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


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

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

               For the quarterly period ended March 31, 1999

                      Commission File Number 001-13937


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


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

    345 Park Avenue, New York, New York                 10154
  (Address of principal executive offices)            (Zip Code)

    (Registrant's telephone number including area code): (212) 409-3333

                               NOT APPLICABLE
       --------------------------------------------------------------
      (Former name, former address, and former fiscal year if changed
                            since last report)

         Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

                                (1) Yes X       No__
                                (2) Yes X       No__

         As of May 13, 1999, 20,998,334 shares of voting common stock
($.001 par value) were outstanding.




                          ANTHRACITE CAPITAL, INC.
                                 FORM 10-Q
                                   INDEX

PART I - FINANCIAL INFORMATION                                            Page

Item 1.  Interim Financial Statements....................................   4

         Statements of Financial Condition
         At March 31, 1999 and December 31, 1998 (Unaudited).............   4

         Statements of Operations and Comprehensive Income (Loss)
         For the Three Months Ended March 31, 1999 and
         For the Period March 24, 1998 (Commencement of Operations)
         Through March 31, 1998 (Unaudited)..............................   5

         Statement of Changes in Stockholders' Equity
         For the Three Months Ended March 31, 1999 (Unaudited)...........   6

         Statements of Cash Flows
         For the Three Months Ended March 31, 1999 and
         For the Period March 24, 1998 (Commencement of Operations)
         Through March 31, 1998 (Unaudited)..............................   7

         Notes to Financial Statements (Unaudited).......................   8

Item 2.  Management's Discussion and Analysis of Financial Condition 
         and Results of Operations.......................................  23

Item 3.  Quantitative and Qualitative Disclosures about Market Risk......  32

Part II - OTHER INFORMATION

Item 1.       Legal Proceedings..........................................  36

Item 2.       Changes in Securities and Use of Proceeds..................  36

Item 3.       Defaults Upon Senior Securities............................  36

Item 4.       Submission of Matters to a Vote of Security Holders........  36

Item 5.       Other Information..........................................  36

Item 6.       Exhibits and Reports on Form 8-K...........................  36

SIGNATURES                                                                 37

Financial Data Schedule                                                    38


<TABLE>
<CAPTION>

Part I - FINANCIAL INFORMATION
Item 1.  Financial Statements

ANTHRACITE CAPITAL, INC.
STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
==============================================================================

                                                             March 31, 1999             December 31, 1998
                                                             --------------             -----------------

<S>                                                <C>             <C>           <C>           <C>   
ASSETS
Cash and cash equivalents                                       $   576                       $  1,087
Restricted cash equivalents                                           -                          3,243
Deposits with brokers as collateral 
  for securities sold short                                      24,713                        276,617
Securities available for sale, at
  fair value
     Subordinated commercial mortgage-backed 
       securities (CMBS)                            $ 266,091                    $273,018
     Other securities                                 207,743                     192,050
                                                   -----------                  ----------
Total securities available for sale                              473,834                       465,068
Securities held for trading, at fair value                            -                        166,835
Commercial mortgage loans, net                                    38,969                        35,581
Due from brokers                                                 122,440                             -
Other assets                                                       8,780                         7,964
                                                                -----------                 -----------
     Total Assets                                              $ 669,312                     $ 956,395
                                                               ============                 ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Short-term borrowings:
    Secured by pledge of subordinated CMBS           $ 158,655                   $ 160,924
    Secured by pledge of other securities 
       available for sale and cash equivalents         151,215                     168,963
    Secured by pledge of securities held for 
        trading                                              -                     133,163
    Secured by pledge of commercial mortgage 
        loans                                           23,014                      23,014
                                                     ---------                  ----------
Total short-term borrowings                                    $ 332,884                     $ 486,064
Securities sold short, at fair value                              24,617                       275,085
Due to brokers                                                   122,424                             -
Distributions payable                                              6,089                         5,796
Other liabilities                                                  2,484                         7,721
                                                               ---------                     ---------
     Total Liabilities                                           488,498                       774,666
                                                               ---------                     ---------

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, par value $0.001 per share; 
  100,000 shares authorized;      
     No shares issued                                                 -                             -
Common stock, par value $0.001 per share; 
     400,000 share authorized; 22,378
     shares issued, 20,998 shares outstanding 
     in 1999; and 21,365 shares issued, 
     19,985 shares outstanding in 1998                               22                             21
Additional paid-in capital                                      303,562                        296,836
Distributions in excess of earnings                             (19,501)                       (20,148)
Accumulated other comprehensive loss                            (87,426)                       (79,137)
Treasury stock, at cost (1,380 shares)                          (15,843)                       (15,843)
                                                               ---------                     ---------
      Total Stockholders' Equity                                180,814                        181,729
                                                               ---------                     ---------
      Total Liabilities and Stockholders' Equity              $ 669,312                     $  956,395
                                                               =========                     =========
</TABLE>

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


<TABLE>
<CAPTION>

ANTHRACITE CAPITAL, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
==========================================================================================

                                                                            For the Period
                                                For the Three               March 24,1998*
                                                Months Ended                   Through
                                                March 31, 1999              March 31, 1998
                                                --------------              --------------

<S>                                              <C>                             <C>    
Interest Income:
Securities available for sale                       $ 11,299                       $    118
Commercial mortgage loans                                908                              -
Securities held for trading                            1,510                              -
Cash and cash equivalents                                241                             97
                                                  ----------                       --------
         Total interest income                        13,958                            215
                                                  ----------                       --------

Expenses:                                                     
Interest                                               
Management fee                                         7,123                             -
                                                       1,050                             21
Other                                                    300                             21
                                                  ----------                       --------
        Total expenses                                 8,473                             42
                                                  ----------                       --------

Other Gain (Loss):
Gain on sale of securities available for sale            136                             -
Gain on securities held for trading                    1,181                             -
Foreign currency loss                                   (67)                             -
                                                  ----------                       --------
        Total other gain                              1,250                              -
                                                  ----------                       --------

Net Income                                             6,735                            173
                                                  ----------                       --------

Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities 
  available for sale:
Unrealized holding gain (loss) arising 
  during period                                       (8,153)                             2
Less: reclassification adjustment for 
  realized gains included in net income                  136                              -
                                                  ----------                       --------
         Other comprehensive loss                     (8,289)                             2
                                                  ----------                       --------

Comprehensive Income (Loss)                         $ (1,554)                     $     175
                                                  ==========                       ========

Net income per share:
   Basic                                            $   0.33                      $    0.01
   Diluted                                              0.33                           0.01
                                                                                              

Weighted average number of shares outstanding:
   Basic                                              20,279                         21,379
   Diluted                                            20,279                         21,388
</TABLE>


*Commencement of operations.
The accompanying notes are an integral part of these financial statements.



<TABLE>
<CAPTION>

ANTHRACITE CAPITAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)

================================================================================================================================


                                                                                  Accumulated
                                     Common       Additional    Distributions        Other           Treasury          Total
                                     Stock,        Paid-In        In Excess      Comprehensive        Stock,       Stockholders'
                                   Par Value       Capital       Of Earnings          Loss           At Cost          Equity
                                 ------------------------------------------------------------------------------------------------

<S>                                   <C>          <C>            <C>             <C>                <C>              <C>      
Balance at December 31, 1998        $    21      $ 296,836      $  (20,148)     $   (79,137)       $ (15,843)       $ 181,729

Net income                                                           6,735                                              6,735

Change in net unrealized gain
(loss) on securities available
for sale, net of
reclassification
Adjustment                                                                            (8,289)                          (8,289)

Distributions declared                                              (6,088)                                            (6,088)

Shares issued under Dividend
Reinvestment and Stock
Purchase Plan                             1           6,726                                                             6,727
                                 -------------------------------------------------------------------------------------------------

Balance at March 31, 1999           $    22       $ 303,562          $ (19,501)   $  (87,426)      $ (15,843)       $ 180,814
                                 =================================================================================================
</TABLE>



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


<TABLE>
<CAPTION>

ANTHRACITE CAPITAL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

===================================================================================================
                                                                                 For the Period
                                                            For the Three         March 24, 1998*
                                                             Months Ended             Through
                                                            March 31, 1999        March 31, 1998


Cash flows from operating activities:
                                                                  
<S>                                                              <C>                      <C>   
     Net income                                                  $  6,735                 $  173

Adjustments to reconcile net income to net cash 
provided by operating activities:
        Purchase of securities held for trading                (1,458,299)                      -
        Proceed from sales of securities held for trading        1,631,670                      -
        Premium amortization (discount accretion), net                 314                     69
        Noncash portion of net foreign currency loss                    67                      -
        Net gain on sale of securities                              (1,317)                     -
        Increase in other assets                                      (816)                (2,951)
        Increase (decrease) in other liabilities                    (5,236)                   982
                                                              -------------     ------------------
Net cash provided (used) by operating activities                   173,118                (1,727)
                                                              -------------     ------------------


Cash flows from investing activities:
     Purchase of securities available for sale                    (59,613)              (382,958)
     Funding of commercial mortgage loan                           (4,393)                     -
     Maturities of restricted cash equivalents                      3,250                      -
     Principal payments received on securities 
        available for sale                                         19,264                      -
     Proceeds from sales of securities available
        for sale                                                   20,113                      -
     Payable for securities purchased                                    -                72,725
                                                              -------------     ------------------
Net cash used in investing activities                             (21,379)              (310,233)
                                                              -------------     ------------------


Cash flows from financing activities:
                                                                                         
     Increase (decrease) in net short-term borrowings            (153,180)                 14,787
     Proceeds from issuance of common stock, net of
      offering costs                                                6,726                 296,972
     Distributions on common stock                                 (5,796)                      -
                                                              -------------     ------------------
Net cash provided (used) by financing activities                 (152,250)                311,759
                                                              -------------     ------------------
Net decrease in cash and cash equivalents                            (511)                   (200)
Cash and cash equivalents, beginning of period                      1,087                     200
                                                              -------------     ------------------
                                                                                           
Cash and cash equivalents, end of period                          $   576                  $   0
                                                               ============     ==================


Supplemental disclosure of cash flow information:                                         
     Interest paid                                               $  9,200                 $    -
                                                               ============     ==================

Noncash financing activities:                                                            
     Net change in unrealized gain (loss) on securities 
       available for sale                                       $ (8,289)                 $    2
                                                               ============     ==================
                                                                                          
     Distributions declared, not yet paid                       $  6,089                  $    -
                                                               ============     ==================
</TABLE>


* Commencement of operations.
The accompanying notes are an integral part of these financial statements.



