 loss in value from OCI
      to
      interest expense over 9.3 years, which was the weighted average remaining term
      of the swaps at the time they were closed out. At March 31, 2008, the Company
      has, in aggregate, $16,512 of net losses related to terminated swaps recorded
      in
      OCI. For the quarter ended March 31, 2008, $409 was reclassified as an increase
      to interest expense and $2,611 will be reclassified as an increase to interest
      expense for the next twelve months.





Upon
      the
      adoption of FAS 159 on January 1, 2008, the Company redesignated interest rate
      swaps with notional amounts aggregating $875,548 as trading swaps. Accordingly,
      the election of the fair value option for these swaps resulted in a
      reclassification of $(25,410) from accumulated OCI to opening distributions
      in
      excess of earnings as of January 1, 2008. At March 31, 2008, the Company had
      interest rate swaps with notional amounts aggregating $1,205,162 designated
      as
      trading derivatives. Trading derivatives with an estimated fair value of $770
      are included in derivative assets on the consolidated statement of financial
      condition and trading derivatives with an estimated fair value of $58,981 are
      included in derivative liabilities on the consolidated statement of financial
      condition. For the three months ended March 31, 2008, the change in estimated
      fair value for these trading derivatives was a decrease of $29,513 and is
      included as a component of gain (loss) on securities held-for-trading on the
      consolidated statement of operations. At March 31, 2008, the $1,205,162 notional
      of swaps designated as trading derivatives had a weighted average remaining
      term
      of 3.1 years.




At
      March
      31, 2008, the Company had a forward LIBOR cap with a notional amount of $85,000
      and an estimated fair value at March 31, 2008, of $285 which is included in
      derivative assets, and the change in estimated fair value related to this
      derivative of $90 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. The Company recorded foreign currency
      gains (losses) of $(8,041) and $1,484  for
      the
      three months ended March 31, 2008 and 2007, respectively.




31


Foreign
      currency agreements at March 31, 2008 consisted of the following:





Estimated
                Fair
              Value
            
            Unamortized
              Cost
            
            Average
                Remaining TermCurrency
                swaps
            
            $
            (21,300
            )
            $
            -
            
            
            8.3
                yearsCDO
                currency swaps
            
            $
            16,191
            
            $
            -
            
            
            9.6
                yearsForwards
            
            $
            (10,689
            )
            $
            -
            
            
            23
                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 primarily uses 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
      accumulated OCI. For the three months ended March 31, 2008 the foreign currency
      gain translation included in accumulated OCI was $9,117. 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.





**Note
      15 NET INTEREST INCOME**





The
      following is a presentation of the Company’s net interest income for the three
      months ended March 31, 2008 and 2007:





For
                the Three Months
              EndedMarch
                31,2008
            
            2007Interest
                Income:Interest
                from securities
            
            $
            52,269
            
            $
            48,180Interest
                from commercial mortgage loans
            
            
            23,732
            
            
            11,166Interest
                from commercial mortgage loan pools
            
            
            12,865
            
            
            13,132Interest
                from cash and cash equivalents
            
            
            1,064
            
            
            924Total
                interest income
            
            
            89,930
            
            
            73,402Interest
                Expense:Interest
                –
                securities
            
            
            56,854
            
            
            55,839Total
                interest expense
            
            
            56,854
            
            
            55,839Net
                interest income
            
            $
            33,076
            
            $
            17,563




32




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





The
      ongoing weaknesses in the subprime mortgage sector and in the broader mortgage
      market have resulted in reduced liquidity for mortgage-backed securities.
      Although this reduction in liquidity has been directly linked to subprime
      residential assets, to which the Company continues to have no direct exposure,
      there has been an overall reduction in liquidity across the credit spectrum
      of
      commercial and residential mortgage products. The Company received and funded
      margin calls totaling $82,570 during 2007 and an additional $91,698 from January
      1, 2008 through May 14, 2008. The Company's ability to maintain adequate
      liquidity is dependent on several factors, many of which are outside of the
      Company's control, including the Company's continued access to credit facilities
      on acceptable terms, the Company's compliance with REIT distribution
      requirements, the timing and amount of margin calls by lenders that are
      dependent on the Company's investments, the valuation of the Company's
      investments and credit risk of the underlying collateral.





The
      aforementioned factors could adversely affect one or more of the Company's
      repurchase counterparties providing funding for the Company's portfolio and
      could cause one or more of the Company's counterparties to be unwilling or
      unable to provide the Company with additional financing. This could potentially
      increase the Company's financing costs and reduce the Company's liquidity.
      If
      one or more major market participants fails or decides to withdraw from the
      market, it could negatively affect the marketability of all fixed income
      securities, and such an event could negatively affect the value of the
      securities in the Company's portfolio, thus reducing the Company's net book
      value. Furthermore, if many of the Company's counterparties are unwilling or
      unable to provide the Company with additional financing, the Company could
      be
      forced to sell its investments at a time when prices are depressed. If this
      were
      to occur, it potentially could have a negative impact on the Company's
      compliance with the REIT asset and income tests necessary to fulfill the
      Company's REIT qualification requirements. In addition, the distribution
      requirements under the REIT provisions of the Code limit the Company's ability
      to retain earnings and thereby replenish or increase capital committed to its
      operations.





In
      addition, the Company's liquidity also may be adversely affected by margin
      calls
      under the Company's repurchase agreements and credit facilities that are
      dependent in part on the valuation of the collateral to secure the financing.
      The Company's repurchase agreements and credit facilities allow the lender,
      to
      varying degrees, to revalue the collateral to values that the lender considers
      to reflect market. If a counterparty 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. When subject to such a margin
      call,
      the Company repays a portion of the outstanding borrowing with minimal notice.
      The Company has hedged a significant amount of its liabilities to offset market
      value declines due to changes in interest rates but is exposed to market value
      fluctuations due to spread widening. A significant increase in margin calls
      as a
      result of spread widening could harm the Company's liquidity, results of
      operations, financial condition and business prospects. Additionally, in order
      to obtain cash to satisfy a margin call, the Company may be required to
      liquidate assets at a disadvantageous time, which could cause the Company to
      incur further losses and consequently adversely affect its results of operations
      and financial condition.




To
      date,
      the credit performance 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 quarter of 2008, the capital
      markets have been marking down the value of all credit sensitive securities
      regardless of performance. The Company believes it has sufficient sources of
      liquidity to fund operations for the next twelve months.





The
      Company's ability to meet its long-term (greater than twelve months) liquidity
      requirements is subject to obtaining additional debt and equity financing.
      Any
      decision by the Company's lenders and investors to provide the Company with
      financing will depend upon a number of factors, such as the Company's compliance
      with the terms of its existing credit arrangements, the Company's financial
      performance, industry or market trends, the general availability of and rates
      applicable to financing transactions, such lenders' and investors' resources
      and
      policies concerning the terms under which they make capital commitments and
      the
      relative attractiveness of alternative investment or lending
      opportunities.


33





During
      the first quarter of 2008, the Company raised $7,513 of capital by issuing
      common shares under its sales agency agreement. Through May 14, 2008, the
      Company raised an additional $4,847 under the 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 $93,425. The Company repaid $52,500 of its loan from
      HoldCo 2 on April 8, 2008. As a result, $60,000 of unused borrowing capacity
      became available under this facility.





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 $65,649 of cash and
      cash equivalents held as of March 31, 2008 as well as from cash generated from
      the aforementioned capital raises (net of debt repayments) that occurred
      subsequent to March 31, 2008.




34




**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, and subsidiaries (collectively, 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
      three
      investment sectors:


1)  Commercial
      Real Estate Securities


2)  Commercial
      Real Estate Loans


3)  Commercial
      Real Estate Equity





The
      commercial real estate securities portfolio provides diversification and high
      yields that are adjusted for anticipated losses over a period of time (typically
      a ten-year weighted average life) and can be financed through the issuance
      of
      secured debt that matches the life of the investment. Commercial real estate
      loans and equity provide attractive risk adjusted returns over shorter periods
      of time through strategic investments in specific property types or regions.





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 $1.364 trillion of assets under management at March
      31,
      2008. The Manager provides an operating platform that incorporates significant
      asset origination, risk management, and operational capabilities.


