**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-Q**





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





For
      the
      quarterly period ended June 30, 2008





OR





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





For
      the
      transition period from: ________ to ________





Commission
      File Number 001-13937





ANTHRACITE
      CAPITAL, INC.


(Exact
      name of registrant as specified in its charter)





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




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





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





NOT
      APPLICABLE


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





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


Yes
                  xNo
                  o




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




Large
                accelerated filerþ
            Accelerated
                filer o
            Non-accelerated
                filer o





Smaller
      reporting company o




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


Yes
                    oNo
                    x


At
      August
      1, 2008, 73,918,326 shares of common stock ($0.001 par value per share) were
      outstanding.




1




ANTHRACITE
      CAPITAL, INC.


FORM
      10-Q


INDEX




PART
                I -
                FINANCIAL INFORMATION
              
              PageItem
                  1.
              
              Financial
                  Statements
              
              4Consolidated
                  Statements of Financial Condition (Unaudited)At
                  June 30, 2008 and December 31, 2007
              
              4Consolidated
                  Statements of Operations (Unaudited)For
                  the Three and Six Months Ended June 30, 2008 and 2007
              
              5Consolidated
                  Statement of Changes in Stockholders' Equity (Unaudited)For
                  the Six Months Ended June 30, 2008
              
              6Consolidated
                  Statements of Cash Flows (Unaudited)For
                  the Six Months Ended June 30, 2008 and 2007
              
              7Notes
                  to Consolidated Financial Statements (Unaudited)
              
              9Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition andResults
                  of Operations
              
              37Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              68Item
                  4.
              
              Controls
                  and Procedures
              
              72Part
                  II - OTHER INFORMATIONItem
                  1.
              
              Legal
                  Proceedings
              
              73Item
                  1A.
              
              Risk
                  Factors
              
              73Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              73Item
                  3.
              
              Defaults
                  Upon Senior SecuritiesItem
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              73Item
                  5.
              
              Other
                  InformationItem
                  6.
              
              Exhibits
              
              75SIGNATURES
              
              76




2




**Cautionary
      Statement Regarding Forward-Looking Statements**


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





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




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


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


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


(4)
      the
      impact of increased competition;


(5)
      the
      impact of future acquisitions or divestitures;


(6)
      the
      unfavorable resolution of legal proceedings;


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


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


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


(10)
      fluctuations in foreign currency exchange rates; and


(11)
      the
      impact of changes to tax legislation and, generally, the tax position of the
      Company.





The
      Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and
      the Company’s subsequent reports filed with the SEC, accessible on the SEC's
      website at www.sec.gov,
      identify additional factors that can affect forward-looking
      statements.




3




Part
      I -
      FINANCIAL INFORMATION


Item
              1.
            Financial
                Statements


**Anthracite
      Capital, Inc. and Subsidiaries**


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


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




June
                30, 2008
            
            December
                31, 2007**ASSETS**Cash
                and cash equivalents
            
            
            
            
            $
            38,684
            
            
            
            
            $
            91,547Restricted
                cash equivalents
            
            
            
            
            
            15,807
            
            
            
            
            
            32,105Securities
                held-for-trading, at estimated fair value:Subordinated
                commercial mortgage-backed securities (“CMBS”)
            
            $
            797,327
            
            
            
            
            $
            1,380Investment
                grade CMBS
            
            
            1,104,751
            
            
            
            
            
            15,923Residential
                mortgage-backed securities (“RMBS”)
            
            
            973
            
            
            
            
            
            901Total
                securities held-for-trading
            
            
            
            
            
            1,903,051
            
            
            
            
            
            18,204Securities
                available-for-sale, at estimated fair value:Subordinated
                CMBS
            
            $
            -
            
            
            
            
            
            1,026,773Investment
                grade CMBS
            
            
            -
            
            
            
            
            
            1,230,075RMBS
            
            
            -
            
            
            
            
            
            9,282Total
                securities available-for-sale
            
            
            
            
            
            -
            
            
            
            
            
            2,266,130Commercial
                mortgage loans (net of loan loss reserve of $25,000 in
                2008)
            
            
            
            
            
            993,382
            
            
            
            
            
            983,387Commercial
                mortgage loan pools, at amortized cost
            
            
            
            
            
            1,229,442
            
            
            
            
            
            1,240,793Equity
                investments
            
            
            
            
            
            138,310
            
            
            
            
            
            108,748Derivative
                instruments, at estimated fair value
            
            
            
            
            
            406,202
            
            
            
            
            
            404,910Other
                assets (includes $2,210 at estimated fair value in 2008)
            
            
            
            
            
            71,948
            
            
            
            
            
            101,886Total
                Assets
            
            
            
            
            $
            4,796,826
            
            
            
            
            $
            5,247,710**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Liabilities:Borrowings:Secured
                by pledge of subordinated CMBS
            
            $
            233,251
            
            
            
            
            $
            293,287Secured
                by pledge of investment grade CMBS
            
            
            146,495
            
            
            
            
            
            207,829Secured
                by pledge of commercial mortgage loans
            
            
            225,813
            
            
            
            
            
            244,476Collateralized
                debt obligations ("CDOs") (at estimated fair value in
                2008)
            
            
            1,252,224
            
            
            
            
            
            1,823,328Senior
                unsecured notes (at estimated fair value in 2008)
            
            
            85,204
            
            
            
            
            
            162,500Senior
                convertible notes (at estimated fair value in 2008)
            
            
            71,160
            
            
            
            
            
            80,000Junior
                unsecured notes (at estimated fair value in 2008)
            
            
            35,611
            
            
            
            
            
            73,103Junior
                subordinated notes to subsidiary trusts issuing preferred securities
                (at
                estimated fair value in 2008)
            
            
            72,829
            
            
            
            
            
            180,477Secured
                by pledge of commercial mortgage loan pools
            
            
            1,211,909
            
            
            
            
            
            1,225,223Total
                borrowings
            
            
            
            
            
            3,334,496
            
            
            
            
            
            4,290,223Payable
                for investments purchased
            
            
            
            
            
            -
            
            
            
            
            
            4,693Distributions
                payable
            
            
            
            
            
            26,135
            
            
            
            
            
            21,064Derivative
                instruments, at estimated fair value
            
            
            
            
            
            433,850
            
            
            
            
            
            442,114Other
                liabilities
            
            
            
            
            
            39,936
            
            
            
            
            
            38,245Total
                Liabilities
            
            
            
            
            
            3,834,417
            
            
            
            
            
            4,796,33912%
                Series E-1 Cumulative Convertible Redeemable Preferred Stock,liquidation
                preference $23,375
            
            
            
            
            
            23,289
            
            
            
            
            
            -12%
                Series E-2 Cumulative Convertible Redeemable Preferred Stock,liquidation
                preference $23,375
            
            
            
            
            
            23,289
            
            
            
            
            
            -Stockholders’
                Equity:Preferred
                stock, 100,000,000 shares authorized;9.375%
                Series C Preferred Stock, liquidation preference $57,500
            
            
            
            
            
            55,435
            
            
            
            
            
            55,4358.25%
                Series D Preferred Stock, liquidation preference $86,250
            
            
            
            
            
            83,259
            
            
            
            
            
            83,259Common
                Stock, par value $0.001 per share; 400,000,000 shares
                authorized;
              73,309,064
                shares issued and outstanding in 2008;63,263,998
                shares issued and outstanding in 2007
            
            
            
            
            
            73
            
            
            
            
            
            63Additional
                paid-in capital
            
            
            
            
            
            762,843
            
            
            
            
            
            691,071Retained
                earnings (distributions in excess of earnings)
            
            
            
            
            
            11,654
            
            
            
            
            
            (122,738
            )Accumulated
                other comprehensive income (loss) (“OCI”)
            
            
            
            
            
            2,567
            
            
            
            
            
            (255,719
            )Total
                Stockholders’ Equity
            
            
            
            
            
            915,831
            
            
            
            
            
            451,371Total
                Liabilities, Mezzanine and
                Stockholders’ Equity
            
            
            
            
            $
            4,796,826
            
            
            
            
            $
            5,247,710




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




4




**Anthracite
      Capital, Inc. and Subsidiaries**


**Consolidated
      Statements of Operations (Unaudited)**


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





For
                the Three Months Ended
              June
                30,
            
            For
                the Six Months Ended
              June
                30,2008
            
            2007
            
            2008
            
            2007Income:Interest
                from securities
            $
            50,604
            
            $
            49,457
            
            $
            102,874
            
            $
            97,636Interest
                from commercial mortgage loans
            
            23,100
            
            
            18,282
            
            
            46,831
            
            
            29,449Interest
                from commercial mortgage loan pools
            
            12,801
            
            
            13,002
            
            
            25,666
            
            
            26,133Earnings
                (loss) from equity investments
            
            (2,566
            )
            
            12,413
            
            
            (557
            )
            
            22,369Interest
                from cash and cash equivalents
            
            918
            
            
            939
            
            
            1,982
            
            
            1,863Total
                income
            
            84,857
            
            
            94,093
            
            
            176,796
            
            
            177,450Expenses:Interest
            
            50,683
            
            
            60,085
            
            
            107,536
            
            
            115,924Management
                and incentive fees
            
            4,940
            
            
            7,729
            
            
            19,159
            
            
            14,682General
                and administrative expense
            
            1,866
            
            
            1,519
            
            
            3,682
            
            
            2,824Total
                expenses
            
            57,489
            
            
            69,333
            
            
            130,377
            
            
            133,430Other
                gains (losses):Realized
                gain (loss) on securities and swaps held-for-trading, net
            
            (4,860
            )
            
            388
            
            
            (9,835
            )
            
            371Unrealized
                gain (loss) on securities held-for-trading
            
            44,453
            
            
            -
            
            
            (325,327
            )
            
            -Unrealized
                gain on swaps classified as held-for-trading
            
            37,572
            
            
            -
            
            
            5,048
            
            
            -Unrealized
                gain (loss) on liabilities
            
            (72,061
            )
            
            
            
            
            406,257Gain
                on sale of securities available-for-sale, net
            
            -
            
            
            158
            
            
            -
            
            
            6,908Provision
                for loan loss
            
            -
            
            
            -
            
            
            (25,190
            )
            
            -Foreign
                currency gain (loss)
            
            (2,145
            )
            
            1,371
            
            
            (10,186
            )
            
            2,855Loss
                on impairment of assets
            
            -
            
            
            (2,900
            )
            
            -
            
            
            (4,098
            )Total
                other gains (losses)
            
            2,959
            
            
            (983
            )
            
            40,767
            
            
            6,036Net
                income
            
            30,327
            
            
            23,777
            
            
            87,186
            
            
            50,056Dividends
                on preferred stock
            
            5,083
            
            
            3,127
            
            
            8,209
            
            
            5,403Net
                income available to common stockholders
            
            25,244
            
            $
            20,650
            
            
            78,977
            
            $
            44,653Net
                income per common share, basic:
            $
            0.36
            
            $
            0.35
            
            $
            1.19
            
            $
            0.76Net
                income per common share, diluted:
            $
            0.34
            
            $
            0.34
            
            $
            1.09
            
            $
            0.76Weighted
                average number of shares outstanding:Basic
            
            69,458,370
            
            
            59,568,356
            
            
            66,437,973
            
            
            58,715,762Diluted
            
            85,846,376
            
            
            59,891,468
            
            
            78,340,316
            
            
            58,878,837Dividend
                declared per share of common stock
            $
            0.31
            
            $
            0.30
            
            $
            0.61
            
            $
            0.59





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




5




**Anthracite
      Capital, Inc. and Subsidiaries**


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


**For
      the Six Months Ended June 30, 2008**


**(in
      thousands)**




RetainedCommon
            
            
            Series
            
            
            Series
            
            
            
            
            
            Earnings
            
            
            AccumulatedStock,
            
            
            C
            
            
            D
            
            
            Additional
            
            
            (Distributions
            
            
            Other
            
            
            
            
            
            TotalPar
            
            
            Preferred
            
            
            Preferred
            
            
            Paid-In
            
            
            in
                Excess
            
            
            Comprehensive
            
            
            Comprehensive
            
            
            Stockholders'Value
            
            
            Stock
            
            
            Stock
            
            
            Capital
            
            
            of
                Earnings)
            
            
            Income
                (Loss)
            
            
            Income
            
            
            EquityBalance
                at January 1, 2008
            
            $
            63
            
            $
            55,435
            
            $
            83,259
            
            $
            691,071
            
            $
            (122,738
            )
            $
            (255,719
            )
            
            
            
            $
            451,371Cumulative
                effect of adjustment from adoption of SFAS No. 159
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            97,578
            
            
            253,045
            
            
            
            
            
            350,623Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            87,186
            
            
            
            
            $
            87,186
            
            
            87,186Unrealized
                loss on cash flow hedges
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,208
            )
            
            (5,208
            )
            
            (5,208
            )Reclassification
                adjustments from cash flow hedges included in net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,124
            
            
            1,124
            
            
            1,124Foreign
                currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            9,325
            
            
            9,325
            
            
            9,325Other
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,241Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            92,427Dividends
                declared-common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (42,163
            )
            
            
            
            
            
            
            
            (42,163
            )Dividends
                on preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8,209
            )
            
            
            
            
            
            
            
            (8,209
            )Issuance
                of common stock
            
            
            10
            
            
            
            
            
            
            
            
            71,772
            
            
            
            
            
            
            
            
            
            
            
            71,782Balance
                at June 30, 2008
            
            $
            73
            
            $
            55,435
            
            $
            83,259
            
            $
            762,843
            
            $
            11,654
            
            $
            2,567
            
            
            
            
            $
            915,831




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




6


**Anthracite
      Capital, Inc. and Subsidiaries**


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


**(in
      thousands)**





For
                the Six Months Ended June 30, 2008
            
            For
                the Six Months Ended June 30, 2007Cash
                flows from operating activities:Net
                income
            
            $
            87,186
            
            $
            50,056Adjustments
                to reconcile net income to net cash provided by operating
                activities:Net
                decrease in trading securities
            
            
            3,450
            
            
            132,870Purchase
                of securities held-for-trading
            
            
            (53,515
            )Unrealized
                loss on securities held-for-trading
            
            
            321,885
            
            
            -Unrealized
                gain on swaps classified as held-for-trading
            
            
            (5,048
            )
            
            -Realized
                loss on securities and swaps held-for-trading, net
            
            
            3,103
            
            
            (7,279
            )Unrealized
                gain on liabilities
            
            
            (406,257
            )
            
            -Earnings
                from subsidiary trust
            
            
            (210
            )
            
            (209
            )Distributions
                from subsidiary trust
            
            
            209
            
            
            209Loss
                (earnings) from equity investments
            
            
            557
            
            
            (22,369
            )Distributions
                of earnings from equity investments
            
            
            1,904
            
            
            8,878Provision
                for loan loss
            
            
            25,190
            
            
            -Discount
                accretion, net
            
            
            (7,470
            )
            
            (3,545
            )Loss
                on impairment of assets
            
            
            -
            
            
            4,098Unrealized
                net foreign currency gain
            
            
            (8,850
            )
            
            (10,323
            )Non-cash
                management and incentive fees
            
            
            8,502
            
            
            2,893(Disbursements)
                proceeds from termination of interest rate swap agreements
            
            
            (17,101
            )
            
            7,412Amortization
                of terminated interest rate swaps from OCI
            
            
            1,124
            
            
            763Increase
                in other assets
            
            
            (7,530
            )
            
            (8,911
            )(Decrease)
                increase in other liabilities
            
            
            (1,473
            )
            
            5,065Net
                cash (used in) provided by operating activities
            
            
            (54,344
            )
            
            159,608Cash
                flows from investing activities:Purchase
                of securities
            
            
            -
            
            
            (215,210
            )Proceeds
                from sale of securities
            
            
            74,272
            
            
            50,335Principal
                payments received on securities
            
            
            54,425
            
            
            42,659Funding
                of commercial mortgage loans
            
            
            (2,286
            )
            
            (574,980
            )Repayments
                received from commercial mortgage loans
            
            
            14,140
            
            
            155,173Repayments
                received from commercial mortgage loan pools
            
            
            5,088
            
            
            12,436Decrease
                in restricted cash equivalents
            
            
            16,298
            
            
            40,548Investment
                in equity investments
            
            
            (35,323
            )
            
            (25,209
            )Net
                cash provided by (used in) investing activities
            
            
            126,614
            
            
            (514,248
            )Cash
                flows from financing activities:(Decrease)
                increase in borrowings under reverse repurchaseagreements
                and credit facilities:Secured
                by pledge of subordinated CMBS
            
            
            (61,907
            )
            
            98,677Secured
                by pledge of investment grade CMBS
            
            
            (62,175
            )
            
            (39,753
            )Secured
                by pledge of commercial mortgage loans
            
            
            (21,570
            )
            
            218,940Secured
                by pledge of securities held-for-trading
            
            
            -
            
            
            (127,249
            )Repayments
                of borrowings secured by commercial mortgage loanpools
            
            
            (6,458
            )
            
            (12,849
            )Repayments
                of collateralized debt obligations
            
            
            (43,603
            )
            
            (29,447
            )Issuance
                of collateralized debt obligations
            
            
            -
            
            
            23,875Issuance
                costs for collateralized debt obligations
            
            
            -
            
            
            (1,518
            )Issuance
                of senior unsecured notes
            
            
            -
            
            
            87,500Issuance
                costs of senior unsecured notes
            
            
            -
            
            
            (2,456
            )Issuance
                of junior unsecured notes
            
            
            -
            
            
            67,528Issuance
                costs of junior unsecured notes
            
            
            -
            
            
            (2,113
            )Dividends
                paid on preferred stock
            
            
            (6,885
            )
            
            (4,217
            )Proceeds
                from issuance of preferred stock, net of offering costs
            
            
            69,866
            
            
            83,267Proceeds
                from issuance of common stock, net of offering costs
            
            
            43,213
            
            
            66,297Dividends
                paid on common stock
            
            
            (38,416
            )
            
            (33,685
            )Net
                cash (used in) provided by financing activities
            
            
            (127,935
            )
            
            392,797Effect
                of exchange rate changes on cash and cash equivalents
            
            
            2,802
            
            
            3,171Net
                increase, (decrease) in cash and cash equivalents
            
            
            (52,863
            )
            
            41,328Cash
                and cash equivalents, beginning of period
            
            
            91,547
            
            
            66,388Cash
                and cash equivalents, end of period
            
            
            38,684
            
            $
            107,716




7




For
                the Six Months Ended June 30, 2008
            
            
            For
                the Six Months Ended June 30, 2007Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            $
            108,769
            
            $
            109,355Series
                E-3 preferred stock conversion
            
            $
            23,289
            
            
            -Incentive
                fees paid by the issuance of common stock
            
            $
            5,280
            
            $
            5,250Investments
                purchased not settled
            
            
            -
            
            $
            66,211Commercial
                mortgage loans purchased not settled
            
            
            -
            
            $
            25,000





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




8




**Anthracite
      Capital, Inc. and Subsidiaries**


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


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





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





Anthracite
      Capital, Inc., a Maryland corporation (collectively with its subsidiaries,
      the
      "Company"), was incorporated in Maryland in November 1997, commenced operations
      on March 24, 1998 and is organized as a real estate investment trust ("REIT").
      The Company seeks to generate income from the spread between the interest
      income, gains and net operating income on its commercial real estate assets
      and
      the interest expense from borrowings to finance its investments. The Company's
      primary activities are investing in high yield commercial real estate debt
      and
      equity. The Company combines traditional real estate underwriting and capital
      markets expertise to maximize the opportunities arising from the continuing
      integration of these two disciplines. The Company focuses on acquiring pools
      of
      performing loans in the form of commercial mortgage-backed securities ("CMBS"),
      issuing secured debt backed by CMBS and providing strategic capital for the
      commercial real estate industry in the form of mezzanine loan financing and
      equity.