   ANTHRACITE CAPITAL, INC.
   NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)   

   NOTE 1   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

   Anthracite Capital, Inc. (the "Company") was incorporated in Maryland in
   November, 1997 and commenced operations on March 24, 1998. The Company's
   principal business activity is to invest in a diversified portfolio of
   multifamily, commercial and residential mortgage loans, mortgage-backed
   securities and other real estate related assets in the U.S. and non-U.S.
   markets. The Company is organized and managed as a single business
   segment.

   The accompanying unaudited 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 generally
   accepted accounting principles ("GAAP") for complete financial
   statements. These financial statements should be read in conjunction
   with the annual financial statements and notes thereto included in the
   Company's annual report on Form 10-K for 1998 filed with the Securities
   and Exchange Commission.

   In the opinion of management, the accompanying financial statements
   contain all adjustments, consisting of normal and recurring accruals,
   necessary for a fair presentation of the results for the interim
   periods. Operating results for interim periods are not necessarily
   indicative of the results that may be expected for the entire year.

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

   A summary of the Company's significant accounting policies follows:

   CASH AND CASH EQUIVALENTS

   All highly liquid investments with original maturities of three months
   or less are considered to be cash equivalents.

   RESTRICTED CASH EQUIVALENTS

   At December 31, 1998, $3,243 of the Company's cash equivalents was
   pledged to secure its short-term borrowings and was classified as
   restricted cash equivalents on the statement of financial condition. At
   March 31, 1999, none of the Company's cash equivalents were pledged.

   SECURITIES AVAILABLE FOR SALE

   The Company has designated its investments in mortgage-backed
   securities, mortgage-related securities and certain other securities as
   assets available for sale because the Company may dispose of them prior
   to maturity. Securities available for sale are carried at estimated fair
   value with the net unrealized gains or losses reported as a component of
   accumulated other comprehensive income (loss) in stockholders' equity.
   Unrealized losses on securities that reflect a decline in value which is
   judged by management to be other than temporary, if any, are charged to
   earnings. At disposition the realized net gain or loss is included in
   income on a specific identification basis. The amortization of premiums
   and accretion of discounts are computed using the effective yield method
   after considering actual and estimated prepayment rates, if applicable,
   and credit losses. Actual prepayment and credit loss experience is
   periodically reviewed and effective yields are recalculated when
   differences arise between prepayments and credit losses originally
   anticipated and amounts actually received plus anticipated future
   prepayments and credit losses.

   SECURITIES HELD FOR TRADING

   The Company has designated certain securities as assets held for trading
   because the Company intends to hold them for short periods of time.
   Securities held for trading are carried at estimated fair value with net
   unrealized gains or losses included in income.

   COMMERCIAL MORTGAGE LOANS

   The Company purchases and originates certain commercial mortgage loans
   to be held as long-term investments. Loans held for long-term investment
   are recorded at cost at the date of purchase. Premiums and discounts
   related to these loans are amortized over their estimated lives using
   the effective interest method. Any origination fee income, application
   fee income and direct costs associated with originating or purchasing
   commercial mortgage loans have been deferred and the net amount is added
   to the basis of the loans on the statement of financial condition. The
   Company recognizes impairment on the loans when it is probable that the
   Company will not be able to collect all amounts due according to the
   contractual terms of the loan agreement. The Company measures impairment
   based on the present value of expected future cash flows discounted at
   the loan's effective interest rate or the fair value of the collateral
   if the loan is collateral dependent.

   SHORT SALES

   As part of its short-term trading strategies (see Note 3), the Company
   may sell securities that it does not own ("short sales"). To complete a
   short sale, the Company may arrange through a broker to borrow the
   securities to be delivered to the buyer. The proceeds received by the
   Company from the short sale are retained by the broker until the Company
   replaces the borrowed securities, generally within a period of less than
   one month. In borrowing the securities to be delivered to the buyer, the
   Company becomes obligated to replace the securities borrowed at their
   market price at the time of the replacement, whatever that price may be.
   A gain, limited to the price at which the Company sold the security
   short, or a loss, unlimited as to dollar amount, will be recognized upon
   the termination of a short sale if the market price is less than or
   greater than the proceeds originally received. The Company's liability
   under the short sales is recorded at fair value, with unrealized gains
   or losses included in net gain or loss on securities held for trading in
   the statement of operations and comprehensive income (loss).

   The Company is exposed to credit loss in the event of nonperformance by
   any broker that holds a deposit as collateral for securities borrowed.
   However, the Company does not anticipate nonperformance by any broker.

   FAIR VALUE OF FINANCIAL INSTRUMENTS

   The fair values of the Company's securities available for sale,
   securities held for trading, commercial mortgage loans and securities
   sold short are based on market prices provided by certain dealers who
   make markets in these financial instruments. The fair values reported
   reflect estimates and may not necessarily be indicative of the amounts
   the Company could realize in a current market exchange. The carrying
   amounts of all other asset and liability accounts in the statements of
   financial condition approximate fair value because of the short-term
   nature of these accounts.

   FORWARD COMMITMENTS

   As part of its short-term trading strategies (see Note 3), the Company
   may enter into forward commitments to purchase or sell U.S. Treasury or
   agency securities, which obligate the Company to purchase or sell such
   securities at a specified date at a specified price. When the Company
   enters into such a forward commitment, it will, generally within sixty
   days or less, enter into a matching forward commitment with the same or
   a different counterparty which entitles the Company to sell (in
   instances where the original transaction was a commitment to purchase)
   or purchase (in instances where the original transaction was a
   commitment to sell) the same or similar securities on or about the same
   specified date as the original forward commitment. Any difference
   between the specified price of the original and matching forward
   commitments will result in a gain or loss to the Company. Changes in the
   fair value of open commitments are recognized on the statement of
   financial condition and included among assets (if there is an unrealized
   gain) or among liabilities (if there is an unrealized loss). A
   corresponding amount is included as a component of net gain or loss on
   securities held for trading in the statement of operations and
   comprehensive income (loss).

   The Company is exposed to interest rate risk on these commitments, as
   well as to credit loss in the event of nonperformance by any other party
   to the Company's forward commitments. However, the Company does not
   anticipate nonperformance by any counterparty.

   FINANCIAL FUTURES CONTRACTS

   As part of its short-term trading strategies (see Note 3), the Company
   may enter into financial futures contracts, which are agreements between
   two parties to buy or sell a financial instrument for a set price on a
   future date. Initial margin deposits are made upon entering into futures
   contracts and can be either cash or securities. During the period that
   the futures contract is open, changes in the value of the contract are
   recognized as gains or losses on securities held for trading by
   "marking-to-market" on a daily basis to reflect the market value of the
   contract at the end of each day's trading. Variation margin payments are
   made or received, depending upon whether gains or losses are incurred.

   HEDGING INSTRUMENTS

   As part of its asset/liability management activities, the Company may
   enter into interest rate swap agreements, forward currency exchange
   contracts and other financial instruments in order to hedge interest
   rate and foreign currency exposures or to modify the interest rate or
   foreign currency characteristics of related items in its statement of
   financial condition.

   Income and expenses from interest rate swap agreements that are, for
   accounting purposes, designated as hedging securities available for sale
   are recognized as a net adjustment to the interest income of the hedged
   item. During the term of the interest rate swap agreements, changes in
   fair value are recognized on the statement of financial condition and
   included among assets (if there is an unrealized gain) or among
   liabilities (if there is an unrealized loss). A corresponding amount is
   included as a component of accumulated other comprehensive income (loss)
   in stockholders' equity. If the underlying hedged securities are sold,
   the amount of unrealized gain or loss in accumulated other comprehensive
   income (loss) relating to the corresponding interest rate swap agreement
   is included in the determination of gain or loss on the sale of the
   securities. If interest rate swap agreements are terminated, the
   associated gain or loss is deferred over the remaining term of the
   agreement, provided that the underlying hedged item still exists. The
   Company had no interest rate swap agreements outstanding at March 31,
   1999.

   Revenues and expenses from forward currency exchange contracts are
   recognized as a net adjustment to foreign currency gain or loss. During
   the term of the forward currency exchange contracts, changes in fair
   value are recognized on the statement of financial condition and
   included among assets (if there is an unrealized gain) or among
   liabilities (if there is an unrealized loss). A corresponding amount is
   included as a component of net foreign currency gain or loss in the
   statement of operations and comprehensive income (loss).

   The Company is exposed to interest rate and/or currency risk on these
   hedging instruments, as well as to credit loss in the event of
   nonperformance by any other party to the Company's hedging instruments.
   However, the Company does not anticipate nonperformance by any
   counterparty.

   FOREIGN CURRENCIES

   Assets and liabilities denominated in foreign currencies are translated
   at the exchange rate in effect on the date of the statement of financial
   condition. Revenues, costs, and expenses denominated in foreign
   currencies are translated at average rates of exchange prevailing during
   the period. Foreign currency gains and losses resulting from this
   process are recognized in the statement of operations and comprehensive
   income (loss).

