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

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

                 For the quarterly period ended March 31, 2005

                                      OR

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

             For the transition period from: ________ to ________

                       Commission File Number 001-13937


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


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


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


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


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


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

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

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).

                           (1) Yes X    No __

         As of May 7, 2005, 53,305,202 shares of common stock ($.001 par value
per share) were outstanding.


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<CAPTION>

                                                      ANTHRACITE CAPITAL, INC.
                                                             FORM 10-Q
                                                               INDEX

PART I - FINANCIAL INFORMATION                                                                                  Page
                                                                                                                ----

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

              Consolidated Statements of Financial Condition
              At March 31, 2005 (Unaudited) and December 31, 2004.................................................4

              Consolidated Statements of Operations (Unaudited)
              For the Three Months Ended March 31, 2005 and 2004..................................................5

              Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
              For the Three Months Ended March 31, 2005...........................................................6

              Consolidated Statements of Cash Flows (Unaudited)
              For the Three Months Ended March 31, 2005 and 2004..................................................7

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

Item 2.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations..............................................................................21

Item 3.       Quantitative and Qualitative Disclosures about Market Risk.........................................41

Item 4.       Controls and Procedures............................................................................46

Part II - OTHER INFORMATION

Item 1.       Legal Proceedings..................................................................................47

Item 2.       Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...................47

Item 3.       Defaults Upon Senior Securities....................................................................47

Item 4.       Submission of Matters to a Vote of Security Holders................................................47

Item 5.       Other Information..................................................................................47

Item 6.       Exhibits...........................................................................................47

SIGNATURES    ...................................................................................................49

</TABLE>

<PAGE>


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

         (1)      the introduction, withdrawal, success and timing of business
                  initiatives and strategies;

         (2)      changes in political, economic or industry conditions, the
                  interest rate environment or financial and capital markets,
                  which could result in changes in the value of the Company's
                  assets;

         (3)      the relative and absolute investment performance and
                  operations of the Company's manager, BlackRock Financial
                  Management, Inc. (the "Manager");

         (4)      the impact of increased competition;

         (5)      the impact of capital improvement projects;

         (6)      the impact of future acquisitions and divestitures;

         (7)      the unfavorable resolution of legal proceedings;

         (8)      the extent and timing of any share repurchases;

         (9)      the impact, extent and timing of technological changes and
                  the adequacy of intellectual property protection;

         (10)     the impact of legislative and regulatory actions and reforms
                  and regulatory, supervisory or enforcement actions of
                  government agencies relating to the Company, the Manager or
                  The PNC Financial Services Group, Inc. ("PNC Bank");

         (11)     terrorist activities, which may adversely affect the general
                  economy, real estate, financial and capital markets,
                  specific industries, and the Company and the Manager;

         (12)     the ability of the Manager to attract and retain highly
                  talented professionals.

         (13)     fluctuations in foreign currency exchange rates; and

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

Forward-looking statements speak only as of the date they are made. The
Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.


<PAGE>

<TABLE>
<CAPTION>

Part I - FINANCIAL INFORMATION
Item 1.  Interim Financial Statements

                                             Anthracite Capital, Inc. and Subsidiaries
                                           Consolidated Statements of Financial Condition
                                                (in thousands, except per share data)
--------------------------------------------------------------------------------------------------------------------------------
                                                                       March 31, 2005                 December 31, 2004
                                                                         (Unaudited)
<S>                                                                 <C>             <C>           <C>                 <C>
ASSETS
Cash and cash equivalents                                                             $22,305                           $23,755
Restricted cash equivalents                                                            17,100                            19,680
Securities available-for-sale, at estimated fair value:
     Subordinated commercial mortgage-backed securities ("CMBS")      $771,485                        $779,218
     Residential mortgage-backed securities ("RMBS")                   129,938                         139,153
     Investment grade securities                                       852,522                         849,302
                                                                   ------------               -----------------
Total securities available-for-sale                                                 1,753,945                         1,767,673
Commercial mortgage loan pools, at amortized cost                                   1,307,035                         1,312,045
Securities held-for-trading, at estimated fair value                                  216,292                           232,918
Commercial mortgage loans, net                                                        237,030                           263,506
Equity investment in the Carbon Capital Funds                                          59,121                            56,812
Investments in real estate joint venture                                                    -                             5,031
Other assets                                                                           60,499                            47,714
                                                                               ---------------                 -----------------
     Total Assets                                                                  $3,673,327                        $3,729,134
                                                                               ===============                 =================


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings:
    Collateralized debt obligations ("CDOs")                        $1,067,764                      $1,067,967
    Secured by pledge of subordinated CMBS                              21,050                          29,358
    Secured by pledge of other securities available-for-sale
      and restricted cash equivalents                                  401,718                         408,832
    Secured by pledge of commercial mortgage loan pools              1,289,463                       1,294,830
    Secured by pledge of securities held-for-trading                   207,861                         223,788
    Secured by pledge of commercial mortgage loans                     121,549                         141,601
                                                                   ------------               -----------------
Total borrowings                                                                   $3,109,405                        $3,166,376
Payable for investments purchased                                                       9,072                                 -
Distributions payable                                                                  15,821                            15,819
Other liabilities                                                                      21,065                            33,201
                                                                               ---------------                 -----------------
     Total Liabilities                                                             $3,155,363                        $3,215,396
                                                                               ---------------                 -----------------

Commitments and Contingencies

Stockholders' Equity:
Common Stock, par value $0.001 per share; 400,000 shares
authorized;
   53,297 shares issued and outstanding in 2005;
     53,289 shares issued and outstanding in 2004                                          53                                53
9.375% Series C Preferred Stock, liquidation preference $57,500
       in 2005 and 2004                                                                55,435                            55,435
Additional paid-in capital                                                            579,010                           578,919
Distributions in excess of earnings                                                 (134,631)                         (134,075)
Accumulated other comprehensive income                                                 18,097                            13,406
                                                                               ---------------                 -----------------
      Total Stockholders' Equity                                                      517,964                           513,738
                                                                               ---------------                 -----------------
      Total Liabilities and Stockholders' Equity                                   $3,673,327                        $3,729,134
                                                                               ===============                 =================

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


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<TABLE>
<CAPTION>

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

                                                                         For the Three     For the Three
                                                                         Months Ended      Months Ended
                                                                        March 31, 2005    March 31, 2004
                                                                       ------------------------------------
<S>                                                                   <C>                    <C>
Income:
    Interest from securities available-for-sale                                  $33,341           $32,726
    Interest from commercial mortgage loans                                        5,344             1,479
    Interest from commercial mortgage loan pools                                  13,552                 -
    Interest from securities held-for-trading                                      2,170             3,177
    Earnings from real estate joint ventures                                          59               222
    Earnings from equity investments                                               2,605             1,372
    Interest from cash and cash equivalents                                          237                88
                                                                       ------------------------------------
        Total income                                                              57,308            39,064
                                                                       ------------------------------------

Expenses:
    Interest                                                                      35,143            20,091
    Interest - securities held-for-trading                                         1,361               782
    Management fee                                                                 2,579             2,130
    General and administrative expense                                               820               602
                                                                       ------------------------------------
        Total expenses                                                            39,903            23,605
                                                                       ------------------------------------

Other gain (losses):
Gain on sale of securities available-for-sale                                         10             2,813
Loss on securities held-for-trading                                              (1,372)           (5,983)
Foreign currency loss                                                              (168)                 -
Loss on impairment of asset                                                        (159)                 -
                                                                       ------------------------------------
       Total other loss                                                          (1,689)           (3,170)
                                                                       ------------------------------------

Net income                                                                        15,716            12,289
                                                                       ------------------------------------

Dividends on preferred stock                                                       1,348             2,446
                                                                       ------------------------------------

Net income available to common stockholders                                      $14,368            $9,843
                                                                       ====================================

Net income per common share, basic:                                                $0.27             $0.20
                                                                       ====================================

Net income per common share, diluted:                                              $0.27             $0.20
                                                                       ====================================

Weighted average number of shares outstanding:
    Basic                                                                         53,294            49,837
    Diluted                                                                       53,303            49,846

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


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<TABLE>
<CAPTION>

Anthracite Capital, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended March 31, 2005
(in thousands)

------------------------------------------------------------------------------------------------------------------------------
                                                   Series                           Accumulated
                                        Common       C      Additional Distributions   Other                        Total
                                        Stock,   Preferred   Paid-In    In Excess  Comprehensive  Comprehensive  Stockholders'
                                      Par Value    Stock     Capital   Of Earnings Income (Loss)       Income       Equity

<S>                                     <C>    <C>       <C>       <C>               <C>             <C>        <C>
Balance at January 1, 2005                 $53    $55,435   $578,919  $(134,075)        $13,406                    $513,738

Net income                                                                15,716                       $15,716       15,716

Unrealized gain on cash flow hedges                                                      25,004         25,004       25,004

Reclassification adjustments from
cash flow hedges included in net
income                                                                                    1,716          1,716        1,716

Change in net unrealized gain (loss)                                                   (22,029)       (22,029)     (22,029)
on securities available-for-sale,
net of reclassification adjustment
                                                                                                ---------------
Other Comprehensive income                                                                               4,691
                                                                                                ---------------
Comprehensive Income                                                                                   $20,407
                                                                                                ===============

Dividends declared-common stock                                         (14,924)                                   (14,924)

Dividends on preferred stock                                             (1,348)                                    (1,348)

Issuance of common stock                     -                    91                                                     91
                                    ----------------------------------------------------------------------------------------

Balance at March 31, 2005                  $53    $55,435   $579,010  $(134,631)        $18,097                    $517,964
                                    ========================================================================================


Disclosure of reclassification adjustment:

Unrealized holding loss
                                                                                                     $(22,039)

Reclassification for realized gains previously recorded as unrealized                                       10
                                                                                                ---------------
                                                                                                     $(22,029)
                                                                                                ===============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>


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<TABLE>
<CAPTION>

Anthracite Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

                                                                                     For the Three           For the Three
                                                                                      Months Ended            Months Ended
                                                                                     March 31, 2005          March 31, 2004
                                                                                 -----------------------  ---------------------
<S>                                                                              <C>                      <C>
Cash flows from operating activities:

     Net income                                                                            $15,716                $12,289

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

        Net (purchase) sale of trading securities                                           15,254                (33,332)

        Net loss on securities                                                               1,362                  3,170

        Earnings from real estate joint ventures and equity investments                     (2,664)                (1,594)

        Loss on impairment of assets                                                           159                      -

        Amortization of collateralized debt obligation issuance costs                          524                    404

        Premium amortization (discount accretion)                                              888                   (961)

        Unrealized net foreign currency gain                                                  (787)                     -

        Decrease in other assets                                                            14,233                  7,570

        (Decrease) increase in other liabilities                                           (12,136)                 4,876
                                                                                 -----------------------  ---------------------
Net cash provided by (used in) operating activities                                         32,549                 (7,578)
                                                                                 -----------------------  ---------------------

Cash flows from investing activities:

     Purchase of securities available-for-sale                                              (6,075)              (117,479)

     Principal payments received on securities available-for-sale                           11,034                 22,419

     Proceeds from sales of securities available-for-sale                                        -                111,790