The
      Company’s ongoing investment activities primarily encompass three core
      investment activities:


1)
            Commercial
                Real Estate Securities


2)
            Commercial
                Real Estate Loans


3)
            Commercial
                Real Estate Equity





The
      accompanying June 30, 2008 unaudited consolidated financial statements have
      been
      prepared in conformity with the instructions to Form 10-Q and Article 10, Rule
      10-01 of Regulation S-X for interim financial statements. Accordingly, they
      do
      not include all of the information and footnotes required by accounting
      principles generally accepted in the United States of America (“GAAP”) for
      complete financial statements. In the opinion of management, all adjustments
      (which include only normal recurring adjustments) necessary to present fairly
      the financial position, results of operations and changes in cash flows have
      been made. These consolidated financial statements should be read in conjunction
      with the annual audited financial statements and notes thereto included in
      the
      Company’s annual report on Form 10-K for the year ended December 31, 2007 filed
      with the Securities and Exchange Commission (the “SEC”).





In
      preparing the consolidated financial statements, management is required to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the dates
      of
      the statements of financial condition and revenues and expenses for the periods
      covered. Actual results could differ from those estimates and assumptions.
      Significant estimates in the financial statements include the valuation of
      the
      Company’s assets and long-term liabilities, credit analysis related to certain
      of the Company's securities, and estimates pertaining to credit performance
      related to CMBS and commercial real estate loans.





***Recent
      Accounting Developments***





*Fair
      Value Measurements*





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




9




*Fair
      Value Accounting*





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





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


(2)
            investments
                in equity of subsidiary trusts;


(3)
            all
                unsecured long-term liabilities, consisting of all senior unsecured
                notes,
                senior convertiblenotes,
                junior unsecured notes and junior subordinated notes; and


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





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





*Disclosures
      about Derivative Instruments and Hedging Activities*





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




10




*Reverse
      Repurchase Agreements*





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





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





Currently,
      the Company records such assets and the related financing gross on its
      consolidated statement of financial condition, and the corresponding interest
      income and interest expense gross on its consolidated statement of operations.
      However, in a transaction in which securities are acquired from and financed
      under a repurchase agreement with the same counterparty, the acquisition may
      not
      qualify as a sale under the provisions of FAS 140. In such cases, the seller
      may
      be required to continue to consolidate the assets sold to the Company, based
      on
      their continuing involvement with such investments. The Company has not
      completed its evaluation of the impact of this FSP, but the Company may be
      precluded from presenting the assets gross on the Company's consolidated
      statement of financial condition and may be instead required to treat the
      Company's net investment in such assets as a derivative.  If it is
      determined that these transactions should be treated as derivatives, the
      derivative instruments entered into by the Company to hedge the Company's
      interest rate exposure with respect to the borrowings under the associated
      repurchase agreements may no longer qualify for hedge accounting, and would
      then, as with the underlying asset transactions, also be marked to market
      through the consolidated statement of operations.  This potential change in
      accounting treatment does not affect the economics of the transactions but
      does
      affect how the transactions would be reported on the Company's consolidated
      financial statements. The Company's cash flows, liquidity and ability to pay
      a
      dividend would be unchanged, and the Company does not believe its REIT taxable
      income or REIT status would be affected. The Company believes stockholders'
      equity would not be materially affected. At June 30, 2008, the Company has
      identified securities held-for-trading with a fair value of approximately
      $126,005 which had been purchased from and financed with reverse repurchase
      agreements totaling approximately $116,642 with the same counterparty since
      their purchase.  If the Company were required to change the current
      accounting treatment for these transactions at June 30, 2008 to that required
      by
      this FSP, total assets and total liabilities would be reduced by approximately
      $116,642.




11




*Investment
      Companies*





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





*Variable
      Interest Entities*





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





The
      Company considers the CMBS where it maintains the right to control the
      foreclosure/workout process on the underlying loans as controlling class CMBS
      ("Controlling Class"). The Company has analyzed the governing pooling and
      servicing agreements for each of its Controlling Class CMBS and believes that
      the terms are industry standard and are consistent with the qualifying
      special-purpose entity ("QSPE") criteria. As a result, the Company does not
      consolidate these entities.




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




*Convertible
      Debt Instruments*




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




12




**Note
              2**
            **NET
                INCOME PER SHARE**





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




For
                the Three Months Ended
              June
                30,
            
            For
                the Six Months Ended
              June
                30,2008
            
            2007
            
            2008
            
            2007Numerator:Numerator
                for basic earnings per share
            
            $
            25,244
            
            $
            20,650
            
            $
            78,977
            
            $
            44,653Interest
                expense on convertible senior notes
            
            
            2,370
            
            
            -
            
            
            4,683
            
            
            -Dividends
                on Series E convertible stock
            
            
            1,929
            
            
            -
            
            
            1,929
            
            
            -Numerator
                for diluted earnings per share
            
            $
            29,543
            
            $
            20,650
            
            $
            85,589
            
            $
            44,653Denominator:Denominator
                for basic earnings per share—
              weighted
                average common
                shares outstanding
            
            
            69,458,370
            
            
            59,568,356
            
            
            66,437,973
            
            
            58,715,762Dilutive
                effect of stock options
            
            
            -
            
            
            2,480
            
            
            -
            
            
            2,760Assumed
                conversion of convertible senior notes
            
            
            7,416,680
            
            
            -
            
            
            7,416,680
            
            
            -Assumed
                conversion of Series E convertible preferred stock
            
            
            8,604,781
            
            
            -
            
            
            4,302,390
            
            
            -Dilutive
                effect of stock based incentive fee
            
            
            366,545
            
            
            320,632
            
            
            183,273
            
            
            160,315Denominator
                for diluted earnings per share—weighted average common shares outstanding
                and common stock equivalents outstanding
            
            
            85,846,376
            
            
            59,891,468
            
            
            78,340,316
            
            
            58,878,837Basic
                net income per weighted average common share:
            
            $
            0.36
            
            $
            0.35
            
            $
            1.19
            
            $
            0.76Diluted
                net income per weighted average common share and common share
                equivalents:
            
            $
            0.34
            
            $
            0.34
            
            $
            1.09
            
            $
            0.76




13


Total
      anti-dilutive stock options excluded from the calculation of net income per
      share were 10,000 for the three and six months ended June 30, 2008. Total
      anti-dilutive stock options excluded from the calculation of net income per
      share were 1,380,151 for the three and six months ended June 30, 2007.





**Note
              3**
            **FAIR
                VALUE DISCLOSURES**





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





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





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





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




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




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


14
 
 The
        Company’s assessment of the significance of a particular input to the fair value
        measurement in its entirety requires judgment and considers factors specific
        to
        the investment.





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





Assets
                at Fair Value as of June 30, 2008Level
                1
            
            Level
                2
            
            Level
                3
            
            TotalSubordinated
                CMBS
            
            $
            -
            
            $
            -
            
            $
            797,327
            
            $
            797,327Investment
                grade CMBS
            
            
            -
            
            
            -
            
            
            1,104,751
            
            
            1,104,751RMBS
            
            
            -
            
            
            -
            
            
            973
            
            
            973Derivative
                instruments
            
            
            -
            
            
            406,202
            
            
            -
            
            
            406,202Investments
                in equity ofsubsidiary
                trusts*
            
            
            -
            
            
            -
            
            
            2,210
            
            
            2,210Total
            
            $
            -
            
            $
            406,202
            
            $
            1,905,261
            
            $
            2,311,463


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





Liabilities
                at Fair Value as of June 30, 2008Level
                1
            
            Level
                2
            
            Level
                3
            
            TotalSenior
                unsecured notes
            
            $
            -
            
            $
            -
            
            $
            85,204
            
            $
            85,204Senior
                convertible notes
            
            
            -
            
            
            -
            
            
            71,160
            
            
            71,160Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            35,611
            
            
            35,611Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            72,829
            
            
            72,829CDOs
            
            
            -
            
            
            -
            
            
            1,252,224
            
            
            1,252,224Derivative
                instruments
            
            
            -
            
            
            433,850
            
            
            -
            
            
            433,850Total
            
            $
            -
            
            $
            433,850
            
            $
            1,517,028
            
            $
            1,950,878





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




Subordinated
                CMBS
            
            Investment
                grade CMBS
            
            RMBS
            
            Junior
                Subordinated NotesBalance
                at April 1, 2008
            
            $
            808,510
            
            $
            1,072,749
            
            $
            1,009
            
            $
            2,093Net
                purchases (sales)
            
            
            (1,870
            )
            
            (14,480
            )
            
            (59
            )
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                (losses) included in earnings
            
            
            (8,573
            )
            
            45,885
            
            
            23
            
            
            117Gains
                included in OCI(1)
            
            
            (740
            )
            
            597
            
            
            -
            
            
            -Balance
                at June 30, 2008
            
            $
            797,327
            
            $
            1,104,751
            
            $
            973
            
            $
            2,210Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                at June 30, 2008(2)
            
            $
            (7,376
            )
            $
            47,519
            
            $
            23
            
            $
            117Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                at June 30, 2008(3)
            
            $
            (1,197
            )
            $
            (1,634
            )
            $
            -
            
            $
            -


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


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


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


15




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




Subordinated
                CMBS
            
            Investment
                grade CMBS
            
            RMBS
            
            Junior
                Subordinated NotesBalance
                at January 1, 2008
            
            $
            1,028,153
            
            $
            1,245,998
            
            $
            10,183
            
            $
            3,135Net
                purchases (sales)
            
            
            954
            
            
            (68,321
            )
            
            (9,282
            )
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                (losses) included in earnings
            
            
            (239,508
            )
            
            (76,253
            )
            
            72
            
            
            (925
            )Gains
                included in OCI(1)
            
            
            7,728
            
            
            3,327
            
            
            -
            
            
            -Balance
                at June 30, 2008
            
            $
            797,327
            
            $
            1,104,751
            
            $
            973
            
            $
            2,210Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to assets still
                held
                at June 30, 2008(2)
            
            $
            (245,381
            )
            $
            (79,549
            )
            $
            72
            
            $
            (925
            )Amount
                of total gains for the period included in earnings attributable to
                the
                change in unrealized gains or losses relating to assets still held
                at June
                30, 2008(3)
            
            $
            5,873
            
            $
            3,296
            
            $
            -
            
            $
            -


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


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


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




16




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





CDOs
            
            Senior
                unsecured notes
            
            Senior
                convertible notes
            
            Junior
                unsecured notes
            
            Trust
                preferredBalance
                at April 1, 2008
            
            $
            1,216,289
            
            $
            80,864
            
            $
            67,696
            
            $
            34,122
            
            $
            68,986Paydowns
            
            
            (20,168
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                included in earnings
            
            
            58,475
            
            
            4,340
            
            
            3,464
            
            
            1,489
            
            
            3,843Losses
                included in OCI(1)
            
            
            (2,372
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at June 30, 2008
            
            
            1,252,224
            
            
            85,204
            
            
            71,160
            
            
            35,611
            
            
            72,829Amount
                of total gains for the period included in earnings attributable to
                the
                change in unrealized gains relating to liabilities still held at
                June 30,
                2008(2)
            
            
            58,475
            
            
            4,340
            
            
            3,464
            
            
            1,939
            
            
            3,843Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to liabilities
                still
                held at June 30, 2008(3)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            (450
            )
            $
            -


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


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


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





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





CDOs
            
            Senior
                unsecured notes
            
            Senior
                convertible notes
            
            Junior
                unsecured notes
            
            Trust
                preferredBalance
                at January 1, 2008
            
            $
            1,598,502
            
            $
            114,473
            
            $
            70,186
            
            $
            44,833
            
            $
            103,312Paydowns
            
            
            (43,603
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                transfers in (out)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gains
                included in earnings
            
            
            (332,582
            )
            
            (29,269
            )
            
            974
            
            
            (9,222
            )
            
            (30,483
            )Losses
                included in OCI(1)
            
            
            29,907
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance
                at June 30, 2008
            
            
            1,252,224
            
            
            85,204
            
            
            71,160
            
            
            35,611
            
            
            72,829Amount
                of total gains (losses) for the period included in earnings attributable
                to the change in unrealized gains or losses relating to liabilities
                still
                held at June 30, 2008(2)
            
            
            (332,582
            )
            
            (29,269
            )
            
            974
            
            
            (14,897
            )
            
            (30,483
            )Amount
                of total gains for the period included in earnings attributable to
                the
                change in unrealized gains or losses relating to liabilities still
                held at
                June 30, 2008(3)
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            5,675
            
            $
            -


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


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


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




17




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





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




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





(1)
            The
                Company recorded a provision for loan loss in the amount of $25,190
                for
                the six months ended June 30, 2008. This provision relates to one
                loan
                with a principal balance of $25,000 and accrued interest of $190.
                This
                charge resulted in one loan that was identified as impaired and for
                which
                the fair value was zero at June 30,
                2008.





***Fair
      Value Option***





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





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





Carrying
                Value at January 1, 2008
            
            Transition
                Adjustment to Retained Earnings (Distributions in Excess of Earnings)
            
            Carrying
                Value at January 1, 2008 (After Adoption of FAS 159)Securities
                held-for-trading (1)
            
            $
            2,284,334
            
            $
            (227,635
            )
            $
            2,284,334CDO
                interest rate swaps (1)
            
            
            (25,410
            )
            
            (25,410
            )
            
            (25,410
            )Liability
                issuance costs
            
            
            35,137
            
            
            (35,137
            )
            
            -Senior
                unsecured notes
            
            
            (162,500
            )
            
            48,027
            
            
            (114,473
            )Senior
                convertible notes
            
            
            (80,000
            )
            
            9,814
            
            
            (70,186
            )Junior
                unsecured notes
            
            
            (73,103
            )
            
            28,269
            
            
            (44,834
            )Investments
                in equity ofsubsidiary
                trusts
            
            
            5,477
            
            
            (2,342
            )
            
            3,135Junior
                subordinated notes
            
            
            (180,477
            )
            
            77,165
            
            
            (103,312
            )CDOs
            
            
            (1,823,328
            )
            
            224,827
            
            
            (1,598,501
            )Cumulative
                effect of the adoption of the fair value option
            
            
            
            
            $
            97,578


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




18




***Valuation***





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





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





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





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





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




19




**Note
              4**
            **SECURITIES
                HELD-FOR TRADING**




Upon
      adoption of FAS 159 as of January 1, 2008, the Company elected the fair value
      option for all of its securities that were previously classified as
      available-for-sale. As a result, all securities are now classified as
      held-for-trading. This reclassification adjustment did not result in a change
      to
      the Company’s intent as it relates to these securities. For the three and six
      months ended June 30, 2008, respectively, $44,453 and $(325,327) were recorded
      as unrealized gain (loss) on the securities and is included in gain (loss)
      on
      securities held-for-trading on the consolidated statement of operations. The
      estimated fair value of securities held-for-trading at June 30, 2008 is
      summarized as follows:




Security
                Description
            
            Estimated
              Fair
              ValueU.S.
                Dollar Denominated:CMBS:Investment
                grade CMBS
            
            $
            694,844Non-investment
                grade rated subordinated CMBS
            
            
            456,261Non-rated
                subordinated CMBS
            
            
            85,804CMBS
                interest only securities (“IOs”)
            
            
            4,427Credit
                tenant leases
            
            
            23,030Investment
                grade REIT debt
            
            
            205,846Multifamily
                agency securities
            
            
            357CDO
                investments - investment grade
            
            
            2,840CDO
                investments - non-investment grade
            
            
            32,733Total
                CMBS
            
            
            1,506,142RMBS:Residential
                CMOs
            
            
            555Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            418Total
                RMBS
            
            
            973Total
                U.S. dollar denominated
            
            
            1,507,115Non-U.S.
                Dollar Denominated:Investment
                grade CMBS
            
            
            173,407Non-investment
                grade rated subordinated CMBS
            
            
            193,271Non-rated
                subordinated CMBS
            
            
            29,258Total
                non-U.S. dollar denominated
            
            
            395,936Total
                securities held-for-trading
            
            $
            1,903,051




20




At
      June
      30, 2008, an aggregate of $1,847,589 in estimated fair value of the Company's
      securities held-for-trading was pledged to secure its collateralized
      borrowings.





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





At
      June
      30, 2008, the anticipated reported yield based upon the adjusted cost of the
      Company's entire subordinated CMBS portfolio was 10.00% per annum. The
      anticipated reported yield of the Company's investment grade securities was
      6.9%. The Company's anticipated yields to maturity on its subordinated CMBS
      and
      other securities are based upon a number of assumptions that are subject to
      certain business and economic uncertainties and contingencies. Examples of
      these
      uncertainties include, among other things, the rate and timing of principal
      payments (including prepayments, repurchases, defaults, liquidations, and
      related expenses), the pass-through or coupon rate, and interest rate
      fluctuations. Additional factors that may affect the Company's anticipated
      yields to maturity on its Controlling Class CMBS include interest payment
      shortfalls due to delinquencies on the underlying mortgage loans, and the timing
      and magnitude of credit losses on the mortgage loans underlying the Controlling
      Class CMBS that are a result of the general condition of the real estate market
      (including competition for tenants and their related credit quality), and
      changes in market rental rates. As these uncertainties and contingencies are
      difficult to predict and are subject to future events that may alter these
      assumptions, no assurance can be given that the anticipated yields to maturity,
      discussed above and elsewhere in this report, will be achieved.







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





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




Loan
                Outstanding
            
            WeightedJune
                30, 2008
            
            December
                31, 2007
            
            Average
                YieldProperty
                Type
            
            Amount
            
            %
            
            Amount
            
            %
            
            2008
            
            2007U.S.Retail
            
            $
            52,437
            
            
            5.30
            %
            $
            52,209
            
            
            5.3
            %
            
            9.6
            %
            
            9.6
            %Office
            
            
            45,549
            
            
            4.6
            
            
            45,640
            
            
            4.6
            
            
            10.3
            
            
            10.3Multifamily
            
            
            175,301
            
            
            17.6
            
            
            174,873
            
            
            17.8
            
            
            9.9
            
            
            9.7Storage
            
            
            32,159
            
            
            3.2
            
            
            32,307
            
            
            3.3
            
            
            9.1
            
            
            9.1Land(1)
            
            
            -
            
            
            -
            
            
            25,000
            
            
            2.5
            
            
            -
            
            
            9.6Hotel
            
            
            12,302
            
            
            1.2
            
            
            12,208
            
            
            1.2
            
            
            10.4
            
            
            10.9Other
                MixedUse
            
            
            3,994
            
            
            0.4
            
            
            3,983
            
            
            0.5
            
            
            8.5
            
            
            8.5Total
                U.S.
            