   NET INCOME PER SHARE

   Net income per share is computed in accordance with Statement of
   Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, and
   is calculated on the basis of the weighted average number of common
   shares 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. For the three
   months ended March 31, 1999, all outstanding stock options were
   antidilutive.

   INCOME TAXES

   The Company intends to elect to be taxed as a Real Estate Investment
   Trust ("REIT") and to comply with the provisions of the Internal Revenue
   Code of 1986, as amended, with respect thereto. Accordingly, the Company
   generally will not be subject to 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 be subject to Federal
   excise tax for the fiscal year ended December 31, 1998. The Company does
   not anticipate that any excise tax incurred will have a material effect
   on its financial statements.

   COMPREHENSIVE INCOME

   SFAS No. 130, Reporting Comprehensive Income, requires the Company to
   classify items of "other comprehensive income", such as unrealized gains
   and losses on securities available for sale, by their nature in the
   financial statements and display the accumulated balance of other
   comprehensive income (loss) separately from retained earnings and
   additional paid-in capital in the stockholders' equity section of the
   statement of financial condition. In accordance with SFAS No. 130,
   cumulative unrealized gains and losses on securities available for sale
   are classified as accumulated other comprehensive income (loss) in
   stockholders' equity and current period unrealized gains and losses are
   included as a component of comprehensive income (loss).

   RECENT ACCOUNTING PRONOUNCEMENT

   During 1998, the Financial Accounting Standards Board issued SFAS No.
   133, Accounting for Derivative Instruments and Hedging Activities. This
   statement establishes accounting and reporting standards for derivative
   instruments including certain derivative instruments embedded in other
   contracts, and for hedging activities. It requires that the Company
   recognize all derivatives as either assets or liabilities in the
   statement of financial condition and measure those instruments at fair
   value. If certain conditions are met, a derivative may be specifically
   designated as a hedge of the exposure to changes in the fair value of a
   recognized asset or liability or a hedge of the exposure to variable
   cash flows of a forecasted transaction. The accounting for changes in
   the fair value of a derivative (e.g., through earnings or outside of
   earnings, through comprehensive income) depends on the intended use of
   the derivative and the resulting designation.

   The Company is required to implement SFAS 133 by January 1, 2000.
   Company management is evaluating the impact that this statement will
   have on its hedging strategies and use of derivative instruments and
   does not believe that implementation will have a material effect on the
   Company's financial statements based on its current hedging strategies.

   RECLASSIFICATIONS

   Certain amounts from prior periods have been reclassified to conform to
   the 1999 presentation.

   NOTE 2   SECURITIES AVAILABLE FOR SALE

   The Company's securities available for sale are carried at estimated
   fair value. The amortized cost and estimated fair value of securities
   available for sale at March 31, 1999 are summarized as follows:


<TABLE>
<CAPTION>

                                                                                  Gross           Gross         Estimated
                                                                 Amortized      Unrealized      Unrealized         Fair
                      Security Description                         Cost            Gain            Loss           Value
   ----------------------------------------------------------- -------------- --------------- --------------- ---------------
<S>                                                                     <C>         <C>              <C>            <C>
   Commercial mortgage-backed securities ("CMBS"):
   Non-investment grade rated subordinated securities               $315,077                      $ (74,845)       $ 240,232
   Non-rated subordinated securities                                  37,403                        (12,921)          24,482
   Non-rated trust certificates                                        1,377                                           1,377
                                                               -------------- --------------- --------------- ---------------
        Total CMBS                                                   353,857                        (87,766)         266,091

   Single-family residential mortgage-backed securities
   ("RMBS"):
   Agency adjustable rate securities                                  52,198           $   9            (79)          52,128
   Agency fixed rate securities                                       12,357                            (59)          12,298
   Privately issued investment grade rated fixed rate
        securities                                                   139,624             556           (109)         140,071
                                                               -------------- --------------- --------------- ---------------
        Total RMBS                                                   204,179             565           (247)         204,497
   Agency insured project loan                                         3,224              22                           3,246
                                                               ============== =============== =============== ===============
        Total securities available for sale                         $561,260          $  587      $ (88,013)        $473,834
                                                               ============== =============== =============== ===============
</TABLE>

   At March 31, 1999, an aggregate of $375,781 in estimated fair value of
   the Company's securities available for sale was pledged to secure its
   short-term borrowings.

   The amortized cost and estimated fair value of securities available for
   sale at December 31, 1998 are summarized as follows:

<TABLE>
<CAPTION>

                                                                                  Gross           Gross         Estimated
                                                                 Amortized      Unrealized      Unrealized         Fair
                      Security Description                         Cost            Gain            Loss           Value
   ----------------------------------------------------------- -------------- --------------- --------------- ---------------
<S>                                                                  <C>             <C>             <C>            <C>
   Commercial mortgage-backed securities ("CMBS"):
   Non-investment grade rated subordinated securities               $314,209                      $ (65,475)       $ 248,734
   Non-rated subordinated securities                                  38,200                        (13,916)          24,284
                                                               -------------- --------------- --------------- ---------------
        Total CMBS                                                   352,409                        (79,391)         273,018
                                                               -------------- --------------- --------------- ---------------
   Single-family residential mortgage-backed securities ("RMBS"):
   Agency adjustable rate securities                                  17,977          $   22                          17,999
   Agency fixed rate securities                                       13,022               1                          13,023
   Privately issued investment grade rated fixed rate
        securities                                                   157,571             278            (96)         157,753
                                                               -------------- --------------- --------------- ---------------
        Total RMBS                                                   188,570             301            (96)         188,775
                                                               -------------- --------------- --------------- ---------------
   Agency insured project loan                                         3,226              49                           3,275
                                                               ============== =============== =============== ===============
        Total securities available for sale                         $544,205          $  350      $ (79,487)        $465,068
                                                               ============== =============== =============== ===============
</TABLE>

   At December 31, 1998, an aggregate of $392,831 in estimated fair value
   of the Company's securities available for sale was pledged to secure its
   short-term borrowings.

   The aggregate estimated fair value by underlying credit rating of the
   Company's securities available for sale at March 31, 1999 is as follows:

<TABLE>
<CAPTION>

                                                    Estimated
                 Security Rating                    Fair Value         Percentage
   ---------------------------------------------- ---------------- --------------------
<S>                                                     <C>                      <C>  
   Agency and agency insured securities                 $ 67,672                 14.3%
   AAA                                                   140,071                 29.6
   BB+                                                    25,937                  5.5
   BB                                                     23,737                  5.0
   BB-                                                    54,115                 11.4
   B+                                                      8,094                  1.7
   B                                                      85,823                 18.1
   B-                                                     30,018                  6.3
   CCC                                                    12,508                  2.6
   Not rated                                              25,859                  5.5
                                                  ================ ====================
   Total securities available for sale                  $473,834               100.0%
                                                  ================ ====================
</TABLE>

   As of March 31, 1999, the mortgage loans underlying the subordinated
   CMBS held by the Company were secured by properties of the types and at
   the locations identified below:

<TABLE>
<CAPTION>

      Property Type       Percentage (1)       Geographic Location        Percentage (1)
   -------------------- ------------------- --------------------------- -------------------
<S>                                  <C>      <C>                                     <C>  
   Multifamily                       29.7%  California                               13.3%
   Retail                             27.7  Texas                                     10.2
   Office                             16.3  New York                                   9.6
   Lodging                             9.8  Florida                                    6.8
   Other                              16.5  Illinois                                   5.6
                                            Other (2)                                 54.5
                        ===================                             ===================
   Total                           100.0%   Total                                  100.0%
                        ===================                             ===================
</TABLE>

(1) Based on a percentage of the total unpaid principal balance of the
underlying loans. (2) No other individual state comprises more than 5% of
the total.

   At March 31, 1999, three mortgage loans underlying the subordinated CMBS
   held by the Company were delinquent. The following table sets forth
   certain information relating to the aggregate principal balance and
   payment status of these loans:

    Past due 30 to 60 days                                $2,308
    Past due 90 days or more                              10,306
                                                          ------
    Total past due                                       $12,614
                                                         =======

   These three mortgage loans comprised 0.145% of the aggregate principal
   balance of the mortgage loans underlying the Company's subordinated
   CMBS. Subsequent to March 31, 1999, the two loans past due more than 90
   days were transferred to special servicing and foreclosure actions were
   initiated. The one loan more than 30 days but less than 60 days
   delinquent was also transferred to special servicing and a workout plan
   is being developed with the borrower. The Company believes that its
   current loss estimates with respect to the delinquent loans are
   appropriate.

   The subordinated CMBS held by the Company consist of subordinated
   securities collateralized by adjustable and fixed rate commercial and
   multifamily mortgage loans. The commercial mortgage-backed trust
   certificates held by the Company represent a 1% beneficial interest in a
   trust established by an affiliate (see Note 6). The assets of the trust
   consist of commercial mortgage loans originated or acquired by the
   affiliate. The RMBS held by the Company consist of adjustable rate and
   fixed rate residential pass-through or mortgage-backed securities
   collateralized by adjustable and fixed rate single-family residential
   mortgage loans. Agency RMBS were issued by Federal Home Loan Mortgage
   Corporation (FHLMC), Federal National Mortgage Association (FNMA) or
   Government National Mortgage Association (GNMA). Privately issued RMBS
   were issued by entities other than FHLMC, FNMA or GNMA. The agency
   insured project loan held by the Company consists of a participation
   interest in a mortgage loan guaranteed by the Federal Housing
   Administration (FHA). The Company's securities available for sale are
   subject to credit, interest rate and/or prepayment risks.