35




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





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





Carrying
                Value atMarch
                31, 2008
            
            December
                31, 2007Amount
            
            %
            
            Amount
            
            %Commercial
                real estate securities
            
            $
            1,881,259
            
            
            44.5
            %
            $
            2,274,151
            
            
            49.3
            %Commercial
                real estate loans(1)
            
            
            1,098,666
            
            
            26.0
            
            
            1,082,785
            
            
            23.5Commercial
                mortgage loan pools(2)
            
            
            1,235,138
            
            
            29.2
            
            
            1,240,793
            
            
            26.9Commercial
                real estate equity(3)
            
            
            9,350
            
            
            0.2
            
            
            9,350
            
            
            0.2Total
                commercial real estate assets
            
            
            4,224,413
            
            
            99.9
            
            
            4,607,079
            
            
            99.9Residential
                mortgage-backed securities
            
            
            1,009
            
            
            0.1
            
            
            10,183
            
            
            0.1Total
            
            $
            4,225,422
            
            
            100.0
            %
            $
            4,617,262
            
            
            100.0
            %





(1)
            Includes
                equity investments in the Carbon Capital
                funds.


(2)
            Represents
                a Controlling Class CMBS that is consolidated for accounting purposes.
                See
                Note 5 of the consolidated financial
                statements.


(3)
            Represents
                equity investment in Dynamic India Fund
                IV





During
      the three months ended March 31, 2008, the Company purchased a total of $53,515
      of commercial real estate assets, which were all non-U.S. dollar denominated
      commercial mortgage-backed securities (“CMBS”).





**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 March 31, 2008 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)USD
              
              $
              1,463,133
              
              $
              420,674
              
              
              -
              
              $
              1,235,138
              
              $
              3,118,945
              
              $
              3,118,945GBP
              
              £
              29,545
              
              £
              44,888
              
              
              -
              
              
              -
              
              £
              74,433
              
              
              147,935EURO
              
              €
              146,615
              
              €
              352,439
              
              
              -
              
              
              -
              
              €
              499,054
              
              
              790,776Canadian
                  Dollars
              
              C$
              87,794
              
              C$
              6,254
              
              
              -
              
              
              -
              
              C$
              94,048
              
              
              91,660Japanese
                  Yen
              
              ¥
              4,132,728
              
              
              -
              
              
              -
              
              
              -
              
              ¥
              4,132,728
              
              
              41,520Swiss
                  Francs
              
              
              -
              
              CHF
              23,962
              
              
              -
              
              
              -
              
              CHF
              23,962
              
              
              24,227Indian
                  Rupees
              
              
              -
              
              
              -
              
              Rs
              374,187
              
              
              -
              
              Rs
              347,187
              
              
              9,350Total
                  USD Equivalent
              
              $
              1,881,259
              
              $
              1,098,666
              
              $
              9,350
              
              $
              1,235,138
              
              $
              4,224,413
              
              $
              4,224,413


(1) Includes
      the Company’s investments in the Carbon Capital Funds of $99,503 at March 31,
      2008.


36





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)USD
              
              $
              1,881,328
              
              $
              445,618
              
              $
              -
              
              $
              1,240,793
              
              $
              3,567,739
              
              $
              3,567,739GBP
              
              £
              35,247
              
              £
              45,944
              
              
              -
              
              
              -
              
              £
              81,191
              
              
              161,618Euro
              
              €
              131,645
              
              €
              354,458
              
              
              -
              
              
              -
              
              €
              486,103
              
              
              710,707Canadian
                  Dollars
              
              C$
              89,805
              
              C$
              6,249
              
              
              -
              
              
              -
              
              C$
              96,054
              
              
              97,324Japanese
                  Yen
              
              ¥
              4,378,759
              
              
              -
              
              
              -
              
              
              -
              
              ¥
              4,378,759
              
              
              39,196Swiss
                  Francs
              
              
              -
              
              
              CHF23,939
              
              
              -
              
              
              -
              
              CHF
              23,939
              
              
              21,145Indian
                  Rupees
              
              
              -
              
              
              -
              
              Rs
              368,483
              
              
              -
              
              Rs
              368,483
              
              
              9,350Total
                  USD Equivalent
              
              $
              2,274,151
              
              $
              1,082,785
              
              $
              9,350
              
              $
              1,240,793
              
              $
              4,607,079
              
              $
              4,607,079


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





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 commitments and swaps to hedge the net exposure.


37


**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 March 31, 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
            
            $
            239,972
            
            $
            175,149
            
            $
            72.99
            
            $
            205,983
            
            $
            85.84
            
            
            6.89
            %Investment
                grade REIT debt
            
            
            121
            
            
            117
            
            
            96.32
            
            
            123
            
            
            101.41
            
            
            5.27CMBS
                rated BB+ to B
            
            
            555,256
            
            
            229,715
            
            
            41.37
            
            
            422,246
            
            
            76.05
            
            
            8.88CMBS
                rated B- or lower
            
            
            514,052
            
            
            119,241
            
            
            23.20
            
            
            164,376
            
            
            31.98
            
            
            10.90CDO
                Investments
            
            
            347,807
            
            
            37,926
            
            
            10.90
            
            
            63,390
            
            
            18.23
            
            
            22.39CMBS
                Interest Only securities (“IOs”)
            
            
            140,207
            
            
            3,115
            
            
            2.22
            
            
            2,477
            
            
            1.77
            
            
            22.09Multifamily
                agency securities
            
            
            353
            
            
            360
            
            
            102.00
            
            
            515
            
            
            146.09
            
            
            6.75Total
                commercial real estate assets outside
              CDOs
            
            
            1,797,768
            
            
            565,623
            
            
            31.46
            
            
            859,110
            
            
            47.79
            
            
            9.82Commercial
                real estate loans and equity outside CDOsCommercial
                real estate loans
            
            
            517,518
            
            
            605,092
            
            
            
            
            
            567,121Commercial
                mortgage loan pools
            
            
            1,152,654
            
            
            1,235,138
            
            
            107.16
            
            
            1,235,138
            
            
            107.16
            
            
            4.15Commercial
                real estate
            
            
            9,350
            
            
            9,350
            
            
            
            
            
            9,350Total
                commercial real estate loans and equity outside CDOs
            
            
            1,679,522
            
            
            1,849,580
            
            
            107.16
            
            
            1,811,609
            
            
            107.16
            
            
            4.15Commercial
                real estate assets included in CDOsInvestment
                grade CMBS
            
            
            772,550
            
            
            647,310
            
            
            83.79
            
            
            731,366
            
            
            94.67
            
            
            7.12Investment
                grade REIT debt
            
            
            223,324
            
            
            219,685
            
            
            98.37
            
            
            224,539
            
            
            100.54
            
            
            5.85CMBS
                rated BB+ to B
            
            
            627,436
            
            
            374,672
            
            
            59.71
            
            
            484,836
            
            
            77.27
            
            
            9.97CMBS
                rated B- or lower
            
            
            200,003
            
            
            46,955
            
            
            23.48
            
            
            72,547
            
            
            36.27
            
            
            14.82CDO
                Investments
            
            
            4,000
            
            
            2,880
            
            
            72.00
            
            
            3,509
            
            
            87.72
            
            
            7.81Credit
                tenant lease
            
            
            23,090
            
            
            24,133
            
            
            104.52
            
            
            23,717
            
            
            102.72
            
            
            5.66Commercial
                real estate loans
            
            
            504,712
            
            
            493,574
            
            
            97.79
            
            
            439,189
            
            
            87.02
            
            
            8.63Total
                commercial real estate assets included in CDOs
            
            
            2,355,115
            
            
            1,809,209
            
            
            76.82
            
            
            1,979,703
            
            
            84.06
            
            
            8.28
            %Total
                commercial real estate assets
            
            $
            5,832,405
            
            $
            4,224,413
            
            
            
            
            $
            4,675,422


38


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





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 March 31, 2008, 49%
      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.


39





The
      table
      below summarizes the Company’s CDO collateral and debt at March 31,
      2008.





Collateral at March 31, 2008
            
            
            Debt at March 31, 2008Adjusted
              Purchase Price
            
            Loss Adjusted
              Yield
            
            
            Adjusted Issue
              Price
            
            Weighted
              Average Cost
              of Funds *
            
            Net
              SpreadCDO
                I
            
            $
            465,361
            
            
            8.16
            %
            
            $
            396,491
            
            
            6.79
            %
            
            1.37
            %CDO
                II
            
            
            301,961
            
            
            7.79
            
            
            
            269,250
            
            
            5.66
            
            
            2.13
            %CDO
                III
            
            
            380,030
            
            
            7.11
            
            
            
            376,108
            
            
            4.73
            
            
            2.38
            %CDO
                HY3
            
            
            415,094
            
            
            9.80
            
            
            
            373,070
            
            
            5.62
            
            
            4.18
            %Euro
                CDO
            
            
            422,912
            
            
            8.34
            
            
            
            417,530
            
            
            5.73
            
            
            2.61
            %Total
                **
            
            $
            1,985,358
            
            
            8.28
            %
            
            $
            1,832,449
            
            
            5.72
            %
            
            2.56
            %


*
      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.