     Funding of commercial mortgage loans                                                        -                (19,961)

     Repayments received from commercial mortgage loans                                     25,361                    120

     Repayments received from commercial mortgage loan pools                                 2,208                      -

     Decrease (increase) in restricted cash equivalents                                      2,580                 (2,544)

     Distributions from joint ventures and equity investments                                5,386                  1,287


     Investment in Carbon Capital Funds                                                          -                 (4,349)

     Net payments under hedging securities                                                  (1,341)                (2,740)
                                                                                 -----------------------  ---------------------
Net cash provided by (used in) investing activities                                         39,153                (11,457)
                                                                                 -----------------------  ---------------------

Cash flows from financing activities:

     Net decrease in borrowings under reverse repurchase agreements and credit
            facilities                                                                     (51,401)              (348,149)

     Repayments of borrowings secured by commercial mortgage loan pools                     (5,367)                     -

     Issuance of collateralized debt obligations                                                 -                384,942

     Repayments of collateralized debt obligations                                            (203)               (12,390)

     CDO issuance costs                                                                          -                (5,472)

     Proceeds from issuance of common stock, net of offering costs                              91                12,860

     Dividends paid on common stock                                                        (14,924)              (13,851)

     Dividends paid on preferred stock                                                      (1,348)               (2,446)
                                                                                 -----------------------  ---------------------
Net cash (used in) provided by financing activities                                        (73,152)               15,494
                                                                                 -----------------------  ---------------------

Net decrease in cash and cash equivalents                                                   (1,450)               (3,541)

Cash and cash equivalents, beginning of period                                              23,755                20,805
                                                                                 -----------------------  ---------------------
Cash and cash equivalents, end of period                                                   $22,305               $17,264
                                                                                 =======================  =====================


Supplemental disclosure of cash flow information:
     Interest paid                                                                         $23,563                $20,661
                                                                                 =======================  =====================

     Investments purchased not settled                                                      $9,072                $49,301
                                                                                 =======================  =====================

     Investments sold not settled                                                             $  -                $  (572)
                                                                                 =======================  =====================


Supplemental schedule of non-cash investing and financing activities:
Consolidation of the Controlling Class CMBS during the three months ended
March 31, 2004:

                                                                                                                For the Three
                                                                                                                Months Ended
                                                                                                               March 31, 2004
                                                                                                               --------------
Carrying value of assets acquired                                                                                $1,222,103
Liabilities assumed                                                                                              $1,199,034



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


<PAGE>



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

Note 1        ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Anthracite Capital, Inc. (the "Company"), a Maryland corporation, is a real
estate finance company that generates income based on the spread between the
interest income on its commercial real estate securities and commercial real
estate loans and the interest expense from borrowings used to finance its
investments. The Company seeks to earn high returns on a risk-adjusted basis
to support a consistent quarterly dividend. The Company has elected to be
taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue
Code of 1986 and, therefore, its income is largely exempt from corporate
taxation. The Company commenced operations on March 24, 1998.

The Company's ongoing investment activities encompass two core investment
activities:
1)       Commercial Real Estate Securities
2)       Commercial Real Estate Loans

The accompanying March 31, 2005 unaudited consolidated financial statements
have been prepared in conformity with the instructions to Form 10-Q and
Article 10, Rule 10-01 of Regulation S-X for interim financial statements.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America
("GAAP") for complete financial statements. These consolidated financial
statements should be read in conjunction with the annual audited financial
statements and notes thereto included in the Company's annual report on Form
10-K for 2004 filed with the Securities and Exchange Commission.

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

Recent Accounting Developments

In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123R, "Share-Based Payment." This statement is a revision to SFAS
No. 123, "Accounting for Stock-Based Compensation" and supercedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
primarily focusing on the accounting for transactions in which an entity
obtains employee services in share-based payment transactions. Entities will
be required to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service, the requisite service period
(usually the vesting period), in exchange for the award. The grant-date fair
value of employee share options and similar instruments will be estimated
using option-pricing models. If an equity award is modified after the grant
date, incremental compensation cost will be recognized in an amount equal to
the excess of the fair value of the modified award over the fair value of the
original award immediately before the modification. As amended by SEC
Interpretive Release 33-8568, "Amendment to Rule 4-01(a) of Regulation S-X
Regarding the Compliance Date for Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share Based Payment," this statement is effective as
of the beginning of the first interim or annual reporting period of the
Company's first fiscal year beginning after June 15, 2005. In accordance with
the SFAS No. 123R, as amended, the Company will adopt SFAS No. 123R effective
January 1, 2006. The Company has determined that this statement will not
impact the Company's consolidated financial statements, as there are no
unvested options as of December 31, 2004 and the Company already applies the
fair value method to all newly-issued options.

In March 2005, the FASB issued FASB Staff Position ("FSP") FIN 46(R)-5,
"Implicit Variable Interests Under FIN 46." FSP FIN 46(R)-5 states that a
reporting entity should consider whether it holds an implicit variable
interest in a variable interest entity (VIE) or in a potential VIE. If the
aggregate of the explicit and implicit variable interests held by the
reporting entity and its related parties would, if held by a single party,
identify that party as the primary beneficiary, the party within the group
most closely associated with the VIE should be deemed the primary beneficiary.
The effective date of FSP FIN 46(R)-5 is the first reporting period beginning
after March 31, 2005, with early application permitted for periods for which
financial statements have not been issued. The adoption of FASB FIN 46(R)-5 is
not expected to have a significant impact on the Company's financial
statements.

Reclassifications

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


<PAGE>


Note 2        NET INCOME PER SHARE

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

                                                                                         For the Three       For the Three
                                                                                         Months Ended         Months Ended
                                                                                        March 31, 2005       March 31, 2004
                                                                                       ------------------  -------------------
<S>                                                                                   <C>                    <C>
Numerator:

       Net income available to common stockholders                                               $14,368               $9,843
                                                                                       ------------------  -------------------
       Numerator for basic earnings per share                                                    $14,368               $9,843
                                                                                       ------------------  -------------------
       Numerator for diluted earnings per share                                                  $14,368               $9,843
                                                                                       ==================  ===================

Denominator:
       Denominator for basic earnings per share--weighted average common shares
       outstanding                                                                            53,294,024           49,836,835
       Dilutive effect of stock options                                                            9,195                9,423
                                                                                       ------------------  -------------------
       Denominator for diluted earnings per share--weighted average common shares              53,303,219           49,846,258
       outstanding and common share equivalents outstanding
                                                                                       ==================  ===================

Basic net income per weighted average common share:                                                $0.27                $0.20
                                                                                       ------------------  -------------------
Diluted net income per weighted average common share and common share equivalents:                 $0.27                $0.20
                                                                                       ------------------  -------------------
</TABLE>

Total anti-dilutive stock options excluded from the calculation of net income
per share were 1,385,151 and 1,385,651 for the three months ended March 31,
2005 and 2004, respectively.



<PAGE>


Note 3        SECURITIES AVAILABLE-FOR-SALE

The Company's securities available-for-sale are carried at estimated fair
value. The amortized cost and estimated fair value of securities
available-for-sale as of March 31, 2005 are summarized as follows:

<TABLE>
<CAPTION>

                                                                              Gross           Gross          Estimated
                                                           Amortized     Unrealized Gain    Unrealized          Fair
                   Security Description                      Cost                              Loss            Value
------------------------------------------------------- ---------------- ---------------- --------------- -----------------
<S>                                                     <C>              <C>               <C>                <C>
CMBS:
CMBS interest only securities ("IOs")                          $119,254           $2,567        $(2,117)          $119,704
Investment grade CMBS                                           403,262           11,178         (8,365)           406,075
Non-investment grade rated subordinated securities              709,267           48,411        (10,692)           746,986
Non-rated subordinated securities                                 4,734            1,253               -             5,987
Credit tenant leases                                             25,387              236           (707)            24,916
Investment grade REIT debt                                      271,213           10,695         (3,111)           278,797
Project loans                                                    23,483                -           (453)            23,030
CDO investments                                                  20,293              365         (2,146)            18,512
                                                        ---------------- ---------------- --------------- -----------------
     Total CMBS                                               1,576,893           74,705        (27,591)         1,624,007
                                                        ---------------- ---------------- --------------- -----------------

Single-family RMBS:
Agency adjustable rate securities                               105,780               40           (891)           104,929
Residential CMOs                                                  1,243               64               -             1,307
Hybrid adjustable rate mortgages ("ARMs")                        24,279                -           (577)            23,702
                                                        ---------------- ---------------- --------------- -----------------
     Total RMBS                                                 131,302              104         (1,468)           129,938
                                                        ---------------- ---------------- --------------- -----------------

                                                        ---------------- ---------------- --------------- -----------------
Total securities available-for-sale                          $1,708,195          $74,809       $(29,059)        $1,753,945
                                                        ================ ================ =============== =================
</TABLE>

As of March 31, 2005, an aggregate of $1,657,548 in estimated fair value of
the Company's securities available-for-sale was pledged to secure its
collateralized borrowings.

As of March 31, 2005, the anticipated weighted average yield to maturity based
upon the amortized cost of the subordinated CMBS ("reported yield") was 10.7%
per annum. The anticipated reported yield of the Company's investment grade
securities available-for-sale was 5.8%. The Company's reported yields on its
subordinated CMBS and investment grade 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 subordinated 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
subordinated 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.

During the three months ended March 31, 2005, the Company realized a gain of
$10 on securities available-for-sale. During the three months ended March 31,
2004, the Company sold securities available-for-sale for total proceeds of
$111,790 resulting in a realized gain of $2,813.

The following table shows the Company's estimated fair value and gross
unrealized losses, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
March 31, 2005.
<TABLE>
<CAPTION>

                                       Less than 12 Months             12 Months or More                    Total
                                   ------------ ---------------- ------------ ----------------- ------------ -----------------

                                                     Gross                         Gross                          Gross
                                    Estimated     Unrealized      Estimated      Unrealized      Estimated      Unrealized
                                      Fair         (Losses)         Fair           Losses          Fair           Losses
                                      Value                         Value                          Value
                                   ------------ ---------------- ------------ ----------------- ------------ -----------------
<S>                                    <C>             <C>            <C>                <C>        <C>              <C>
CMBS IOs                               $60,004         $(2,031)       $1,915             $(86)      $61,919          $(2,117)
Investment grade CMBS                  112,046          (1,963)       94,768           (6,402)      206,814           (8,365)
Non-investment grade rated
   subordinated securities              57,788          (1,428)       68,565           (9,264)      126,353          (10,692)
Credit tenant leases                    16,108            (707)            -                 -       16,108             (707)
Investment grade REIT debt              89,351          (2,846)        5,103             (265)       94,454           (3,111)
Project loans                           22,130            (341)          900             (112)       23,030             (453)
CDO investments                         14,528          (2,146)            -                 -       14,528           (2,146)
Agency adjustable rate securities      101,782            (891)            -                 -      101,782             (891)
ARMs                                    19,902            (401)        3,800             (176)       23,702             (577)
                                   ------------ ---------------- ------------ ----------------- ------------ -----------------
Total temporarily impaired
   securities                         $493,639        $(12,754)     $175,051         $(16,305)     $668,690         $(29,059)
                                   ============ ================ ============ ================= ============ =================
</TABLE>

The temporary impairment of the available-for-sale securities results from the
estimated fair value of the securities falling below the amortized cost basis.
Management possesses both the intent and the ability to hold the securities
until maturity, allowing for the anticipated recovery in estimated fair value
of the securities held. As such, management does not believe any of the
securities held are other-than-temporarily impaired at March 31, 2005.