   The subordinated CMBS owned by the Company provide credit support to the
   more senior classes of the related commercial securitization. Cash flow
   from the mortgages underlying the CMBS generally is 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, then the remaining CMBS classes will bear
   such losses in order of their relative subordination.

   As of March 31, 1999, the anticipated weighted average unleveraged yield
   to maturity for GAAP purposes of the Company's CMBS was 9.50% per annum
   and of the Company's other securities available for sale was 6.42% per
   annum. The Company's anticipated yields to maturity on its CMBS and
   other securities available for sale are based upon a number of
   assumptions that are subject to certain business and economic
   uncertainties and contingencies. Examples of these include, among other
   things, the rate and timing of principal payments (including
   prepayments, repurchases, defaults and liquidations), the pass-through
   or coupon rate and interest rate fluctuations. Additional factors that
   may affect the Company's anticipated yields to maturity on its 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 CMBS that are a result of the
   general condition of the real estate market (including competition for
   tenants and their related credit quality) and changes in market rental
   rates. As these uncertainties and contingencies are difficult to predict
   and are subject to future events which may alter these assumptions, no
   assurance can be given that the anticipated yields to maturity,
   discussed above and elsewhere, will be achieved.

   The agency adjustable rate RMBS held by the Company are subject to
   periodic and lifetime caps that limit the amount such securities'
   interest rates can change during any given period and over the life of
   the loan. At March 31, 1999, the average periodic cap on the agency
   adjustable rate RMBS was 2.0% per annum and the average lifetime cap net
   of servicing fees was equal to 11.7%.

   At March 31, 1999, the unamortized net discount on securities available
   for sale was $206,675, which represented 26.9% of the then remaining
   face amount of such securities.

   During the three months ended March 31, 1999, the Company sold a portion
   of its securities available for sale for total proceeds of $20,113,
   resulting in a realized gain of $136.

   NOTE 3     SECURITIES HELD FOR TRADING

   Securities held for trading reflect short-term trading strategies which
   the Company employs from time to time, designed to generate economic and
   taxable gains. As part of its trading strategies, the Company may
   acquire long or short positions in U.S. Treasury or agency securities,
   forward commitments to purchase such securities, financial futures
   contracts and other fixed income or fixed income derivative securities.
   Any taxable gains from such strategies will be applied as an offset
   against the tax basis capital loss carryforward that the Company
   incurred during 1998 as a result of the sale of a substantial portion of
   its securities available for sale.

   The Company's securities held for trading are carried at estimated fair
   value. At March 31, 1999, the Company did not have any long positions in
   securities held for trading. At December 31, 1998, the Company's
   securities held for trading consisted of U.S. Treasury securities with
   an estimated fair value of $166,835. At March 31, 1999, the Company held
   short positions in U.S. Treasury securities with an estimated fair value
   of $(24,617). At December 31, 1998, the Company held short positions
   consisting of U.S. Treasury securities and an agency fixed rate note
   with estimated fair values of $(223,757) and $(51,328), respectively.

   During the three months ended March 31, 1999, aggregate net realized and
   unrealized gains (losses) on securities held for trading (including
   financial futures contracts and forward commitments to purchase or sell
   agency RMBS -- see Note 10) were $1,181.

   The Company's trading strategies are subject to the risk of
   unanticipated changes in the relative prices of long and short positions
   in trading securities, but are designed to be relatively unaffected by
   changes in the overall level of interest rates.

   Amounts due to or from brokers at March 31, 1999 represent amounts
   payable or receivable, respectively, from unsettled purchases or sales
   of the Company's securities held for trading and related short-term
   borrowings. These amounts were paid or received in full on April 1,
   1999.

   NOTE 4     COMMERCIAL MORTGAGE LOANS

   On August 26, 1998, the Company along with a syndicate of other lenders
   originated a loan secured by a second lien on five luxury hotels in
   London, England and vicinity. The loan has a five-year maturity and may
   be prepaid at any time. The loan is denominated in pounds sterling and
   bears interest at a rate based upon the London Interbank Offered Rate
   (LIBOR) for pounds sterling plus approximately 4%. The Company's
   investment in the loan is carried at amortized cost and translated into
   U.S. dollars at the exchange rate in effect on the reporting date. The
   amortized cost and certain additional information with respect to the
   Company's investment in the loan at March 31, 1999 (at the exchange rate
   in effect on that date) are summarized as follows:

    Interest      Principal      Unamortized        Amortized
      Rate         Balance         Discount           Cost
   ------------- ------------- ------------------ ---------------
         9.38%       $34,663              $  86        $ 34,577

   The exchange rate for the British pound at March 31, 1999 was
   (pound)0.619387 to US$1.00.

   At March 31, 1999, the entire principal balance of the Company's
   investment in the loan was pledged to secure line of credit borrowings
   included in short-term borrowings. The loan was current in payment
   status at March 31, 1999.

   Through March 31, 1999, the Company had funded $4,393 under a commitment
   outstanding to fund a $35,000 floating rate commercial real estate
   construction loan secured by a second mortgage. The subject property is
   an office complex located in Santa Monica, California. Each extension of
   funds under the commitment is subject to satisfaction by the borrower of
   various closing conditions. The Company received a $175 commitment fee
   relating to the commitment, which is being amortized into income over
   the two-and-one-half year life of the loan. At March 31, 1999, the
   weighted average interest rate on amounts funded under the commitment
   was 11.47% and the borrower had made all payments when due. Subsequent
   to March 31, 1999, the Company funded an additional $6,846 of this
   commitment.

   NOTE 5     COMMON STOCK

   On March 17, 1999, the Company declared distributions to its
   stockholders of $0.29 per share, which were paid on April 15, 1999 to
   stockholders of record on March 31, 1999.

   During the three months ended March 31, 1999, the Company issued
   1,013,326 shares of common stock under its Dividend Reinvestment and
   Stock Purchase Plan and received total proceeds of $6,726.

   On March 31, 1999 the Company filed a $200,000 shelf registration
   statement with the SEC. The shelf registration statement will permit the
   Company to issue a variety of debt and equity securities in the public
   markets should appropriate opportunities arise.

   NOTE 6     TRANSACTIONS WITH AFFILIATES

   The Company has a Management Agreement (the "Management Agreement") with
   BlackRock Financial Management, Inc. (the "Manager"), a majority owned
   indirect subsidiary of PNC Bank Corp. ("PNC") and the employer of
   certain directors and officers of the Company, under which the Manager
   manages the Company's day-to-day operations, subject to the direction
   and oversight of the Company's Board of Directors. The Company pays the
   Manager an annual base management fee equal to a percentage of the
   Average Invested Assets of the Company as further defined in the
   Management Agreement. The base management fee is equal to 1% per annum
   of the Average Invested Assets rated less than BB- or not rated, 0.75%
   of Average Invested Assets rated BB- to BB+, and 0.35% of Average
   Invested Assets rated above BB+.

   The Company accrued $1,050 and $21 in base management fees for the three
   months ended March 31, 1999 and for the period March 24, 1998 to March
   31, 1998, respectively, in accordance with the terms of the Management
   Agreement

   The Company will also pay the Manager, as incentive compensation, an
   amount equal to 25% of the Funds from Operations of the Company plus
   gains (minus losses) from debt restructuring and sales of property,
   before incentive compensation, in excess of the amount that would
   produce an annualized Return on Equity equal to 3.5% over the Ten-Year
   U.S. Treasury Rate as further defined in the Management Agreement. For
   purposes of the incentive compensation calculation, equity is generally
   defined as proceeds from issuance of common stock before underwriting
   discounts and commissions and other costs of issuance.

   The Company did not accrue for or pay the Manager any incentive
   compensation for the three months ended March 31, 1999, or for the
   period March 24, 1998 to March 31, 1998.

   On March 17, 1999, the Company's Board of Directors approved an
   Administration Agreement with the Manager and the termination of a
   previous agreement with an unaffiliated third party. Under the terms of
   the Administration Agreement, the Manager will provide financial
   reporting, audit coordination and accounting oversight services. The
   Company will pay the Manager a monthly administrative fee at an annual
   rate of 0.06% of the first $125 million of average net assets, 0.04% of
   the next $125 million of average net assets and 0.03% of average net
   assets in excess of $250 million subject to a minimum annual fee of
   $120. The terms of the Administrative Agreement are substantially
   similar to the terms of the previous agreement.

   On March 19, 1999, the Company purchased certificates representing a 1%
   interest in Midland Commercial Mortgage Owner Trust I (the "Trust") for
   a total of $1,377 from Midland Loan Services, Inc. ("Midland"), a wholly
   owned indirect subsidiary of PNC and the depositor to the Trust. The
   assets of the Trust consist of commercial mortgage loans originated or
   acquired by Midland. In connection with this transaction, the Company
   entered into a committed line of credit from PNC Funding Corp., a wholly
   owned indirect subsidiary of PNC, to borrow up to 90% of the fair market
   value of the Company's interest in the Trust, provided that amounts
   outstanding under the line at any time may not exceed $4,500.
   Outstanding borrowings against this line of credit bear interest at a
   LIBOR based variable rate.

   NOTE 7     STOCK OPTIONS

   The Company has adopted a stock option plan (the "1998 Stock Option
   Plan") that provides for the grant of both qualified incentive stock
   options that meet the requirements of Section 422 of the Code, and
   non-qualified stock options, stock appreciation rights and dividend
   equivalent rights. Stock options may be granted to the Manager,
   directors, officers and any key employees of the Company, directors,
   officers and key employees of the Manager and to any other individual or
   entity performing services for the Company.