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





The
      Company’s below investment grade CMBS investment activity is part of 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 March 31, 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 $59,621,932. At March 31, 2008, subordinated Controlling
      Class CMBS with a par of $1,582,866 were included on the Company’s consolidated
      statement of financial condition and subordinated Controlling Class CMBS with
      a
      par of $713,850 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 March 31, 2008 was $313,882; the average credit protection, or subordination
      level, of this portfolio was 0.95%.


40


The
      Company’s investment in its subordinated Controlling Class CMBS securities by
      credit rating category at March 31, 2008 was as follows:




Par
            
            Estimated
              Fair
              Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Weighted
              Average
              Subordination
              LevelBB+
            
            $
            277,334
            
            $
            132,667
            
            
            47.84
            
            $
            228,801
            
            
            82.50
            
            
            4.17
            %BB
            
            
            191,486
            
            
            77,122
            
            
            40.28
            
            
            155,463
            
            
            81.19
            
            
            2.80
            %BB-
            
            
            185,771
            
            
            83,999
            
            
            45.22
            
            
            134,218
            
            
            72.25
            
            
            4.88
            %B+
            
            
            106,575
            
            
            42,831
            
            
            40.19
            
            
            69,479
            
            
            65.19
            
            
            2.21
            %B
            
            
            136,636
            
            
            52,759
            
            
            38.61
            
            
            82,882
            
            
            60.66
            
            
            1.87
            %B-
            
            
            123,361
            
            
            34,092
            
            
            27.64
            
            
            64,207
            
            
            52.05
            
            
            1.34
            %CCC+
            
            
            6,868
            
            
            1,966
            
            
            28.63
            
            
            3,340
            
            
            48.63
            
            
            1.14
            %CCC
            
            
            22,314
            
            
            4,809
            
            
            21.55
            
            
            7,658
            
            
            34.32
            
            
            0.88
            %NR
            
            
            532,521
            
            
            98,701
            
            
            18.53
            
            
            137,274
            
            
            25.78
            
            
            n/aTotal
            
            $
            1,582,866
            
            $
            528,946
            
            
            33.42
            
            $
            883,322
            
            
            55.81





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
              PurchasePrice
            
            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 three months ended March 31, 2008, the loan pools were paid down by
      $1,126,054. 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.





As
      the
      portfolio matures and expected losses occur, subordination levels of the lower
      rated classes of a CMBS investment will be reduced. This may cause the lower
      rated classes to be downgraded, which would negatively affect their estimated
      fair value and therefore the Company’s net asset value. Reduced estimated fair
      value would negatively affect the Company’s ability to finance any such
      securities that are not financed through a CDO or similar matched funding
      vehicle. In some cases, securities held by the Company may be upgraded to
      reflect seasoning of the underlying collateral and thus would increase the
      estimated fair value of the securities. During the three months ended March
      31,
      2008, one security in one of the Company’s Controlling Class CMBS was upgraded
      by at least one rating agency and five securities in one Controlling Class
      CMBS
      were downgraded. Additionally, at least one rating agency upgraded six of the
      Company’s non-Controlling Class commercial real estate securities and downgraded
      four.


41





As
      the
      portfolio matures and expected losses occur, subordination levels of the lower
      rated classes of a CMBS investment will be reduced. This may cause the lower
      rated classes to be downgraded, which would negatively affect their estimated
      fair value and therefore the Company's net asset value. Reduced estimated fair
      value would negatively affect the Company's ability to finance any such
      securities that are not financed through a CDO or similar matched funding
      vehicle. In some cases, securities held by the Company may be upgraded to
      reflect seasoning of the underlying collateral and thus would increase the
      estimated fair value of the securities.





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
      $857,108 related to principal of the underlying loans will not be recoverable,
      of which $410,155 is expected to occur over the next five years. The total
      loss
      estimate of $857,108 represents 1.4% of the total underlying loan pools.





The
      Company considers delinquency information from the Lehman Brothers Conduit
      Guide
      to be the most relevant benchmark to measure credit performance and market
      conditions applicable to its Controlling Class CMBS holdings. The year of
      issuance, or vintage year, is important, as older loan pools will tend to have
      more delinquencies than newly underwritten loans. 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
      March 31, 2008 are shown in the table below:





Vintage
              Year
            
            Underlying
              Collateral
            
            Delinquencies
              Outstanding
            
            Lehman Brothers
              Conduit
                Guide1998
            
            $
            2,609,523
            
            
            2.02
            %
            
            0.81
            %1999
            
            $
            507,956
            
            
            3.10
            %
            
            0.83
            %2001
            
            $
            809,251
            
            
            1.65
            %
            
            0.83
            %2002
            
            $
            950,721
            
            
            0.00
            %
            
            0.62
            %2003
            
            $
            1,941,127
            
            
            1.83
            %
            
            0.87
            %2004
            
            $
            6,309,388
            
            
            0.58
            %
            
            0.39
            %2005
            
            $
            11,854,334
            
            
            0.56
            %
            
            0.41
            %2006
            
            $
            13,704,612
            
            
            0.72
            %
            
            0.27
            %2007
            
            $
            20,935,020
            
            
            0.27
            %
            
            0.17
            %Total
            
            $
            59,621,932
            
            
            0.62
            %
            
            0.34
            %*


*
      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 t he
      Company’s portfolio modestly under-performed the market in the first quarter,
      the absolute amount of the delinquencies experienced by the Company remains
      low. These
      seasoning criteria generally will adjust for the lower delinquencies that occur
      in newly originated collateral. See “Item 7A - Quantitative and Qualitative
      Disclosures About Market Risks” for a detailed discussion of how delinquencies
      and loan losses affect the Company.


42


The
      following table sets forth certain information relating to the aggregate
      principal balance and payment status of delinquent commercial mortgage loans
      underlying the Controlling Class CMBS held by the Company at March 31,
      2008:





March
                31, 2008Principal
            
            Number
              of
              Loans
            
            %
                of
              CollateralPast
                due 30 days to 59 days
            
            $
            105,194
            
            
            16
            
            
            0.18
            %Past
                due 60 days to 89 days
            
            $
            18,915
            
            
            7
            
            
            0.03
            %Past
                due 90 days or more
            
            $
            186,909
            
            
            27
            
            
            0.31
            %Real
                Estate owned
            
            $
            40,845
            
            
            13
            
            
            0.07
            %Foreclosure
            
            $
            15,120
            
            
            2
            
            
            0.03
            %Total
                Delinquent
            
            $
            366,983
            
            
            65
            
            
            0.62
            %Total
                Collateral Balance
            
            $
            59,621,932
            
            
            4,814





Of
      the 65
      delinquent loans at March 31, 2008, 13 loans were real estate owned and being
      marketed for sale, 2 loans were in foreclosure and the remaining 50 loans were
      in some form of workout negotiations. The Controlling Class CMBS owned by the
      Company have a delinquency rate of 0.62%. During 2008, the underlying collateral
      experienced early payoffs of $1,126,054, representing 1.89% of the quarter-end
      pool balance. These loans were paid off at par with no loss. Aggregate losses
      related to the underlying collateral of $498 were realized during three months
      ended March 31, 2008. This brings cumulative realized losses to $127,402, which
      is 13.0% 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. Special servicer
      expenses are also expected to increase as portfolios mature.





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.


43


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 March
      31,
      2008 was as
      follows:





March 31, 2008
              ExposureProperty
              Type
            
            Collateral
              Balance
            
            % of
              TotalOffice
            
            $
            20,145,993
            
            
            33.8
            %Retail
            
            
            16,928,041
            
            
            28.4Multifamily
            
            
            13,068,419
            
            
            21.9Industrial
            
            
            4,512,265
            
            
            7.6Lodging
            
            
            4,141,535
            
            
            6.9Healthcare
            
            
            327,933
            
            
            0.6Other
            
            
            497,746
            
            
            0.8Total
            
            $
            59,621,932
            
            
            100
            %





At
      March
      31, 2008, the estimated fair value of the Company’s holdings of subordinated
      Controlling Class CMBS is $354,376 lower than the adjusted cost for these
      securities, which consists of a gross unrealized gain of $4,041 and a gross
      unrealized loss of $358,417. The adjusted purchase price of the Company’s
      subordinated Controlling Class CMBS portfolio at March 31, 2008 represents
      approximately 55.8% of its par amount. The estimated fair value of the Company’s
      subordinated Controlling Class CMBS portfolio at March 31, 2008 represents
      approximately 33.4% of its par amount. As the portfolio matures, the Company
      expects to recoup the $354,376 of unrealized loss, provided that the credit
      losses experienced are not greater than the credit losses assumed in the
      projected cash flow analysis. At March 31, 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.