            
            321,742
            
            
            32.4
            
            
            346,220
            
            
            35.2
            
            
            9.8
            
            
            9.7Non-U.S.Retail
            
            
            293,915
            
            
            29.6
            
            
            278,669
            
            
            28.3
            
            
            8.7
            
            
            8.9Office
            
            
            255,904
            
            
            25.8
            
            
            238,691
            
            
            24.3
            
            
            8.4
            
            
            8.8Multifamily
            
            
            44,139
            
            
            4.4
            
            
            41,403
            
            
            4.2
            
            
            8.5
            
            
            8.6Storage
            
            
            51,352
            
            
            5.2
            
            
            51,272
            
            
            5.2
            
            
            9.2
            
            
            9.5Industrial
            
            
            17,202
            
            
            1.7
            
            
            17,274
            
            
            1.8
            
            
            10.3
            
            
            10.6Hotel
            
            
            4,175
            
            
            0.4
            
            
            5,016
            
            
            0.5
            
            
            10.0
            
            
            10.1Other
                MixedUse
            
            
            4,953
            
            
            0.5
            
            
            4,842
            
            
            0.5
            
            
            9.0
            
            
            9.0Total
                Non-U.S.
            
            
            671,640
            
            
            67.6
            
            
            637,167
            
            
            64.8
            
            
            8.7
            
            
            8.9Total
            
            $
            993,382
            
            
            100.00
            %
            $
            983,387
            
            
            100.00
            %
            
            9.00
            %
            
            9.20
            %


(1)
            Net
                of a loan loss reserve of $25,000 at June 30,
                2008.




21




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





Year
                of maturity
            
            Number
                of loans maturing
            
            Current
              carrying
                value
            
            %
                of total2008
            
            
            1
            
            
            35,921
            
            
            3.6
            %2009
            
            
            -
            
            
            -
            
            
            0.0
            %2010
            
            
            3
            
            
            24,783
            
            
            2.5
            %2011
            
            
            15
            
            
            304,444
            
            
            30.6
            %2012
            
            
            18
            
            
            264,058
            
            
            26.6
            %Thereafter
            
            
            23
            
            
            364,176
            
            
            36.7
            %Total
            
            
            60
            
            
            993,382
            
            
            100.0
            %





Activity
      for the six months ended June 30, 2008 was as follows:





Book
                ValueBalance
                at December 31, 2007
            
            $
            983,387Investments
                in commercial mortgage loans
            
            
            2,286Proceeds
                from repayment of mortgage loans
            
            
            (14,140
            )Provision
                for loan loss
            
            
            (25,000
            )Foreign
                currency
            
            
            42,863Discount
              accretion, net
            
            
            3,986Balance
                at June 30, 2008
            
            $
            993,382





The
      Company recorded a provision for loan losses of $25,190 for the six months
      ended
      June 30, 2008. This provision relates to one loan with a principal balance
      of
      $25,000 and accrued interest of $190. The loan is in default and due to the
      reduction in value of the underlying collateral below the principal balance
      of
      the loan, the Company believes the collectibility of the loan is not
      probable.





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





Provision
                for possible loan losses, December 31, 2007
            
            $
            -Provision
                for loan losses
            
            
            25,190Reserve
                for possible loan losses, June 30, 2008
            
            $
            25,190




22




Subsequent
      to June 30, 2008, one of the Company’s mezzanine loans with a carrying value of
      $35,921 defaulted. The borrower executed a standstill agreement which is being
      extended to allow time to conclude an extension agreement. As of June 30, 2008,
      the Company concluded that a loan loss reserve is not necessary.








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





During
      the second quarter of 2004, the Company acquired subordinated CMBS in a trust
      representing a Controlling Class interest. The Company obtained a greater degree
      of influence over the disposition of the commercial mortgage loans than is
      typically granted to the special servicer. As a result of this expanded
      influence, the trust was not a QSPE and FIN 46R required the Company to
      consolidate the assets, liabilities and results of operations of the trust.





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





Over
      the
      life of the commercial mortgage loan pools, the Company reviews and updates
      its
      loss assumptions to determine the impact on expected cash flows to be collected.
      A decrease in estimated cash flows will reduce the amount of interest income
      recognized in future periods and would result in an impairment charge recorded
      on the consolidated statement of operations. An increase in estimated cash
      flows
      will increase the amount of interest income recorded in future periods.








**Note
              7**
            **IMPAIRMENTS
                - CMBS**





The
      Company updates its estimated cash flows for securities subject to Emerging
      Issues Task Force Issue 99-20, *Recognition
      of Interest Income and Impairment on Purchased and Retained Beneficial Interests
      in Securitized Financial Assets* (“EITF
      99-20”), on a quarterly basis. Prior to the adoption of FAS 159, an impairment
      charge was required under EITF 99-20 if the updated yield was lower than the
      current accrual yield and the security had a market value less than its adjusted
      purchase price. The Company carries these securities at their estimated fair
      value on its consolidated statements of financial condition.





For
      the
      six months ended June 30, 2007, changes in timing of assumed credit loss and
      prepayments on three CMBS required an impairment charge totaling $2,777. Also,
      the Company increased its underlying loss expectations for one below investment
      grade European CMBS during the six months ended June 30, 2007, resulting in
      an
      additional impairment charge of $1,321.





As
      a
      result of the adoption of FAS 159 on January 1, 2008, the Company will no longer
      assess securities elected under the fair value option for other-than-temporary
      impairment because the changes in fair value are recorded in the statement
      of
      operations rather than as an adjustment to OCI in stockholders’
equity.




23




**Note
              8**
            **EQUITY
                INVESTMENTS**





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





Carbon
                I
            
            Carbon
                II
            
            Dynamic
                India
              Fund
                IV *
            
            AHR
                JV
            
            AHR
                Int’l JV
            
            TotalBalance
                atDecember
                31, 2007
            
            $
            1,636
            
            $
            97,762
            
            $
            9,350
            
            $
            -
            
            $
            -
            
            $
            108,748Contributions
                toinvestments
            
            
            -
            
            
            -
            
            
            -
            
            
            1,137
            
            
            30,886
            
            
            32,023Equity
                earnings
            
            
            75
            
            
            (600
            )
            
            -
            
            
            (48
            )
            
            16
            
            
            (557
            )Distributions
                of earnings
            
            
            -
            
            
            (1,904
            )
            
            -
            
            
            -
            
            
            -
            
            
            (1,904
            )Balance
                atJune
                30, 2008
            
            $
            1,711
            
            $
            95,258
            
            $
            9,350
            
            $
            1,089
            
            $
            30,902
            
            $
            138,310


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





At
      June
      30, 2008, the Company owned approximately 20% of Carbon Capital, Inc. (“Carbon
      I”). The Company also owned approximately 26% of Carbon Capital II, Inc.
      (“Carbon II”, and collectively with Carbon I, the “Carbon Capital Funds”). The
      Carbon Capital Funds are private commercial real estate income opportunity
      funds
      managed by the Manager (see Note 12 of the consolidated financial statements).





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





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





As
      of
      June 30, 2008 Carbon II has three assets located in Florida that are in various
      stages of resolution. The properties consist of one hotel and two multifamily
      properties. Carbon II took title to one of the multifamily properties during
      2007. During the six months ended June 30, 2008, Carbon II increased its loan
      loss reserves for two loans by $911. At June 30, 2008 the total loan loss
      reserve for these loans is $4,242. For the property owned, Carbon II recognized
      an impairment charge of $5,181 during 2007.





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





During
      the second quarter of 2008, a $30,000 first leasehold mortgage on a 43.9 acre
      tract of land in Las Vegas, zoned for commercial use, went into default. Carbon
      II is engaged in workout discussions, and other alternatives are being
      explored . Carbon
      II
      believes a loan loss reserve is not necessary at June 30, 2008. All other
      commercial real estate loans in Carbon II are performing as
      expected.




24




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





The
      Company will invest up to $5,000, for up to a 10% interest, in Anthracite JV
      LLC
      (“AHR JV”). AHR JV will invest in U.S. CMBS rated higher than BB. As of June 30,
      2008, the Company had invested $1,137 in AHR JV. The
      other
      member in AHR JV is managed by or otherwise associated with an affiliate of
      Credit Suisse.





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








**Note
              9**
            **BORROWINGS**





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





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




Borrowing
                Type
            
            
            Market
                Value
            
            
            Adjusted
                Issuance Price
            
            
            Weighted
                Average Borrowing Rate
            
            
            Weighted
                Average Remaining Maturity
            
            
            Estimated
                Fair Value of Assets PledgedCredit
                facilities (1)
            
            $
            610,317
            
            $
            610,317
            
            
            4.92
            %
            
            323
                days
            
            $
            858,382Commercial
                mortgage loan pools
            
            
            1,207,151
            
            
            1,207,151
            
            
            4.00
            %
            
            4.42
                years
            
            
            1,229,442CDOs
                (2)
            
            
            1,252,224
            
            
            1,810,258
            
            
            5.71
            %
            
            5.13
                years
            
            
            1,854,758Senior
                unsecured notes (2)
            
            
            85,204
            
            
            162,500
            
            
            7.59
            %
            
            8.82
                yearsJunior
                unsecured notes (2)
            
            
            35,611
            
            
            78,777
            
            
            6.56
            %
            
            13.84
                yearsSenior
                convertible notes (2)
            
            
            71,160
            
            
            80,000
            
            
            11.75
            %
            
            19.18
                yearsJunior
                subordinated notes (2)
            
            
            72,829
            
            
            180,477
            
            
            7.64
            %
            
            27.61
                yearsTotal
                Borrowings
            
            $
            3,334,496
            
            $
            4,129,480
            
            
            5.39
            %
            
            5.86
                years
            
            $
            3,942,582


(1)
            Includes
                $4,758 of borrowings under facilities related to commercial mortgage
                loan
                pools.


(2)
            As
                a result of the adoption of FAS 159 on January 1, 2008, the Company
                records the above liabilities at fair value. Changes in fair value
                are
                recorded in unrealized gain (loss) on liabilities on the consolidated
                statement of operations. For the six months ended June 30, 2008,
                $406,257
                was recorded as a result of a reduction in the fair value of such
                liabilities.




25




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




Borrowing
                Type
            
            Within
                30 days
            
            31
                to 59 days
            
            60
                days to less than 1 year
            
            1
                year to 3 years
            
            3
                years to 5 years
            
            Over
                5 years
            
            TotalCredit
                facilities
            
            $
            -
            
            $
            -
            
            $
            439,474
            
            $
            170,843
            
            $
            -
            
            $
            -
            
            $
            610,317Commercial
                mortgage loan pools(1)
            
            
            -
            
            
            2,120
            
            
            343,333
            
            
            103,903
            
            
            40,119
            
            
            717,676
            
            
            1,207,151CDOs(1)
            
            
            397
            
            
            694
            
            
            45,144
            
            
            172,900
            
            
            736,650
            
            
            854,473
            
            
            1,810,258Senior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            162,500
            
            
            162,500Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            78,777
            
            
            78,777Senior
                convertible notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            80,000
            
            
            80,000Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            180,477
            
            
            180,477Total
                Borrowings
            
            $
            397
            
            $
            2,814
            
            $
            827,951
            
            $
            447,646
            
            $
            776,769
            
            $
            2,073,903
            
            $
            4,129,480




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




*Reverse
      Repurchase Agreements and Credit Facilities*





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





Under
      the
      credit facilities and the reverse repurchase agreements, the respective lender
      retains the right to mark the underlying collateral to estimated fair value.
      A
      reduction in the value of pledged assets would require the Company to provide
      additional collateral or fund margin calls. From time to time, the Company
      may
      be required to provide additional collateral or fund margin calls. See “Item 3 -
      Quantitative and Qualitative Disclosures About Market Risk” for a discussion of
      the Company’s exposure to potential margin calls.





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




June
                30,
                2008
            
            December
                31, 2007Maturity
                Date
            
            Facility
                Amount
            
            Total
                Borrowings
            
            Unused
                Borrowing Capacity
            
            Facility
                Amount
            
            Total
                Borrowings
            
            Unused
                Borrowing CapacityBank
                of America, N.A.(1)(7)
            
            
            9/18/09
            
            $
            275,000
            
            $
            170,843
            
            $
            104,157
            
            $
            275,000
            
            $
            211,088
            
            $
            63,912Deutsche
                Bank AG, Cayman Islands Branch(2)(6)
            
            
            12/20/08
            
            
            200,000
            
            
            110,104
            
            
            89,896
            
            
            200,000
            
            
            174,186
            
            
            25,814Bank
                of America, N.A.(3)(8)
            
            
            9/17/08
            
            
            100,000
            
            
            80,529
            
            
            19,471
            
            
            100,000
            
            
            87,706
            
            
            12,294Morgan
                Stanley Bank(3)(4)
            
            
            2/07/09
            
            
            300,000
            
            
            248,841
            
            
            51,159
            
            
            300,000
            
            
            198,621
            
            
            101,379BlackRock
                HoldCo 2, Inc.(1)(5)
            
            
            3/06/09
            
            
            60,000
            
            
            -
            
            
            60,000
            
            
            -
            
            
            -
            
            
            -$
            935,000
            
            $
            610,317
            
            $
            324,683
            
            $
            875,000
            
            $
            671,601
            
            $
            203,399


(1)
            USD
                only


(2)
            Multicurrency
                (USD and Non- USD)


(3)
            Non-USD
                only


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


(5)
            Repaid
                in full on April 8, 2008; $30,000 borrowed on July 28,
                2008


(6)
            Renewed
                on July 8, 2008 until July 8, 2010, see details
                below.


(7)
            Renewed
                on August 7, 2008 until September 18, 2010, see details
                below.


(8)
            Renewed
                on August 7, 2008 until September 18, 2010, see details
                below.




26




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





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





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





On
      July
      8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
      repurchase agreement until July 8, 2010. In connection with the extension,
      certain financial covenants were added or modified to conform to the covenants
      in the Morgan Stanley Bank facility described above. In addition, the Company
      separately agreed with Deutsche Bank AG, Cayman Islands Branch, that to the
      extent the Company from time to time agrees to covenants that are more
      restrictive than those in the Deutsche Bank agreement, the covenants in the
      Deutsche Bank agreement will automatically be deemed to be modified to match
      the
      restrictions in such more restrictive covenants, subject to limited exceptions.
      The amended agreement also provides that the Company’s failure (1) to procure an
      extension of any of its existing facilities with Bank of America, N.A. and
      Morgan Stanley Bank as of the 15th day before the maturity date of such facility
      or (2) to demonstrate to the satisfaction of Deutsche Bank that it is
      negotiating a bona fide commitment to extend or replace such facility as of
      the
      30th day before the maturity date, would constitute an event of default under
      such agreement; however, any such failure would not be deemed to constitute
      an
      event of default if the Company demonstrates to the satisfaction of Deutsche
      Bank that it has sufficient liquid assets, as defined under such agreement,
      to
      pay down such the multicurrency repurchase agreement when due. At the time
      of
      the extension, total borrowings outstanding under the Deutsche Bank agreement
      were $110,104. Under the terms of the extension agreements, no additional
      borrowings are permitted under the facility. In addition, monthly amortization
      payments of approximately $2,000 per month are required under the
      facility.




27




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





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





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





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





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





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





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




28




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





On
      April
      4, 2008, the Company issued $70,125 of 12% Series E-1 Cumulative Convertible
      Redeemable Preferred Stock, 12% Series E-2 Cumulative Convertible Redeemable
      Preferred Stock and 12% Series E-3 Cumulative Convertible Redeemable Preferred
      Stock (collectively, the “Series E Preferred Stock”). Net proceeds to the
      Company were $69,866. Dividends are payable on the Series E Preferred Stock
      at a
      12% coupon and the holder has the right to convert the preferred stock into
      common stock at $7.49 per share (a 12% premium to the closing price of the
      Company's common stock on March 28, 2008, the pricing date).





Holders
      of the Series E-1 and E-2 preferred stock have the right to require the Company
      to repurchase their shares for cash equal to the liquidation preference per
      share. The Series E-1 preferred stock repurchase date is April 4, 2012 and
      the
      Series E-2 repurchase date is April 4, 2013.





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


The
        holder is a subsidiary of a fund managed by an affiliate of Credit
        Suisse.





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





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





Shares
            
            Net
                ProceedsDividend
                Reinvestment and Stock Purchase Plan
            
            
            89,301
            
            $
            675Sales
                agency agreement
            
            
            2,601,338
            
            
            19,253Incentive
                fees*
            
            
            424,425
            
            
            3,163Incentive
                fee - stock based*
            
            
            316,320
            
            
            2,116Series
                E-3 preferred stock conversion
            
            
            3,119,661
            
            
            23,289Private
                transaction (see details below)
            
            
            3,494,021
            
            
            23,286Total
            
            
            10,045,066
            
            $
            71,782


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





In
      conjunction with the Company’s issuance of the Series E Preferred Stock on April
      4, 2008, the Company also issued 3,494,021 shares of Common Stock, for $6.69
      per
      share, resulting in net proceeds of $23,286.





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





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




29




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





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





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





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





The
      amended Management Agreement also provides for the Manager to receive a
      quarterly incentive fee equal to 25% of the amount by which the applicable
      quarter’s Operating Earnings (as defined in the Management Agreement) of the
      Company (before incentive fee) plus realized gains, net foreign currency gains
      and decreases in expense associated with reversals of credit impairments on
      commercial mortgage loans; less realized losses, net foreign currency losses
      and
      increases in expense associated with credit impairments on commercial mortgage
      loans exceeds the weighted average issue price per share of the Company's Common
      Stock ($11.21 per common share at June 30, 2008) multiplied by the ten-year
      Treasury note rate plus 4.0% per annum (expressed as a quarterly percentage),
      multiplied by the weighted average number of shares of the Company's Common
      Stock outstanding during the applicable quarterly period. The Management
      Agreement continues to provide that the incentive fee payable to the Manager
      shall be subject to a rolling four-quarter high watermark.





Under
      the
      terms of the prior Management Agreement, the Manager was entitled to receive
      an
      incentive fee equal to 25% of the amount by which the rolling four-quarter
      GAAP
      net income before the incentive fee exceeds the greater of 8.5% or 400 basis
      points over the ten-year Treasury note multiplied by the adjusted per share
      issue price of the Company’s Common Stock. Additionally, up to 30% of the
      incentive fees earned in 2007 or after were paid in shares of the Company’s
      Common Stock subject to certain provisions under a compensatory deferred stock
      plan approved by the stockholders of the Company in 2007. The Board of Directors
      also authorized a stock-based incentive plan where one-half of one percent
      of
      common shares outstanding as of December 31st is paid to the
      Manager.