   The exercise price for any stock option granted under the 1998 Stock
   Option Plan may not be less than 100% of the fair market value of the
   shares of common stock at the time the option is granted. Each option
   must terminate no more than ten years from the date it is granted.
   Subject to anti-dilution provisions for stock splits, stock dividends
   and similar events, the 1998 Stock Option Plan authorizes the grant of
   options to purchase an aggregate of up to 2,470,453 shares of common
   stock.

   Pursuant to the 1998 Stock Option Plan, certain officers, directors and
   employees of the Company and the Manager have been granted options to
   purchase 1,163,967 shares of the Company's common stock and PNC
   Investment Corp., a wholly owned indirect subsidiary of PNC, has been
   granted options to purchase 324,176 shares of the Company's common
   stock. The exercise price of these options is $15 per share. The
   remaining contractual life of each option is approximately 9 years. One
   quarter of these options, representing 372,036 shares, vested on March
   27, 1999 and the remaining options vest in three equal installments on
   March 27, 2000, March 27, 2001 and March 27, 2002. All of these options
   remain outstanding; none were exercised or expired during 1999.

   In addition to the foregoing, on March 17, 1999 pursuant to the 1998
   Stock Option Plan, options to purchase 270,000 shares of the Company's
   common stock were granted to certain officers of the Company and
   employees of the Manager who provide services to the Company. The
   exercise price of these options is $8.61 per share. The remaining
   contractual life of each option is approximately 10 years. The options
   vest in two equal installments on March 31, 2000 and March 31, 2001.
   None of these options were exercised or expired during 1999.

   Options to purchase 246,544 shares of the Company's common stock that
   were granted to certain officers, directors and employees of the Company
   and the Manager in connection with the Company's initial public offering
   expired on March 30, 1999; none were exercised during 1999.

   NOTE 8      SHORT-TERM BORROWINGS

   The Company's short-term borrowings consist of line of credit borrowings
   and reverse repurchase agreements.

   During 1998, the Company entered into a Master Assignment Agreement, as
   amended, and related Note, which provide financing for the Company's
   investments. The agreement, which is with Merrill Lynch Mortgage Capital
   Inc., permits the Company to borrow up to $400,000 and terminates August
   20, 1999. The agreement requires assets to be pledged as collateral,
   which may consist of rated CMBS, rated RMBS, residential and commercial
   mortgage loans, and certain other assets. Outstanding borrowings against
   this line of credit bear interest at a LIBOR based variable rate.

   The Company is subject to various covenants in this line of credit,
   including maintaining a minimum GAAP net worth of $140,000 and a
   debt-to-equity ratio not to exceed 6 to 1, as well as a covenant that
   after September 30, 1998 the Company's GAAP net worth will not decline
   by more than 37 percent over any two consecutive fiscal quarters. At
   March 31, 1999, the Company was in compliance with all such covenants.

   During 1999, the Company entered into a committed line of credit from
   PNC Funding Corp. to borrow up to 90% of the fair market value of the
   Company's interest in the Trust, provided that amounts outstanding under
   the line at any time may not exceed $4,500. Outstanding borrowings
   against this line of credit bear interest at a LIBOR based variable
   rate. This line of credit terminates on March 17, 2000 and the lender's
   recourse is limited to the Company's interest in the Trust.

   The Company has entered into reverse repurchase agreements to finance
   most of its securities available for sale that are not financed under
   its lines of credit. The reverse repurchase agreements are
   collateralized by most of the Company's securities available for sale
   and bear interest at rates that have historically moved in close
   relationship to LIBOR.

   Certain information with respect to the Company's short-term borrowings
   at March 31, 1999 is summarized as follows:


<TABLE>
<CAPTION>
                                                                            Reverse                   Total
                                                     Lines of              Repurchase               Short-Term
                                                      Credit               Agreements               Borrowings
                                                --------------------- ----------------------- -------------------
<S>                                                    <C>                    <C>                       <C>      
   Outstanding borrowings                              $ 65,300               $ 267,584                 $ 332,884
   Weighted average borrowing rate                        6.57%                   5.46%                     5.68%
   Weighted average remaining maturity                 142 Days                 67 Days                   82 Days
   Estimated fair value of assets pledged              $ 94,001                $307,707                 $ 401,708
</TABLE>

   At March 31, 1999, $23,014 of borrowings outstanding under the lines of
   credit were denominated in pounds sterling.

   At March 31, 1999, the Company's short-term borrowings had the following
   remaining maturities:

<TABLE>
<CAPTION>

                                                              Reverse Repurchase                   Total
                                   Lines of Credit                Agreements               Short-Term Borrowings
                                ------------------------- ----------------------------- ------------------------------
<S>                                          <C>                       <C>                           <C>        
   Within 30 days                                 -                    $   40,045                    $    40,045
   31 to 59 days                                  -                       151,215                        151,215
   Over 59 days                            $ 65,300                        76,324                        141,624
                                ========================= ============================= ==============================
                                           $ 65,300                    $  267,584                    $   332,884
                                ========================= ============================= ==============================
</TABLE>

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

   The Company is currently negotiating additional financing facilities to
   increase financing flexibility and provide capital to fund future
   growth. There is no assurance that such negotiations will be concluded
   successfully.

   NOTE 9       HEDGING INSTRUMENTS

   The Company has entered into forward currency exchange contracts
   pursuant to which it has agreed to exchange (pound)7,800 (pounds
   sterling) for $12,597 (U.S. dollars) on June 30, 1999. In certain
   circumstances, the Company may be required to provide collateral to
   secure its obligations under the forward currency exchange contracts, or
   may be entitled to receive collateral from the counterparty to the
   forward currency exchange contracts. At March 31, 1999, no collateral
   was required under the forward currency exchange contracts. The
   estimated fair value of the forward currency exchange contracts was $11
   at March 31, 1999.

   NOTE 10      COMMITMENTS AND CONTINGENCIES

   Information with respect to the Company's outstanding forward
   commitments to purchase or sell agency RMBS at March 31, 1999 is
   summarized as follows:


<TABLE>
<CAPTION>

                                                                
                                                                                                                           
                                                                   Estimated                                               
                             Principal         Contract               Fair                                                Net   
                             Amount of         Price of             Value of          Gross             Gross         Unrealized
                             Subject            Subject             Subject         Unrealized       Unrealized          Gains  
     Description             Securities       Securities          Securities          Losses            Gains           (Losses)
------------------------- ----------------- ------------------ ------------------ --------------- --------------- --------------
<S>                            <C>                 <C>               <C>               <C>                <C>                <C>
   Forward
   commitments to
   purchase                  $460,000           $453,188           $453,625            $ (148)            $ 585           $ 437

   Forward
   commitments to
   sell                       380,000            376,916            377,444              (700)              172           (528)

                                                                                  -----------------------------------------------
   Total                                                                               $ (848)            $ 757          $ (91)
                                                                                  ===============================================
</TABLE>

   The gross unrealized gains and gross unrealized losses shown above are
   included in other assets and other liabilities, respectively, in the
   statement of financial condition. In instances where a forward
   commitment has been closed out with the same counterparty and a right of
   setoff exists, only the net unrealized gain or loss is reflected in
   other assets or liabilities. All of the Company's forward commitments to
   purchase or sell agency RMBS at March 31, 1999 related to delivery of
   such securities in April 1999. All such commitments were closed out
   prior to their respective contractual delivery dates.

   At March 31, 1999, the Company had outstanding a short position of 210
   ten-year U.S. Treasury Note futures contracts expiring in June 1999 that
   represented $21,000 in face amount of U.S. Treasury Notes. The estimated
   fair value of these contracts was minimal at March 31, 1999.

   Through March 31, 1999, the Company had funded $4,393 under a commitment
   outstanding to fund a $35,000 floating rate construction loan. See Note
   4.



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

   GENERAL: The Company was organized in November 1997 to invest in a
   diversified portfolio of multifamily, commercial and residential
   mortgage loans, mortgage-backed securities and other real estate related
   assets in the U.S. and non-U.S. markets. The Company expects to generate
   income for distribution to its stockholders primarily from the net
   earnings derived from its investments in real estate related assets. The
   Company intends to operate in a manner that permits it to be taxed as a
   REIT for Federal income tax purposes.

   In March 1998, the Company received $296.9 million of net proceeds from
   the initial public offering of 20,000,000 shares and the private
   placement of 1,365,198 shares of its common stock, which the Company
   used to acquire its initial portfolio of investments. The Company
   commenced operations on March 24, 1998.

   The following discussion should be read in conjunction with the
   financial statements and related notes. Dollar amounts are expressed in
   thousands, other than per share amounts.

   MARKET CONDITIONS: During the first quarter of 1999 the market for high
   yield CMBS and commercial loans was relatively stable. The liquidity
   crisis of 1998 has subsided as new capital is being deployed in these
   markets and dealer inventories shrink. The continued recovery of
   investment grade CMBS prices has yet to be seen in the subordinate
   classes that the Company owns but credit fundamentals remain strong.
   Delinquencies reported by the ACLI continued to decline to new lows as
   the U.S. economy continued to turn in strong performance.

   The first quarter of 1999 saw the yield on the ten-year U.S. Treasury
   Note increase by 58 basis points from 4.66% to 5.24% while spreads
   between credit sensitive sectors of the debt markets and the ten-year
   U.S. Treasury Note remained relatively constant. This increase in
   interest rates led to a decline in the value of the Company's investment
   portfolio since December 31, 1998. The unrealized loss on the Company's
   holdings of subordinated CMBS increased from $79,391 at December 31,
   1998 to $87,766 at March 31, 1999. However, real estate credit
   fundamentals remained solid and the Company believes there has been no
   discernible change in the credit quality of its portfolio.