**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.


44


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


Loans
                  Outstanding
              
              Weighted
                AverageMarch
                  31, 2008
              
              December
                  31, 2007
              
              YieldProperty
                  Type
              
              Amount
              
              %
              
              Amount
              
              %
              
              2008
              
              2007U.S.Retail
              
              $
              52,152
              
              
              5.2
              %
              $
              52,209
              
              
              5.3
              %
              
              9.6
              %
              
              9.6
              %Office
              
              
              45,574
              
              
              4.6
              
              
              45,640
              
              
              4.6
              
              
              10.3
              
              
              10.3Multifamily
              
              
              175,092
              
              
              17.5
              
              
              174,873
              
              
              17.8
              
              
              9.9
              
              
              9.7Storage
              
              
              32,220
              
              
              3.2
              
              
              32,307
              
              
              3.3
              
              
              9.1
              
              
              9.1Land
              
              
              -
              
              
              -
              
              
              25,000
              
              
              2.5
              
              
              -
              
              
              9.6Hotel
              
              
              12,149
              
              
              1.2
              
              
              12,208
              
              
              1.2
              
              
              10.4
              
              
              10.9Other
                  Mixed Use
              
              
              3,983
              
              
              0.4
              
              
              3,983
              
              
              0.5
              
              
              8.5
              
              
              8.5Total
                  U.S.
              
              
              321,170
              
              
              32.1
              
              
              346,220
              
              
              35.2
              
              
              9.8
              
              
              9.7Non
                  U.S.Retail
              
              
              298,795
              
              
              29.9
              
              
              278,669
              
              
              28.3
              
              
              8.7
              
              
              8.9Office
              
              
              257,768
              
              
              25.8
              
              
              238,691
              
              
              24.3
              
              
              8.4
              
              
              8.8Multifamily
              
              
              44,318
              
              
              4.4
              
              
              41,403
              
              
              4.2
              
              
              8.4
              
              
              8.6Storage
              
              
              50,789
              
              
              5.1
              
              
              51,272
              
              
              5.2
              
              
              9.2
              
              
              9.5Industrial
              
              
              17,174
              
              
              1.7
              
              
              17,274
              
              
              1.8
              
              
              10.3
              
              
              10.6Hotel
              
              
              4,169
              
              
              0.4
              
              
              5,016
              
              
              0.5
              
              
              10.0
              
              
              10.1Other
                  Mixed Use
              
              
              4,980
              
              
              0.6
              
              
              4,842
              
              
              0.5
              
              
              9.0
              
              
              9.0Total
                  Non U.S.
              
              
              677,993
              
              
              67.9
              
              
              637,167
              
              
              64.8
              
              
              8.7
              
              
              8.9Total
              
              $
              999,163
              
              
              100.0
              %
              $
              983,387
              
              
              100.0
              %
              
              9.1
              %
              
              9.2
              %





The
      Company did not purchase any commercial real estate loans during the three
      months ended March 31, 2008. During the quarter ended March 31, 2008, the
      Company received repayments of commercial real estate loans in the aggregate
      amount of $7,368.





The
      Company recorded a provision for loan losses of $25,190 for the three months
      ended March 31, 2008. This provision relates to one loan with a principal
      balance of $25,000 and accrued interest of $190. The loan is in default and
      due
      to the reduction in value of the underlying collateral below the principal
      balance of the loan, the Company believes the collectibility of the loan is
      not
      probable.





The
      Company invests in the Carbon Capital Funds which also invest in commercial
      real
      estate loans. For the three months ended March 31, 2008, the Company recorded
      $2,009 of income for the Carbon Capital Funds. Carbon II increased its
      investment in U.S. commercial real estate loans by funding an additional
      investment of $636 during the first quarter of 2008. Paydowns in Carbon Capital
      Funds during the quarter totaled $41,487. 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:





March 31, 2008
            
            December 31, 2007Carbon
                I
            
            $
            1,707
            
            $
            1,636Carbon
                II
            
            
            97,796
            
            
            97,762$
            99,503
            
            $
            99,398


45





As
      of
      March 31, 2008 Carbon II has three assets located in Florida that are in various
      stages of resolution. The properties consist on one hotel and two multifamily
      properties. Carbon II took title to one of the multifamily properties during
      2007. During the three months ended March 31, 2008, Carbon II increased its
      loan
      loss reserves for the two loans by $498. At March 31, 2008 the total loan loss
      reserve for these loans is $3,830. For the property owned, Carbon II established
      an impairment charge of $5,181 during 2007.





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.
      The borrower defaulted at maturity in February 2008. The loan has been
      restructured, modified and extended to allow for an orderly liquidation of
      the
      collateral.  Interest to the Carbon II position will be paid, to the extent
      available, from available cash flow.  Carbon II believes a loan loss
      reserve is not necessary at March 31, 2008.





Subsequent
      to March 31, 2008, Carbon II experienced an additional loan default.  A
      modification and extension of this loan is being negotiated.  All other
      commercial real estate loans in the Carbon Capital Funds are performing as
      expected.





**Commercial
      Real Estate**





The
      Company has an indirect investment in a commercial real estate development
      fund
      located in India. At March 31, 2008, the Company’s capital committed was
      $11,000, of which $9,350 had been drawn. The entity conducts its operations
      in
      the local currency, Indian Rupees.


46





***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
              March 31,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated incomeCommercial
                real estate securities
            
            $
            43,624
            
            $
            42,388
            
            $
            1,236
            
            
            2.9
            %Commercial
                real estate loans
            
            
            8,327
            
            
            6,049
            
            
            2,278
            
            
            37.7
            %Commercial
                mortgage loan pools
            
            
            12,865
            
            
            13,132
            
            
            (267
            )
            
            (2.0
            )%Residential
                mortgage-backed securities
            
            
            60
            
            
            2,299
            
            
            (2,239
            )
            
            (97.4
            )%Cash
                and cash equivalents
            
            
            800
            
            
            388
            
            
            412
            
            
            106.2
            %Total
                U.S. interest income
            
            $
            65,676
            
            $
            64,256
            
            $
            1,420
            
            
            2.2
            %Non-U.S
                dollar denominated incomeCommercial
                real estate securities
            
            $
            8,586
            
            $
            3,493
            
            $
            5,093
            
            
            145.9
            %Commercial
                real estate loans
            
            
            15,404
            
            
            5,117
            
            
            10,287
            
            
            201.0
            %Cash
                and cash equivalents
            
            
            264
            
            
            536
            
            
            (272
            )
            
            (50.7
            )%Total
                non-U.S. dollar denominated interest income
            
            $
            24,254
            
            $
            9,146
            
            $
            15,108
            
            
            165.2
            %Total
                Interest Income
            
            $
            89,930
            
            $
            73,402
            
            $
            16,528
            
            
            22.5
            %





*U.S.
      dollar denominated income*





For
      the
      three months ended March 31, 2008 versus 2007, interest income from U.S. assets
      increased $1,420, or 2.2%. The Company continued to acquire commercial real
      estate securities and loans throughout 2007 which offset the decline in interest
      income resulting in the sale of residential mortgage-backed securities during
      2007.





*Non-U.S.
      dollar denominated income*





For
      the
      three months ended March 31, 2008 versus 2007, interest income from non-U.S.
      assets increased $15,108, or 165.2%. The Company continues to increase its
      investment in non-U.S. dollar assets resulting in higher interest income from
      non-U.S. commercial real estate securities and loans. The Company has increased
      its investment portfolio outside the U.S. in order to provide geographic
      diversification.


47


The
      following table reconciles interest income and total income for the three months
      ended March 31, 2008 and 2007.





For the three monthsended
              March 31,
            
            Variance2008
            
            2007
            
            Amount
            
            %Interest
                Income
            
            $
            89,930
            
            $
            73,402
            
            $
            16,528
            
            
            22.5
            %Earnings
              from BlackRockDiamond
                Property Fund, Inc.
            