30




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





For
                the Three Months Ended
              June
                30,
            
            For
                the Six Months Ended
              June
                30,2008
            
            2007
            
            2008
            
            2007Management
                fee
            
            $
            2,961
            
            $
            3,868
            
            $
            6,236
            
            $
            7,388Incentive
                fee
            
            
            1,334
            
            
            2,922
            
            
            11,879
            
            
            5,646Incentive
                fee - stock based
            
            
            645
            
            
            939
            
            
            1,044
            
            
            1,648Total
                management and incentive fees
            
            $
            4,940
            
            $
            7,729
            
            $
            19,159
            
            $
            14,682





At
      June
      30, 2008 and 2007, management and incentive fees of $14,182 and $7,308,
      respectively, remain payable to the Manager and are included on the accompanying
      consolidated statement of financial condition as a component of other
      liabilities. In accordance with the provisions of the Management Agreement,
      the
      Company recorded reimbursements to the Manager of $125 and $250 for certain
      expenses incurred on behalf of the Company during the three and six months
      ended
      June 30, 2008 and $117 and $235 for the three and six months ended June 30,
      2007, respectively.





The
      Company also has administration and accounting services agreements with the
      Manager. Under the terms of the administration services agreement, the Manager
      provides financial reporting, audit coordination and accounting oversight
      services to the Company. Under the terms of the accounting services agreement,
      the Manager provides investment accounting services to the Company. For the
      three and six months ended June 30, 2008, the Company recorded administration
      and investment accounting service fees of $255 and $510, respectively, which
      are
      included in general and administrative expense on the accompanying consolidated
      statements of operations. For the three and six months ended June 30, 2007,
      the
      Company recorded administration and investment accounting service fees of $363
      and $140, respectively, which are included in general and administrative expense
      on the accompanying consolidated statements of operations.





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





On
      March
      7, 2008, the Company entered into a $60,000 credit facility with a subsidiary
      of
      BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
      BlackRock Financial Management, Inc. The facility has a term of 364 days with
      two 364-day extension periods, subject to lender approval. The facility is
      collateralized by a pledge of the Company’s investment in Carbon II and gives
      the lender the option to purchase the Carbon II investment at fair market value
      (as determined by the terms of the agreement) from the Company. On April 8,
      2008, the Company repaid $52,500 to HoldCo 2, representing all then-outstanding
      borrowings under the facility. On July 28, 2008, the Company reborrowed $30,000
      under the facility.





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




31




The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II, a private commercial real estate income opportunity fund managed
      by
      the Manager. The Company’s investment in Carbon II at June 30, 2008 was $95,258.
      The Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon II. On June 30, 2008, the Company
      owned approximately 26% of the outstanding shares of Carbon II.





During
      2000, the Company completed the acquisition of CORE Cap, Inc. At the time of
      the
      CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE Cap, Inc.’s
      external advisor) $12,500 over a ten-year period (“Installment Payment”) to
      purchase the right to manage the Core Cap, Inc. assets under the existing
      management contract (“GMAC Contract”). The GMAC Contract had to be terminated in
      order to allow the Company to complete the merger, as the Company’s management
      agreement with the Manager did not provide for multiple managers. As a result
      the Manager offered to buy out the GMAC Contract as the Manager estimated it
      would receive incremental fees above and beyond the Installment Payment, and
      thus was willing to pay for, and separately negotiate, the termination of the
      GMAC Contract. Accordingly, the value of the Installment Payment was not
      considered in the Company’s allocation of its purchase price to the net assets
      acquired in the acquisition of CORE Cap, Inc. The Company agreed that should
      the
      Management Agreement with its Manager be terminated, not renewed or not extended
      for any reason other than for cause, the Company would pay to the Manager an
      amount equal to the Installment Payment less the sum of all payments made by
      the
      Manager to GMAC. At June 30, 2008, the Installment Payment would be $2,000
      payable over two years. The Company is not required to accrue for this
      contingent liability because it is not probable.








**Note
              13**
            **DERIVATIVE
                INSTRUMENTS AND HEDGING
                ACTIVITIES**




The
      Company accounts for its derivative investments under FAS 133, which establishes
      accounting and reporting standards for derivative instruments, including certain
      derivative instruments embedded in other contracts and for hedging activities.
      All derivatives, whether designated in hedging relationships or not, are
      required to be recorded in the consolidated statement of financial condition
      at
      estimated fair value. If the derivative is designated as a cash flow hedge,
      the
      effective portions of change in the estimated fair value of the derivative
      are
      recorded in OCI and are recognized in the consolidated statement of operations
      when the hedged item affects earnings. Ineffective portions of changes in the
      estimated fair value of cash flow hedges are recognized in earnings. If the
      derivative is designated as a fair value hedge, the changes in the estimated
      fair value of the derivative and of the hedged item attributable to the hedged
      risk are recognized in earnings.




The
      Company uses interest rate swaps to manage exposure to variable cash flows
      on
      portions of its borrowings under reverse repurchase agreements, credit
      facilities and the floating rate debt of its CDOs. On the date in which the
      derivative contract is entered into, the Company designates the derivative
      as
      either a cash flow hedge or a trading derivative.




Occasionally,
      counterparties will require the Company, or the Company will require
      counterparties, to provide collateral for the interest rate swap agreements
      in
      the form of margin deposits. Such deposits are recorded as a component of either
      other assets, other liabilities or restricted cash. Should the counterparty
      fail
      to return deposits paid, the Company would be at risk for the estimated fair
      value of that asset. At June 30, 2008, the Company did not have any balances
      pledged to counterparties as collateral under these agreements.




32




At
      June
      30, 2008, the Company had interest rate swaps with notional amounts aggregating
      $99,260 designated as cash flow hedges of borrowings under reverse repurchase
      agreements and credit facilities. Cash flow hedges with an estimated fair
      value of $1,702 are included in derivative assets in the consolidated statement
      of financial condition. For the six months ended June 30, 2008, the net change
      in the estimated fair value of the interest rate swaps was a decrease of $3,905,
      of which $1,303 was deemed ineffective and is included as a decrease of interest
      expense and $5,208 was recorded as a reduction of OCI. At June 30, 2008, the
      $99,260 of notional swaps designated as cash flow hedges had a weighted average
      remaining term of 3.5 years.





During
      the six months ended June 30, 2008, the Company terminated five of its interest
      rate swaps with a notional amount of $168,500 that were designated as cash
      flow
      hedges of borrowings under reverse repurchase agreements and credit facilities.
      The Company will reclassify the $18,253 loss in value from OCI to interest
      expense over 7.6 years, which was the weighted average remaining term of the
      swaps at the time they were closed out. At June 30, 2008, the Company has,
      in
      aggregate, $19,933 of net losses related to terminated swaps recorded in OCI.
      For the quarter ended June 30, 2008, $715 was reclassified as an increase to
      interest expense and $3,561 will be reclassified as an increase to interest
      expense for the next twelve months.





Upon
      the
      adoption of FAS 159 on January 1, 2008, the Company redesignated interest rate
      swaps with notional amounts aggregating $875,548 as trading swaps. Accordingly,
      the election of the fair value option for these swaps resulted in a
      reclassification of $(25,410) from OCI to opening distributions in excess of
      earnings as of January 1, 2008. At June 30, 2008, the Company had interest
      rate
      swaps with notional amounts aggregating $1,238,755 designated as trading
      derivatives. Trading derivatives with an estimated fair value of $3,569 are
      included in derivative assets on the consolidated statement of financial
      condition and trading derivatives with an estimated fair value of $28,236 are
      included in derivative liabilities on the consolidated statement of financial
      condition. For the six months ended June 30, 2008, the change in estimated
      fair
      value for these trading derivatives was a increase of $3,704 and is included
      as
      a component of gain (loss) on securities held-for-trading on the consolidated
      statement of operations. At June 30, 2008, the $1,238,755 notional of swaps
      designated as trading derivatives had a weighted average remaining term of
      5.2
      years.




At
      June
      30, 2008, the Company had a forward LIBOR cap with a notional amount of $85,000
      and an estimated fair value at June 30, 2008, of $260 which is included in
      derivative assets, and the change in estimated fair value related to this
      derivative of $65 is included as a component of gain (loss) in securities
      held-for-trading on the consolidated statement of operations.




***Foreign
      Currency***




The
      U.S.
      dollar is considered the functional currency for certain of the Company’s
      international subsidiaries. Foreign currency transaction gains or losses are
      recognized in the period incurred and are included in foreign currency gain
      (loss) in the consolidated statement of operations. Gains and losses on foreign
      currency forward commitments are included in foreign currency gain (loss) in
      the
      consolidated statements of operations. The Company recorded foreign currency
      gains (losses) of $(2,145) and $(10,186) for the three and six months ended
      June
      30, 2008 and $1,371 and $2,855 for the three and six months ended 2007,
      respectively.




33




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





Estimated
                Fair Value
            
            Unamortized
                Cost
            
            Average
                Remaining TermCurrency
                swaps
            
            $
            (22,181
            )
            $
            -
            
            
            8.1
                yearsCDO
                currency swaps
            
            $
            18,554
            
            $
            -
            
            
            9.4
                yearsForwards
            
            $
            (1,316
            )
            $
            -
            
            
            23
                days




Consistent
      with SFAS No. 52, *Foreign
      Currency Translation* (“FAS
      52”), FAS 133 allows hedging of the foreign currency risk of a net investment
      in
      a foreign operation. The Company may use foreign currency forward contracts
      to
      manage the foreign exchange risk associated with the Company’s investment in its
      non-U.S. dollar functional currency foreign subsidiary. In accordance with
      FAS
      52, the Company records the change in the carrying amount of this investment
      in
      the cumulative translation adjustment account within OCI. For the six months
      ended June 30, 2008 the foreign currency gain translation included in
      accumulated OCI was $9,325. Simultaneously, the effective portion of the hedge
      of this exposure is also recorded in the cumulative translation adjustment
      account and any ineffective portion of net investment hedges is recorded in
      income.








**Note
              14**
            **NET
                INTEREST INCOME**





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




For
                the Three Months
              EndedJune
                30,
            
            For
                the Six Months
              EndedJune
                30,2008
            
            2007
            
            2008
            
            2007Interest
                Income:Interest
                from securities
            
            $
            50,604
            
            $
            49,457
            
            $
            102,874
            
            $
            97,636Interest
                from commercial mortgage loans
            
            
            23,100
            
            
            18,282
            
            
            46,831
            
            
            29,449Interest
                from commercial mortgage loan pools
            
            
            12,801
            
            
            13,002
            
            
            25,666
            
            
            26,133Interest
                from cash and cash equivalents
            
            
            918
            
            
            939
            
            
            1,982
            
            
            1,863Total
                interest income
            
            
            87,423
            
            
            81,680
            
            
            177,353
            
            
            155,081Interest
                Expense:Interest
                - securities
            
            
            50,683
            
            
            60,085
            
            
            107,536
            
            
            115,924Total
                interest expense
            
            
            50,683
            
            
            60,085
            
            
            107,536
            
            
            115,924Net
                interest income
            
            $
            36,740
            
            $
            21,595
            
            $
            69,817
            
            $
            39,157




34




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





The
      ongoing weaknesses in the subprime mortgage sector and in the broader mortgage
      market have resulted in reduced liquidity for mortgage-backed securities.
      Although this reduction in liquidity was originally linked to subprime
      residential assets, to which the Company continues to have no direct exposure,
      there has been an overall reduction in liquidity across the credit spectrum
      of
      commercial and residential mortgage products. The Company received and funded
      margin calls totaling $82,570 during 2007 and an additional $120,619 from
      January 1, 2008 through August 8, 2008, $35,708 of which occurred since April
      1,
      2008. The Company's ability to maintain adequate liquidity is dependent on
      several factors, many of which are outside of the Company's control, including
      the Company's continued access to credit facilities (including repurchase
      agreements) on acceptable terms, the Company's compliance with REIT distribution
      requirements, the timing and amount of margin calls by lenders that are
      dependent on the valuation of the Company's investments and credit risk of
      the
      underlying collateral.





The
      aforementioned factors could adversely affect one or more of the Company's
      credit facilities (including repurchase agreement) counterparties which provide
      funding for the Company's portfolio or could cause one or more of the Company's
      counterparties to be unwilling or unable to provide the Company with additional
      financing or to extend current credit facilities on the maturity date. If one
      or
      more of the Company's counterparties were unwilling or unable to provide the
      Company with additional financing and the Company were unable to replace such
      facilities, the Company’s liquidity would be reduced, which could have a
      material adverse effect on the Company's financial condition and business.
      The
      Company could be forced to sell its investments at a time when prices are
      depressed, which could adversely affect the Company's ability to comply with
      REIT asset and income tests and maintain its qualification as a
      REIT.





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





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





To
      date,
      the credit performance of the Company's investments remains consistent both
      with
      the Company's expectations and with the broader commercial real estate finance
      industry experience; nevertheless, during the first six months of 2008, the
      capital markets have been marking down the value of all credit-sensitive
      securities regardless of performance. The Company believes it has sufficient
      sources of liquidity to fund operations for the next twelve months.




35




During
      the first six months of 2008, the Company raised $19,253 of capital by issuing
      common shares under its sales agency agreement. From January 1, 2008 through
      August 8, 2008, the Company raised an additional $4,103 under the sales agency
      agreement. On April 4, 2008, in a privately negotiated transaction, the Company
      issued $70,125 of Series E Preferred Stock and 3,494,021 shares of Common Stock,
      resulting in combined net proceeds of $93,425. The Company repaid $52,500 of
      its
      loan from HoldCo 2 on April 8, 2008. On July 28, 2008, the Company subsequently
      reborrowed $30,000 from HoldCo 2.





In
      the
      event of a further reduction in market liquidity, the Company’s short-term (one
      year or less) liquidity needs will be met primarily with $38,684 of unrestricted
      cash and cash equivalents held as of June 30, 2008 as well as future common
      stock issuances under the Company’s sales agency agreement, and $30,000 of
      unused borrowing capacity from HoldCo 2.





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




36




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





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





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





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





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


1)
            Commercial
                Real Estate Securities


2)
            Commercial
                Real Estate Loans


3)
            Commercial
                Real Estate Equity


4)
            Residential
                Mortgage-Backed Securities (“RMBS”)





The
      commercial real estate securities portfolio provides diversification and high
      yields that are adjusted for anticipated losses over a period of time (typically
      a ten-year weighted average life). Commercial real estate loans and equity
      provide attractive risk adjusted returns over shorter periods of time through
      strategic investments in specific property types or regions. Given the
      dramatically improved relative value in the RMBS sector, the Company may
      replenish the RMBS portfolio as its source of liquidity.





The
      Company's common stock, par value $0.001 per share ("Common Stock"), is traded
      on the New York Stock Exchange ("NYSE") under the symbol "AHR". The Company's
      primary long-term objective is to generate sufficient earnings to support a
      dividend at a level which provides an attractive return to stockholders. The
      Company establishes its dividend by analyzing the long-term sustainability
      of
      earnings given existing market conditions and the current composition of its
      portfolio. This includes an analysis of the Company's credit loss assumptions,
      general level of interest rates and projected hedging costs.





The
      Company is managed by BlackRock Financial Management, Inc. (the "Manager"),
      a
      subsidiary of BlackRock, Inc., a publicly traded (NYSE:BLK) asset management
      company with more than $1.428 trillion of assets under management at June 30,
      2008. The Manager provides an operating platform that incorporates significant
      asset origination, risk management, and operational capabilities.





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




37




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





Carrying
                Value atJune
                30, 2008
            
            December
                31, 2007Amount
            
            %
            
            Amount
            
            %Commercial
                real estate securities(4)
            
            $
            1,903,167
            
            
            44.6
            %
            $
            2,274,151
            
            
            49.3
            %Commercial
                real estate loans(1)
            
            
            1,121,253
            
            
            26.3
            
            
            1,082,785
            
            
            23.5Commercial
                mortgage loan pools(2)
            
            
            1,229,442
            
            
            28.8
            
            
            1,240,793
            
            
            26.9Commercial
                real estate equity(3)
            
            
            9,350
            
            
            0.2
            
            
            9,350
            
            
            0.2Total
                commercial real estate assets
            
            
            4,263,212
            
            
            100
            %
            
            4,607,079
            
            
            99.9Residential
                mortgage-backed securities
            
            
            973
            
            
            0.0
            
            
            10,183
            
            
            0.1Total
            
            $
            4,264,185
            
            
            100
            %
            $
            4,617,262
            
            
            100.0
            %


(1)
            Includes
                equity investments in the Carbon Capital funds and AHR International
                JV.


(2)
            Represents
                a Controlling Class CMBS that is consolidated for accounting purposes.
                See
                Note 6 of the consolidated financial
                statements.


(3)
            Represents
                equity investment in Dynamic India Fund
                IV


(4)
            Includes
                equity investment in AHR JV





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




38




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





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




Commercial
                Real Estate Securities(2)
            
            
            Commercial
                Real Estate Loans(1)
            
            
            Commercial
                Real Estate
              Equity
            
            
            Commercial
                Mortgage Loan Pools
            
            
            Total
                Commercial Real Estate Assets
            
            
            Total
                Commercial Real Estate Assets (USD)
            
            
            %
                of TotalUSD
            
            $
            1,507,230
            
            $
            418,711
            
            
            -
            
            $
            1,229,442
            
            $
            3,155,383
            
            $
            3,155,383
            
            
            74.0
            %GBP
            
            £
            28,487
            
            £
            44,679
            
            
            -
            
            
            -
            
            £
            73,166
            
            
            145,613
            
            
            3.4
            %EURO
            
            €
            136,522
            
            €
            370,606
            
            
            -
            
            
            -
            
            €
            507,128
            
            
            799,006
            
            
            18.7
            %Canadian
                Dollars
            
            C$
            86,907
            
            C$
            6,276
            
            
            -
            
            
            -
            
            C$
            93,183
            
            
            91,847
            
            
            2.2
            %Japanese
                Yen
            
            ¥
            4,079,450
            
            
            -
            
            
            -
            
            
            -
            
            ¥
            4,079,450
            
            
            38,484
            
            
            0.9
            %Swiss
                Francs
            
            
            -
            
            CHF
            23,966
            
            
            -
            
            
            -
            
            CHF
            23,966
            
            
            23,529
            
            
            0.6
            %Indian
                Rupees
            
            
            -
            
            
            -
            
            Rs
            401,302
            
            
            -
            
            Rs
            401,302
            
            
            9,350
            
            
            0.2
            %Total
                USD Equivalent
            
            $
            1,903,167
            
            $
            1,121,253
            
            $
            9,350
            
            $
            1,229,442
            
            $
            4,263,212
            
            $
            4,263,212
            
            
            100.0
            %


(1)
            Includes
                the Company’s investments in the Carbon Capital Funds of $96,969 and AHR
                International JV of $30,902 at June 30,
                2008.


(2)
            Includes
                the Company’s investment in AHR JV of $1,089 at June 30,
                2008.