   The Company's earnings depend, in part, on the relationship between
   long-term interest rates and short-term interest rates. The Company's
   investments bear interest at fixed rates determined by reference to the
   yields of medium- or long-term U.S. Treasury securities or at adjustable
   rates determined by reference (with a lag) to the yields on various
   short-term instruments. The Company's borrowings bear interest at rates
   that are determined with reference to the London Interbank Offered Rate
   (LIBOR). To the extent that interest rates on the Company's borrowings
   increase without an offsetting increase in the interest rates earned on
   the Company's investments, the Company's earnings could be negatively
   affected.

   From December 31, 1998 to March 31, 1999, one-month LIBOR declined from
   5.06% to 4.94. The decline in LIBOR during the period had a slight
   beneficial impact on the Company's financing costs. At the end of April
   1999, the ten-year U.S. Treasury yield had increased from its March 31,
   1999 level to 5.34%.

   RECENT EVENTS: During the second quarter of 1999, the Company applied a
   portion of its cash on hand to fund approximately $6,846 of its
   commitment outstanding to originate a $35,000 floating rate commercial
   real estate construction loan secured by a second mortgage (see Note 4
   to the accompanying financial statements). The Company intends to fund
   the remaining portion of the commitment through a combination of
   existing cash on hand, new equity, additional borrowings and/or
   syndication of a portion of the commitment.

   FUNDS FROM OPERATIONS (FFO): Most industry analysts, including the
   Company, consider FFO an appropriate supplementary measure of operating
   performance of a REIT. In general, FFO adjusts net income for non-cash
   charges such as depreciation, certain amortization expenses and gains or
   losses from debt restructuring and sales of property. However, FFO does
   not represent cash provided by operating activities in accordance with
   GAAP and should not be considered an alternative to net income as an
   indication of the results of the Company's performance or to cash flows
   as a measure of liquidity.

   In 1995, the National Association of Real Estate Investment Trusts
   ("NAREIT") established new guidelines clarifying its definition of FFO
   and requested that REITs adopt this new definition beginning in 1996.
   The Company computes FFO in accordance with the definition recommended
   by NAREIT. The Company believes that the exclusion from FFO of gains or
   losses from sales of property was not intended to address gains or
   losses from sales of securities as it applies to the Company.
   Accordingly, the Company includes gains or losses from sales of
   securities in its calculation of FFO.

   The Company's FFO for the three months ended March 31, 1999 and for the
   period from March 24, 1998 to March 31, 1998 was $6,735 and $173,
   respectively, which was the same as its reported GAAP net income for
   such periods. The Company reported cash flows provided by operating
   activities of $173,118, cash flows used in investing activities of
   $21,379 and cash flows used in financing activities of $152,250 in its
   statement of cash flows for the three months ended March 31, 1999.

   RESULTS OF OPERATIONS

   Net income for the three months ended March 31, 1999 was $6,735 or $0.33
   per share (basic and diluted), as compared with $173 or $.01 per share
   (basic and diluted) for the period March 24, 1998 (commencement of
   operations) to March 31, 1998. Because the Company was in the process of
   acquiring its investment portfolio during the abbreviated 1998 period,
   the results of operations for that period are not comparable to the 1999
   results.

   INTEREST INCOME: The following table sets forth information regarding
   the total amount of income from certain of the Company's
   interest-earning assets and the resultant average yields. Information is
   based on monthly average balances during the period.
<TABLE>
<CAPTION>

                                                               For the Three Months Ended March 31, 1999
                                                     ------------------------------------------------------------
                                                            Interest              Average            Annualized
                                                             Income               Balance              Yield
                                                     --------------------- --------------------- ----------------
                                                     --------------------- --------------------- ----------------
<S>                                                         <C>                   <C>                  <C>  
   CMBS                                                     $  8,357              $351,866             9.46%
   Other securities available for sale                         2,942               183,991             6.40%
   Commercial mortgage loans                                     908                36,769             9.88%
                                                     ===================== ===================== ================
   Total                                                    $ 12,207              $572,646             8.53%
                                                     ===================== ===================== ================
</TABLE>

   In addition to the foregoing, the Company earned $241 in interest income
   from cash and cash equivalents and $1,510 in interest income from
   securities held for trading during the three months ended March 31,
   1999.

   INTEREST EXPENSE: The following table sets forth information regarding
   the total amount of interest expense from certain of the Company's
   short-term borrowings and the resultant average yields. Information is
   based on daily average balances during the period.
<TABLE>
<CAPTION>

                                                               For the Three Months Ended March 31, 1999
                                                     -----------------------------------------------------------
                                                             Interest             Average            Annualized
                                                             Expense              Balance              Yield
                                                     --------------------- --------------------- ---------------
<S>                                                           <C>                 <C>                  <C>  
   Reverse repurchase agreements                              $3,941              $272,212             5.79%
   Line of credit borrowings                                   1,056                65,300             6.47%
                                                     ===================== ===================== ===============
   Total                                                      $4,997              $337,512             5.92%
                                                     ===================== ===================== ===============
</TABLE>

   In addition to the foregoing, the Company incurred $2,126 in interest
   expense from short-term borrowings relating to its securities held for
   trading and securities sold short during the three months ended March
   31, 1999.

   NET INTEREST MARGIN FROM OPERATING PORTFOLIO: The Company considers its
   operating portfolio to consist of its securities available for sale, its
   commercial mortgage loans and its 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 liquid investment grade
   securities to enhance the Company's liquidity. The Company considers its
   trading strategies to be distinct from its operating portfolio. Net
   interest margin from the operating portfolio is annualized net interest
   income from the portfolio divided by the average monthly balance of
   interest-earning assets in the portfolio. Net interest income from the
   operating portfolio is total interest income from the portfolio less
   interest relating to short-term borrowings secured by investments in the
   operating portfolio. For the three months ended March 31, 1999, total
   interest income from the operating portfolio was $12,448 and total
   related interest expense was $4,997, resulting in net interest income of
   $7,451 and net annualized interest margin of 5.32% from the operating
   portfolio for the period.

   OTHER EXPENSES: Expenses other than interest expense consist primarily
   of management fees and general and administrative expenses. Management
   fees of $1,050 for the three months ended March 31, 1999 and $21 for the
   period March 24, 1998 through March 31, 1998 were comprised solely of
   the base management fee paid to the Manager for such periods (as
   provided pursuant to the management agreement between the Manager and
   the Company), as the Manager earned no incentive fee for such period.
   Other expenses of $300 for the three months ended March 31, 1999 were
   comprised of accounting agent fees, custodial agent fees, directors'
   fees, fees for professional services, insurance premiums and other
   miscellaneous expenses.

   OTHER GAIN (LOSS): During the three months ended March 31, 1999, the
   Company sold a portion of its securities available for sale for total
   proceeds of $20,113, resulting in a realized gain of $136. The gain on
   securities held for trading of $1,181 for the three months ended March
   31, 1999 consisted primarily of realized and unrealized gains and losses
   on U.S. Treasury and agency securities, forward commitments to purchase
   or sell agency RMBS, and financial futures contracts. The foreign
   currency loss of $67 for the three months ended March 31, 1999 relates
   to the Company's net investment in a commercial mortgage loan
   denominated in pounds sterling.

   DISTRIBUTIONS DECLARED: On March 17, 1999, the Company declared
   distributions to its stockholders totaling $6,089 or $0.29 per share,
   which were paid on April 15, 1999 to stockholders of record on March 31,
   1999.

   TAX BASIS NET INCOME AND GAAP NET INCOME: Net income as calculated for
   tax purposes (tax basis net income) was estimated at $7,853, or $0.39
   per share (basic and diluted), for the three months ended March 31,
   1999, compared to a net income as calculated in accordance with
   generally accepted accounting principles (GAAP) of $6,735, or $0.33 per
   share (basic and diluted), for the three months ended March 31, 1999.
   Differences between tax basis net income and GAAP net income arise for
   various reasons. For example, in computing income from its subordinated
   CMBS for GAAP purposes, the Company takes into account estimated credit
   losses on the underlying loans whereas for tax basis income purposes,
   only actual credit losses are taken into account. Certain general and
   administrative expenses may differ due to differing treatment of the
   deductibility of such expenses for tax basis income. Also, differences
   could arise in the treatment of premium and discount amortization on the
   Company's securities available for sale.

   A reconciliation of GAAP net income to tax basis net income is as
follows:

                                                                For the Three
                                                                Months Ended
                                                               March 31, 1999
                                                              -----------------
   GAAP net income                                                 $ 6,735
   Subordinate CMBS income differences due to credit 
   loss assumptions                                                  1,102
   General and administrative expense differences                       16
                                                              =================
   Tax basis net income                                            $ 7,853
                                                              =================

   CHANGES IN FINANCIAL CONDITION

   SECURITIES AVAILABLE FOR SALE: At March 31, 1999 and December 31, 1998
   an aggregate of $87,426 and $79,137, respectively, in unrealized losses
   on securities available for sale were included as a component of
   accumulated other comprehensive income (loss) in stockholders' equity.