As of March 31, 2005, the Company owns 16 different trusts where, through its
investment in the lowest or non-rated subordinated CMBS of such trusts, the
Company is in the first loss position. The Company considers the CMBS
securities where it maintains the right to control the foreclosure/workout
process on the underlying loans its controlling class CMBS ("Controlling
Class"). The following table sets forth certain information relating to the
aggregate principal balance and payment status of delinquent mortgage loans
underlying the Controlling Class CMBS held by the Company as of March 31,
2005. The underlying collateral related to the Company's investment in
commercial mortgage loan pools is also included in the table. See Note 4 of
the consolidated financial statements, Commercial Mortgage Loan Pools, for a
further description of the Company's investment in commercial mortgage loan
pools.
<TABLE>
<CAPTION>

     ----------------------------------------------------------------- ----------------------------------------------
                                                                                   March 31, 2005
     ------------------------------------------ ---------------------- ---------------------- -----------------------
                                                                         Number of Loans            % of
                                                   Principal                                     Collateral
     ------------------------------------------ ---------------------- ---------------------- -----------------------
<S>                                               <C>                         <C>                  <C>
     Past due 30 days to 60 days                        $55,132                     14                  0.30%
     ------------------------------------------ ---------------------- ---------------------- -----------------------
     Past due 60 days to 90 days                         40,207                      8                  0.22
     ------------------------------------------ ---------------------- ---------------------- -----------------------
     Past due 90 days or more                           124,967                     20                  0.69
     ------------------------------------------ ---------------------- ---------------------- -----------------------
     Real estate owned ("REO")                            9,445                      3                  0.05
     ------------------------------------------ ---------------------- ---------------------- -----------------------
     Foreclosure                                          3,641                      1                  0.02
     ------------------------------------------ ---------------------- ---------------------- -----------------------
     Total delinquent                                  $233,392                     46                  1.28%
     ------------------------------------------ ---------------------- ---------------------- -----------------------
     Total principal balance                        $18,252,096
     ------------------------------------------ ---------------------- ---------------------- -----------------------
</TABLE>

To the extent that the Company's expectation of realized losses on individual
loans supporting the CMBS, if any, or such resolutions differ significantly
from the Company's original loss estimates, it may be necessary to reduce the
projected reported yield on the applicable CMBS investment to better reflect
such investment's expected earnings net of expected losses, and write the
investment down to its estimated fair value. While realized losses on
individual loans may be higher or lower than original estimates, the Company
currently believes its aggregate loss estimates and reported yields are
appropriate on all investments.


Note 4        COMMERCIAL MORTGAGE LOAN POOLS

During the second quarter of 2004, the Company acquired subordinated CMBS in a
trust establishing a Controlling Class interest. As the Controlling Class
holder, the Company has the ability to control dispositions or workouts of any
defaulted loans in this trust. The Company negotiated for and obtained a
greater degree of discretion over the disposition of the commercial mortgage
loans than is typically granted to the special servicer. As a result of this
expanded discretion, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" (revised December 2003) ("FIN 46R") required the Company to
consolidate the net assets and results of operations of the trust.

The CMBS securities acquired by the Company have a par value of $41,495 with
$13,890 not rated and the balance rated BBB- to B-. During the third quarter
of 2004 the Company sold the BBB- rated security, which had the impact of
increasing the borrowings for the commercial loan pool by $5,848. As of March
31, 2005, the CMBS securities owned by the Company have a par value of
$35,495.

The debt associated with the REMIC trust is non-recourse to the Company, and
is secured only by the commercial mortgage loan pools. The consolidation of
the REMIC trust results in an increase in the Company's total debt to capital
ratio from 3.5:1 to 6.0:1, but has no effect on the Company's recourse debt to
capital ratio. The Company received authorization from its lenders to permit
debt to capital ratios in excess of existing covenants. For income recognition
purposes, the Company considers the unrated commercial mortgage loans in the
pool as a single asset reflecting the credit assumptions made in establishing
loss adjusted yields for Controlling Class securities.

Approximately 45% of the par amount of the commercial mortgage loan pool is
comprised of loans that are shadow rated A2 or better by Moody's Investors
Service Inc. and AA by Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies. The Company has taken into account the credit quality
of the underlying loans in formulating its loss assumptions. Credit losses
assumed on the entire pool are 1.40% of the principal balance, or 2.53% of the
unrated principal balance. The Company accounts for the unrated commercial
mortgage loans in the pool as a single asset based on this common credit risk
characteristic.

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


Note 5        SECURITIES HELD-FOR-TRADING

Securities classified as held-for-trading include investments that the Company
intends to hold for a short period of time, usually less than one year. This
classification generally includes highly liquid securities that the Company
acquires to earn net interest income until the Company redeploys that capital
into credit sensitive commercial real estate opportunities.

The Company's securities held-for-trading are carried at estimated fair value.
At March 31, 2005, the Company's securities held-for-trading consisted of FNMA
Mortgage Pools with an estimated fair value of $216,292. At March 31, 2005,
the Company also had foreign currency forward commitments with an estimated
fair value of $(25,801). The FNMA Mortgage Pools, and the underlying
mortgages, bear interest at fixed rates for specified periods, generally three
to seven years, after which the rates are periodically reset to market.


Note 6        COMMON STOCK

On March 10, 2005, the Company declared dividends to its common stockholders
of $0.28 per share, payable on May 2, 2005 to stockholders of record on March
31, 2005. For U.S. federal income tax purposes, the dividends are expected to
be ordinary income to the Company's stockholders.

For the three months ended March 31, 2004, the Company issued 1,077,102 shares
of Common Stock under its Dividend Reinvestment and Stock Purchase Plan (the
"Dividend Reinvestment Plan"). Net proceeds to the Company were approximately
$12,606. During the second quarter of 2004, the dividend reinvestment portion
of the Dividend Reinvestment Plan was reinstated for all dividend payments
made after August 2, 2004, and for all future dividend payment dates with a
discount of 2%. The optional cash purchase portion of the Dividend
Reinvestment Plan remains suspended; however, it may be resumed at any time.


Note 7        TRANSACTIONS WITH AFFILIATES

The Company has a Management Agreement with the Manager, a majority owned
indirect subsidiary of The PNC Financial Services Group, Inc. 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. On March 25, 2002, the
Management Agreement was extended for one year through March 27, 2003, with
the approval of the unaffiliated directors, on terms similar to the prior
agreement with the following changes: (i) the incentive fee calculation would
be based on GAAP earnings instead of funds from operations, (ii) the removal
of the four-year period to value the Management Agreement in the event of
termination and (iii) subsequent renewal periods of the Management Agreement
would be for one year instead of two years. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., a national investment banking and financial advisory
firm, advised the Board in the 2002 renewal process.

On March 6, 2003, the unaffiliated directors approved an extension of the
Management Agreement from its expiration of March 27, 2003 for one year
through March 31, 2004. The terms of the renewed agreement were similar to the
prior agreement except for the incentive fee calculation that would provide
for a rolling four-quarter high watermark rather than a quarterly calculation.
In determining the rolling four-quarter high watermark, the Company would
calculate the incentive fee based upon the current and prior three quarters'
net income. The Manager would be paid an incentive fee in the current quarter
if the Yearly Incentive Fee, as defined, were greater than what was paid to
the Manager in the prior three quarters cumulatively. The Company phased in
the rolling four-quarter high watermark commencing with the second quarter of
2003. Calculation of the incentive fee was based on GAAP earnings and adjusted
to exclude special one-time events pursuant to changes in GAAP accounting
pronouncements after discussion between the Manager and the unaffiliated
directors. The incentive fee threshold did not change. The high watermark
provided for the Manager to be paid 25% of the amount of earnings (calculated
in accordance with GAAP) per share that exceeds the product of the adjusted
issue price of the Company's Common Stock per share and the greater of 9.5% or
350 basis points over the ten-year Treasury note.

The Management Agreement was further extended for one year from March 31, 2004
through March 31, 2005. The base management fee was revised to equal 2% of the
quarterly average total stockholders' equity for the applicable quarter. The
incentive fee was revised to be 25% of the amount of earnings (calculated in
accordance with GAAP) per share that exceeds the product of the adjusted issue
price of the Company's Common Stock per share ($11.37 as of December 31, 2004)
and the greater of 8.5% or 400 basis points over the ten-year Treasury note.
On March 31, 2005, the Management Agreement was extended for one additional
year through March 31, 2006. The terms of the extended agreement did not
change.

During the year ended December 31, 2003 and for the three months ended March
31, 2004, the Company paid the Manager an annual base management fee equal to
a percentage of the average invested assets of the Company as defined in the
Management Agreement. The base management fee was 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 0.20% of average invested assets rated
above BB+. During the third quarter of 2003, the Manager agreed to reduce the
management fees by 20% from its calculated amount for the third and fourth
quarters of 2003 and the first quarter of 2004. This revision resulted in
$1,046 in savings to the Company during 2003 and $532 for the three months
ended March 31, 2004, respectively.

The Company incurred $2,579 and $2,130 in base management fees in accordance
with the terms of the Management Agreement for the three months ended March
31, 2005 and 2004, respectively. The Company did not incur incentive fees for
the three months ended March 31, 2005 and 2004. In accordance with the
provisions of the Management Agreement, the Company recorded reimbursements to
the Manager of $0 and $34 for certain expenses incurred on behalf of the
Company for the three months ended March 31, 2005 and 2004, respectively,
which are included in general and administrative expense on the accompanying
consolidated statements of operations.

The Company has an administration agreement with the Manager. Under the terms
of the administration agreement, the Manager provides financial reporting,
audit coordination and accounting oversight services to the Company. The
agreement can be cancelled upon 60-day written notice by either party. The
Company pays 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. For the three months
ended March 31, 2005 and 2004, the Company paid administration fees of $51 and
$44, respectively, which are included in general and administrative expense on
the accompanying consolidated statements of operations.

During 2001, the Company entered into a $50,000 commitment to acquire shares
in Carbon Capital, Inc. ("Carbon I"), a private commercial real estate income
opportunity fund managed by the Manager. The Carbon I investment period ended
on July 12, 2004 and the Company's investment in Carbon I as of March 31, 2005
was $41,255. The Company does not incur any additional management or incentive
fees to the Manager as a result of its investment in Carbon I. On March 31,
2005, the Company owned approximately 20% of the outstanding shares in Carbon
I.

On October 13, 2004, the Company entered into a commitment of up to $30,000 to
acquire shares in Carbon Capital II, Inc. ("Carbon II), a private commercial
real estate income opportunity fund managed by the Manager. On November 19,
2004, the Company entered into an additional $32,067 commitment to acquire
shares in Carbon II. During 2004, the Company received capital call notices
from Carbon II of $16,953. As of March 31, 2005, the Company's investment in
Carbon II was $17,866 and the Company's remaining commitment to Carbon II is
$45,114. The Company may commit up to the lower of 20% of the total of Carbon
II's capital commitments or $100,000. The Company does not incur any
additional management or incentive fees to the Manager as a result of its
investment in Carbon II. The Company's unaffiliated directors approved this
transaction in September 2004.