            
            -
            
            
            5,970
            
            
            (5,970
            )
            
            (100.0
            )Earnings
                from Carbon I
            
            
            71
            
            
            840
            
            
            (769
            )
            
            (91.6
            )Earnings
                from Carbon II
            
            
            1,938
            
            
            3,146
            
            
            (1,208
            )
            
            (38.4
            )Total
                Income
            
            $
            91,939
            
            $
            83,358
            
            $
            8,581
            
            
            10.3
            %





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


For
                  the three months
                ended
                March
                  31,
              
              Variance2008
              
              2007
              
              Amount
              
              %U.S.
                  dollar denominated interest expenseCollateralized
                  debt obligations
              
              $
              18,629
              
              $
              22,979
              
              $
              (4,350
              )
              
              (18.9
              )%Commercial
                  real estate securities
              
              
              3,410
              
              
              8,363
              
              
              (4,953
              )
              
              (59.2
              )Commercial
                  real estate loans
              
              
              1,361
              
              
              540
              
              
              821
              
              
              151.9Commercial
                  mortgage loan pools
              
              
              12,207
              
              
              12,400
              
              
              (193
              )
              
              (1.6
              )Residential
                  mortgage-backed securities
              
              
              45
              
              
              3,324
              
              
              (3,279
              )
              
              (98.6
              )Senior
                  convertible notes
              
              
              2,313
              
              
              -
              
              
              2,313
              
              
              100.0Senior
                  unsecured notes
              
              
              3,058
              
              
              1,347
              
              
              1,711
              
              
              127.0Junior
                  unsecured notes
              
              
              3,267
              
              
              3,280
              
              
              (13
              )
              
              (0.4
              )Equity
                  investments
              
              
              158
              
              
              -
              
              
              158
              
              
              100.0Cash
                  flow hedges
              
              
              421
              
              
              (438
              )
              
              859
              
              
              (196.1
              )Hedge
                  ineffectiveness*
              
              
              79
              
              
              (109
              )
              
              188
              
              
              (172.5
              )Total
                  U.S. Interest Expense
              
              $
              44,948
              
              $
              51,686
              
              $
              (6,738
              )
              
              (13.0
              )%Non-U.S.
                  dollar denominated interest expenseEuro
                  CDO
              
              $
              5,356
              
              $
              3,692
              
              $
              1,664
              
              
              45.1Commercial
                  real estate securities
              
              
              2,980
              
              
              -
              
              
              2,980
              
              
              100.0Commercial
                  real estate loans
              
              
              2,242
              
              
              461
              
              
              1,781
              
              
              386.3Junior
                  subordinated notes
              
              
              1,328
              
              
              -
              
              
              1,328
              
              
              100.0Total
                  Non- U.S. Interest Expense
              
              $
              11,906
              
              $
              4,153
              
              
              7,753
              
              
              186.7
              %Total
                  Interest Expense
              
              $
              56,854
              
              $
              55,839
              
              $
              1,015
              
              
              1.8
              %


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


48


*U.S
      dollar denominate interest expense*





For
      the
      three months ended March 31, 2008 versus 2007, U.S. dollar interest expense
      decreased $6,738 or 13.0%. The three month decrease was due to the sale of
      residential mortgage-backed securities during 2007 and the write-off of
      long-term debt issuance cost as required by FAS 159, offset by the issuance
      of
      convertible debt and senior notes.





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





For
      the
      three months ended March 31, 2008 versus 2007, non-U.S. dollar interest expense
      increased $7,753, or 186.7%. The three month increase was due to increased
      purchases of non-dollar securities and loans during the last three quarters
      of
      2007.





***Net
      Interest Margin and Net Interest Spread from the Portfolio:*** The
      Company considers its interest generating portfolio to consist of its securities
      available-for-sale, securities held-for-trading, commercial mortgage loans,
      and
      cash and cash equivalents because these assets relate to its core strategy
      of
      acquiring and originating high yield loans and securities backed by commercial
      real estate, while at the same time maintaining a portfolio of investment grade
      securities to enhance the Company's liquidity. 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 March 31,2008
            
            2007Interest
                income
            
            $
            89,930
            
            $
            73,402Interest
                expense related to the consolidation of commercial mortgage loan
                pools
            
            
            (12,207
            )
            
            (12,400
            )Adjusted
                interest income
            
            $
            77,723
            
            $
            61,002


49


For the three months
                ended March 31,2008
              
              2007Interest
                  expense
              
              $
              56,854
              
              $
              55,839Interest
                  expense related to the consolidation of commercial mortgage loan
                  pools
              
              
              (12,207
              )
              
              (12,400
              )Hedge
                  ineffectiveness
              
              
              79
              
              
              109Adjusted
                  interest expense
              
              $
              44,726
              
              $
              43,548





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 March 31,2008
            
            2007Adjusted
                interest income
            
            $
            77,723
            
            $
            61,002Adjusted
                interest expense
            
            $
            44,726
            
            $
            43,548Adjusted
                net interest income ratiosNet
                interest margin
            
            
            4.2
            %
            
            2.1
            %Average
                yield
            
            
            9.8
            %
            
            7.4
            %Cost
                of funds
            
            
            5.9
            %
            
            5.9
            %Net
                interest spread
            
            
            3.9
            %
            
            1.5
            %Ratios
                including income from equity investmentsNet
                interest margin
            
            
            4.3
            %
            
            3.1
            %Average
                yield
            
            
            9.8
            %
            
            8.1
            %Cost
                of funds
            
            
            5.9
            %
            
            5.9
            %Net
                interest spread
            
            
            3.9
            %
            
            2.3
            %


50


***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 months ended March 31, 2008 and 2007,
      respectively.





For the three months
              ended March 31,
            
            Variance2008
            
            2007
            
            Amount
            
            %Management
                fee
            
            $
            3,275
            
            $
            3,520
            
            $
            (245
            )
            
            (6.9
            )%Incentive
                fee
            
            
            10,544
            
            
            2,724
            
            
            7,820
            
            
            287.1
            %Incentive
                fee –
                stock based
            
            
            399
            
            
            709
            
            
            (310
            )
            
            (43.7
            )%General
                and administrative expense
            
            
            1,815
            
            
            1,305
            
            
            510
            
            
            39.1
            %Total
                other expenses
            
            $
            16,033
            
            $
            8,258
            
            $
            7,775
            
            
            94.2
            %





Under
      the
      terms of the management agreement in effect until March 31, 2008, management
      fees were based on 2% of average quarterly stockholders’ equity. The decrease of
      $245, or (6.9)%, is due to the decrease in the Company’s average stockholders’
equity. The Company’s incentive fee is based on the extent to which net income
      (before incentive fees) for a rolling four quarters exceeds a defined hurdle
      rate (See Note 13 of the consolidated financial statements). Net income (before
      incentive fees) of $115,517 for the twelve months ended March 31, 2008 resulted
      in $13,476 of incentive fees, $10,544 of which was recorded in the first quarter
      of 2008. Net income (before incentive fees) of $87,764 for the twelve months
      ended March 31, 2007 resulted in $7,474 of incentive fees, $2,724 of which
      was
      recorded in the first quarter of 2007. The decrease in incentive fee - stock
      based of $310 is 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 expense for the quarter ended March 31, 2008
      is
      primarily attributable to increased professional fees.





***Other
      Gains (Losses):*** **** Gains
      on
      securities available-for-sale were $6,750 for the three months ended March
      31,
      2007. Upon the adoption of FAS 159 on January 1, 2008, all of the Company’s
      securities were transferred to securities held-for-trading and gains (losses)
      on
      securities held-for-trading totaled $71,037 and $(17) for the three months
      ended
      March 31, 2008 and 2007, respectively. The gain of $71,037 for the three months
      ended March 31, 2008 is comprised of realized losses of $(4,977) and unrealized
      losses on securities and swaps of $(402,304), offset by unrealized gains on
      liabilities of $478,318. Foreign currency gains (loss) were $(8,041) and $1,484
      for the three months ended March 31, 2008 and 2007. Included in accumulated
      other comprehensive income (loss) was a $9,117 gain on foreign currency
      translation. As a result, the Company’s foreign currency economic gain for the
      three months ended March 31, 2008 was $1,076. This represents the net impact
      of
      the Company’s foreign currency exposure for the applicable periods. The losses
      on impairment of assets of $(1,198) for the three month period ended March
      31,
      2007 was related to the Company’s write down of certain CMBS as required by EITF
      99-20.





***Dividends
      Declared:*** On
      March
      12, 2008, the Company declared distributions to its holders of Common Stock
      $0.30 per share, which were paid on April 30, 2008 to stockholders of record
      on
      March 31, 2008.