   The Company's securities available for sale, which are carried at
   estimated fair value, included the following at March 31, 1999:
<TABLE>
<CAPTION>

                                                                       Estimated
                                                                         Fair
                    Security Description                                 Value                   Percentage
--------------------------------------------------------------- ----------------------- ------------------------
   Commercial mortgage-backed securities:
<S>                                                                     <C>                          <C>  
   Non-investment grade rated subordinated securities                   $ 240,232                    50.7%
   Non-rated subordinated securities                                       24,482                      5.2
   Non-rated trust certificates                                             1,377                      0.3
                                                                ----------------------- ------------------------
                                                                          266,091                     56.2
   Total CMBS
                                                                ----------------------- ------------------------

   Single-family residential mortgage-backed securities ("RMBS"):
   Agency adjustable rate securities                                       52,128                     11.0
   Agency fixed rate securities                                            12,298                      2.6
   Privately issued investment grade rated fixed rate                     140,071                     29.6
   securities
                                                                ----------------------- ------------------------
                                                                          204,497                     43.2
   Total RMBS
                                                                ----------------------- ------------------------
   Agency insured project loan                                              3,246                      0.6
                                                                ======================= ========================
                                                                         $473,834                    100.0%
   Total securities available for sale
                                                                ======================= ========================
</TABLE>

   The Company's securities available for sale included the following at
December 31, 1998:
<TABLE>
<CAPTION>

                                                                        Estimated
                                                                          Fair
                    Security Description                                  Value                   Percentage
--------------------------------------------------------------- ----------------------- ------------------------
   Commercial mortgage-backed securities:
<S>                                                                     <C>                          <C>  
   Non-investment grade rated subordinated securities                   $ 248,734                    53.5%
   Non-rated subordinated securities                                       24,284                     5.2
                                                                ----------------------- ------------------------
                                                                          273,018                    58.7
   Total CMBS
                                                                ----------------------- ------------------------

   Single-family residential mortgage-backed securities ("RMBS"):
   Agency adjustable rate securities                                       17,999                     3.9
   Agency fixed rate securities                                            13,023                     2.8
   Privately issued investment grade rated fixed rate                     157,753                    33.9
   securities
                                                                ----------------------- ------------------------
                                                                          188,775                    40.6
   Total RMBS
                                                                ----------------------- ------------------------
   Agency insured project loan                                              3,275                     0.7
                                                                ======================= ========================
                                                                         $465,068                   100.0%
   Total securities available for sale
                                                                ======================= ========================
</TABLE>

   During three months ended March 31, 1999, the Company sold a portion of
   its securities available for sale for total proceeds of $20,113,
   resulting in a realized gain of $136.

   SHORT-TERM BORROWINGS: To date, the Company's debt has consisted of line
   of credit borrowings and reverse repurchase agreements, which have been
   collateralized by a pledge of most of the Company's securities available
   for sale, securities held for trading and its commercial mortgage loan
   denominated in pounds sterling. The Company's financial flexibility is
   affected by its ability to renew or replace on a continuous basis its
   maturing short-term borrowings. To date, the Company has obtained
   short-term financing in amounts and at interest rates consistent with
   the Company's financing objectives.

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

   The following table sets forth information regarding the Company's
short-term borrowings.
<TABLE>
<CAPTION>

                                                         For the Three Months Ended March 31, 1999
                                             ---------------------------------------------------------------
                                                  Average               Maximum                Range of
                                                  Balance               Balance               Maturities
                                             --------------------- --------------------- -------------------
<S>                                               <C>                   <C>                 <C>      
   Reverse repurchase agreements                  $318,859              $497,820           1 to 151 days
   Line of credit borrowings                        65,300                65,300              142 days
                                             --------------------- --------------------- -------------------
   Total                                          $384,159              $563,120           1 to 151 days
                                             ===================== ===================== ===================
</TABLE>

   HEDGING INSTRUMENTS: The Company has entered into forward currency
   exchange contracts pursuant to which it has agreed to exchange
   (pound)7,800 (pounds sterling) for $12,597 (U.S. dollars) on June 30,
   1999. In certain circumstances, the Company may be required to provide
   collateral to secure its obligations under the forward currency exchange
   contracts, or may be entitled to receive collateral from the
   counterparty to the forward currency exchange contracts. At March 31,
   1999, no collateral was required under the forward currency exchange
   contracts. The estimated fair value of the forward currency exchange
   contracts was $11 at March 31, 1999.

   CAPITAL RESOURCES AND LIQUIDITY: Liquidity is a measurement of the
   Company's ability to meet potential cash requirements, including ongoing
   commitments to repay borrowings, fund investments, loan acquisition and
   lending activities and for other general business purposes. The primary
   sources of funds for liquidity consist of short-term borrowings,
   principal and interest payments on and maturities of securities
   available for sale, securities held for trading and commercial mortgage
   loans, and proceeds from sales thereof.

   On March 31, 1999 the Company filed a $200,000 shelf registration
   statement with the SEC. The shelf registration statement will permit the
   Company to issue a variety of debt and equity securities in the public
   markets should appropriate opportunities arise.

   The Company's operating activities provided cash flows of $173,118
   during the three months ended March 31, 1999, primarily through sales of
   trading securities in excess of purchases.

   The Company's investing activities used cash flows totaling $21,379
   during the three months ended March 31, 1999, primarily to purchase
   securities available for sale and to fund a commercial mortgage loan.

   The Company's financing activities used $152,250 during the three months
   ended March 31, 1999, primarily to reduce the level of short-term
   borrowings related to the Company's trading portfolio.

   Although the Company's portfolio of securities available for sale was
   acquired at a net discount to the face amount of such securities, the
   Company has received to date and expects to continue to receive
   sufficient coupon income in cash from its portfolio to fund
   distributions to stockholders as necessary to maintain its REIT status.

   The Company is subject to various covenants in its existing lines of
   credit, including maintaining a minimum GAAP net worth of $140,000 and a
   debt-to-equity ratio not to exceed 6 to 1, as well as a covenant that
   after September 30, 1998 the Company's GAAP net worth will not decline
   by more than 37 percent over any two consecutive fiscal quarters. At
   March 31, 1999, the Company was in compliance with all such covenants.

   The Company is currently negotiating additional financing facilities to
   increase financing flexibility and provide capital to fund future
   growth. There is no assurance that such negotiations will be concluded
   successfully.

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

   REIT STATUS: The Company intends to elect to be taxed as a REIT and to
   comply with the provisions of the Internal Revenue Code of 1986, as
   amended, with respect thereto. Accordingly, the Company generally will
   not be subject to 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 on net income or capital gains not distributed.

   INVESTMENT COMPANY ACT: The Company intends to conduct its business so
   as not to become regulated as an investment company under the Investment
   Company Act of 1940, as amended (the "Investment Company Act"). Under
   the Investment Company Act, a non-exempt entity that is an investment
   company is required to register with the Securities and Exchange
   Commission ("SEC") and is subject to extensive, restrictive and
   potentially adverse regulation relating to, among other things,
   operating methods, management, capital structure, dividends and
   transactions with affiliates. The Investment Company Act exempts
   entities that are "primarily engaged in the business of purchasing or
   otherwise acquiring mortgages and other liens on and interests in real
   estate" ("Qualifying Interests"). Under current interpretation by the
   staff of the SEC, to qualify for this exemption, the Company, among
   other things, must maintain at least 55% of its assets in Qualifying
   Interests. Pursuant to such SEC staff interpretations, certain of the
   Company's interests in agency pass-through and mortgage-backed
   securities and agency insured project loans are Qualifying Interests. In
   general, the Company will acquire subordinated interests in commercial
   mortgage-backed securities ("subordinated CMBS") only when such mortgage
   securities are collateralized by pools of first mortgage loans, when the
   Company can monitor the performance of the underlying mortgage loans
   through loan management and servicing rights, and when the Company has
   appropriate workout/foreclosure rights with respect to the underlying
   mortgage loans. When such arrangements exist, the Company believes that
   the related subordinated CMBS constitute Qualifying Interests for
   purposes of the Investment Company Act. Therefore, the Company believes
   that it should not be required to register as an "investment company"
   under the Investment Company Act as long as it continues to invest
   primarily in such subordinated CMBS and/or in other Qualifying
   Interests. However, if the SEC or its staff were to take a different
   position with respect to whether the Company's subordinated CMBS
   constitute Qualifying Interests, the Company could be required to modify
   its business plan so that either (i) it would not be required to
   register as an investment company or (ii) it would comply with the
   Investment Company Act and be able to register as an investment company.
   In such event, (i) modification of the Company's business plan so that
   it would not be required to register as an investment company would
   likely entail a disposition of a significant portion of the Company's
   subordinated CMBS or the acquisition of significant additional assets,
   such as agency pass-through and mortgage-backed securities, which are
   Qualifying Interests or (ii) modification of the Company's business plan
   to register as an investment company would result in significantly
   increased operating expenses and would likely entail significantly
   reducing the Company's indebtedness (including the possible prepayment
   of the Company's short-term borrowings), which could also require it to
   sell a significant portion of its assets. No assurances can be given
   that any such dispositions or acquisitions of assets, or deleveraging,
   could be accomplished on favorable terms. Consequently, any such
   modification of the Company's business plan could have a material
   adverse effect on the Company. Further, if it were established that the
   Company were an unregistered investment company, there would be a risk
   that the Company would be subject to monetary penalties and injunctive
   relief in an action brought by the SEC, that the Company would be unable
   to enforce contracts with third parties and that third parties could
   seek to obtain recission of transactions undertaken during the period it
   was established that the Company was an unregistered investment company.
   Any such results would be likely to have a material adverse effect on
   the Company.

   YEAR 2000 READINESS DISCLOSURE: The Company is currently in the process
   of evaluating its information technology infrastructure and other
   systems for Year 2000 compliance. Substantially all of the Company's
   infrastructure and systems are supplied by the Manager. The Manager has
   advised the Company that it is currently evaluating whether such systems
   are Year 2000 compliant.

   The Manager has advised the Company that it has established a plan for
   minimizing the risks posed by the Year 2000 problem. For its internal
   systems, the Manager established a plan to test systems for Year 2000
   compliance, remediate such systems where necessary, and validate its
   remediation efforts to confirm Year 2000 compliance. With respect to
   products and services provided by third parties, the Manager established
   a plan to learn from the third parties whether their products and
   services are Year 2000 compliant and upgrade to Year 2000 compliant
   products and services where necessary. In addition, the Manager has
   developed contingency plans for all mission critical systems. Finally,
   the Manager and the Company will participate in industry-wide Year 2000
   testing of its systems where available and appropriate.