During 2000, the Company completed the acquisition of CORE Cap, Inc. At the
time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE
Cap, Inc.'s external advisor) $12,500 over a ten-year period ("Installment
Payment") to purchase the right to manage the CORE Cap, Inc. assets under the
existing management contract ("GMAC Contract"). The GMAC Contract had to be
terminated in order to allow the Company to complete the merger, as the
Company's management agreement with the Manager did not provide for multiple
managers. As a result the Manager offered to buy-out the GMAC Contract as the
Manager estimated it would receive incremental fees above and beyond the
Installment Payment, and thus was willing to pay for, and separately
negotiate, the termination of the GMAC Contract. Accordingly, the value of the
Installment Payment was not considered in the Company's allocation of its
purchase price to the net assets acquired in the acquisition of CORE Cap, Inc.
The Company agreed that should the Management Agreement with its Manager be
terminated, not renewed or not extended for any reason other than for cause,
the Company would pay to the Manager an amount equal to the Installment
Payment less the sum of all payments made by the Manager to GMAC. As of March
31, 2005, the Installment Payment would be $6,500 payable over six years. The
Company does not accrue for this contingent liability.


Note 8         BORROWINGS

Certain information with respect to the Company's collateralized borrowings at
March 31, 2005 is summarized as follows:
<TABLE>
<CAPTION>

                                     Lines of           Reverse         Commercial                                Total
                                    Credit and         Repurchase      Mortgage Loan      Collateralized      Collateralized
                                    Term Loans         Agreements          Pools          Debt Obligations      Borrowings
                                 --------------- ------------------ ----------------- --------------------- ----------------
<S>                                    <C>                <C>             <C>                   <C>              <C>
Outstanding borrowings                 $146,516           $606,435        $1,288,690            $1,067,764       $3,109,404
Weighted average
    borrowing rate                        3.95%              2.90%            3.77%                 5.90%             4.34%
Weighted average
    remaining maturity                 513 days            24 days        2,747 days            2,752 days       2,112 days
Estimated fair value of
    assets pledged                     $222,122           $701,913        $1,307,035            $1,195,859       $3,426,928
</TABLE>


<PAGE>


As of March 31, 2005, the Company's collateralized borrowings had the
following remaining maturities:
<TABLE>
<CAPTION>

                                                 Reverse         Commercial        Collateralized            Total
                              Lines of         Repurchase         Mortgage             Debt             Collateralized
                               Credit          Agreements       Loan  Pools         Obligations*           Borrowings
                            -------------- ----------------- ----------------- ------------------- -------------------------
<S>                             <C>         <C>                     <C>                 <C>                 <C>
Within 30 days                         $-          $569,739                $-                  $-                  $569,739
31 to 59 days                           -            36,696                 -                   -                    36,696
60 days to less than 1
year                               64,527                 -                 -                   -                    64,527
1 year to 3 years                  81,989                 -                 -                   -                    81,989
3 years to 5 years                      -                 -                 -                   -                         -
Over 5 years                            -                 -         1,288,690           1,067,764                 2,356,454
                            -------------- ----------------- ----------------- ------------------- -------------------------
                                 $146,516          $606,435        $1,288,690          $1,067,764                $3,109,405
                            ============== ================= ================= =================== =========================
</TABLE>

* Comprised of $405,573 of CDO debt with a weighted average remaining maturity
of 7.04 years as of March 31, 2005, $293,075 of CDO debt with a weighted
average remaining maturity of 7.46 years as of March 31, 2005, and $369,116 of
CDO debt with a weighted average remaining maturity of 8.14 years as of March
31, 2005.

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


Note 9      DERIVATIVE INSTRUMENTS

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

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

As of March 31, 2005, the Company had interest rate swaps with notional
amounts aggregating $1,173,959 that were designated as cash flow hedges of
borrowings under reverse repurchase agreements and CDOs. Cash flow hedges with
an estimated fair value of $25,220 are included in other assets on the
consolidated statement of financial condition and cash flow hedges with an
estimated fair value of $(10,965) are included in other liabilities on the
consolidated statement of financial condition. For the three months ended
March 31, 2005, the net change in the estimated fair value of the interest
rate swaps was a decrease of $25,265, of which $261 was deemed ineffective and
is included as a decrease of interest expense and $25,004 was recorded as an
addition to OCI. As of March 31, 2005, the $1,173,959 notional of swaps that
were designated as cash flow hedges had a weighted average remaining term of
7.1 years.

As of March 31, 2005, the Company had interest rate swaps with notional
amounts aggregating $267,445 designated as trading derivatives. Trading
derivatives with an estimated fair value of $922 are included in other assets
on the consolidated statement of financial condition and trading derivatives
with an estimated fair value of $(58) are included in other liabilities on the
consolidated statement of financial condition. For the three months ended
March 31, 2005, the change in estimated fair value for these trading
derivatives was an increase of $723 and is included as a reduction of loss on
securities held-for-trading in the consolidated statements of operations. As
of March 31, 2005, the $267,445 notional of swaps that were designated as
trading derivatives had a weighted average remaining term of 7.7 years.

Occasionally, counterparties will require the Company or the Company will
require counterparties to provide collateral for the interest rate swap
agreements in the form of margin deposits. Net deposits are recorded as a
component of either other assets or other liabilities. Should the counterparty
fail to return deposits paid, the Company would be at risk for the estimated
fair value of that asset. At March 31, 2005 and December 31, 2004, the balance
of such net margin deposits owed to counterparties as collateral under these
agreements totaled $1,300 and $(4,680), respectively.

Additionally, the Company had a forward London Interbank Offered Rate
("LIBOR") cap with a notional amount of $85,000 and an estimated fair value at
March 31, 2005, of $558 which is included in other assets, and the change in
estimated fair value related to this derivative is included as a component of
loss on securities held-for-trading in the consolidated statements of
operations.

<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

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

I.       General

Anthracite Capital, Inc. (the "Company"), a Maryland corporation, is a real
estate finance company that generates income based on the spread between the
interest income on its commercial real estate securities and commercial real
estate loans and the interest expense from borrowings to finance its
investments. The Company's primary activity is investing in high yielding
commercial real estate debt. The Company combines traditional real estate
underwriting and capital markets expertise to exploit the opportunities
arising from the continuing integration of these two disciplines. The Company
focuses on acquiring pools of performing loans in the form of commercial
mortgage-backed securities ("CMBS"), issuing secured debt backed by CMBS and
providing strategic capital for the commercial real estate industry in the
form of mezzanine loan financing. The Company commenced operations on March
24, 1998.

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

The Company is managed by BlackRock Financial Management, Inc. (the
"Manager"), a subsidiary of BlackRock, Inc., a publicly traded (NYSE: BLK)
asset management company with approximately $391,300,000 of assets under
management as of March 31, 2005. The Manager provides an operating platform
that incorporates significant asset origination, risk management, and
operational capabilities.

The Company's ongoing investment activities encompass two core investment
activities:
     1)  Commercial Real Estate Securities
     2)  Commercial Real Estate Loans

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

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

The following table illustrates the mix of the Company's asset types as of
March 31, 2005 and December 31, 2004:
<TABLE>
<CAPTION>

                                                                   Carrying Value as of
                                                         March 31, 2005        December 31, 2004
                                                         Amount        %         Amount        %
                                                     -------------------------------------------------

<S>                                                      <C>            <C>      <C>            <C>
Commercial real estate securities                        $1,624,007   45.4%      $1,628,519   44.8%
Commercial mortgage loan pools                            1,307,035   36.6        1,312,045   36.1
Commercial real estate loans(1)                             296,151   8.3           325,350   8.9
Residential mortgage-backed securities                      346,230   9.7           372,071   10.2
                                                     -------------------------------------------------

Total                                                    $3,573,423  100.0%      $3,637,985  100.0%
                                                     -------------------------------------------------
</TABLE>


(1) Includes the Company's investments the Carbon Capital Funds and a real
estate joint venture.

Commercial Real Estate Securities Portfolio Activity

Commercial real estate securities include CMBS, investment grade real estate
investment trusts ("REIT") debt and collateralized debt obligation ("CDO")
investments. During the three months ended March 31, 2005, the Company's
commercial real estate securities portfolio remained substantially the same
with an estimated fair value of $1,628,519 at December 31, 2004 compared with
$1,624,007 at March 31, 2005.

The Company's CDO offerings allow the Company to match fund its commercial
real estate portfolio by issuing long-term debt to finance long-term assets.
The CDO debt is non-recourse to the Company; therefore, the Company's losses
are limited to its equity investment in the CDO. The CDO debt is hedged to
protect the Company from an increase in short-term interest rates. As of March
31, 2005, over 86% of the estimated fair value of the Company's subordinated
CMBS assets are match funded in the Company's CDOs.



<PAGE>


The Company retained 100% of the equity of CDOs I, II and III and recorded the
transactions on its consolidated financial statements as secured financing.
<TABLE>
<CAPTION>

                  Collateral as of March 31, 2005              Debt as of March 31, 2005
            -------------------------------------------------------------------------------------
                                                                        Weighted
                 Adjusted           Loss Adjusted    Adjusted Issue     Average               Net
              Purchase Price            Yield             Price       Cost of Funds *       Spread
            --------------------------------------------------------------------------------------
<S>                 <C>                <C>               <C>               <C>                <C>
CDO I               $435,996           9.16%             $405,573         6.81%              2.35%
CDO II               324,865           7.94%              293,075**       5.74%              2.20%
CDO III              377,341           7.18%              369,116**       5.02%              2.13%
--------------------------------------------------------------------------------------------------
Total **          $1,138,202           8.15%           $1,067,764         5.90%              2.25%
</TABLE>

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

The following table details the par, estimated fair value, adjusted purchase
price, and loss adjusted yield of the Company's commercial real estate
securities outside of the CDOs as of March 31, 2005:

<TABLE>
<CAPTION>
                                                                               Adjusted
                                                      Estimated      Dollar     Purchase    Dollar   Loss Adjusted
                                     Par             Fair Value      Price       Price       Price        Yield
                               ------------------------------------------------------------------------------------
<S>                                 <C>              <C>             <C>        <C>           <C>            <C>
Investment grade CMBS               $157,169         $156,192        99.38      $163,280      103.89         4.71%
Investment grade REIT debt            43,885           42,696        97.29        44,264      100.86         5.34%
CMBS rated BB+ to B                   99,125           79,089        79.79        77,891       78.58         8.21%
CMBS rated B- or lower                74,565           13,912        18.66        15,903       21.33        15.28%
CDO investments                      201,125           18,512         9.20        20,293       10.09        50.28%
CMBS Interest Only securities
("IOs")                            3,667,317          119,704         3.26       118,325        3.23         7.28%
Project loans                         22,582           23,030       101.98        23,483      103.99         5.63%
                               ---------------------------------------------------------------------------------
Total                             $4,265,768         $453,135        10.62      $463,439       10.86         8.42%
</TABLE>