51





***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 March 31, 2008 and December 31,
      2007:





U.S.
                dollar denominated securities
            
            March
                31,
              2008
              Estimated
              Fair
              Value
            
            Percentage
            
            December
                31,
              2007
              Estimated
              Fair
              Value
                (1)
            
            PercentageCommercial
                mortgage-backed securities:CMBS
                IOs
            
            $
            3,115
            
            
            0.2
            %
            $
            15,915
            
            
            0.7
            %Investment
                grade CMBS
            
            
            641,539
            
            
            34.1
            
            
            766,996
            
            
            33.6Non-investment
                grade rated subordinated securities
            
            
            441,693
            
            
            23.5
            
            
            630,139
            
            
            27.6Non-rated
                subordinated securities
            
            
            91,684
            
            
            4.9
            
            
            110,481
            
            
            4.8Credit
                tenant lease
            
            
            24,133
            
            
            1.3
            
            
            24,949
            
            
            1.1Investment
                grade REIT debt
            
            
            219,801
            
            
            11.7
            
            
            246,095
            
            
            10.8Multifamily
                agency securities
            
            
            359
            
            
            -
            
            
            37,123
            
            
            1.6CDO
                investments
            
            
            40,807
            
            
            2.2
            
            
            49,630
            
            
            2.2Total
                CMBS
            
            
            1,463,131
            
            
            77.9
            
            
            1,881,328
            
            
            82.4Residential
                mortgage-backed securities:Agency
                adjustable rate securities
            
            
            -
            
            
            -
            
            
            1,193
            
            
            0.1Residential
                CMOs
            
            
            587
            
            
            -
            
            
            627
            
            
            0.0Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            422
            
            
            -
            
            
            8,363
            
            
            0.4Total
                RMBS
            
            
            1,009
            
            
            -
            
            
            10,183
            
            
            0.5Total
                U.S. dollar denominated securities
            
            $
            1,464,140
            
            
            77.9
            
            $
            1,891,511
            
            
            82.9
            %





Non-U.S.
                dollar denominated securitiesCommercial
                mortgage-backed securities:Investment
                grade CMBS
            
            
            180,922
            
            
            9.6
            
            
            151,532
            
            
            6.6Non-investment
                grade rated subordinated securities
            
            
            206,702
            
            
            11.0
            
            
            212,433
            
            
            9.3Non-rated
                subordinated securities
            
            
            30,504
            
            
            1.5
            
            
            28,857
            
            
            1.2Total
                Non-U.S. dollar denominatedsecurities
            
            
            418,128
            
            
            22.1
            
            
            392,822
            
            
            17.1
            %Total
                securities
            
            $
            1,882,268
            
            
            100.0
            %
            $
            2,284,333
            
            
            100.0
            %


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


52





The
      Company continues to purchase non-U.S. dollar denominated securities in order
      to
      increase geographic diversification. During the first quarter of 2008, the
      Company sold the majority of its remaining multifamily agency securities and
      CMBS IOs. In addition, the dislocation in the capital markets during the first
      quarter of 2008 caused CMBS spreads to widen significantly. This development
      resulted in a significant decline in the Company’s U.S. CMBS portfolio during
      the first quarter of 2008.





*Borrowings:* ****** At
      March
      31, 2008 and December 31, 2007, the Company's debt consisted of credit
      facilities, CDOs, senior unsecured notes, senior 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 securities available-for-sale, securities held-for-trading, and its
      commercial mortgage loans. The Company's financial flexibility is affected
      by
      its ability to renew or replace on a continuous basis its maturing short-term
      borrowings. At March 31, 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
      credit facilities and reverse repurchase agreements the lender retains the
      right
      to mark the underlying collateral to its estimated fair value. A reduction
      in
      the value of its pledged assets would require the Company to provide additional
      collateral or fund margin calls. From time to time, the Company expects that
      it
      will be required to provide such additional collateral or fund margin
      calls.





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





March 31, 2008Market
              Value
            
            Adjusted
              Issuance Price
            
            Maximum
              Balance
            
            Range of
              MaturitiesCDO
                debt*
            
            $
            1,216,289
            
            $
            1,832,449
            
            $
            1,832,449
            
            
            3.7 to
                7 yearsCommercial
                mortgage loan pools
            
            
            1,213,143
            
            
            1,213,143
            
            
            1,213,143
            
            
            0.8
                to 10.7 yearsReverse
                repurchase agreements
            
            
            4,515
            
            
            4,515
            
            
            80,171
            
            
            11 daysCredit
                facilities
            
            
            712,127
            
            
            712,127
            
            
            712,127
            
            
            170 to 536 daysSenior
                convertible notes
            
            
            67,696
            
            
            80,000
            
            
            80,000
            
            
            19.4
                yearsSenior
                unsecured notes**
            
            
            80,864
            
            
            162,500
            
            
            162,500
            
            
            9.1
                yearsJunior
                unsecured notes
            
            
            34,122
            
            
            79,228
            
            
            73,903
            
            
            14.1
                yearsJunior
                subordinated notes***
            
            
            68,986
            
            
            180,477
            
            
            180,477
            
            
            27.9
                yearsTotal
            
            $
            3,397,742
            
            $
            4,264,439


*
      Disclosed as adjusted issue price. Total par of the Company’s CDO debt at March
      31, 2008 was $1,841,804.


**
      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.





The
      table
      above does not include interest payments on the Company’s borrowings. Such
      disclosure of interest payments has been omitted because certain borrowings
      require variable rate interest payments. The Company’s total interest payments
      for the three months ended March 31, 2008 were $60,001.





At
      March
      31, 2008, the Company's borrowings had the following weighted average yields
      and
      range of interest rates and yields:


53





Reverse
              Repurchase
              Agreements
            
            Lines
                of
              Credit
            
            Collateralized
              Debt
              Obligations
            
            Commercial
              Mortgage
              Loan
                Pools
            
            Junior
              Subordinated
              Notes
            
            Senior
              Unsecured
              Notes
            
            Junior
              Unsecured
              Notes
            
            Convertible
              Debt
            
            Total
              Collateralized
              BorrowingsWeighted
                average yield
            
            
            3.76
            %
            
            4.86
            %
            
            5.65
            %
            
            3.99
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            5.34
            %Interest
                RateFixed
            
            
            -
            %
            
            -
            %
            
            6.80
            %
            
            3.99
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            6.17
            %Floating
            
            
            3.76
            %
            
            4.86
            %
            
            3.92
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            4.18
            %Effective
                YieldFixed
            
            
            -
            %
            
            -
            %
            
            7.30
            %
            
            3.99
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            6.44
            %Floating
            
            
            3.76
            %
            
            4.86
            %
            
            3.91
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            4.17
            %





***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.





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




At March 31, 2008Notional Value
            
            Estimated Fair
              Value
            
            Unamortized
              Cost
            
            Average Remaining
              Term
                (years)Cash
                flow hedges
            
            $
            110,500
            
            $
            (5,980
            )
            $
            (1,612
            )
            
            3.9Trading
                swaps
            
            
            1,205,162
            
            
            656
            
            
            -
            
            
            3.1CDO
                trading swaps
            
            
            1,144,853
            
            
            (58,867
            )
            
            -
            
            
            5.3CDO
                LIBOR cap
            
            
            85,000
            
            
            285
            
            
            1,407
            
            
            5.2





At December 31, 2007Notional Value
            
            Estimated Fair
              Value
            
            Unamortized
              Cost
            
            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 March 31, 2008 and December 31, 2007 consisted of the
      following:


At March 31, 2008Estimated Fair
                Value
              
              Unamortized
                Cost
              
              Average Remaining
                TermCurrency
                  swaps
              
              $
              (21,300
              )
              
              -
              
              
              8.3
                  yearsCDO
                  currency swaps
              
              
              16,191
              
              
              -
              
              
              9.6
                  yearsForwards
              
              
              (10,688
              )
              
              -
              
              
              23
                  days


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


54


**Capital
      Resources and Liquidity**





The
      ongoing weaknesses in the subprime mortgage sector and in the broader mortgage
      market have resulted in reduced liquidity for mortgage-backed securities.
      Although this reduction in liquidity has been directly linked to subprime
      residential assets, to which the Company continues to have no direct exposure,
      there has been an overall reduction in liquidity across the credit spectrum
      of
      commercial and residential mortgage products. The Company received and funded
      margin calls totaling $82,570 during 2007, and $91,698 from January 1, 2008
      through May 14, 2008. The Company's ability to maintain adequate liquidity
      is
      dependent on several factors, many of which are outside of the Company's
      control, including the Company's continued access to credit facilities on
      acceptable terms, the Company's compliance with REIT distribution requirements,
      the timing and amount of margin calls by lenders that are dependent on the
      Company's investments, the valuation of the Company's investments and credit
      risk of the underlying collateral.





The
      aforementioned factors could adversely affect one or more of the Company's
      repurchase counterparties providing funding for the Company's portfolio and
      could cause one or more of the Company's counterparties to be unwilling or
      unable to provide the Company with additional financing. This could potentially
      increase the Company's financing costs and reduce the Company's liquidity.
      If
      one or more major market participants fails or decides to withdraw from the
      market, it could negatively affect the marketability of all fixed income
      securities, and such an event could negatively affect the value of the
      securities in the Company's portfolio, thus reducing the Company's net book
      value. Furthermore, if many of the Company's counterparties are unwilling or
      unable to provide the Company with additional financing, the Company could
      be
      forced to sell its investments at a time when prices are depressed. If this
      were
      to occur, it potentially could have a negative effect on the Company's
      compliance with the REIT asset and income tests necessary to fulfill the
      Company's REIT qualification requirements. In addition, the distribution
      requirements under the REIT provisions of the Code limit the Company's ability
      to retain earnings and thereby replenish or increase capital committed to its
      operations.