   The Manager has advised the Company that, it has completed the testing,
   remediation and validation of its internal systems for Year 2000
   compliance. The Manager has advised the Company that it has communicated
   with substantially all of the Manager's and the Company's suppliers of
   products and services to determine their Year 2000 compliance status and
   the extent to which the Manager or the Company could be affected by any
   supplier's Year 2000 compliance issues. The Manager has received
   responses from substantially all such suppliers with respect to their
   Year 2000 compliance. Some suppliers have indicated that an upgrade of
   their products or services will be necessary in order to make such
   products or services Year 2000 compliant. The Manager expects to
   complete such upgrades for critical third party software by June 30,
   1999 and for the remaining third party software by September 30, 1999.
   Despite assurances from such suppliers, however, there can be no
   assurance that the products and services of such suppliers, who are
   beyond the Company's control, will be Year 2000 compliant. In the event
   that any of the Company's significant suppliers do not successfully and
   timely achieve Year 2000 compliance, the Company's business or
   operations could be adversely affected.

   The Manager has advised the Company that it expects to incur costs of up
   to $500 to complete the evaluation and modification of its systems as
   may be necessary to achieve Year 2000 compliance. The Company may be
   required to bear a portion of the costs incurred by the Manager in this
   regard. Approximately $250 has been expended by the Manager as of March
   31, 1999. There can be no assurance that the costs will not exceed the
   amount referred to above.

   The Manager has advised the Company that it has completed a contingency
   plan for the possible Year 2000 failure of its mission critical systems
   or suppliers and is in the process of implementing the contingency plan.
   In addition to the contingency plan, the Manager has informed the
   Company that it intends to develop a plan for checking its critical
   systems during the first two days of the year 2000 to determine whether
   such systems will continue to operate on Monday, January 3, 2000 when
   business resumes. There can be no assurance that such a plan or the
   Manager's contingency plan will be successful in preventing a disruption
   of the Company's operations.

   The Manager has advised the Company that it does not anticipate any
   material disruption in the operations of the Company as a result of any
   failure by the Manager to achieve Year 2000 compliance. There can be no
   assurance, however, that the Company will not experience a disruption in
   operations caused by Year 2000 problems.

   Item 3.  Quantitative and Qualitative Disclosures About Market Risk

   MARKET RISK: Market risk is the exposure to loss resulting from changes
   in interest rates, credit curve spreads, foreign currency exchange
   rates, commodity prices and equity prices. The primary market risks to
   which the Company is exposed are interest rate risk and credit curve
   risk. Interest rate risk is highly sensitive to many factors, including
   governmental, monetary and tax policies, domestic and international
   economic and political considerations and other factors beyond the
   control of the Company. Credit curve risk is highly sensitive to
   dynamics of the markets for commercial mortgage securities and other
   loans and securities held by the Company. Excessive supply of these
   assets combined with reduced demand will cause the market to require a
   higher yield. This demand for higher yield will cause the market to use
   a higher spread over the U.S. Treasury securities yield curve, or other
   benchmark interest rates, to value these assets. Changes in the general
   level of the U.S. Treasury yield curve can have significant effects on
   the market value of the Company's portfolio. The majority of the
   Company's assets are fixed rate securities valued based on a market
   credit spread to U.S. Treasuries. As U.S. Treasury securities are priced
   to a higher yield and/or the spread to U.S. Treasuries used to price the
   Company's assets is increased, the market 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 market value of the
   Company's portfolio may increase. Changes in the market 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 LIBOR money market rates can
   affect the Company's net interest income. The majority of the Company's
   liabilities are floating rate based on a market spread to U.S. 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,
   indeed, that such losses may exceed the amount invested in such
   instruments. A hedge may not perform its intended purpose of offsetting
   losses or increased costs. 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 test
   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.

   The following tables quantify the potential changes in the Company's net
   portfolio value and net interest income under various interest rate and
   credit spread scenarios. Net portfolio value is defined as the value of
   interest-earning assets net of the value of interest-bearing
   liabilities. It is evaluated using an assumption that interest rates, as
   defined by the U.S. Treasury yield curve, increase or decrease 300 basis
   points and the assumption that the yield curves of the rate shocks will
   be parallel to each other. Net interest income in this set of scenarios
   is calculated using the assumption that the U.S.
   LIBOR curve remains constant.

   Net interest income is defined as interest income earned from
   interest-earning assets net of the interest expense incurred by the
   interest bearing liabilities. It is evaluated using the assumptions that
   interest rates, as defined by the U.S. LIBOR curve, increase or decrease
   by 200 basis points and the assumption that the yield curve of the LIBOR
   rate shocks will be parallel to each other. Market value in this
   scenario is calculated using the assumption that the U.S. Treasury yield
   curve remains constant.

   All changes in income and value are measured as percentage changes from
   the respective values calculated in the scenario labeled as "Base Case".
   The base interest rate scenario assumes interest rates as of March 31,
   1999. Actual results could differ significantly from these estimates.

         PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
                 GIVEN U.S. TREASURY YIELD CURVE MOVEMENTS

               Change in                     Projected Change in
         Treasury Yield Curve,                    Portfolio
            +/- Basis Points                   Net Market Value
   ------------------------------------- -------------------------------
                  -300                              32.8%
                  -200                              21.6%
                  -100                              10.4%
               Base Case                              0
                  +100                             (11.9)%
                  +200                             (23.1)%
                  +300                             (34.3)%

         PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET MARKET VALUE
                     GIVEN CMBS CREDIT SPREAD MOVEMENTS

              Change in                      Projected Change in
           Credit Spreads,                        Portfolio
          +/- Basis Points                     Net Market Value
      -------------------------          --------------------------
                -300                                36.5%
                -200                                22.9%
                -100                                10.8%
              Base Case                               0
                +100                                (9.6)%
                +200                               (18.3)%
                +300                               (26.1)%

        PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET INTEREST INCOME
                           GIVEN LIBOR MOVEMENTS

                                                          Projected Change
                    Change in LIBOR,                        in Portfolio
                    +/- Basis Points                    Net Interest Income
             -------------------------------        ---------------------------
                          -200                                 10.1%
                          -100                                  5.2%
                        Base Case                                0
                          +100                                 (6.3)%
                          +200                                (13.0)%

   ASSET AND LIABILITY MANAGEMENT: Asset and liability management is
   concerned with the timing and magnitude of the repricing and or maturing
   of assets and liabilities. It is the objective of the Company 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.

   The Company uses interest rate duration as its primary measure of
   interest rate risk. This metric, expressed when considering any existing
   leverage, allows the Company's management to approximate changes in the
   net market value of the Company's portfolio given potential changes in
   the U.S. Treasury yield curve. Interest rate duration considers both
   assets and liabilities. As of March 31, 1999, the Company's duration on
   equity was approximately 11.5 years. This implies that a parallel shift
   of the U.S. Treasury yield curve of 100 basis points would cause the
   Company's net asset value to increase or decrease by approximately
   11.5%. Because the Company's assets, and their markets, have other, more
   complex sensitivities to interest rates, the Company's management
   believes that this metric represents a good approximation of the change
   in portfolio net market value in response to changes in interest rates,
   though actual performance may vary due to changes in prepayments, credit
   spreads and the cost of increased market volatility. 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 repricing within a given time
   period), are used but are considered of lesser significance in the daily
   management of the Company's portfolio. The majority of the Company's
   assets pay a fixed coupon and the income from such assets are relatively
   unaffected by interest rate changes. The majority of the Company's
   liabilities are borrowings under its line of credit or reverse
   repurchase agreements that bear interest at variable rates that reset
   monthly. Given this relationship between assets and liabilities, the
   Company's interest rate sensitivity gap is highly negative. This implies
   that a period of falling short-term interest rates will tend to increase
   the Company's net interest income while a period of rising short-term
   interest rates will tend to reduce the Company's net interest income.
   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.

   The Company currently has positions in forward currency exchange
   contracts to hedge currency exposure in connection with its commercial
   mortgage loan denominated in pounds sterling. The purpose of the
   Company's foreign currency hedging activities is to protect the Company
   from the risk that the eventual U.S. dollar net cash inflows from the
   commercial mortgage loan will be adversely affected by changes in
   exchange rates. The Company's current strategy is to roll these
   contracts from time to time to hedge the expected cash flows from the
   loan. Fluctuations in foreign exchange rates are not expected to have a
   material impact on the Company's net portfolio value or net interest
   income.


   Part II - OTHER INFORMATION

   Item 1.      Legal Proceedings

   At March 31, 1999 there were no pending legal proceedings to which the
   Company was a party or of which any of its property was subject.

   Item 2.      Changes in Securities and Use of Proceeds

   Not applicable

   Item 3.      Defaults Upon Senior Securities

   Not applicable

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

   Not applicable

   Item 5.      Other Information

   None

   Item 6.      Exhibits and Reports on Form 8-K

   (a)   Exhibits

   Exhibit 27.1 - Financial Data Schedule (filed herewith)

   (b)   Reports on Form 8-K

   None



   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 17, 1999                  By: /s/ Hugh R. Frater
                                           -----------------------------------
                                        Name:  Hugh R. Frater  
                                        Title:
                                        President and Chief Executive Officer
                                        (authorized officer of registrant)



   Dated: May 17, 1999                   By: /s/ Richard M. Shea
                                            ----------------------------------
                                         Name:  Richard M. Shea   
                                         Title:
                                         Chief Operating Officer and Chief
                                         Financial Officer (principal 
                                         accounting officer)



   FINANCIAL DATA SCHEDULE

   THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
   MARCH 31, 1999 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
   ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.