<PAGE>


The following table details the par, estimated fair value, adjusted purchase
price and loss adjusted yield of the Company's commercial real estate
securities outside of the CDOs as of December 31, 2004:

<TABLE>
<CAPTION>
                                                                               Adjusted
                                                      Estimated      Dollar     Purchase     Dollar   Loss Adjusted
                                     Par             Fair Value      Price       Price        Price        Yield
                               ------------------------------------------------------------------------------------
<S>                                 <C>              <C>             <C>        <C>           <C>        <C>
Investment grade CMBS               $145,420        $146,467        100.72      $150,612      103.57         4.59%
Investment grade REIT debt            43,885          43,291         98.65        44,274      100.89         5.34%
CMBS rated BB+ to B                   96,825          77,738         80.29        75,465       77.94         8.24%
CMBS rated B- or lower                74,740          14,833         19.85        16,120       21.57        11.00%
CDO investments                      203,182          19,837          9.76        19,450        9.57        56.65%
CMBS IOs                           3,712,604         125,246          3.37       122,379        3.30         7.31%
Project loans                         23,082          23,649        102.46        24,092      104.38         5.65%
                               ------------------------------------------------------------------------------------
Total                             $4,299,738        $451,061         10.49      $452,392       10.52         8.53%
</TABLE>

Below Investment Grade CMBS and Underlying Loan Performance

The Company divides its below investment grade CMBS investment activity into
two portfolios; Controlling Class CMBS and other below investment grade CMBS.
The distinction between the two is in the rights the Company obtains with its
investment in Controlling Class CMBS. Controlling Class rights allow the
Company to control the workout and/or disposition of defaults that occur in
the underlying loans. These securities absorb the first losses realized in the
underlying loan pools. The Company's other below investment grade CMBS have no
rights associated with its ownership to control the workout and/or disposition
of underlying loan defaults; however, these investments are not the first to
absorb losses in the underlying pools. The coupon payment on the non-rated
security can also be reduced for special servicer fees charged to the trust.
The next highest rated security in the structure will then generally be
downgraded to non-rated and become the first to absorb losses and expenses
from that point on.

During the first quarter of 2005, the Company acquired $2,300 of par of other
below investment grade CMBS. The total par of the Company's other below
investment grade CMBS at March 31, 2005 was $325,556; the average credit
protection, or subordination level, of this portfolio is 5.29%. The total par
of the Company's subordinated Controlling Class CMBS securities at March 31,
2005 was $633,774 and the total par of the loans underlying these securities
was $18,252,096.

<PAGE>


The Company's investment in its subordinated Controlling Class CMBS by credit
rating category at March 31, 2005 is as follows:
<TABLE>
<CAPTION>

                                 Estimated    Dollar       Adjusted       Dollar     Subordination
                       Par      Fair Value     Price    Purchase Price     Price         Level
                  ------------------------------------------------------------------------------------
<S>                  <C>            <C>           <C>           <C>           <C>        <C>
BB+                  $129,494       $124,553      96.18         $113,111      87.35      6.61%
BB                     78,875         67,919      86.11           64,093      81.26      4.75%
BB-                   118,144         96,345      81.55           90,823      76.87      4.30%
B+                     61,604         40,295      65.41           41,186      66.86      2.87%
B                     171,093        105,913      61.90          103,051      60.23      2.70%
B-                      7,809          4,430      56.73            4,589      58.76      1.41%
CCC                    19,326          3,495      18.08            6,580      34.05      1.47%
NR                     47,430          5,977      12.60            4,734       9.98       n/a
                  ------------------------------------------------------------------------------------
Total                $633,744       $448,927      70.83         $428,166      67.56
</TABLE>

The Company's investment in its subordinated Controlling Class CMBS by credit
rating category at December 31, 2004 is as follows:
<TABLE>
<CAPTION>

                                 Estimated    Dollar       Adjusted       Dollar     Subordination
                       Par      Fair Value     Price    Purchase Price     Price         Level
                  ------------------------------------------------------------------------------------
<S>                    <C>          <C>           <C>           <C>           <C>        <C>
BB+                    $129,493     $122,294      94.44         $112,754      87.07      6.50%
BB                       76,575       65,610      85.68           61,602      80.45      4.73%
BB-                     118,144       91,919      77.80           90,307      76.44      4.16%
B+                       61,604       40,409      65.59           40,951      66.48      2.88%
B                       171,093      106,455      62.22          102,893      60.14      2.64%
B-                        7,809        4,478      57.35            4,552      58.29      1.41%
CCC                      19,326        4,360      22.56            6,573      34.01      1.38%
NR                       47,605        5,984      12.57            4,996      10.49       n/a
                  ------------------------------------------------------------------------------------
Total                  $631,649     $441,509      69.90         $424,628      67.23
</TABLE>

During the three months ended March 31, 2005, servicers reduced the par amount
of the Company's Controlling Class CMBS in the amount of $175. Further
delinquencies and losses may cause the par reductions to continue and cause
the Company to conclude that a change in loss adjusted yield is required along
with a write down of the adjusted purchase price through the income statement
according to Emerging Issue Task Force ("EITF") 99-20. Also during the three
months ended March 31, 2005, the loan pools were paid down by $289,459. Pay
down proceeds are distributed to the highest rated CMBS class first and reduce
the percent of total underlying collateral represented by each rating
category.

For all of the Company's Controlling Class securities, the Company assumes
that a total of 1.88% of the original loan balance will not be recoverable.
This estimate was developed based on an analysis of individual loan
characteristics and prevailing market conditions at the time of origination.
This loss estimate equates to cumulative expected defaults of approximately 5%
over the life of the portfolio and an average assumed loss severity of 35% of
the defaulted loan balance. All estimated workout expenses including special
servicer fees are included in these assumptions. Actual results could differ
materially from these estimated results. See Item 3 -"Quantitative and
Qualitative Disclosures About Market Risk" for a discussion of how differences
between estimated and actual losses could affect Company earnings.

The Company monitors credit performance on a monthly basis and debt service
coverage ratios on a quarterly basis. Using these and other statistics, the
Company maintains watch lists for loans that are delinquent thirty days or
more and for loans that are not delinquent but have issues that the Company's
management believes require close monitoring.

During the first quarter of 2005, changes in prepayment assumptions caused the
expected yield on one investment grade CMBS to decline by 1 basis point. As a
result, the Company recorded a loss on impairment of the asset of $159. Based
on current economic conditions, the Company believes the $159 will be repaid
in full and the impairment charge will be reflected in income over the
remaining life of the bond.

During 2004, the Company completed a detailed re-underwriting of its 1998
vintage Controlling Class CMBS. Upon completion, the Company determined that
the Company's portfolio contained six 1998 vintage CMBS in four separate CMBS
transactions that required impairment charges at December 31, 2004 following
the application of EITF 99-20. As a result, the Company recorded a loss on
impairment of assets of $26,018 in the fourth quarter of 2004. A variety of
factors influence updated yields for these securities, including magnitude of
credit loss, timing of credit loss, prepayments and servicer advances. The
magnitude of credit losses did not significantly change as a result of this
process, as total loss expectations on the underlying loans moved from 2.06%
to 2.04%. Changes in the timing of credit losses and prepayments caused
updated yields on these securities to decline by a weighted average of 66
basis points (0.66%). Market dislocations in 1998 caused disproportionate
unrealized losses in estimated fair value on these securities based on price
quotes received from third parties. The Company had recorded these unrealized
losses as other comprehensive loss on its consolidated statement of financial
condition since that time.

Based on current economic conditions and updated credit assumptions, the
Company believes these 1998 vintage CMBS will be repaid in full and that the
impairment charge of $25,355 with respect to five of the six securities will
be reflected in income over the remaining life of the bonds.

<PAGE>


The Company considers delinquency information from the Lehman Brothers Conduit
Guide to be the most relevant benchmark to measure credit performance and
market conditions applicable to its Controlling Class CMBS holdings. The year
of issuance, or vintage year, is important, as older loan pools will tend to
have more delinquencies than newly underwritten loans. The Company owns
Controlling Class CMBS issued in 1998, 1999, 2001, 2002, 2003, and 2004.
Comparable delinquency statistics referenced by vintage year as a percentage
of par outstanding as of March 31, 2005 are shown in the table below:

                         Underlying      Delinquencies       Lehman Brothers
         Vintage Year    Collateral       Outstanding         Conduit Guide
         ----------------------------------------------------------------------
            1998          $6,582,145            3.24%                   1.61%
            1999             686,550            1.44%                   2.51%
            2001             895,794            0.16%                   1.71%
            2002           1,172,921            0.31%                   0.66%
            2003           2,146,791            0.24%                   0.26%
            2004           6,767,895               -%                   0.02%
                     ----------------------------------------------------------
            Total        $18,252,096           1.28%*                  0.84%*
* Weighted average based on current principal balance.

Morgan Stanley also tracks CMBS loan delinquencies for the specific CMBS
transactions with more than $200,000 of collateral and that have been seasoned
for at least one year. This seasoning criteria will generally adjust for the
lower delinquencies that occur in newly originated collateral. As of March 31,
2005, the Morgan Stanley index indicated that delinquencies on 297
securitizations were 1.59%, and as of December 31, 2004, this same index
indicated that delinquencies on 286 securitizations were 1.74%. See Item 3 -
"Quantitative and Qualitative Disclosures About Market Risks" for a detailed
discussion of how delinquencies and loan losses affect the Company.

Delinquencies on the Company's CMBS collateral as a percent of principal
increased in line with expectations. The Company's aggregate delinquency
experience is consistent with comparable data provided in the Lehman Brothers
Conduit Guide.

Of the 46 delinquent loans shown on the chart in Note 3 of the consolidated
financial statements, 3 loans were real estate owned and being marketed for
sale, 1 loan was in foreclosure, and the remaining 42 loans were in some form
of workout negotiations. Aggregate realized losses of $244 were realized
during the three months ended March 31, 2005. This brings cumulative realized
losses to $75,220, which is 19.3% of total estimated losses. These losses
include special servicer and other workout expenses. This experience to date
is in line with the Company's loss expectations. Realized losses and special
servicer expenses are expected to increase on the underlying loans as the
portfolio matures. Special servicer expenses are also expected to increase as
the portfolio mature.

The Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of its
right to control the workout process for delinquent loans as early as
possible. The Company maintains diversification of credit exposures through
its underwriting process and can shift its focus in future investments by
adjusting the mix of loans in subsequent acquisitions. The comparative
profiles of the loans underlying the Company's CMBS by property type as of
March 31, 2005 and December 31, 2004 are as follows:

                            3/31/05 Exposure           12/31/04 Exposure
     -------------------------------------------------------------------------
                                            % of                        % of
     Property Type         Loan Balance     Total        Loan Balance    Total
     -------------------------------------------------------------------------
     Retail                  $5,989,387      32.8%         $6,026,472   32.4%
     Multifamily              5,211,102       28.6          5,305,129    28.6
     Office                   4,596,786       25.2          4,617,616    24.9
     Industrial               1,264,592        6.9          1,272,583     6.8
     Lodging                    750,379        4.1            915,369     4.9
     Healthcare                 324,698        1.8            327,832     1.8
     Other                      115,152        0.6            115,728     0.6
                       -------------------------------------------------------
     Total                  $18,252,096       100%        $18,580,729    100%
                       =======================================================

As of March 31, 2005, the estimated fair value of the Company's holdings of
Controlling Class CMBS is $20,761 higher than the adjusted cost for these
securities which consists of a gross unrealized gain of $31,258 and a gross
unrealized loss of $10,497. The adjusted purchase price of the Company's
Controlling Class CMBS portfolio as of March 31, 2005 represents approximately
67.6% of its par amount. The estimated fair value of the Company's Controlling
Class CMBS portfolio as of March 31, 2005 represents approximately 70.8% of
its par amount. As the portfolio matures, the Company expects to recoup the
$10,497 of unrealized loss, provided that the credit losses experienced are
not greater than the credit losses assumed in the projected cash flow
analysis. As of March 31, 2005, the Company believes there has been no
material deterioration in the credit quality of its portfolio below current
expectations.