In
      addition, the Company's liquidity also may be adversely affected by margin
      calls
      under the Company's repurchase agreements and credit facilities that are
      dependent in part on the valuation of the collateral to secure the financing.
      The Company's repurchase agreements and credit facilities allow the lender,
      to
      varying degrees, to revalue the collateral to values that the lender considers
      to reflect market. If a counterparty 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. When subject to such a margin
      call,
      the Company repays a portion of the outstanding borrowing with minimal notice.
      The Company has hedged a significant amount of its portfolio to offset market
      value declines due to changes in interest rates but is exposed to market value
      fluctuations due to spread widening. A significant increase in margin calls
      as a
      result of spread widening could harm the Company's liquidity, results of
      operations, financial condition and business prospects. Additionally, in order
      to obtain cash to satisfy a margin call, the Company may be required to
      liquidate assets at a disadvantageous time, which could cause the Company to
      incur further losses and consequently adversely affect its results of operations
      and financial condition.


55





To
      date,
      the credit performance of the Company's investments remains consistent both
      with
      the Company's expectations and with the broader commercial real estate finance
      industry experience; nevertheless, subsequent to December 31, 2007, the capital
      markets have been marking down the value of all credit sensitive securities
      regardless of performance. The
      Company believes it has sufficient sources of liquidity to fund operations
      for
      the next twelve months.





The
      Company's ability to meet its long-term (greater than twelve months) liquidity
      requirements is subject to obtaining additional debt and equity financing.
      Any
      decision by the Company's lenders and investors to provide the Company with
      financing will depend upon a number of factors, such as the Company's compliance
      with the terms of its existing credit arrangements, the Company's financial
      performance, industry or market trends, the general availability of and rates
      applicable to financing transactions, such lenders' and investors' resources
      and
      policies concerning the terms under which they make capital commitments and
      the
      relative attractiveness of alternative investment or lending
      opportunities.





During
      the first quarter, the Company raised $7,513 of capital by issuing common shares
      under its sales agency agreement. Through May 14, 2008, the Company raised
      an
      additional $4,847 under the sales agency agreement. On April 4, 2008, in a
      privately negotiated transaction, the Company issued $70,125 of Series E
      Cumulative Redeemable Convertible Preferred Stock and 3,494,021 shares of Common
      Stock, resulting in combined net proceeds of $93,425. The Company repaid $52,500
      of its loan from HoldCo 2 on April 8, 2008. As a result, $60,000 of unused
      borrowing capacity became available under this facility.





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 $65,649 of cash and
      cash equivalents held as of March 31, 2008 as well as from the aforementioned
      capital raises (net of debt repayments) that occurred subsequent to March 31,
      2008.





Certain
      information with respect to the Company's borrowings at March 31, 2008 is
      summarized as follows:




Borrowing
                Type
            
            Market Value
              of Borrowings
            
            Amortized
              Cost of
              Borrowings
            
            Weighted
              Average
              Borrowing
              Rate
            
            WeightedAverage
              Remaining
              Maturity
            
            Estimated Fair
              Value of Assets
              PledgedReverse
                repurchase agreements
            
            $
            4,515
            
            $
            4,515
            
            
            3.76
            %
            
            11 days
            
            $
            8,161Credit
                facilities (1)
            
            
            712,127
            
            
            712,127
            
            
            4.86
            %
            
            343 days
            
            
            1,002,638Commercial
                mortgage loan pools
            
            
            1,213,143
            
            
            1,213,143
            
            
            4.00
            %
            
            4.66 years
            
            
            1,235,138CDOs
                (2)
            
            
            1,216,289
            
            
            1,832,449
            
            
            5.65
            %
            
            5.33 years
            
            
            1,772,477Senior
                unsecured notes (2)
            
            
            80,864
            
            
            162,500
            
            
            7.59
            %
            
            9.1 years
            
            
            -Junior
                unsecured notes (2)
            
            
            34,122
            
            
            79,227
            
            
            6.56
            %
            
            14.1 years
            
            
            -Senior
                convertible notes (2)
            
            
            67,696
            
            
            80,000
            
            
            11.75
            %
            
            19.4 years
            
            
            -Junior
                subordinated notes (2)
            
            
            68,986
            
            
            180,477
            
            
            7.64
            %
            
            27.9 years
            
            
            -Total
                Borrowings
            
            $
            3,397,742
            
            $
            4,264,438
            
            
            5.34
            %
            
            5.93 years
            
            $
            4,018,414


(1) Includes
      $4,758 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 on liabilities on the consolidated statement of operations.
      For
      the three months ended March 31, 2008, $478,318 was recorded as a result of
      a
      reduction in the fair value of such liabilities.


56




At
      March
      31, 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
            
            TotalReverse
                repurchase agreements
            
            $
            4,515
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            4,515Credit
                facilities
            
            
            -
            
            
            -
            
            
            537,968
            
            
            174,159
            
            
            -
            
            
            -
            
            
            712,127Commercial
                mortgage loan pools
            
            
            2,135
            
            
            2,074
            
            
            379,026
            
            
            116,649
            
            
            63,884
            
            
            649,375
            
            
            1,213,143CDOs*
            
            
            6,727
            
            
            13,359
            
            
            40,982
            
            
            140,719
            
            
            739,196
            
            
            891,466
            
            
            1,832,449Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            79,227
            
            
            79,227Senior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            162,500
            
            
            162,500Senior
                convertible notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            80,000
            
            
            80,000Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            180,477
            
            
            180,477Total
                Borrowings
            
            $
            13,377
            
            $
            15,433
            
            $
            957,976
            
            $
            431,527
            
            $
            803,080
            
            $
            2,043,045
            
            $
            4,264,438




*Reverse
      Repurchase Agreements and Credit Facilities*





The
      Company is subject to financial covenants in its credit facilities.





On
      October 22, 2007, the Company notified Deutsche Bank, AG that it had elected
      to
      extend the $200,000 credit facility for one year and the new maturity date
      will
      be December 20, 2008. In connection with this extension, the Company is required
      to amortize the loan by 50% in June 2008 and by 25% in September 2008. The
      remaining 25% is due in December 2008.





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 this extension, certain financial
      covenants were added or modified so that: (i) the Company is required to have
      a
      minimum debt service coverage ratio 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 indebtedness to tangible net worth shall not be greater
      than 3:1 and (vi) 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 (as defined in the related guaranty), subject to certain exceptions
      before March 31, 2008. Mark-to-market indebtedness is generally defined under
      the related guaranty to mean short-term liabilities that have a margin call
      feature. The aforementioned covenants are the most restrictive covenants at
      March 31, 2008.





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 "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.


57





On
      March
      7, 2008, the Company and HoldCo 2 entered into the credit agreement. The
      Facility has a term of 364 days with two 364-day extension periods, subject
      to
      the Lender's approval. The Facility is collateralized by a pledge of equity
      shares that the Company holds in Carbon II. The principal amount of the Facility
      is the lesser of $60,000 or a number determined in accordance with a borrowing
      base calculation equal to 60% of the value of the shares of Carbon II that
      are
      pledged to secure the Facility.





The
      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 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 Facility and reduce the outstanding
      balance.





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




Outstanding
      borrowings at March 31, 2008 under the Facility totaled $52,500 and were repaid
      in full on April 8, 2008.





For
      the
      quarter ended March 31, 2008, the Company was in compliance with all covenants.





*Preferred
      Equity Issuance*





On
      April
      4, 2008, the Company issued $70,125 of Series E Cumulative Redeemable
      Convertible Preferred Stock. Net proceeds were $70,069. Dividends are payable
      on
      the three new series of convertible preferred stock at a 12% coupon and the
      purchaser 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).





*Common
      Equity Issuances*





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, resulting
      in
      net proceeds of $23,356.





For
      the
      three months ended March 31, 2008, the Company issued 37,060 shares of Common
      Stock under its Dividend Reinvestment and Stock Purchase Plan (the "Dividend
      Reinvestment Plan"). Net proceeds to the Company under the Dividend Reinvestment
      Plan were approximately $260.


58


For
      the
      three months ended March 31, 2008, the Company issued 1,174,383 shares of Common
      Stock under a sales agency agreement with Brinson Patrick Securities
      Corporation. Net proceeds to the Company were approximately $7,513.