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






Commercial
                Real Estate Securities
            
            
            Commercial
                Real Estate Loans(1)
            
            
            Commercial
                Real Estate Equity
            
            
            Commercial
                Mortgage Loan Pools
            
            
            Total
                Commercial Real Estate Assets
            
            
            Total
                Commercial Real Estate Assets (USD)
            
            
            %
                of TotalUSD
            
            $
            1,881,328
            
            $
            445,618
            
            $
            -
            
            $
            1,240,793
            
            $
            3,567,739
            
            $
            3,567,739
            
            
            77.4
            %GBP
            
            £
            35,247
            
            £
            45,944
            
            
            -
            
            
            -
            
            £
            81,191
            
            
            161,618
            
            
            3.5
            %Euro
            
            €
            131,645
            
            €
            354,458
            
            
            -
            
            
            -
            
            €
            486,103
            
            
            710,707
            
            
            15.4
            %Canadian
                Dollars
            
            C$
            89,805
            
            C$
            6,249
            
            
            -
            
            
            -
            
            C$
            96,054
            
            
            97,324
            
            
            2.1
            %Japanese
                Yen
            
            ¥
            4,378,759
            
            
            -
            
            
            -
            
            
            -
            
            ¥
            4,378,759
            
            
            39,196
            
            
            0.9
            %Swiss
                Francs
            
            
            -
            
            CHF
            23,939
            
            
            -
            
            
            -
            
            CHF
            23,939
            
            
            21,145
            
            
            0.5
            %Indian
                Rupees
            
            
            -
            
            
            -
            
            Rs
            368,483
            
            
            -
            
            Rs
            368,483
            
            
            9,350
            
            
            0.2
            %Total
                USD Equivalent
            
            $
            2,274,151
            
            $
            1,082,785
            
            $
            9,350
            
            $
            1,240,793
            
            $
            4,607,079
            
            $
            4,607,079
            
            
            100.0
            %


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





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




39




**Commercial
      Real Estate Assets Portfolio Activity**





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





Commercial
                real estate securities outside CDOs
            
            Par
            
            Carrying
                Value
            
            Dollar
                Price
            
            Adjusted
                Purchase Price
            
            Dollar
              Price
            
            Expected
              YieldInvestment
                grade CMBS
            
            $
            219,774
            
            $
            159,830
            
            $
            72.72
            
            $
            190,190
            
            $
            86.54
            
            
            7.08
            %Investment
                grade REIT debt
            
            
            121
            
            
            117
            
            
            96.90
            
            
            123
            
            
            101.41
            
            
            5.27CMBS
                rated BB+ to B
            
            
            565,361
            
            
            235,745
            
            
            41.70
            
            
            432,343
            
            
            76.47
            
            
            8.85CMBS
                rated B- or lower
            
            
            514,031
            
            
            110,761
            
            
            21.34
            
            
            161,542
            
            
            31.40
            
            
            8.39CDO
                Investments
            
            
            347,807
            
            
            32,732
            
            
            9.41
            
            
            62,005
            
            
            17.83
            
            
            21.55CMBS
                Interest Only securities (“IOs”)
            
            
            110,688
            
            
            4,427
            
            
            4.00
            
            
            2,192
            
            
            1.98
            
            
            24.90Multifamily
                agency securities
            
            
            350
            
            
            357
            
            
            102.00
            
            
            515
            
            
            147.08
            
            
            6.74Total
                commercial real estate assets outside CDOs
            
            
            1,758,132
            
            
            543,969
            
            
            30.88
            
            
            849,910
            
            
            48.28
            
            
            9.34Commercial
                real estate loans and equity outside CDOsCommercial
                real estate loans
            
            
            645,885
            
            
            631,391
            
            
            
            
            
            596,407Commercial
                mortgage loan pools
            
            
            1,189,528
            
            
            1,229,442
            
            
            103.36
            
            
            1,229,442
            
            
            103.36
            
            
            4.15Commercial
                real estate
            
            
            9,350
            
            
            9,350
            
            
            
            
            
            9,350Total
                commercial real estate loans and equity outside CDOs
            
            
            1,844,763
            
            
            1,870,183
            
            
            103.36
            
            
            1,835,199
            
            
            103.36
            
            
            4.15Commercial
                real estate assets included in CDOsInvestment
                grade CMBS
            
            
            808,780
            
            
            708,420
            
            
            87.59
            
            
            759,536
            
            
            93.91
            
            
            7.28Investment
                grade REIT debt
            
            
            210,624
            
            
            205,729
            
            
            97.68
            
            
            211,767
            
            
            100.54
            
            
            5.78CMBS
                rated BB+ to B
            
            
            591,077
            
            
            372,632
            
            
            63.04
            
            
            460.937
            
            
            77.98
            
            
            9.95CMBS
                rated B- or lower
            
            
            199,983
            
            
            46,545
            
            
            23.27
            
            
            71,936
            
            
            35.97
            
            
            10.14CDO
                Investments
            
            
            4,000
            
            
            2,840
            
            
            71.00
            
            
            3,535
            
            
            88.38
            
            
            7.84Credit
                tenant lease
            
            
            22,944
            
            
            23,032
            
            
            100.38
            
            
            23,562
            
            
            102.70
            
            
            5.66Commercial
                real estate loans
            
            
            499,504
            
            
            489,861
            
            
            98.07
            
            
            437,105
            
            
            87.51
            
            
            8.60Total
                commercial real estate assets included in CDOs
            
            
            2,336,912
            
            
            1,849,059
            
            
            79.12
            
            
            1,968,378
            
            
            84.23
            
            
            8.15
            %Total
                commercial real estate assets
            
            $
            5,939,807
            
            $
            4,263,211
            
            
            
            
            $
            4,653,487




40




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


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





The
      Company’s CDO offerings allow the Company to match fund its commercial real
      estate portfolio by issuing long-term debt to finance long-term assets. The
      CDO
      debt is non-recourse to the Company; therefore, the Company’s losses are limited
      to its equity investment in the CDO. The CDO debt is also hedged to protect
      the
      Company from an increase in short-term interest rates. At June 30, 2008, 57%
      of
      the estimated fair value of the Company’s subordinated CMBS was match funded in
      the Company's CDOs in this manner. The Company retained 100% of the equity
      of
      CDOs I, II, III, HY3 and Euro (each as defined below) and recorded the
      transactions on its consolidated financial statements as secured
      financing.




41




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




Collateral
                at June 30, 2008
            
            
            Debt
                at June 30, 2008Adjusted
              Purchase
                Price
            
            
            Loss
                Adjusted
              Yield
            
            
            Adjusted
                Issue Price
            
            
            Weighted
                Average Cost of Funds *
            
            
            Net
                SpreadCDO
                I
            
            $
            454,341
            
            
            8.23
            %
            $
            384,179
            
            
            6.75
            %
            
            1.48
            %CDO
                II
            
            
            301,221
            
            
            7.82
            
            
            262,559
            
            
            5.77
            
            
            2.05
            %CDO
                III
            
            
            374,462
            
            
            7.05
            
            
            375,638
            
            
            5.14
            
            
            1.91
            %


CDO
                HY3
            
            
            415,232
            
            
            9.79
            
            
            372,725
            
            
            5.29
            
            
            4.50
            %Euro
                CDO
            
            
            423,122
            
            
            8.24
            
            
            415,157
            
            
            5.07
            
            
            3.17
            %


Total
                **
            
            $
            1,968,378
            
            
            8.28
            %
            $
            1,810,258
            
            
            5.59
            %
            
            2.69
            %


*
      Weighted Average Cost of Funds is the current cost of funds plus hedging
      expenses.


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





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





The
      Company views its below investment grade CMBS investment activity as two
      portfolios: Controlling Class CMBS and other below investment grade CMBS. The
      Company considers the CMBS securities where it maintains the right to influence
      the foreclosure/workout process on the underlying loans its controlling class
      CMBS (“Controlling Class”). The distinction between the two is in the rights the
      Company obtains with its investment in Controlling Class CMBS. Controlling
      Class
      rights allow the Company to influence the workout and/or disposition of defaults
      that occur in the underlying loans. These securities absorb the first losses
      realized in the underlying loan pools. The coupon payment on the non-rated
      security also can be reduced for special servicer fees charged to the trust.
      The
      next highest rated security in the structure then generally will be downgraded
      to non-rated and become the first to absorb losses and expenses from that point
      on. At June 30, 2008, the Company owned 39 trusts where it is in the first
      loss
      position and is designated as the controlling class representative by owning
      the
      lowest rated or non-rated CMBS class. The total par of the loans underlying
      these securities was $58,356,845. At June 30, 2008, subordinated Controlling
      Class CMBS with a par of $1,556,235 were included on the Company’s consolidated
      statement of financial condition and subordinated Controlling Class CMBS with
      a
      par of $750,623 were held as collateral by CDO HY1 and CDO HY2 (each as defined
      below).





The
      Company’s other below investment grade CMBS have more limited rights associated
      with its ownership to influence the workout and/or disposition of underlying
      loan defaults. The total par of the Company’s other below investment grade CMBS
      at June 30, 2008 was $313,079; the average credit protection, or subordination
      level, of this portfolio was 0.93%.




42




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




Par
            
            Estimated
                Fair Value
            
            Dollar
                Price
            
            Adjusted
                Purchase Price
            
            Dollar
                Price
            
            Weighted
                Average Subordination LevelBB+
            
            $
            250,
                135
            
            $
            127,960
            
            $
            51.16
            
            $
            210,257
            
            $
            84.06
            
            
            4.18
            %BB
            
            
            191,578
            
            
            88,612
            
            
            46.25
            
            
            156,143
            
            
            81.50
            
            
            3.16
            %BB-
            
            
            182,916
            
            
            94,521
            
            
            51.67
            
            
            133,211
            
            
            72.83
            
            
            5.03
            %B+
            
            
            106,635
            
            
            40,594
            
            
            38.07
            
            
            70,207
            
            
            65.84
            
            
            2.12
            %B
            
            
            133,772
            
            
            49,770
            
            
            37.20
            
            
            81,965
            
            
            61.27
            
            
            1.85
            %B-
            
            
            117,106
            
            
            30,789
            
            
            26.29
            
            
            61,188
            
            
            52.25
            
            
            1.36
            %CCC+
            
            
            13,214
            
            
            3,171
            
            
            24.00
            
            
            7,206
            
            
            54.53
            
            
            0.65
            %CCC
            
            
            28,161
            
            
            5,056
            
            
            17.95
            
            
            10,504
            
            
            37.30
            
            
            0.75
            %NR
            
            
            532,718
            
            
            93,027
            
            
            17.46
            
            
            133,503
            
            
            25.06
            
            
            n/aTotal
            
            $
            1,556,235
            
            $
            533,500
            
            $
            34.28
            
            $
            864,184
            
            $
            55.53




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




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




During
      the six months ended June 30, 2008, the loan pools were paid down by $2,103,618.
      Pay down proceeds are distributed to the highest rated CMBS class first and
      reduce the percent of total underlying collateral represented by each rating
      category.





As
      the
      portfolio matures and expected losses occur, subordination levels of the lower
      rated classes of a CMBS investment will be reduced. This may cause the lower
      rated classes to be downgraded, which would negatively affect their estimated
      fair value and therefore the Company’s net book value. Reduced estimated fair
      value would negatively affect the Company’s ability to finance any such
      securities that are not financed through a CDO or similar matched funding
      vehicle. In some cases, securities held by the Company may be upgraded to
      reflect seasoning of the underlying collateral and thus would increase the
      estimated fair value of the securities. During the six months ended June 30,
      2008, four securities in one of the Company’s Controlling Class CMBS was
      upgraded by at least one rating agency and thirteen securities in one
      Controlling Class CMBS were downgraded. Additionally, at least one rating agency
      upgraded eleven of the Company’s non-Controlling Class commercial real estate
      securities and downgraded eight.




43




As
      part
      of its underwriting process, the Company assumes a certain amount of loans
      will
      incur losses over time. In performing continuing credit reviews on the 39
      Controlling Class trusts, the Company estimates that specific losses totaling
      $851,920 related to principal of the underlying loans will not be recoverable,
      of which $399,403  is
      expected to occur over the next five years. The total loss estimate of $851,920
      represents 1.46% of the total underlying loan pools.





The
      Company considers delinquency information from the Lehman Brothers Conduit
      Guide
      to be the most relevant benchmark to measure credit performance and market
      conditions applicable to its Controlling Class CMBS holdings. The year of
      issuance, or vintage year, is important, as older loan pools will tend to have
      more delinquencies than newly underwritten loans. The Company owns Controlling
      Class CMBS issued in 1998, 1999, and 2001 through 2007. Comparable delinquency
      statistics referenced by vintage year as a percentage of par outstanding at
      June
      30, 2008 are shown in the table below:





Vintage
              Year
            
            Underlying
              Collateral
            
            Delinquencies
                Outstanding
            
            Lehman
                Brothers Conduit Guide1998
            
            $
            1,640,063
            
            
            2.58
            %
            
            0.81
            %1999
            
            
            497,288
            
            
            2.22
            %
            
            0.83
            %2001
            
            
            805,373
            
            
            0.91
            %
            
            0.83
            %2002
            
            
            914,620
            
            
            0.00
            %
            
            0.62
            %2003
            
            
            1,751,059
            
            
            1.48
            %
            
            0.87
            %2004
            
            
            6,315,137
            
            
            0.70
            %
            
            0.39
            %2005
            
            
            11,819,255
            
            
            0.63
            %
            
            0.41
            %2006
            
            
            13,684,183
            
            
            0.71
            %
            
            0.27
            %2007
            
            
            20,929,867
            
            
            0.24
            %
            
            0.17
            %Total
            
            $
            58,356,845
            
            
            0.59
            %
            
            0.33
            %*


*
      Weighted average based on current principal balance.





Delinquencies
      on the Company’s CMBS collateral as a percent of principal are in line with
      expectations. While the Company’s portfolio modestly under-performed relative to
      the market in the first six months of 2008, the absolute amount of the
      delinquencies experienced by the Company remains low. These seasoning criteria
      generally will adjust for the lower delinquencies that occur in newly originated
      collateral. See “Item 7A - Quantitative and Qualitative Disclosures About Market
      Risks” for a detailed discussion of how delinquencies and loan losses affect the
      Company.




44




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





June
                30, 2008Principal
            
            Number
                of Loans
            
            %
                of CollateralPast
                due 30 days to 59 days
            
            $
            67,839
            
            
            8
            
            
            0.11
            %Past
                due 60 days to 89 days
            
            
            28,257
            
            
            5
            
            
            0.05
            %Past
                due 90 days or more
            
            
            207,783
            
            
            34
            
            
            0.36
            %Real
                Estate owned
            
            
            26,633
            
            
            13
            
            
            0.05
            %Foreclosure
            
            
            15,120
            
            
            2
            
            
            0.03
            %Total
                Delinquent
            
            
            345,632
            
            
            62
            
            
            0.59
            %Total
                Collateral Balance
            
            
            58,356,845
            
            
            4,573





Of
      the 62
      delinquent loans at June 30, 2008, 13 loans were real estate owned and being
      marketed for sale, 2 loans were in foreclosure and the remaining 47 loans were
      in some form of workout negotiations. The Controlling Class CMBS owned by the
      Company have a delinquency rate of 0.59%. During 2008, the underlying collateral
      experienced early payoffs of $2,103,618 representing 3.60% of the quarter-end
      pool balance. These loans were paid off at par with no loss. Aggregate losses
      related to the underlying collateral of $1,533 were realized during the six
      months ended June 30, 2008. This brings cumulative realized losses to $128,437,
      which is 12.76% of total estimated losses. These losses include special servicer
      and other workout expenses. This experience to date is in line with the
      Company's loss expectations. Realized losses and special servicer expenses
      are
      expected to increase on the underlying loans as the portfolio matures. Special
      servicer expenses are also expected to increase as portfolios
      mature.




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




45




The
      Company manages its credit risk through disciplined underwriting,
      diversification, active monitoring of loan performance and exercise of its
      right
      to influence the workout process for delinquent loans as early as possible.
      The
      Company maintains diversification of credit exposures through its underwriting
      process and can shift its focus in future investments by adjusting the mix
      of
      loans in subsequent acquisitions. The profile of the loans underlying the
      Company’s CMBS by property type at June 30, 2008 was as follows:





June
                30, 2008
              ExposureProperty
                Type
            
            Collateral
                Balance
            
            %
                of TotalOffice
            
            $
            19,921,612
            
            
            34.1
            %Retail
            
            
            16,575,136
            
            
            28.4
            %Multifamily
            
            
            12,555,914
            
            
            21.5
            %Industrial
            
            
            4,437,281
            
            
            7.6
            %Lodging
            
            
            4,055,537
            
            
            6.9
            %Healthcare
            
            
            324,298
            
            
            0.6
            %Other
            
            
            487,067
            
            
            0.9
            %Total
            
            $
            58,356,845
            
            
            100.0
            %





At
      June
      30, 2008, the estimated fair value of the Company’s holdings of subordinated
      Controlling Class CMBS is $330,684 lower than the adjusted cost for these
      securities, which consists of a gross unrealized gain of $7,010 and a gross
      unrealized loss of $337,694. The adjusted purchase price of the Company’s
      subordinated Controlling Class CMBS portfolio at June 30, 2008 represents
      approximately 55.53% of its par amount. The estimated fair value of the
      Company’s subordinated Controlling Class CMBS portfolio at June 30, 2008
      represents approximately 34.28% of its par amount. As the portfolio matures,
      the
      Company expects to recoup the $330,684 of unrealized loss, provided that the
      credit losses experienced are not greater than the credit losses assumed in
      the
      projected cash flow analysis. At June 30, 2008, the Company believed there
      has
      been no material deterioration in the credit quality of its portfolio below
      current expectations.





The
      Company’s interest income calculated in accordance with Emerging Issues Task
      Force Issue 99-20, *Recognition
      of Interest Income and Impairment on Purchased and Retained Beneficial Interests
      in Securitized Financial Assets* (“EITF
      99-20”) for its CMBS is computed based upon a yield, which assumes credit losses
      will occur. The yield to compute the Company’s taxable income does not assume
      there would be credit losses, as a loss can only be deducted for tax purposes
      when it has occurred. This is the primary difference between the Company’s
      income in accordance with accounting principles generally accepted in the United
      States of America (“GAAP”) and taxable income.




46




**Commercial
      Real Estate Loan Activity**





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





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




Loan
                Outstanding
            
            WeightedJune
                30, 2008
            
            December
                31, 2007
            
            Average
                YieldProperty
                Type
            
            Amount
            
            %
            
            Amount
            
            %
            
            2008
            
            2007U.S.Retail
            
            $
            52,437
            
            
            5.30
            %
            $
            52,209
            
            
            5.30
            %
            
            9.6
            %
            
            9.6
            %Office
            
            
            45,549
            
            
            4.6
            
            
            45,640
            
            
            4.6
            
            
            10.3
            
            
            10.3Multifamily
            
            
            175,301
            
            
            17.6
            
            
            174,873
            
            
            17.8
            
            
            9.9
            
            
            9.7Storage
            
            
            32,159
            
            
            3.2
            
            
            32,307
            
            
            3.3
            
            
            9.1
            
            
            9.1Land(1)
            
            
            -
            
            
            -
            
            
            25,000
            
            
            2.5
            
            
            -
            
            
            9.6Hotel
            
            
            12,302
            
            
            1.2
            
            
            12,208
            
            
            1.2
            
            
            10.4
            
            
            10.9Other
                MixedUse
            
            
            3,994
            
            
            0.4
            
            
            3,983
            
            
            0.5
            
            
            8.5
            
            
            8.5Total
                U.S.
            