As the portfolio matures and expected losses occur, subordination levels of
the lower rated classes of a CMBS investment will be reduced. This may cause
the lower rated classes to be downgraded, which would negatively affect their
estimated fair value and therefore the Company's net asset value. Reduced
estimated fair value will negatively affect the Company's ability to finance
any such securities that are not financed through a CDO or similar matched
funding vehicle. In some cases, securities held by the Company may be upgraded
to reflect seasoning of the underlying collateral and thus would increase the
estimated fair value of the securities. During the three months ended March
31, 2005, the Company did not experience any rating changes on its Controlling
Class CMBS.

The Company's income calculated in accordance with generally accepted
accounting principles in the United States of America ("GAAP") for its CMBS
securities is computed based upon a yield, which assumes credit losses will
occur. The yield to compute the Company's taxable income does not assume there
would be credit losses, as a loss can only be deducted for tax purposes when
it has occurred. As a result, for the years 1998 through March 31, 2005, the
Company's GAAP income accrued on its CMBS assets was approximately $38,156
lower than the taxable income accrued on the CMBS assets.


<PAGE>


Commercial Real Estate Loan Activity

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

The following table summarizes the Company's commercial real estate loan
portfolio by property type as of March 31, 2005 and December 31, 2004:
<TABLE>
<CAPTION>

                                    Book Value                            Weighted
                  -----------------------------------------------         Average
                      March 31, 2005         December 31, 2004             Yield
  Property        --------------------------------------------------------------------
    Type                Amount        %        Amount      Amount     2005     2004
--------------------------------------------------------------------------------------

<S>                    <C>          <C>        <C>          <C>       <C>      <C>
Office                 $87,394      36.9%      $88,311      33.5%     9.7%     9.2%
Residential             13,530        5.7       13,480        5.1     12.2     12.2
Retail                  59,284       25.0       59,070       22.4      7.3      6.6
Hotel                   76,822       32.4      102,645       39.0      5.7      7.8
                  --------------------------------------------------------------------
Total                 $237,030     100.0%     $263,506     100.0%     7.7%     8.3%
                  --------------------------------------------------------------------
</TABLE>

In June 2003, the borrower submitted payment in an attempt to fully repay the
loan on a Los Angeles office building in connection with the borrower's sale
of the property. Upon the sale of the property securing this loan, and
pursuant to the loan documents, the Company was entitled to a supplemental
exit fee that was to be paid upon repayment of the loan. The borrower has
refused to pay the supplemental exit fee. The Company filed suit on July 15,
2003 against the co-borrowers, MP-555 West Fifth Mezzanine, LLC and MP-808
South Olive Mezzanine, LLC, which are both affiliates of Maguire Properties,
Inc. (NYSE: MPG). The suit also names the Guarantor, Robert F. Maguire, III.


Critical Accounting Estimates

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

Securities Available-for-sale

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

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

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

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

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

Impairment - Securities

In accordance with SFAS No. 115, when the estimated fair value of the security
classified as available-for-sale has been below amortized cost for a
significant period of time and the Company concludes that it no longer has the
ability or intent to hold the security for the period of time over which the
Company expects the values to recover to amortized cost, the investment is
written down to its fair value. The resulting charge is included in income,
and a new cost basis is established. Additionally, under EITF 99-20, when
changes in estimated cash flows from the cash flows previously estimated occur
due to actual prepayment and credit loss experience, and the present value of
the revised cash flows using the current expected yield is less than the
present value of the previously estimated remaining cash flows (adjusted for
cash receipts during the intervening period), an other-than-temporary
impairment is deemed to have occurred. Accordingly, the security is written
down to fair value with the resulting change being included in income, and a
new cost basis established. In both instances, the original discount or
premium is written off when the new cost basis is established.

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

Mortgage Loans

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

Derivative Instruments

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


II.      Results of Operations

Net income for the three months ended March 31, 2005 was $14,368 or $0.27 per
share (basic and diluted). Net income for the three months ended March 31,
2004 was $9,843 or $0.20 per share (basic and diluted). Net income increased
to $0.27 per share for the three months ended March 31, 2005 as compared to
$0.20 per share for the three months ended March 31, 2004.

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

<TABLE>
<CAPTION>

                                                       For the Three Months Ended March 31,
                                                           2005                     2004
                                                 -------------------------- ----------------------
                                                         Interest                 Interest
                                                          Income                   Income
                                                 -------------------------- ----------------------
<S>                                                         <C>                    <C>
Commercial real estate securities                           $32,631                $29,185
Commercial mortgage loan pools                               13,552                      -
Commercial real estate loans                                  5,344                  1,479
RMBS                                                          2,880                  6,717
Cash and cash equivalents                                       237                     88
                                                 -------------------------- ----------------------
Total                                                       $54,644                $37,469
                                                 ========================== ======================
</TABLE>

The following chart reconciles interest income and total income for the three
months ended March 31, 2005 and 2004.

<TABLE>
<CAPTION>

                                                      For the Three Months Ended March 31,
                                                           2005                   2004
                                                 ------------------------------------------------
<S>                                                         <C>                    <C>
Interest Income                                             $54,644                $37,469
Earnings from real estate joint ventures                         59                    223
Earnings from the Carbon Capital Funds                        2,605                  1,372
                                                 ------------------------------------------------
Total Income                                                $57,308                $39,064
                                                 ================================================
</TABLE>
For the three months ended March 31, 2005, interest income from commercial
real estate securities increased by $929 due to yield adjustments on the
Company's CMBS IO portfolio computed in accordance with SFAS No. 91.

Interest Expense: The following table sets forth information regarding the
total amount of interest expense from certain of the Company's collateralized
borrowings. Information is based on daily average balances during the period.

<TABLE>
<CAPTION>

                                                                 For the Three Months Ended March 31,
                                                                     2005                     2004
                                                           ------------------------- ------------------------
                                                                   Interest                 Interest
                                                                   Expense                   Expense
                                                           ------------------------- ------------------------
<S>                                                                   <C>                      <C>
Reverse repurchase agreements                                         $4,088                   $3,147
Commercial mortgage loan pools                                        12,777                        -
Lines of credit and term loan                                          1,852                      955
CDO liabilities                                                       15,748                   11,167
                                                           ------------------------- ------------------------
Total                                                                $34,465                  $15,269
                                                           ========================= ========================
</TABLE>

The foregoing interest expense amounts for the three months ended March 31,
2005 do not include a $261 reduction of interest expense related to hedge
ineffectiveness, as well as a $2,300 addition to interest expense related to
swaps. The foregoing interest expense amounts for the three months ended March
31, 2004 do not include a $973 addition to interest expense related to hedge
ineffectiveness, as well as a $4,631 addition to interest expense related to
swaps. See Note 9 of the consolidated financial statements, Derivative
Instruments, for a further description of the Company's hedge ineffectiveness.

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

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

The following chart describes the interest income, interest expense, net
interest margin and net interest spread for the Company's portfolio. The
following interest income and interest expense amounts exclude income and
expense related to real estate joint ventures, equity investments, hedge
ineffectiveness, and the effect of the consolidation of the commercial
mortgage loan pools.
<TABLE>
<CAPTION>

                                                      For the Three Months Ended March 31,
                                                     2005                              2004
                                               -------------------------------------------------
<S>                                                <C>                               <C>
                 Interest income                   $42,096                           $37,508
                 Interest expense                  $24,101                           $19,917
                 Net interest margin                  3.21%                             3.18%
                 Net interest spread                  2.28%                             2.48%
</TABLE>

Other Expenses: Expenses other than interest expense consist primarily of
management fees and general and administrative expenses. Management fees paid
to the Manager of $2,579 and $2,130 for the three months ended March 31, 2005
and 2004, respectively, were solely base management fees and were lower for
the quarter ended March 31, 2004 as the Manager agreed to reduce the
management fees by 20%. General and administrative expense of $820 and $602
for the three months ended March 31, 2005, and 2004, respectively, were
comprised of accounting agent fees, custodial agent fees, directors' fees,
fees for professional services, and insurance premiums. General and
administrative fees for the quarter ended March 31, 2005 rose primarily due to
an increase in professional fees related to ongoing Sarbanes-Oxley Act
compliance.

Other Gains (Losses): During the three months ended March 31, 2005, the
Company realized a gain of $10 on securities available-for-sale. During the
three months ended March 31, 2004, the Company sold a portion of its
securities available-for-sale for total proceeds of $111,790, resulting in a
realized gain of $2,813. The losses on securities held-for-trading were $1,372
and $5,983 for the three months ended March 31, 2005 and 2004, respectively.
The loss on impairment of asset of $159 for the three months ended March 31,
2005 was related to the Company's write down of a CMBS.

Dividends Declared: On March 10, 2005, the Company declared distributions to
its stockholders of $0.28 per share, which was paid on May 2, 2005 to
stockholders of record on March 31, 2005.

Changes in Financial Condition

Securities Available-for-sale: The Company's securities available-for-sale,
which are carried at estimated fair value, included the following at March 31,
2005 and December 31, 2004:

<TABLE>
<CAPTION>

                                                           March 31,                         December 31,
                                                             2005                               2004
                                                          Estimated                            Estimated
                                                             Fair                                Fair
                Security Description                        Value            Percentage          Value         Percentage
  ------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                    <C>             <C>               <C>
  Commercial mortgage-backed securities:
  CMBS IOs                                                  $119,704            6.8%          $125,246             7.1%
  Investment grade CMBS                                      406,075            23.2           389,813             22.1
  Non-investment grade rated subordinated
  securities                                                 746,986            42.6           753,388             42.6
  Non-rated subordinated securities                            5,987             0.3             5,994              0.3
  Credit tenant leases                                        24,916             1.4            25,251              1.4
  Investment grade REIT debt                                 278,797            15.9           285,341             16.2
  Project loans                                               23,030             1.3            23,650              1.3
  CDO investments                                             18,512             1.1            19,837              1.1
                                                     --------------------------------------------------------------------
       Total CMBS                                          1,624,007            92.6         1,628,520             92.1
                                                     --------------------------------------------------------------------

  Single-family residential mortgage-backed securities:
  Agency adjustable rate securities                          104,929            6.0            112,139              6.4
  Residential CMOs                                             1,307            0.1              1,407              0.1
  Hybrid arms                                                 23,702            1.3             25,606              1.5
                                                     --------------------------------------------------------------------
       Total RMBS                                            129,938            7.4            139,153              7.9
                                                     --------------------------------------------------------------------

                                                     --------------------------------------------------------------------
  Total securities available-for-sale                     $1,753,945          100.0%        $1,767,673           100.0%
                                                     ====================================================================
</TABLE>

Borrowings: As of March 31, 2005 and December 31, 2004, the Company's debt
consisted of line-of-credit borrowings, CDO debt, term loans and reverse
repurchase agreements, collateralized by a pledge of most of the Company's
securities available-for-sale, securities held-for-trading, and its commercial
mortgage loans. The Company's financial flexibility is affected by its ability
to renew or replace on a continuous basis its maturing short-term borrowings.
As of March 31, 2005 and December 31, 2004, the Company has obtained financing
in amounts and at interest rates consistent with the Company's short-term
financing objectives.