*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
      March
      31, 2008 the Company owned securities of 39 Controlling Class CMBS trusts with
      a
      par of $1,857,019. The total par amount of CMBS issued by the 39 trusts was
      $67,597,670. One of the Company's 39 Controlling Class trusts does not qualify
      as a QSPE and has been consolidated by the Company (see Note 7 of the
      consolidated financial statements).





The
      Company's maximum exposure to loss as a result of its investment in these QSPEs
      totaled $1,129,177 and $1,126,442 at March 31, 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 March 31, 2008 and December 31, 2007, respectively, was
      $60,787 and $61,206.





The
      Company also owns non-investment 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 March 31, 2008 and
      December 31, 2007, the Company's total maximum exposure to loss as a result
      of
      its investment in Leaf was $6,111 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 $61,623 and provided
      cash flow of $164,739 for the three months ended March 31, 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 increases operating cash flows.
      Net cash from trading securities provided an outflow of $48,916 and received
      $132,076 for the three months ended March 31, 2008 and 2007, respectively.


59





Net
      cash
      provided by investing activities consists primarily of the purchase, sale,
      and
      repayments on securities, commercial loan pools, commercial mortgage loans
      and
      equity investments. The Company's investing activities provided cash flows
      of
      $126,570 and used cash flows of $208,374 during the three months ended March
      31,
      2008 and 2007, respectively. The variance in investing cash flows is primarily
      attributable to FAS 159 reclassifications of securities available-for-sale
      to
      operating activities and purchases of securities and funding of commercial
      mortgage loans.





Net
      cash
      provided by financing activities was an outflow for $92,324 for the three months
      ended March 31, 2008 versus a cash inflow of $29,751 for the three months ended
      March 31, 2007, respectively, primarily due to margin calls on reverse
      repurchase agreements and credit facilities during the first quarter of 2008.





**Transactions
      with Affiliates**




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
      fee
      and any incentive fee 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.





Other
      significant changes pursuant to the amended Management Agreement include a
      reduction in the quarterly base management fee from 0.5000% of stockholders'
      equity to 0.3750% for the first $400 million in average total stockholders'
      equity; 0.3125% for the next $400 million of average total stockholders' equity
      and 0.2500% 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 2.0% 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 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.


60





Under
      the
      terms of the prior Management Agreement, the Manager was entitled to receive
      an
      incentive fee under the Management Agreement 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 ($11.33 per
      common share at March 31, 2008). Additionally, up to 30% of the incentive fees
      earned in 2007 or after was 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 Board of Directors also authorized
      a
      stock based incentive plan where one-half of one percent of common shares
      outstanding as of December 31st is paid to the Manager.





The
      following is a summary of management and incentive fees incurred for the three
      months ended March 31, 2008 and 2007:





For the Three Months
              Ended March 31,2008
            
            2007Management
                fee
            
            $
            3,275
            
            $
            3,520Incentive
                fee
            
            
            10,544
            
            
            2,724Incentive
                fee – stock based
            
            
            399
            
            
            709Total
                management and incentive fees
            
            $
            14,218
            
            $
            6,953





At
      March
      31, 2008 and 2007, respectively, management and incentive fees of $13,366 and
      $11,248 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
      reimbursements to the Manager of $125 and $117 for certain expenses incurred
      on
      behalf of the Company during the three months ended March 31, 2008 and 2007,
      respectively.





The
      Company 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 months
      ended March 31, 2008 and 2007, the Company recorded administration and
      investment accounting fees of $255 and $181, 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 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.


61





On
      March
      7, 2008, the Company entered into a $60,000 credit facility with a subsidiary
      of
      BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
      BlackRock Financial Management, Inc. The facility has a term of 364 days with
      two 364-day extension periods, subject to lender approval. The facility is
      collateralized by a pledge of the Company’s investment in Carbon II and gives
      the lender the option to purchase the Carbon II investment at fair market value
      (as determined by the terms of the agreement) from the Company. Outstanding
      borrowings at March 31, 2008 under this facility totaled $52,500 and were repaid
      in full on April 8, 2008.





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 March 31, 2008 was $1,707. The
      Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon I. On March 31, 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 March 31, 2008 was
      $97,796. The Company does not incur any additional management or incentive
      fees
      to the Manager related to its investment in Carbon II. On March 31, 2008, the
      Company owned approximately 26% of the outstanding shares of Carbon
      II.




**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.





The
      Company and certain 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.


62


**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 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 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 is increased, the estimated fair value of the Company's
      portfolio may decline. Conversely, as U.S. Treasury securities are priced to
      a
      lower yield and/or the spread to U.S. Treasuries used to price the Company's
      assets is decreased, the estimated fair value of the Company's portfolio may
      increase. Changes in the estimated fair value of the Company's portfolio may
      affect the Company's net income or cash flow directly through their impact
      on
      unrealized gains or losses on securities held-for-trading or indirectly through
      their impact on the Company's ability to borrow. Changes in the level of the
      U.S. Treasury yield curve can also affect, among other things, the prepayment
      assumptions used to value certain of the Company's securities and the Company's
      ability to realize gains from the sale of such assets. In addition, changes
      in
      the general level of the LIBOR money market rates can affect the Company's
      net
      interest income. At December 31, 2007, 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.


63





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. The primary risks associated
      with acquiring and financing these assets under repurchase agreements and
      committed borrowing facilities are mark-to-market risk and short-term rate
      risk.
      Certain secured financing arrangements provide for an advance rate based upon
      a
      percentage of the estimated fair value of the asset being financed. Market
      movements that cause asset values to decline would require a margin call or
      a
      cash payment to maintain the relationship between asset value and amount
      borrowed. A cash flow based CDO is an example of a secured financing vehicle
      that does not require a mark-to-market to establish or maintain a level of
      financing. When financed assets are subject to a mark-to-market margin call,
      the
      Company carefully monitors the interest rate sensitivity of those assets. The
      duration of the assets financed which are subject to a mark-to-market margin
      call was 2.0 years based on net asset value at March 31, 2008. This means that
      a
      100 basis point increase in interest rates would cause a margin call of
      approximately $16,000.





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
      March 31, 2008, economic duration for the Company's entire portfolio was 2.4
      years. This implies that for each 100 basis points of change in interest rates
      the Company's economic value will change by approximately 2.4%.





The
      GAAP
      book value of the Company’s common stock is $10.28 per share. As indicated in
      the table above a 100 basis point change in interest rates will change reported
      book value by approximately 2.4%, or $19,000. However, the duration of the
      Company’s portfolio not financed with match funded debt is 2.0. This means that
      a 100 basis point increase in interest rates or credit spreads would cause
      a
      margin call of approximately $16,000.





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 March 31, 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
              inEarningsper
              Share-200
            
            $
            0.02-100
            
            $
            0.01-50
            
            $
            0.00Base
                Case+50
            
            $
            (0.00
            )+100
            
            $
            (0.01
            )+200
            
            $
            (0.02
            )


64


***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 regardless of whether that principal is paid. Therefore, timing
      is
      of paramount importance because the longer the principal balance remains
      outstanding, the more interest coupon the holder receives; which results in
      a
      larger economic return. Alternatively, if principal is lost faster than
      originally assumed, there is less opportunity to receive interest coupon; which
      results in a lower or possibly negative return.





If
      actual
      principal losses on the underlying loans exceed 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.





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 $0.63
      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.


65





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




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




***Currency
      Risk:*** The
      Company has foreign currency rate exposures related to certain CMBS and
      commercial real estate loans. The Company's principal currency exposures are
      to
      the Euro, 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.


66


**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 March 31, 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 March 31, 2008 that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.


67


**Part
      II – OTHER
      INFORMATION**





ITEM
      1. **** Legal
      Proceedings





At
      March
      31, 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





None.





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





During
      the three months ended March 31, 2008, the Company issued 316,320 shares
      of unregistered common stock with an aggregate value of $2,116 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
      "Management Agreement") requiring the Company to grant to the Manager a number
      of shares of Company 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 Management Agreement is in effect. The
      issuance of common stock was made in reliance upon the exemption from
      registration under Section 4(2) of the Securities Act.





ITEM
      6.
      Exhibits





Exhibit
                No.
            
            Description31.1
            
            Exchange
                Act Rule (3a-14b)/15d-14(a) Certification of Chief Executive
                Officer31.2
            
            Exchange
                Act Rule (3a-14b)/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





68


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:
                May 15, 2008
            By:
            /s/
                Christopher A. MilnerName:
                Christopher A. MilnerTitle:
                Chief Executive OfficerDated:
                May 15, 2008
            By:
            /s/
                James J. LillisName:
                James J. LillisTitle:
                Chief Financial Officer





69