            
            321,742
            
            
            32.4
            
            
            346,220
            
            
            35.2
            
            
            9.8
            
            
            9.7Non-U.S.Retail
            
            
            293,915
            
            
            29.6
            
            
            278,669
            
            
            28.3
            
            
            8.7
            
            
            8.9Office
            
            
            255,904
            
            
            25.8
            
            
            238,691
            
            
            24.3
            
            
            8.4
            
            
            8.8Multifamily
            
            
            44,139
            
            
            4.4
            
            
            41,403
            
            
            4.2
            
            
            8.5
            
            
            8.6Storage
            
            
            51,352
            
            
            5.2
            
            
            51,272
            
            
            5.2
            
            
            9.2
            
            
            9.5Industrial
            
            
            17,202
            
            
            1.7
            
            
            17,274
            
            
            1.8
            
            
            10.3
            
            
            10.6Hotel
            
            
            4,175
            
            
            0.4
            
            
            5,016
            
            
            0.5
            
            
            10.0
            
            
            10.1Other
                MixedUse
            
            
            4,953
            
            
            0.5
            
            
            4,842
            
            
            0.5
            
            
            9.0
            
            
            9.0Total
                Non-U.S.
            
            
            671,640
            
            
            67.6
            
            
            637,167
            
            
            64.8
            
            
            8.7
            
            
            8.9Total
            
            $
            993,382
            
            
            100.00
            %
            $
            983,387
            
            
            100.00
            %
            
            9.00
            %
            
            9.20
            %





(1)
            Net
                of a loan loss reserve of $25,000 at June 30,
                2008.





During
      the six months ended June 30, 2008, the Company funded an additional $2,286
      for
      a commercial real estate loan. The Company received repayments of commercial
      real estate loans in the aggregate amount of $14,140.





The
      Company invests in the Carbon Capital Funds which also invest in commercial
      real
      estate loans. For the three and six months ended June 30, 2008, respectively,
      the Company recorded $2,534 and $(525) of earnings (loss) related to the Carbon
      Capital Funds primarily due to the establishment of a loan loss reserve in
      Carbon II. Carbon II increased its investment in U.S. commercial real estate
      loans by funding an additional investment of $910 during the second quarter
      of
      2008. Paydowns in the Carbon Capital Funds during the quarter totaled $3,376.
      As
      loans are repaid or sold, Carbon II has redeployed capital into acquisitions
      of
      additional loans for the portfolio. The Carbon I investment period has expired.




47




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





June
                30, 2008
            
            December
                31, 2007Carbon
                I
            
            $
            1,711
            
            $
            1,636Carbon
                II
            
            
            95,258
            
            
            97,762$
            96,969
            
            $
            99,398





As
      of
      June 30, 2008 Carbon II has three assets located in Florida that are in various
      stages of resolution. The properties consist on one hotel and two multifamily
      properties. Carbon II took title to one of the multifamily properties during
      2007. During the six months ended June 30, 2008, Carbon II increased its loan
      loss reserves for two loans by $911. At June 30, 2008 the total loan loss
      reserve for these loans is $4,242. For the property owned, Carbon II recognized
      an impairment charge of $5,181 during 2007.





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





During
      the second quarter of 2008, a $30,000 first leasehold mortgage on a 43.9 acre
      tract of land in Las Vegas, zoned for commercial use, went into
      default. Carbon II is engaged in workout discussions, and other alternatives
      are
      being explored. Carbon II believes a loan loss reserve is not necessary at
      June
      30, 2008. All other commercial real estate loans in the Carbon Capital Funds
      are
      performing as expected.





**Commercial
      Real Estate**





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




48




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





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




For
                the Three Months Ended
              June
                30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated incomeCommercial
                real estate securities
            
            $
            41,094
            
            $
            43,596
            
            $
            (2,502
            )
            
            (5.7
            )%Commercial
                real estate loans
            
            
            8,041
            
            
            7,548
            
            
            493
            
            
            6.5
            %Commercial
                mortgage loan pools
            
            
            12,801
            
            
            13,002
            
            
            (201
            )
            
            (1.5
            )%Residential
                mortgage-backed securities
            
            
            16
            
            
            1,443
            
            
            (1,427
            )
            
            (98.9
            )%Cash
                and cash equivalents
            
            
            586
            
            
            648
            
            
            (62
            )
            
            (9.6
            )%Total
                U.S. interest income
            
            
            62,538
            
            
            66,237
            
            
            (3,699
            )
            
            (5.6
            )%Non-U.S
                dollar denominated incomeCommercial
                real estate securities
            
            
            9,494
            
            
            4,417
            
            
            5,077
            
            
            114.9
            %Commercial
                real estate loans
            
            
            15,059
            
            
            10,735
            
            
            4,324
            
            
            40.3
            %Cash
                and cash equivalents
            
            
            332
            
            
            291
            
            
            41
            
            
            14.1
            %Total
                non-U.S. dollar denominated interest income
            
            
            24,885
            
            
            15,443
            
            
            9,442
            
            
            61.1
            %Total
                Interest Income
            
            $
            87,423
            
            $
            81,680
            
            $
            5,743
            
            
            7.0
            %





For
                the Six Months Ended
              June
                30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated incomeCommercial
                real estate securities
            
            $
            84,718
            
            $
            85,983
            
            $
            (1,265
            )
            
            (1.5
            )%Commercial
                real estate loans
            
            
            16,368
            
            
            13,597
            
            
            2,771
            
            
            20.4
            %Commercial
                mortgage loan pools
            
            
            25,666
            
            
            26,134
            
            
            (468
            )
            
            (1.8
            )%Residential
                mortgage-backed securities
            
            
            76
            
            
            3,742
            
            
            (3,666
            )
            
            (98.0
            )%Cash
                and cash equivalents
            
            
            1,386
            
            
            1,036
            
            
            350
            
            
            33.8
            %Total
                U.S. interest income
            
            
            128,214
            
            
            130,492
            
            
            (2,278
            )
            
            (1.7
            )%Non-U.S
                dollar denominated incomeCommercial
                real estate securities
            
            
            18,080
            
            
            7,910
            
            
            10,170
            
            
            128.6
            %Commercial
                real estate loans
            
            
            30,463
            
            
            15,852
            
            
            14,611
            
            
            92.2
            %Cash
                and cash equivalents
            
            
            596
            
            
            827
            
            
            (231
            )
            
            (27.9
            )%Total
                non-U.S. dollar denominated interest income
            
            
            49,139
            
            
            24,589
            
            
            24,550
            
            
            99.8
            %Total
                Interest Income
            
            $
            177,353
            
            $
            155,081
            
            $
            22,272
            
            
            14.4
            %





*U.S.
      dollar denominated income*





For
      the
      three and six months ended June 30, 2008 versus 2007, interest income from
      U.S.
      assets decreased $3,699, or 5.6% and $2,278, or 1.7%. As of March 31, 2008,
      the
      Company increased the loss assumptions on certain of its controlling class
      CMBS.
      This contributed to the majority of the decline in income from commercial real
      estate securities of $2,502 or 5.7% for the three months ended June 30, 2008
      and
      $1,265 or 1.5% for the six months ended June 30, 2008. During the second half
      of
      2007 and the first quarter of 2008, the Company sold most of its residential
      mortgage backed securities portfolio. As a result, interest income declined
      $1,427 or 98.9% for the three months ended June 30, 2008 and $3,666 or 98.0%
      for
      the six months ended June 30, 2008.




49




*Non-U.S.
      dollar denominated income*





For
      the
      three and six months ended June 30, 2008 versus 2007, interest income from
      non-U.S. assets increased $9,441, or 61.1% and $24,550, or 99.8%. During 2007,
      the Company continued to increase its investment in non-U.S. dollar commercial
      real estate assets resulting in higher interest income from non-U.S. commercial
      real estate securities and loans. The Company has increased its investment
      portfolio outside the U.S. in order to provide geographic
      diversification.





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





For
                the three months ended June 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Interest
                Income
            
            $
            87,423
            
            $
            81,680
            
            $
            5,743
            
            
            7.0
            %Earnings
                from BlackRockDiamond
                Property Fund, Inc.
            
            
            -
            
            
            8,430
            
            
            (8,430
            )
            
            (100.0
            )Earnings
                from JVs
            
            
            (32
            )
            
            -
            
            
            (32
            )
            
            100.0Earnings
                from Carbon I
            
            
            4
            
            
            18
            
            
            (14
            )
            
            (77.8
            )Earnings
                from Carbon II
            
            
            (2,538
            )
            
            3,965
            
            
            (6,503
            )
            
            (164.0
            )Total
                Income
            
            $
            84,857
            
            $
            94,093
            
            $
            (9,236
            )
            
            (9.8
            )%





For
                the six months ended June 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Interest
                Income
            
            $
            177,353
            
            $
            155,081
            
            $
            22,272
            
            
            14.4
            %Earnings
                from BlackRockDiamond
                Property Fund, Inc.
            
            
            -
            
            
            14,400
            
            
            (14,400
            )
            
            (100.0
            )Earnings
                from JVs
            
            
            (32
            )
            
            -
            
            
            (32
            )
            
            100.0Earnings
                from Carbon I
            
            
            75
            
            
            858
            
            
            (783
            )
            
            (91.1
            )Earnings
                from Carbon II
            
            
            (600
            )
            
            7,111
            
            
            (7,711
            )
            
            (108.4
            )Total
                Income
            
            $
            176,796
            
            $
            177,450
            
            $
            (654
            )
            
            (0.4
            )%




50




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





For
                the three months ended
              June
                30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated interest expenseCollateralized
                debt obligations
            
            $
            15,391
            
            $
            22,437
            
            $
            (7,046
            )
            
            (31.4
            )%Commercial
                real estate securities
            
            
            2,316
            
            
            8,773
            
            
            (6,457
            )
            
            (73.6
            )Commercial
                real estate loans
            
            
            914
            
            
            1,470
            
            
            (556
            )
            
            (37.8
            )Commercial
                mortgage loan pools
            
            
            12,183
            
            
            12,308
            
            
            (125
            )
            
            (1.0
            )Residential
                mortgage-backed securities
            
            
            -
            
            
            1,738
            
            
            (1,738
            )
            
            (100.0
            )Senior
                convertible notes
            
            
            2,370
            
            
            -
            
            
            2,370
            
            
            100.0Senior
                unsecured notes
            
            
            3,016
            
            
            1,860
            
            
            1,156
            
            
            62.2Junior
                subordinated notes
            
            
            3,328
            
            
            3,439
            
            
            (111
            )
            
            (3.2
            )HoldCo
                2 loan
            
            
            55
            
            
            -
            
            
            55
            
            
            100.0Cash
                flow hedges
            
            
            466
            
            
            (265
            )
            
            731
            
            
            (275.6
            )Hedge
                ineffectiveness*
            
            
            (1,382
            )
            
            165
            
            
            (1,547
            )
            
            (937.8
            )Total
                U.S. Interest Expense
            
            $
            38,657
            
            $
            51,925
            
            $
            (13,268
            )
            
            (25.6
            )%Non-U.S.
                dollar denominated interest expenseEuro
                CDO
            
            $
            5,041
            
            $
            4,160
            
            $
            881
            
            
            21.2
            %Commercial
                real estate securities
            
            
            2,336
            
            
            886
            
            
            1,450
            
            
            163.7Commercial
                real estate loans
            
            
            3,208
            
            
            2,167
            
            
            1,041
            
            
            48.0Junior
                subordinated notes
            
            
            1,441
            
            
            947
            
            
            494
            
            
            52.2Total
                Non- U.S. Interest Expense
            
            
            12,026
            
            
            8,160
            
            
            3,866
            
            
            47.4Total
                Interest Expense
            
            $
            50,683
            
            $
            60,085
            
            $
            (9,402
            )
            
            (15.6
            )%




51




For
                the six months ended
              June
                30,
            
            Variance2008
            
            2007
            
            Amount
            
            %U.S.
                dollar denominated interest expenseCollateralized
                debt obligations
            
            $
            34,020
            
            $
            45,333
            
            $
            (11,313
            )
            
            (25.0
            )%Commercial
                real estate securities
            
            
            5,726
            
            
            17,134
            
            
            (11,408
            )
            
            (66.6
            )Commercial
                real estate loans
            
            
            2,274
            
            
            2,011
            
            
            263
            
            
            13.1Commercial
                mortgage loan pools
            
            
            24,391
            
            
            24,708
            
            
            (317
            )
            
            (1.3
            )Residential
                mortgage-backed securities
            
            
            45
            
            
            5,062
            
            
            (5,017
            )
            
            (99.1
            )Senior
                convertible notes
            
            
            4,683
            
            
            -
            
            
            4,683
            
            
            100.0Senior
                unsecured notes
            
            
            6,074
            
            
            3,207
            
            
            2,867
            
            
            89.4Junior
                subordinated notes
            
            
            6,595
            
            
            6,719
            
            
            (124
            )
            
            (1.8
            )HoldCo
                2 loan
            
            
            213
            
            
            -
            
            
            213
            
            
            100.0Cash
                flow hedges
            
            
            885
            
            
            (859
            )
            
            1,744
            
            
            (203.0
            )Hedge
                ineffectiveness*
            
            
            (1,303
            )
            
            56
            
            
            (1,359
            )
            
            (2,426.8
            )Total
                U.S. Interest Expense
            
            $
            83,603
            
            $
            103,371
            
            $
            (19,768
            )
            
            (19.1
            )%Non-U.S.
                dollar denominated interest expenseEuro
                CDO
            
            $
            10,397
            
            $
            8,092
            
            $
            2,305
            
            
            28.5
            %Commercial
                real estate securities
            
            
            6,189
            
            
            886
            
            
            5,303
            
            
            598.5Commercial
                real estate loans
            
            
            4,578
            
            
            2,628
            
            
            1,950
            
            
            74.2Junior
                subordinated notes
            
            
            2,769
            
            
            947
            
            
            1,822
            
            
            192.4Total
                Non- U.S. Interest Expense
            
            
            23,933
            
            
            12,553
            
            
            11,380
            
            
            90.7Total
                Interest Expense
            
            $
            107,536
            
            $
            115,924
            
            $
            (8,388
            )
            
            (7.2
            )%


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





*U.S
      dollar denominated interest expense*





For
      the
      three and six months ended June 30, 2008 versus 2007, U.S. dollar interest
      expense decreased $13,268 or 25.6% and $19,768 or 19.1%. The Company sold most
      of its residential mortgage backed securities portfolio during the second half
      of 2007 and the first quarter of 2008. As a result, related interest expense
      declined $1,738 or 100.0% for the three months ended June 30, 2008 and $5,017
      or
      99.1% for the six months ended June 30, 2008. This was offset by the issuance
      of
      convertible notes in August and September of 2007 and senior unsecured notes
      in
      May and June of 2007.





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





For
      the
      three and six months ended June 30, 2008 versus 2007, non-U.S. dollar interest
      expense increased $3,866 or 47.4% and $11,380, or 90.7%. The increase was due
      to
      increased purchases of non-U.S. dollar securities and loans during 2007. Also,
      the junior subordinated notes were issued in April of 2007. As a result, the
      junior subordinated notes were outstanding for the full quarter and six months
      ended June 30, 2008. For the three and six months ended June 30, 2008 versus
      June 30, 2007, U.S. dollar interest expense related to collateralized debt
      obligations declined $7,046 or 31.4% and $11,313 or 25%. The decline was caused
      primarily due to an income statement reclassification. Under FAS 159, interest
      expense related to CDO swaps are classified in realized gain (loss) and are
      no
      longer included in interest expense. For the three and six months ended June
      30,
      2008, $4,796 and $6,732 were included in realized gain (loss). The balance
      of
      the decline in CDO interest expense was primarily due to lower libor rates
      in
      2008 versus 2007.




52




***Net
      Interest Margin and Net Interest Spread from the Portfolio:*** The
      Company considers its interest generating portfolio to consist of its securities
      available-for-sale, securities held-for-trading, commercial mortgage loans,
      and
      cash and cash equivalents because these assets relate to its core strategy
      of
      acquiring and originating high yield loans and securities backed by commercial
      real estate, while at the same time maintaining a portfolio of investment grade
      securities to enhance the Company's liquidity. The Company's equity investments,
      which include the Carbon Capital Funds, also generate a significant portion
      of
      the Company's income.





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





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




For
                the three months ended June 30,
            
            For
                the six months ended June 30,2008
            
            2007
            
            2008
            
            2007Interest
                income
            
            $
            87,423
            
            $
            81,680
            
            $
            177,353
            
            $
            155,081Interest
                expense related to the consolidation of commercial mortgage loan
                pools
            
            
            (12,110
            )
            
            (12,409
            )
            
            (24,271
            )
            
            (24,880
            )Adjusted
                interest income
            
            $
            75,313
            
            $
            69,271
            
            $
            153,082
            
            $
            130,201








For
                the three months ended June 30,
            
            For
                the six months ended June 30,2008
            
            2007
            
            2008
            
            2007Interest
                expense
            
            $
            50,683
            
            $
            60,085
            
            $
            107,536
            
            $
            115,924Interest
                expense related to the consolidation of commercial mortgage loan
                pools
            
            
            (12,110
            )
            
            (12,409
            )
            
            (24,271
            )
            
            (24,880
            )Hedge
                ineffectiveness
            
            
            (1,382
            )
            
            165
            
            
            (1,303
            )
            
            56Adjusted
                interest expense
            
            $
            37,191
            
            $
            47,841
            
            $
            81,962
            
            $
            91,100





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




53




The
      following chart includes the adjusted interest income, adjusted interest
      expense, net interest margin and net interest spread for the Company's
      portfolio. The interest income and interest expense amounts exclude income
      and
      expense related to hedge ineffectiveness, and the gross-up effect of the
      consolidation of a variable interest entity (“VIE”) that includes commercial
      mortgage loan pools. The Company believes interest income and expense excluding
      the effects of these items better reflects the Company's net interest margin
      and
      net interest spread from the portfolio.