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

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

<TABLE>
<CAPTION>

                                                                          For the Three Months Ended
                                                                                March 31, 2005
                                                       -----------------------------------------------------------------

                                                          March 31, 2005         Maximum              Range of
                                                             Balance             Balance             Maturities
                                                       --------------------- ---------------- --------------------------
<S>                                                           <C>              <C>             <C>
CDO debt*                                                     $1,067,764       $1,067,967      6.7 to 8.8 years
Commercial mortgage loan pools                                 1,288,690       $1,294,058      3.8 to 13.7 years
Reverse repurchase agreements                                    606,435          646,335        5 to 52 days
Line of credit and term loan borrowings                          146,516          166,555       97 to 993 days
                                                       --------------------- ---------------- --------------------------
* Disclosed as adjusted issue price. Total par of the Company's CDO debt as of
March 31, 2005 was $1,080,996.
</TABLE>

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

Interest rate swap agreements as of March 31, 2005 and December 31, 2004
consisted of the following:

<TABLE>
<CAPTION>

                                                             As of March 31, 2005
                              -----------------------------------------------------------------------------------
                                                     Estimated Fair    Unamortized            Average Remaining
                                 Notional Value          Value             Cost                 Term (years)
                              -----------------------------------------------------------------------------------
<S>                                 <C>                 <C>                                        <C>
Cash flow hedges                    $461,800            $6,301                 -                   5.29
Trading swaps                         44,000               808                 -                   6.87
CDO cash flow hedges                 712,159             7,954                 -                   8.26
CDO timing swaps                     223,445                55                 -                   7.83


                                                           As of December 31, 2004
                              -----------------------------------------------------------------------------------
                                                     Estimated Fair    Unamortized            Average Remaining
                                 Notional Value          Value             Cost                 Term (years)
                              -----------------------------------------------------------------------------------
Cash flow hedges                    $452,600              $253                 -                   5.44
Trading swaps                         16,000               (5)                 -                   1.94
CDO cash flow hedges                 718,120          (11,262)                 -                   8.50
CDO timing swaps                     223,445               145                 -                   8.08
</TABLE>


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
collateralized borrowings, principal and interest payments on and maturities
of securities available-for-sale, securities held-for-trading and commercial
mortgage loans, and proceeds from the maturity or sales thereof.

To the extent that the Company may become unable to maintain its borrowings at
their current level due to changes in the financing markets for the Company's
assets, the Company may be required to sell assets in order to achieve lower
borrowing levels. In this event, the Company's level of net income would
decline. The Company's principal strategies for mitigating this risk are to
maintain portfolio leverage at levels it believes are sustainable and to
diversify the sources and types of available borrowing and capital. The
Company has utilized committed bank facilities and preferred stock offerings,
and will consider resecuritization or other achievable term funding of
existing assets.

For the three months ended March 31, 2004, the Company issued 1,077,102 shares
of Common Stock under its Dividend Reinvestment and Stock Purchase Plan (the
"Dividend Reinvestment Plan"). Net proceeds to the Company were approximately
$12,606. During the first quarter of 2004, the Company suspended its Dividend
Reinvestment Plan for all investments after March 26, 2004, and for all future
investment dates. During the second quarter of 2004, the dividend reinvestment
portion of the Dividend Reinvestment Plan was reinstated for all dividend
payments made after August 2, 2004, and for all future dividend payment dates
with a discount of 2%. The optional cash purchase portion of the Dividend
Reinvestment Plan remains suspended; however, it may be resumed at any time.

As of March 31, 2005, $90,811 of the Company's $200,000 committed credit
facility with Deutsche Bank, AG was available for future borrowings and
$50,473 of the Company's $75,000 committed credit facility with Greenwich
Capital, Inc. was available. The Company had outstanding borrowings of $12,800
under a $13,000 committed credit facility with Morgan Stanley Mortgage
Capital, Inc. The Morgan Stanley Mortgage Capital, Inc. facility matures May
11, 2006.

<PAGE>


At March 31, 2005, the Company's collateralized borrowings had the following
remaining maturities:
<TABLE>
<CAPTION>

                                                   Reverse           Collateralized      Commercial           Total
                                  Lines of        Repurchase              Debt            Mortgage        Collateralized
                                   Credit         Agreements           Obligations       Loan Pools         Borrowings
                                ------------- ------------------ -------------------- ------------------ ------------------
<S>                                  <C>            <C>                   <C>                <C>              <C>
Within 30 days                       $   -          $569,739              $    -             $    -           $569,739
31 to 59 days                            -            36,696                   -                  -             36,696
60 days to less than 1 year         64,527                 -                   -                  -             64,527
1 year to 3 years                   81,989                 -                   -                  -             81,989
3 year to 5 years                        -                 -                   -                  -                  -
Over 5 years                             -                 -           1,067,764          1,288,690          2,356,454
                                ------------- ------------------ -------------------- ------------------ ------------------
                                  $146,516          $606,435          $1,067,764         $1,288,690         $3,109,405
                                ============= ================== ==================== ================== ==================
</TABLE>

* Comprised of $405,573 of CDO debt with a weighted average remaining maturity
of 7.04 years as of March 31, 2005, $293,075 of CDO debt with a weighted
average remaining maturity of 7.46 years as of March 31, 2005 and $369,116 of
CDO debt with a weighted average remaining maturity of 8.14 years as of March
31, 2005.

The Company has no off-balance sheet financing arrangements.

The Company's operating activities provided (used) cash flows of $32,549 and
$(7,578) during the three months ended March 31, 2005 and 2004, respectively,
primarily through net income and sale of trading securities in 2004 and
through net income offset by the purchases of trading securities in 2003.

The Company's investing activities provided (used) cash flows of $39,153 and
$(11,457) during the three months ended March 31, 2005 and 2004, respectively,
primarily from repayments received on securities and commercial mortgage
loans, offset by purchase securities available-for-sale and commercial
mortgage loan purchases.

The Company's financing activities (used) provided cash flows $(73,152) and
$15,494 during the three months ended March 31, 2005 and 2004, respectively,
primarily from decrease in borrowings and dividends paid, offset by issuance
of collateralized debt obligations in 2003.

The Company is subject to various covenants in its lines of credit, including
maintaining a minimum net worth measured on GAAP of $305,000, a recourse
debt-to-equity of 3.0 to 1, a minimum cash requirement based upon certain
debt-to-equity ratios, a minimum recourse debt service coverage ratio of 1.75
and a minimum liquidity reserve of $10,000. As of March 31, 2005, the Company
was in compliance with all covenants.

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

Contingent Liability

During 2000, the Company completed the acquisition of CORE Cap, Inc. At the
time of the CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE
Cap, Inc.'s external advisor) $12,500 over a ten-year period ("Installment
Payment") to purchase the right to manage the Core Cap, Inc. assets under the
existing management contract ("GMAC Contract"). The GMAC Contract had to be
terminated in order to allow the Company to complete the merger, as the
Company's management agreement with the Manager did not provide for multiple
managers. As a result the Manager offered to buy-out the GMAC Contract as the
Manager estimated it would receive incremental fees above and beyond the
Installment Payment, and thus was willing to pay for, and separately
negotiate, the termination of the GMAC Contract. Accordingly, the value of the
Installment Payment was not considered in the Company's allocation of its
purchase price to the net assets acquired in the acquisition of CORE Cap, Inc.
The Company agreed that should the Management Agreement with its Manager be
terminated, not renewed or not extended for any reason other than for cause,
the Company would pay to the Manager an amount equal to the Installment
Payment less the sum of all payments made by the Manager to GMAC. As of March
31, 2005, the Installment Payment would be $6,500 payable over six years. The
Company does not accrue for this contingent liability.

Transactions with Affiliates

The Company has a Management Agreement with the Manager, a majority owned
indirect subsidiary of The PNC Financial Services Group, Inc. 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. On March 25, 2002, the
Management Agreement was extended for one year through March 27, 2003, with
the approval of the unaffiliated directors, on terms similar to the prior
agreement with the following changes: (i) the incentive fee calculation would
be based on GAAP earnings instead of funds from operations, (ii) the removal
of the four-year period to value the Management Agreement in the event of
termination and (iii) subsequent renewal periods of the Management Agreement
would be for one year instead of two years. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., a national investment banking and financial advisory
firm, advised the Board in the 2002 renewal process.

On March 6, 2003, the unaffiliated directors approved an extension of the
Management Agreement from its expiration of March 27, 2003 for one year
through March 31, 2004. The terms of the renewed agreement were similar to the
prior agreement except for the incentive fee calculation that would provide
for a rolling four-quarter high watermark rather than a quarterly calculation.
In determining the rolling four-quarter high watermark, the Company would
calculate the incentive fee based upon the current and prior three quarters'
net income. The Manager would be paid an incentive fee in the current quarter
if the Yearly Incentive Fee, as defined, were greater than what was paid to
the Manager in the prior three quarters cumulatively. The Company phased in
the rolling four-quarter high watermark commencing with the second quarter of
2003. Calculation of the incentive fee was based on GAAP earnings and adjusted
to exclude special one-time events pursuant to changes in GAAP accounting
pronouncements after discussion between the Manager and the unaffiliated
directors. The incentive fee threshold did not change. The high watermark
provided for the Manager to be paid 25% of the amount of earnings (calculated
in accordance with GAAP) per share that exceeds the product of the adjusted
issue price of the Company's Common Stock per share and the greater of 9.5% or
350 basis points over the ten-year Treasury note.

The Management Agreement was further extended for one year from March 31, 2004
through March 31, 2005. The base management fee was revised to equal 2% of the
quarterly average total stockholders' equity for the applicable quarter. The
incentive fee was revised to be 25% of the amount of earnings (calculated in
accordance with GAAP) per share that exceeds the product of the adjusted issue
price of the Company's Common Stock per share ($11.37 as of December 31, 2004)
and the greater of 8.5% or 400 basis points over the ten-year Treasury note.
On March 31, 2005, the Management Agreement was extended for one additional
year through March 31, 2006. The terms of the extended agreement did not
change.

During the year ended December 31, 2003 and for the three months ended March
31, 2004, the Company paid the Manager an annual base management fee equal to
a percentage of the average invested assets of the Company as defined in the
Management Agreement. The base management fee was 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 0.20% of average invested assets rated
above BB+. During the third quarter of 2003, the Manager agreed to reduce the
management fees by 20% from its calculated amount for the third and fourth
quarter of 2003 and the first quarter of 2004. This revision resulted in
$1,046 in savings to the Company during 2003 and $532 for the three months
ended March 31, 2004, respectively.