For
                the Three Months ended
              June
                30,
            
            For
                the Six Months ended
              June
                30,2008
            
            2007
            
            2008
            
            2007Adjusted
                interest income
            
            $
            75,313
            
            $
            69,271
            
            $
            153,082
            
            $
            130,201Adjusted
                interest expense
            
            $
            37,191
            
            $
            47,841
            
            $
            81,962
            
            $
            91,100Adjusted
                net interest income ratiosNet
                interest margin
            
            
            5.2
            %
            
            2.4
            %
            
            4.6
            %
            
            2.3
            %Average
                yield
            
            
            10.2
            %
            
            7.8
            %
            
            10.0
            %
            
            7.6
            %Cost
                of funds
            
            
            5.1
            %
            
            6.2
            %
            
            5.5
            %
            
            6.0
            %Net
                interest spread
            
            
            5.1
            %
            
            1.6
            %
            
            4.5
            %
            
            1.6
            %Ratios
                including income from equity investmentsNet
                interest margin
            
            
            4.7
            %
            
            3.6
            %
            
            4.5
            %
            
            3.4
            %Average
                yield
            
            
            9.5
            %
            
            8.7
            %
            
            9.7
            %
            
            8.4
            %Cost
                of funds
            
            
            5.1
            %
            
            6.2
            %
            
            5.5
            %
            
            6.0
            %Net
                interest spread
            
            
            4.4
            %
            
            2.5
            %
            
            4.1
            %
            
            2.4
            %





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





For
                the three months ended June 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Management
                fee
            
            $
            2,961
            
            $
            3,868
            
            $
            (907
            )
            
            (23.4
            )%Incentive
                fee
            
            
            1,334
            
            
            2,922
            
            
            (1,588
            )
            
            (54.3
            )Incentive
                fee - stock based
            
            
            645
            
            
            939
            
            
            (294
            )
            
            (31.3
            )General
                and administrative expense
            
            
            1,866
            
            
            1,519
            
            
            347
            
            
            22.8Total
                other expenses
            
            $
            6,806
            
            $
            9,248
            
            
            (2,442
            )
            
            (26.4
            )%





For
                the six months ended June 30,
            
            Variance2008
            
            2007
            
            Amount
            
            %Management
                fee
            
            $
            6,236
            
            $
            7,388
            
            
            (1,152
            )
            
            (15.6
            )%Incentive
                fee
            
            
            11,879
            
            
            5,646
            
            
            6,233
            
            
            110.4Incentive
                fee - stock based
            
            
            1,044
            
            
            1,648
            
            
            (604
            )
            
            (36.7
            )General
                and administrative expense
            
            
            3,682
            
            
            2,824
            
            
            858
            
            
            30.4Total
                other expenses
            
            $
            22,841
            
            $
            17,506
            
            
            5,335
            
            
            30.5
            %




54




The
      Company’s amended Management Agreement includes a change in the quarterly base
      management fee from 0.50% of stockholders' equity for the quarter ended June
      30,
      2008 to 0.375% for the first $400 million in average total stockholders' equity,
      0.3125% for the next $400 million of average total stockholders' equity and
      0.25% for the average total stockholders' equity in excess of $800 million.
      The
      decrease in incentive fee - stock based of $294 and $604 for the three and
      six
      months ended June 30, 2008, respectively, is due to the decline in the market
      price of the Common Stock. The fee is based on the number of shares of Common
      Stock outstanding as of year end. The Company accrues the incentive fee - stock
      based expense each quarter based on the shares outstanding at the end of the
      quarter.





General
      and administrative expense is comprised of accounting agent fees, custodial
      agent fees, directors' fees and expenses, fees for professional services,
      insurance premiums, broken deal expenses, and due diligence costs. The increase
      in general and administrative expense for the three and six months ended June
      30, 2008 is primarily attributable to increased professional fees, insurance
      costs and director fees.





***Other
      Gains (Losses):*** **** Upon
      the
      adoption of FAS 159 on January 1, 2008, the changes in the estimated fair value
      of the Company's available-for-sale securities, long-term liabilities, and
      certain interest swaps are recorded in earnings. The gain of $76,142 for the
      six
      months ended June 30, 2008 is comprised of realized losses of $(9,835) and
      unrealized losses on securities and swaps of $(320,279), offset by unrealized
      gains on liabilities of $406,257. Foreign currency gains (loss) were $(10,186)
      and $2,855 for the six months ended June 30, 2008 and 2007. Included in
      accumulated other comprehensive income (loss) was a $9,325 gain on foreign
      currency translation. As a result, the Company’s foreign currency exposure for
      the six months ended June 30, 2008 resulted in a net economic loss of $861.
      The
      losses on impairment of assets of $(4,098) for the six month period ended June
      30, 2007 was related to the Company’s write down of certain CMBS as required by
      EITF 99-20.





***Dividends
      Declared:***





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





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




55




***Changes
      in Financial Condition***





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





U.S.
                dollar denominated securities
            
            June
                30, 2008 Estimated Fair
              Value
            
            Percentage
            
            December
                31, 2007 Estimated
              Fair
              Value
                (1)
            
            PercentageCommercial
                mortgage-backed securities:CMBS
                IOs
            
            $
            4,427
            
            
            0.2
            %
            $
            15,915
            
            
            0.7
            %Investment
                grade CMBS
            
            
            694,844
            
            
            36.5
            
            
            766,996
            
            
            33.6Non-investment
                grade rated subordinated securities
            
            
            456,261
            
            
            24.0
            
            
            630,139
            
            
            27.6Non-rated
                subordinated securities
            
            
            85,804
            
            
            4.5
            
            
            110,481
            
            
            4.8Credit
                tenant lease
            
            
            23,030
            
            
            1.2
            
            
            24,949
            
            
            1.1Investment
                grade REIT debt
            
            
            205,846
            
            
            10.8
            
            
            246,095
            
            
            10.8Multifamily
                agency securities
            
            
            357
            
            
            -
            
            
            37,123
            
            
            1.6CDO
                investments
            
            
            35,573
            
            
            1.9
            
            
            49,630
            
            
            2.2Total
                CMBS
            
            
            1,506,142
            
            
            79.1
            
            
            1,881,328
            
            
            82.4Residential
                mortgage-backed securities:Agency
                adjustable rate securities
            
            
            -
            
            
            -
            
            
            1,193
            
            
            0.1Residential
                CMOs
            
            
            555
            
            
            -
            
            
            627
            
            
            -Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            418
            
            
            -
            
            
            8,363
            
            
            0.4Total
                RMBS
            
            
            973
            
            
            0.1
            
            
            10,183
            
            
            0.5Total
                U.S. dollar denominatedsecurities
            
            $
            1,507,115
            
            
            79.2
            %
            $
            1,891,511
            
            
            82.9
            %





Non-U.S.
                dollar denominated securitiesCommercial
                mortgage-backed securities:Investment
                grade CMBS
            
            $
            173,407
            
            
            9.1
            %
            $
            151,532
            
            
            6.6
            %Non-investment
                grade rated subordinated securities
            
            
            193,271
            
            
            10.2
            
            
            212,433
            
            
            9.3Non-rated
                subordinated securities
            
            
            29,258
            
            
            1.5
            
            
            28,858
            
            
            1.2Total
                Non-U.S. dollar denominatedsecurities
            
            
            395,936
            
            
            20.8
            
            
            392,823
            
            
            17.1Total
                securities
            
            $
            1,903,051
            
            
            100.0
            %
            $
            2,284,334
            
            
            100.0
            %


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





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




56




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





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





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





June
                30, 2008Market
                Value
            
            Adjusted
                Issuance Price
            
            Maximum
              Balance
            
            Range
                of
              MaturitiesCDO
                debt*
            
            $
            1,252,224
            
            $
            1,810,258
            
            $
            1,832,454
            
            
            3.6
                to 6.7 yearsCommercial
                mortgage loan pools
            
            
            1,207,151
            
            
            1,207,151
            
            
            1,207,151
            
            
            199
                to 10.5 yearsCredit
                facilities
            
            
            610,317
            
            
            610,317
            
            
            687,293
            
            
            79
                to 538 daysSenior
                convertible notes
            
            
            71,160
            
            
            80,000
            
            
            80,000
            
            
            19.18
                yearsSenior
                unsecured notes**
            
            
            85,204
            
            
            162,500
            
            
            162,500
            
            
            8.82
                yearsJunior
                unsecured notes
            
            
            35,611
            
            
            78,777
            
            
            78,777
            
            
            13.84
                yearsJunior
                subordinated notes***
            
            
            72,829
            
            
            180,477
            
            
            180,477
            
            
            27.61
                yearsTotal
            
            $
            3,334,496
            
            $
            4,129,480


*
      Disclosed as adjusted issue price. Total par of the Company’s CDO debt at June
      30, 2008 was $1,395,101.


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


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





The
      table
      above does not include interest payments on the Company’s borrowings. Disclosure
      of interest payments has been omitted because certain borrowings require
      variable rate interest payments. The Company’s total interest payments for the
      six months ended June 30, 2008 were $108,769.




57





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





Lines
                of Credit
            
            Collateralized
                Debt Obligations
            
            Commercial
                Mortgage Loan Pools
            
            Junior
                Subordinated Notes
            
            Senior
                Unsecured Notes
            
            Junior
                Unsecured Notes
            
            Convertible
                Debt
            
            Total
                BorrowingsWeighted
                average yield
                Interest
                  Rate
            
            
            4.92
            %
            
            5.71
            %
            
            4.00
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            5.39
            %Fixed
            
            
            -
            %
            
            6.79
            %
            
            4.00
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            6.16
            %Floating
            
            
            4.92
            %
            
            3.54
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            3.89
            %Effective
                YieldFixed
            
            
            -
            %
            
            7.23
            %
            
            4.00
            %
            
            7.64
            %
            
            7.59
            %
            
            6.56
            %
            
            11.75
            %
            
            6.43
            %Floating
            
            
            4.92
            %
            
            3.54
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            -
            %
            
            3.89
            %








***Hedging
      Instruments:*** The
      Company may modify its exposure to market interest rates by entering into
      various financial instruments that adjust portfolio duration. These financial
      instruments are intended to mitigate the effect of changes in interest and
      foreign exchange rates on the value of the Company's liabilities and the cost
      of
      borrowing.





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





At
                June 30, 2008Notional
                Value
            
            Estimated
                Fair Value
            
            Unamortized
                Cost
            
            Average
                Remaining Term (years)Cash
                flow hedges
            
            $
            99,260
            
            $
            1,702
            
            $
            (1,612
            )
            
            3.5Trading
                swaps
            
            
            97,039
            
            
            (1,829
            )
            
            -
            
            
            2.9CDO
                trading swaps
            
            
            1,141,716
            
            
            (22,838
            )
            
            -
            
            
            5.4CDO
                LIBOR cap
            
            
            85,000
            
            
            260
            
            
            1,407
            
            
            4.9





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





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




At
                June 30, 2008Estimated
                Fair Value
            
            
            Unamortized
              Cost
            
            
            Average
                Remaining TermCurrency
                swaps
            
            $
            (22,181
            )
            
            -
            
            
            8.1
                yearsCDO
                currency swaps
            
            
            18,554
            
            
            -
            
            
            9.4
                yearsForwards
            
            
            (1,316
            )
            
            -
            
            
            23
                days




58




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






**Capital
      Resources and Liquidity**





The
      ongoing weaknesses in the subprime mortgage sector and in the broader mortgage
      market have resulted in reduced liquidity for mortgage-backed securities.
      Although this reduction in liquidity was originally linked to subprime
      residential assets, to which the Company continues to have no direct exposure,
      there has been an overall reduction in liquidity across the credit spectrum
      of
      commercial and residential mortgage products. The Company received and funded
      margin calls totaling $82,570 during 2007 and an additional $120,619 from
      January 1, 2008 through August 8, 2008, $35,708 of which occurred since April
      1,
      2008. The Company's ability to maintain adequate liquidity is dependent on
      several factors, many of which are outside of the Company's control, including
      the Company's continued access to credit facilities (including repurchase
      agreements) on acceptable terms, the Company's compliance with REIT distribution
      requirements, the timing and amount of margin calls by lenders that are
      dependent on the valuation of the Company's investments and credit risk of
      the
      underlying collateral.





The
      aforementioned factors could adversely affect one or more of the Company's
      credit facilities (including repurchase agreement) counterparties which provide
      funding for the Company's portfolio or could cause one or more of the Company's
      counterparties to be unwilling or unable to provide the Company with additional
      financing or to extend current credit facilities on the maturity date. If one
      or
      more of the Company's counterparties were unwilling or unable to provide the
      Company with additional financing and the Company were unable to replace such
      facilities, the Company’s liquidity would be reduced, which could have a
      material adverse effect on the Company's financial condition and business.
      The
      Company could be forced to sell its investments at a time when prices are
      depressed, which could adversely affect the Company's ability to comply with
      REIT asset and income tests and maintain its qualification as a
      REIT.





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





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




59




To
      date,
      the credit performance of the Company's investments remains consistent both
      with
      the Company's expectations and with the broader commercial real estate finance
      industry experience; nevertheless, during the first six months of 2008, the
      capital markets have been marking down the value of all credit-sensitive
      securities regardless of performance. The Company believes it has sufficient
      sources of liquidity to fund operations for the next twelve months.




During
      the first six months of 2008, the Company raised $19,253 of capital by issuing
      common shares under its sales agency agreement. Through August 8, 2008, the
      Company raised an additional $4,103 under the sales agency agreement. On April
      4, 2008, in a privately negotiated transaction, the Company issued $70,125
      of
      Series E Preferred Stock and 3,494,021 shares of Common Stock, resulting in
      combined net proceeds of $93,425. The Company repaid $52,500 of its loan from
      HoldCo 2 on April 8, 2008. On July 28, 2008, the Company subsequently reborrowed
      $30,000 from HoldCo 2.





In
      the
      event of a further reduction in market liquidity, the Company’s short-term (one
      year or less) liquidity needs will be met primarily with $38,684 of unrestricted
      cash and cash equivalents held as of June 30, 2008 as well as future common
      stock issuances under the Company’s sales agency agreement, and $30,000 of
      unused borrowing capacity from HoldCo 2.





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





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




Borrowing
                Type
            
            Market
                Value of Borrowings
            
            Adjusted
                Issue Price of Borrowings
            
            Weighted
                Average Borrowing Rate
            
            Weighted
                Average Remaining Maturity
            
            Estimated
                Fair Value of Assets PledgedCredit
                facilities (1)
            
            $
            610,317
            
            $
            610,317
            
            
            4.92
            %
            
            323
                days
            
            $
            858,382Commercial
                mortgage loan pools
            
            
            1,207,151
            
            
            1,207,151
            
            
            4.00
            %
            
            4.42
                years
            
            
            1,229,442CDOs
                (2)
            
            
            1,252,224
            
            
            1,810,258
            
            
            5.71
            %
            
            5.13
                years
            
            
            1,854,758Senior
                unsecured notes (2)
            
            
            85,204
            
            
            162,500
            
            
            7.59
            %
            
            8.82
                yearsJunior
                unsecured notes (2)
            
            
            35,611
            
            
            78,777
            
            
            6.56
            %
            
            13.84
                yearsSenior
                convertible notes (2)
            
            
            71,160
            
            
            80,000
            
            
            11.75
            %
            
            19.18
                yearsJunior
                subordinated notes (2)
            
            
            72,829
            
            
            180,477
            
            
            7.64
            %
            
            27.61
                yearsTotal
                Borrowings
            
            $
            3,334,496
            
            $
            4,129,480
            
            
            5.39
            %
            
            5.86
                years
            
            $
            3,942,582


(1)
            Includes
                $4,758 of borrowings under facilities related to commercial mortgage
                loan
                pools.


(2)
            As
                a result of the adoption of FAS 159 on January 1, 2008, the Company
                records the above liabilities at fair value. Changes in fair value
                are
                recorded in unrealized gain on liabilities on the consolidated statement
                of operations. For the six months ended June 30, 2008, $406,527 was
                recorded as a result of a reduction in the fair value of such liabilities.




60




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




Borrowing
                Type
            
            Within
                30 days
            
            31
                to 59 days
            
            60
                days to less than 1 year
            
            1
                year to 3 years
            
            3
                years to 5 years
            
            Over
                5 years
            
            TotalCredit
                facilities
            
            $
            -
            
            $
            -
            
            $
            439,474
            
            $
            170,843
            
            $
            -
            
            $
            -
            
            $
            610,317Commercial
                mortgage loan pools(1)
            
            
            -
            
            
            2,120
            
            
            343,333
            
            
            103,903
            
            
            40,119
            
            
            717,676
            
            
            1,207,151CDOs(1)
            
            
            397
            
            
            694
            
            
            45,144
            
            
            172,900
            
            
            736,650
            
            
            854,473
            
            
            1,810,258Junior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            162,500
            
            
            162,500Senior
                unsecured notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            78,777
            
            
            78,777Senior
                convertible notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            80,000
            
            
            80,000Junior
                subordinated notes
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            180,477
            
            
            180,477Total
                Borrowings
            
            
            397
            
            
            2,814
            
            
            827,951
            
            
            447,646
            
            
            776,769
            
            
            2,073,903
            
            
            4,129,480


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




*Credit
      Facilities and Reverse Repurchase Agreements*





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





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





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




61




On
      July
      8, 2008, Deutsche Bank AG, Cayman Islands Branch, extended its multicurrency
      repurchase agreement until July 8, 2010. In connection with the extension,
      certain financial covenants were added or modified to conform to the covenants
      in the Morgan Stanley Bank facility described above. In addition, the Company
      separately agreed with Deutsche Bank AG, Cayman Islands Branch, that to the
      extent the Company from time to time agrees to covenants that are more
      restrictive than those in the Deutsche Bank agreement, the covenants in the
      Deutsche Bank agreement will automatically be deemed to be modified to match
      the
      restrictions in such more restrictive covenants, subject to limited exceptions.
      The amended agreement also provides that the Company’s failure (1) to procure an
      extension of any of its existing facilities with Bank of America, N.A. and
      Morgan Stanley Bank as of the 15th day before the maturity date of such facility
      or (2) to demonstrate to the satisfaction of Deutsche Bank that it is
      negotiating a bona fide commitment to extend or replace such facility as of
      the
      30th day before the maturity date, would constitute an event of default under
      such agreement; however, any such failure would not be deemed to constitute
      an
      event of default if the Company demonstrates to the satisfaction of Deutsche
      Bank that it has sufficient liquid assets, as defined under such agreement,
      to
      pay down such the multicurrency repurchase agreement when due. At the time
      of
      the extension, total borrowings outstanding under the Deutsche Bank agreement
      were $110,104. Under the terms of the extension agreements, no additional
      borrowings are permitted under the facility. In addition, monthly amortization
      payments of approximately $2,000 per month are required under the
      facility.





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





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





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





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




62




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





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





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





*Preferred
      Equity Issuance*





On
      April
      4, 2008, the Company issued $70,125 of Series E Cumulative
      Convertible Redeemable Preferred Stock. Net proceeds were $69,866.
      Dividends are payable on the three new series of convertible preferred stock
      at
      a 12% coupon and the holder has the right to convert the preferred stock into
      common stock at $7.49 per share (a 12% premium to the closing price of the
      Company's common stock on March 28, 2008, the pricing date).


Holders
        of the Series E-1 and E-2 preferred stock have the right to require the Company
        to repurchase their shares for cash equal to the liquidation preference per
        share. The Series E-1 preferred stock repurchase date is April 4, 2012 and
        the
        Series E-2 repurchase date is April 4, 2013.


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


The
        holder is a subsidiary of a fund managed by an affiliate of Credit
        Suisse.


*Common
      Equity Issuances*





In
      conjunction with the Company’s issuance of the Series E Preferred Stock on April
      4, 2008, the Company also issued 3,494,021 shares of Common Stock, resulting
      in
      net proceeds of $23,286.





For
      the
      six months ended June 30, 2008, the Company issued 89,301 shares of Common
      Stock
      under its Dividend Reinvestment and Stock Purchase Plan (the "Dividend
      Reinvestment Plan"). Net proceeds to the Company under the Dividend Reinvestment
      Plan were approximately $675.





For
      the
      six months ended June 30, 2008, the Company issued 2,601,338 shares of Common
      Stock under a sales agency agreement with Brinson Patrick Securities
      Corporation. Net proceeds to the Company were approximately $19,253.





*Off-Balance
      Sheet Arrangements*




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




63




At
      June
      30, 2008 the Company owned securities of 39 Controlling Class CMBS trusts with
      a
      par of $1,858,015. The total par amount of CMBS issued by the 39 trusts was
      $67,618,949. One of the Company's 39 Controlling Class trusts does not qualify
      as a QSPE and has been consolidated by the Company (see Note 6 of the
      consolidated financial statements).





The
      Company's maximum exposure to loss as a result of its investment in these QSPEs
      totaled $1,130,541 and $1,126,442 at June 30, 2008 and December 31, 2007,
      respectively.





In
      addition, the Company has completed two securitizations that qualify as QSPEs
      under FAS 140. Through CDO HY1 and CDO HY2 the Company issued non-recourse
      liabilities secured by commercial related assets including portions of 17
      Controlling Class CMBS. Should future guidance from the standard setters
      determine that Controlling Class CMBS are not QSPEs, the Company would be
      required to consolidate the assets, liabilities, income and expense of CDO
      HY1
      and CDO HY2.





The
      Company's total maximum exposure to loss as a result of its investment in CDO
      HY1 and CDO HY2 at June 30, 2008 and December 31, 2007 was $59,561 and $61,206,
      respectively.





The
      Company also owns non-investment grade debt and preferred securities in LEAFs
      CMBS I Ltd ("Leaf"), a QSPE under FAS 140. Leaf issued non-recourse liabilities
      secured by investment grade commercial real estate securities. At June 30,
      2008
      and December 31, 2007, the Company's total maximum exposure to loss as a result
      of its investment in Leaf was $5,980 and $6,264, respectively.




*Cash
      Flows*





Cash
      provided by operating activities is net income adjusted for certain non-cash
      items and changes in operating assets and liabilities including the Company's
      trading securities. Operating activities used cash flows of $54,344 and provided
      cash flow of $159,608 for the six months ended June 30, 2008 and 2007,
      respectively. Operating cash flow is affected by the purchase and sale of fixed
      income securities classified as trading securities. Proceeds received from
      the
      sale and repayment of trading securities also increases operating cash flows.
      Net cash from trading securities was an outflow of $48,922 and an inflow of
      $132,870 for the six months ended June 30, 2008 and 2007, respectively. Also,
      during the first six months of 2008, the company terminated interest rate swaps
      which resulted in an outflow of $17,107, while during the same period of 2007,
      it was an inflow of $7,412.





Net
      cash
      provided by investing activities consists primarily of purchases, sales, and
      repayments on securities, commercial loan pools, commercial mortgage loans
      and
      equity investments. The Company's investing activities provided cash flows
      of
      $126,614 and used cash flows of $514,248 during the six months ended June 30,
      2008 and 2007, respectively. The variance in investing cash flows is primarily
      attributable to purchases of securities and funding of commercial mortgage
      loans. During the six months ended June 30, 2008 and June 30, 2007, net cash
      used to fund commercial loans was $2,286 and $574,980, respectively. Purchases
      of securities during the six months ended June 30, 2008 of $53,515 are
      classified as operating activities due to the adoption of FAS 159, versus
      purchases of securities during the six months ended June 30, 2007 of which
      $215,210 were classified as investing activities prior to the adoption of FAS
      159.




64




Net
      cash
      from financing activities was an outflow of $127,935 for the six months ended
      June 30, 2008 versus a cash inflow of $392,797 for the six months ended June
      30,
      2007, respectively, primarily due to margin calls on reverse repurchase
      agreements and credit facilities during the first quarter of 2008, net of
      preferred and common stock issuances. During the six months ended June 30,
      2008
      and June 30, 2007, net cash provided by the issuances of common and preferred
      stock was $113,079 and $149,564, respectively. Also, during the six months
      ended
      June 30, 2007, the company issued senior unsecured notes and junior secured
      notes which raised $150,459 of cash in the aggregate.





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




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





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





Other
      significant changes pursuant to the amended Management Agreement include a
      reduction in the quarterly base management fee from 0.5000% of stockholders'
      equity to 0.3750% for the first $400 million in average total stockholders'
      equity; 0.3125% for the next $400 million of average total stockholders' equity
      and 0.2500% for the average total stockholders' equity in excess of $800
      million. Under the terms of the prior Management Agreement, the Company paid
      the
      Manager a base management fee equal to 0.5% of the quarterly average total
      stockholders’ equity for the applicable quarter. The amended Management
      Agreement continues to provide that the Company will grant the Manager Common
      Stock equal to one-half of one percent (0.5%) of the total number of shares
      of
      the Company's Common Stock outstanding as of a specified date in the fourth
      quarter of each year.





The
      amended Management Agreement also provides for the Manager to receive a
      quarterly incentive fee equal to 25% of the amount by which the applicable
      quarter’s Operating Earnings (as defined in the Management Agreement) of the
      Company (before incentive fee) plus realized gains, net foreign currency gains
      and decreases in expense associated with reversals of credit impairments on
      commercial mortgage loans; less realized losses, net foreign currency losses
      and
      increases in expense associated with credit impairments on commercial mortgage
      loans exceeds the weighted average issue price per share of the Company's Common
      Stock ($11.21 per common share at June 30, 2008) multiplied by the ten-year
      Treasury note rate plus 4.0% per annum (expressed as a quarterly percentage),
      multiplied by the weighted average number of shares of the Company's Common
      Stock outstanding during the applicable quarterly period. The Management
      Agreement continues to provide that the incentive fee payable to the Manager
      shall be subject to a rolling four-quarter high watermark.




65




Under
      the
      terms of the prior Management Agreement, the Manager was entitled to receive
      an
      incentive fee under the Management Agreement equal to 25% of the amount by
      which
      the rolling four-quarter GAAP net income before the incentive fee exceeded
      the
      greater of 8.5% or 400 basis points over the ten-year Treasury note multiplied
      by the adjusted per share issue price of the Company’s Common Stock.
      Additionally, up to 30% of the incentive fees earned in 2007 or after was paid
      in shares of the Company’s Common Stock subject to certain provisions under a
      compensatory deferred stock plan approved by the stockholders of the Company
      in
      2007. The Board of Directors also authorized a stock based incentive plan where
      one-half of one percent of common shares outstanding as of December 31st is
      paid
      to the Manager.





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





For
                the Three Months
              Ended
                June 30,
            
            For
                the Six Months
              Ended
                June 30,2008
            
            2007
            
            2008
            
            2007Management
                fee
            
            $
            2,961
            
            $
            3,868
            
            $
            6,236
            
            $
            7,388Incentive
                fee
            
            
            1,334
            
            
            2,922
            
            
            11,879
            
            
            5,646Incentive
                fee - stock based
            
            
            645
            
            
            939
            
            
            1,044
            
            
            1,648Total
                management and incentive fees
            
            $
            4,940
            
            $
            7,729
            
            $
            19,159
            
            $
            14,682





At
      June
      30, 2008 and 2007, respectively, management and incentive fees of $14,182 and
      $7,308 remain payable to the Manager and are included on the accompanying
      consolidated statements of financial condition as a component of other
      liabilities.





In
      accordance with the provisions of the Management Agreement, the Company recorded
      reimbursements to the Manager of $125 and $250 for certain expenses incurred
      on
      behalf of the Company during the three and six months ended June 30, 2008 and
      $117 and $235 for the three and six months ended June 30, 2007,
      respectively.





The
      Company also has administration and accounting services agreements with the
      Manager. Under the terms of the administration services agreement, the Manager
      provides financial reporting, audit coordination and accounting oversight
      services to the Company. Under the terms of the accounting services agreement,
      the Manager provides investment accounting services to the Company. For the
      three and six months ended June 30, 2008, the Company recorded administration
      and investment accounting service fees of $255 and $510, respectively, which
      are
      included in general and administrative expense on the accompanying consolidated
      statements of operations. For the three and six months ended June 30, 2007,
      the
      Company recorded administration and investment accounting service fees of $363
      and $410, respectively, which are included in general and administrative expense
      on the accompanying consolidated statements of operations.




66





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





On
      March
      7, 2008, the Company entered into a $60,000 credit facility with a subsidiary
      of
      BlackRock, Inc. BlackRock, Inc. is the parent of the Company’s manager,
      BlackRock Financial Management, Inc. The facility has a term of 364 days with
      two 364-day extension periods, subject to lender approval. The facility is
      collateralized by a pledge of the Company’s investment in Carbon II and gives
      the lender the option to purchase the Carbon II investment at fair market value
      (as determined by the terms of the agreement) from the Company. On April 8,
      2008, the Company repaid $52,500 to HoldCo 2, representing all then-outstanding
      borrowings under the facility. On July 28, 2008, the Company reborrowed $30,000
      under the facility.





During
      2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
      I, a private commercial real estate income opportunity fund managed by the
      Manager. The Company’s investment in Carbon I at June 30, 2008 was $1,707. The
      Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon I. On June 30, 2008, the Company
      owned approximately 20% of the outstanding shares of Carbon I.





The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II, a private commercial real estate income opportunity fund managed
      by
      the Manager. The Company’s investment in Carbon II at June 30, 2008 was $95,258.
      The Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon II. On June 30, 2008, the Company
      owned approximately 26% of the outstanding shares of Carbon II.







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





Certain
      of the Company’s subsidiaries have elected to be treated as taxable REIT
      subsidiaries.  This election permits the subsidiaries to enter into
      activities related to foreign investments that may not have constituted
      qualifying assets generating qualifying income for the REIT tests.




67




**ITEM
              3.**
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK





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





The
      majority of the Company's assets are fixed rate securities valued based on
      a
      market credit spread to U.S. Treasury securities. As U.S. Treasury securities
      are priced to a higher yield and/or the spread to U.S. Treasuries used to price
      the Company's assets is increased, the estimated fair value of the Company's
      portfolio may decline. Conversely, as U.S. Treasury securities are priced to
      a
      lower yield and/or the spread to U.S. Treasuries used to price the Company's
      assets is decreased, the estimated fair value of the Company's portfolio may
      increase. Changes in the estimated fair value of the Company's portfolio may
      affect the Company's net income or cash flow directly through their impact
      on
      unrealized gains or losses on securities held-for-trading or indirectly through
      their impact on the Company's ability to borrow. Changes in the level of the
      U.S. Treasury yield curve can also affect, among other things, the prepayment
      assumptions used to value certain of the Company's securities and the Company's
      ability to realize gains from the sale of such assets. In addition, changes
      in
      the general level of the LIBOR money market rates can affect the Company's
      net
      interest income. At June 30, 2008, all of the Company's short-term
      collateralized liabilities outside of the CDOs are floating rate based on a
      market spread to LIBOR. As the level of LIBOR increases or decreases, the
      Company's interest expense will move in the same direction.





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




68




The
      Company monitors and manages interest rate risk based on a method that takes
      into consideration the interest rate sensitivity of the Company's assets and
      liabilities, including preferred stock. The Company's objective is to acquire
      assets and match fund the purchase so that interest rate risk associated with
      financing these assets is reduced or eliminated. A cash flow based CDO is an
      example of a secured financing vehicle that does not require a mark-to-market
      to
      establish or maintain a level of financing. The primary risks associated with
      acquiring and financing assets under reverse repurchase agreements and committed
      borrowing facilities are mark-to-market risk and short-term rate risk. Certain
      secured financing arrangements provide for an advance rate based upon a
      percentage of the estimated fair value of the asset being financed. Market
      movements that cause asset values to decline would require a margin call or
      a
      cash payment to maintain the relationship between asset value and amount
      borrowed. When financed assets are subject to a mark-to-market margin call,
      the
      Company carefully monitors the interest rate sensitivity of those assets. The
      duration of the assets financed which are subject to a mark-to-market margin
      call was 1.9 years based on net asset value at June 30, 2008. This means that
      a
      100 basis point increase in interest rates would cause a margin call of
      approximately $17,000.





The
      Company also focuses on economic risk in managing its sensitivity to interest
      rates and maintains an economic duration within a band of 2.0 to 5.0 years.
      At
      June 30, 2008, economic duration for the Company's entire portfolio was 2.9
      years. This implies that for each 100 basis points of change in interest rates
      the Company's economic value will change by approximately 2.9%, or $27,000.
      However, the duration of the Company’s portfolio not financed with match funded
      debt is 1.9 years. This means that a 100 basis point increase in interest rates
      or credit spreads would cause a margin call of approximately
      $17,000.





Net
      interest income sensitivity to changes in interest rates is analyzed using
      the
      assumptions that interest rates, as defined by the LIBOR curve, increase or
      decrease and that the yield curves of the LIBOR rate shocks will be parallel
      to
      each other.





Regarding
      the table below, all changes in net interest income are measured as percentage
      changes from the respective values calculated in the scenario labeled as “Base
      Case.” The base interest rate scenario assumes interest rates at June 30, 2008.
      Actual results could differ significantly from these estimates.





**Projected
                Percentage Change In Net**
              **Interest
                Income Per Share Given LIBOR Movements**Change
                in LIBOR,
              +/-
                Basis Points
            
            Projected
                Change in
              Earnings
                per Share-200
            
            $
            0.02-100
            
            $
            0.01-50
            
            $
            0.00Base
                Case+50
            
            $
            (0.00
            )+100
            
            $
            (0.01
            )+200
            
            $
            (0.02
            )




69




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





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





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





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





Factors
      that indicate a higher loss severity or acceleration of the timing of an
      expected loss will cause a reduction in the expected yield and therefore reduce
      the earnings of the Company. For purposes of illustration, a doubling of the
      losses in the Company's Controlling Class CMBS, without a significant
      acceleration of those losses, would reduce GAAP income by approximately $0.57
      per share of Common Stock per year. A significant acceleration of the timing
      of
      these losses would cause the Company's net income to decrease.





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




70




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




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




71




**ITEM
              4.**
            CONTROLS
                AND PROCEDURES





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





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




72




**Part
      II - OTHER INFORMATION**





ITEM
              1.
            Legal
                Proceedings





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





ITEM
              1A.
            Risk
                Factors





None.





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





During
      the six months ended June 30, 2008, the Company issued 740,745 shares
      of unregistered Common Stock with an aggregate value of $5,280 as
      follows. 316,320 shares of unregistered common stock with an aggregate
      value of $2,116 were issued to BlackRock Financial Management, Inc., the manager
      of the Company (the "Manager"), under the Company's 2006 Stock Award and
      Incentive Plan (the "Plan") and pursuant to the provision of the amended and
      restated investment advisory agreement, dated as of March 15, 2007, between
      the
      Company and the Manager (the "Management Agreement") requiring the Company
      to
      grant to the Manager a number of shares of Company common stock equal to
      one-half of one percent (0.5%) of the total number of shares of Common Stock
      outstanding as of December 31 of each year in which the Management Agreement
      is
      in effect. 424,425 restricted shares of unregistered common stock with
      an aggregate value of $3,163 were issued to the Manager under the Company's
      2008
      Manager Equity Plan and pursuant to the provision the Management Agreement
      providing that 30% of the Manager's incentive fees earned under the Management
      Agreement shall be paid in shares of the Company's Common Stock. The issuances
      of common stock were made in reliance upon the exemption from registration
      under
      Section 4(2) of the Securities Act.





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





At
      the
      annual meeting of the Company’s stockholders on May 15, 2008, the Company’s
      stockholders approved (1) the election of Hugh R. Frater, Jeffrey C. Keil and
      Deborah J. Lucas to the Board of Directors of the Company for a three-year
      term
      expiring in 2011, the election of Walter E. Gregg Jr. to the Board of Directors
      of the Company for the two-year balance of a three-year term expiring in 2010
      and the election of Christopher A. Milner to the Board of Directors of the
      Company for the one-year balance of a three-year term expiring in 2009, (2)
      the
      ratification of the appointment by the Board of Directors of the Company of
      Deloitte & Touche LLP as the Company’s independent auditors for the fiscal
      year ending December 31, 2008 and (3) the approval of the Anthracite Capital,
      Inc. 2008 Manager Equity Plan.




73




The
      result of the vote is as follows:





Election
                of Hugh R. FraterFor:
            
            
            56,167,937Against/Withheld:
            
            
            1,586,381Abstentions:
            
            
            0Broker
                Non-Votes:
            
            
            0Election
                of Jeffrey C. KeilFor:
            
            
            56,158,239Against/Withheld:
            
            
            1,596,079Abstentions:
            
            
            0Broker
                Non-Votes:
            
            
            0Election
                of Deborah J. LucasFor:
            
            
            56,062,340Against/Withheld:
            
            
            1,691,979Abstentions:
            
            
            0Broker
                Non-Votes:
            
            
            0Election
                of Walter E. Gregg Jr.For:
            
            
            56,059,509Against/Withheld:
            
            
            1,694,809Abstentions:
            
            
            0Broker
                Non-Votes:
            
            
            0Election
                of Christopher A. MilnerFor:
            
            
            56,228,723Against/Withheld:
            
            
            1,525,595Abstentions:
            
            
            0Broker
                Non-Votes:
            
            
            0Ratification
                of Deloitte & Touche LLPFor:
            
            
            56,571,102Against/Withheld:
            
            
            869,095Abstentions:
            
            
            314,118Broker
                Non-Votes:
            
            
            0Approval
                of the Anthracite Capital, Inc. 2008 Manager Equity
                PlanFor:
            
            
            29,068,522Against/Withheld:
            
            
            3,653,546Abstentions:
            
            
            990,799Broker
                Non-Votes:
            
            
            31,078,894





The
      terms
      of the following other directors of the Company continued after the meeting:
      Scott M. Amero, Carl F. Geuther, John B. Levy and Andrew P. Rifkin.




74




ITEM
              6.
            Exhibits




Exhibit No.
            
            Description




10.1
            Amendment,
                Agreement and Waiver, dated as of August 7, 2008, in respect of the
                Credit
                Agreement, dated as of March 17, 2006, as amended, restated, supplemented
                or otherwise modified, by and among AHR Capital BOFA Limited as a
                borrower, each of the borrowers from time to time party thereto,
                Anthracite Capital, Inc. as borrower agent and Bank of America, N.A.
                as
                lender


10.2
            Amendment
                and Agreement, dated as of August 7, 2008, in respect of the Master
                Repurchase Agreement, dated as of July 20, 2007, as amended, restated,
                supplemented or otherwise modified, by and among Anthracite Capital
                BOFA
                Funding LLC, as seller, Bank of America, N.A. and Bank of America
                Mortgage
                Capital Corporation, as buyers, and Bank of America, N.A. as agent
                for the
                buyers


10.3
            Amended
                and Restated Guaranty, dated as of August 7, 2008, by Anthracite
                Capital,
                Inc. for the benefit of Bank of America, N.A. and Bank of America
                Mortgage
                Capital Corporation


10.4
            Amended
                and Restated Parent Guaranty, dated as of August 7, 2008, by Anthracite
                Capital, Inc. in favor of Bank of America,
                N.A.


31.1
            Exchange
                Act Rule (13a-14a)/15d-14(a) Certification of Chief Executive
                Officer


31.2
            Exchange
                Act Rule (13a-14a)/15d-14(a) Certification of Chief Financial
                Officer


32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002









75




SIGNATURES








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





ANTHRACITE
                CAPITAL, INC.Dated:
              August 11, 2008
            By:
            /s/ Christopher
              A. MilnerName:
                Christopher A. MilnerTitle:
                Chief Executive Officer






Dated:
              August 11, 2008
            By:
            /s/ James
              J.
              LillisName:
                James J. LillisTitle:
                Chief Financial Officer




76