The Company incurred $2,579 and $2,130 in base management fees in accordance
with the terms of the Management Agreement for the three months ended March
31, 2005 and 2004, respectively. The Company did not incur incentive fees for
the three months ended March 31, 2005 and 2004. In accordance with the
provisions of the Management Agreement, the Company recorded reimbursements to
the Manager of $0 and $34 for certain expenses incurred on behalf of the
Company for the three months ended March 31, 2005 and 2004, respectively,
which are included in general and administrative expense on the accompanying
consolidated statements of operations.

The Company has an administration agreement with the Manager. Under the terms
of the administration agreement, the Manager provides financial reporting,
audit coordination and accounting oversight services to the Company. The
agreement can be cancelled upon 60-day written notice by either party. The
Company pays 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. For the three months
ended March 31, 2005 and 2004, the Company paid administration fees of $51 and
$44, respectively, which are included in general and administrative expense on
the accompanying consolidated statements of operations.

During 2001, the Company entered into a $50,000 commitment to acquire shares
in Carbon Capital, Inc ("Carbon I"), a private commercial real estate income
opportunity fund managed by the Manager. The Carbon I investment period ended
on July 12, 2004 and the Company's investment in Carbon I as of March 31, 2005
was $41,255. The Company does not incur any additional management or incentive
fees to the Manager as a result of its investment in Carbon I. On March 31,
2005, the Company owned approximately 20% of the outstanding shares in Carbon
I.

On October 13, 2004, the Company entered into a commitment of up to $30,000 to
acquire shares in Carbon Capital II, Inc. ("Carbon II"), a private commercial
real estate income opportunity fund managed by the Manager. On November 19,
2004, the Company entered into an additional $32,067 commitment to acquire
shares in Carbon II. During 2004, the Company received capital call notices
from Carbon II of $16,953. As of March 31, 2005, the Company's investment in
Carbon II was $17,866 and the Company's remaining commitment to Carbon II is
$45,114. The Company may commit up to the lower of 20% of the total of Carbon
II's capital commitments or $100,000. The Company does not incur any
additional management or incentive fees to the Manager as a result of its
investment in Carbon II. The Company's unaffiliated directors approved this
transaction in September 2004.

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


<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The majority of the Company's assets are fixed rate securities valued based on
a market credit spread to U.S. Treasuries. As U.S. Treasury securities are
priced to a higher yield and/or the spread to U.S. Treasuries used to price
the Company's assets is increased, the estimated fair value of the Company's
portfolio may decline. Conversely, as U.S. Treasury securities are priced to a
lower yield and/or the spread to U.S. Treasuries used to price the Company's
assets is decreased, the estimated fair value of the Company's portfolio may
increase. Changes in the estimated fair value of the Company's portfolio may
affect the Company's net income or cash flow directly through their impact on
unrealized gains or losses on securities held-for-trading or indirectly
through their impact on the Company's ability to borrow. Changes in the level
of the U.S. Treasury yield curve can also affect, among other things, the
prepayment assumptions used to value certain of the Company's securities and
the Company's ability to realize gains from the sale of such assets. In
addition, changes in the general level of the LIBOR money market rates can
affect the Company's net interest income. As of March 31, 2005, all of the
Company's liabilities outside of the CDOs are floating rate based on a market
spread to LIBOR. As the level of LIBOR increases or decreases, the Company's
interest expense will move in the same direction.

The Company may utilize a variety of financial instruments, including interest
rate swaps, caps, floors and other interest rate exchange contracts, in order
to limit the effects of fluctuations in interest rates on its operations. The
use of these types of derivatives to hedge interest-earning assets and/or
interest-bearing liabilities carries certain risks, including the risk that
losses on a hedge position will reduce the funds available for payments to
holders of securities and that such losses may exceed the amount invested in
such instruments. A hedge may not perform its intended purpose of offsetting
losses or 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 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 Company monitors and manages interest rate risk based on a method that
takes into consideration the interest rate sensitivity of the Company's assets
and liabilities, including its preferred stock. The Company's objective is to
acquire assets and match fund the purchase so that interest rate risk
associated with financing these assets is reduced or eliminated. The primary
risks associated with acquiring and financing these assets are mark-to-market
risk and short-term rate risk. Examples of these financing types include
30-day repurchase agreements and committed borrowing facilities. Certain
secured financing arrangements provide for an advance rate based upon a
percentage of the estimated fair value of the asset being financed. Market
movements that cause asset values to decline would require a margin call or a
cash payment to maintain the relationship between asset value and amount
borrowed. A cash flow based CDO is an example of a secured financing vehicle
that does not require a mark to market to establish or maintain a level of
financing. When financed assets are subject to a mark to market margin call,
the Company carefully monitors the interest rate sensitivity of those assets.
The duration of the assets financed which are subject to a mark to market
margin call was 1.91 years based on net asset value as of March 31, 2005.

The Company's reported book value incorporates the estimated fair value of the
Company's interest bearing assets but it does not incorporate the estimated
fair value of the Company's interest bearing fixed rate liabilities and
preferred stock. The fixed rate liabilities and preferred stock will generally
reduce the actual interest rate risk of the Company from a pure economic
perspective even though changes in the estimated fair value of these
liabilities are not reflected in the Company's book value. The fixed rate
liabilities issued in CDO I, CDO II and CDO III reduce the Company's economic
duration by approximately 4.84 years. The Series C Preferred Stock reduces the
Company's economic duration by approximately 0.44 year. The Company's GAAP
book value is not reduced by the change in the estimated fair value of these
liabilities and therefore is approximately 5.28 years longer than the economic
duration. The Company's duration management strategy focuses on the economic
risk and maintains economic duration within a band of 3.0 to 5.0 years. At
March 31, 2005, economic duration for the Company's entire portfolio was 3.33
years. Earnings per share is analyzed using the assumptions that interest
rates, as defined by the LIBOR curve, increase or decrease and that the yield
curves of the LIBOR rate shocks will be parallel to each other. Estimated fair
value in this scenario is calculated using the assumption that the U.S.
Treasury yield curve remains constant even though changes in both long- and
short-term interest rates can occur simultaneously.



<PAGE>


Regarding the table below, all changes in income and 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, 2005. Actual results could differ significantly from these
estimates.

                        Projected Percentage Change In
                              Earnings Per Share
                             Given LIBOR Movements
                Change in LIBOR,           Projected Change in
                +/- Basis Points            Earnings per Share
          -------------------------------------------------------
                    -200                             $0.050
                    -100                             $0.025
                     -50                             $0.012
                    Base Case
                     +50                           $(0.012)
                    +100                           $(0.025)
                    +200                           $(0.050)

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

All loans are subject to a certain probability of default. Before acquiring a
Controlling Class security, the Company will perform an analysis of the
quality of all of the loans proposed. As a result of this analysis, loans with
unacceptable risk profiles are either removed from the proposed pool or the
Company receives a price adjustment. The Company underwrites its Controlling
Class CMBS investments assuming the underlying loans will suffer a certain
dollar amount of defaults and these defaults will lead to some level of
realized losses. Loss adjusted yields are computed based on these assumptions
and applied to each class of security supported by the cash flow on the
underlying loans. The most significant variables affecting loss adjusted
yields include, but are not limited to, the number of defaults, the severity
of loss that occurs subsequent to a default and the timing of the actual loss.
The different rating levels of CMBS will react differently to changes in these
assumptions. The lowest rated securities (B- or lower) are generally more
sensitive to changes in timing of actual losses. The higher rated securities
(B or higher) are more sensitive to the severity of losses and timing of
cashflows.

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

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

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

For purposes of illustration, a doubling of the losses in the Company's
Controlling Class CMBS, without a significant acceleration of those losses,
would reduce GAAP income going forward by approximately $0.31 per share of
Common Stock per year and cause a significant write down at the time the loss
assumption is changed. The amount of the write down depends on several
factors, including which securities are most affected at the time of the write
down, but is estimated to be in the range of $0.05 to $0.25 per share based on
a doubling of expected losses. A significant acceleration of the timing of
these losses would cause the Company's net income to decrease. The Company's
exposure to a write down is mitigated by the fact that most of these assets
are financed on a non-recourse basis in the Company's CDOs, where a
significant portion of the risk of loss is transferred to the CDO bondholders.
As of March 31, 2005, securities with a total estimated fair value of
$1,204,426 are collateralizing the CDO borrowings of $1,083,268; therefore,
the Company's preferred equity interest in the three CDOs is $121,158 ($2.27
per share). The CDO borrowings are not marked to market in accordance with
GAAP even though their economic value will change in response to changes in
interest rates and/or credit spreads.

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

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


<PAGE>


ITEM 4.       CONTROLS AND PROCEDURES

           Under the direction of the Company's Chief Executive Officer and
           Chief Financial Officer, the Company evaluated its disclosure
           controls and procedures and concluded that its disclosure controls
           and procedures were effective as of March 31, 2005.

           No change in internal control over financial reporting occurred
           during the quarter ended March 31, 2005 that has materially
           affected, or is reasonably likely to materially affect, such
           internal control over financial reporting.



<PAGE>


Part II - OTHER INFORMATION

Item 1.      Legal Proceedings

At March 31, 2005 there were no pending legal proceedings of which the Company
was a defendant or of which any of its properties were subject.

Item 2.      Changes in Securities, Use of Proceeds and Issuer Purchases of
             Equity Securities
<TABLE>
<CAPTION>

                                                                     Total Number of Shares
                                                                      Purchased as Part of     Maximum Number of Shares
                                 Total Number of    Average Price   Publicly Announced Plans   that May Yet Be Purchased
                                Shares Purchased   Paid per Share          or Programs        Under the Plans or Programs
                               -------------------------------------------------------------------------------------------
<S>                            <C>                  <C>              <C>                       <C>
January 1, 2005 through                 -                 -                     -                          -
January 31, 2005
February 1, 2005 through
February 28, 2005                       -                 -                     -                          -
March 1, 2005 through March
31, 2005                                -                 -                     -                          -
                               ----------------------------------------------------------------
Total                                   -                 -                     -
                               ================================================================
</TABLE>

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

Not applicable.

Item 6.     Exhibits

Exhibits

10.1     Amendment and Extension, dated as of March 31, 2005, to the
         Amended and Restated Investment Advisory Agreement, dated as of
         March 11, 2004, between the Registrant and BlackRock Financial
         Management, Inc. (incorporated by reference to Exhibit 99.1 to the
         Form 8-K of the Registrant filed on March 31, 2005).

31.1     Certification of Chief Executive Officer

31.2     Certification of Chief Financial Officer

32.1     Section 1350 Certification of Chief Executive Officer and Chief
         Financial Officer


<PAGE>


                                  SIGNATURES


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




                                           ANTHRACITE CAPITAL, INC.



Dated:  May 10, 2005                       By: /s/ Christopher A. Milner
                                               --------------------------------
                                               Name: Christopher A. Milner
                                               Title: Chief Executive Officer
                                               (duly authorized representative)




Dated:  May 10, 2005                       By: /s/ James J. Lillis
                                               --------------------------------
                                               Name: James J. Lillis
                                               Title: Chief Financial Officer