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


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

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

             For the quarterly period ended September 30, 1999

                      Commission File Number   001-13937
                                             -------------


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


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

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


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

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

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

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

      As of November 11, 1999, 20,964,034 shares of voting common stock
($.001 par value) were outstanding.



                             ANTHRACITE CAPITAL, INC.
                                    FORM 10-Q
                                      INDEX

PART I - FINANCIAL INFORMATION                                            Page
                                                                          ----

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

         Statements of Financial Condition
         At September 30, 1999 and December 31, 1998 (Unaudited).............4

         Statements of Operations and Comprehensive Income
         For the Three Months Ended September 30, 1999 and 1998, and
         For the Nine Months Ended September 30, 1999 and For the Period
         March 24, 1998 (Commencement of Operations) Through September
         30, 1998 (Unaudited)................................................5

         Statement of Changes in Stockholders' Equity
         For the Nine Months Ended September 30, 1999 (Unaudited)............6

         Statements of Cash Flows
         For the Nine Months Ended September 30, 1999 and
         For the Period March 24, 1998 (Commencement of Operations)
         Through September 30, 1998 (Unaudited)..............................7

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

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........36

Part II - OTHER INFORMATION

Item 1.  Legal Proceedings..................................................41

Item 2.  Changes in Securities and Use of Proceeds..........................41

Item 3.  Defaults Upon Senior Securities....................................41

Item 4.  Submission of Matters to a Vote of Security Holders................41

Item 5.  Other Information..................................................41

Item 6.  Exhibits and Reports on Form 8-K...................................41

SIGNATURES..................................................................42

Financial Data Schedule.....................................................43


<PAGE>


Part I - FINANCIAL INFORMATION
Item 1.  Financial Statements

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

                                                                       September 30, 1999   December 31, 1998
                                                                       ------------------   -----------------
<S>                                                                  <C>                  <C>
ASSETS
Cash and cash equivalents                                                       $  9,694             $  1,087
Restricted cash equivalents                                                            -                3,243

Deposits with brokers as collateral for securities sold short                          -              276,617
Securities available for sale, at fair value
     Subordinated commercial mortgage-backed securities (CMBS)         $ 262,905             $273,018
     Investment Grade securities                                         326,000              192,050
                                                                       ---------             --------
Total securities available for sale                                              588,905              465,068
Securities held for trading, at fair value                                             -              166,835
Commercial mortgage loans, net                                                    63,519               35,581
Other assets                                                                       7,554                7,964
                                                                             -----------          -----------
      Total Assets                                                             $ 669,672             $956,395
                                                                             ===========          ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Collateralized borrowings:
    Secured by pledge of subordinated CMBS                              $154,389             $160,924
    Secured by pledge of other securities available for sale
             and cash equivalents                                        213,605              168,963
    Secured by pledge of securities held for trading                           -              133,163
    Secured by pledge of commercial mortgage loans                        27,980               23,014
                                                                        --------             --------
Total collateralized borrowings                                                $ 395,974            $ 486,064
Securities sold short, at fair value                                                   -              275,085
Payable for securities purchased                                                  88,133                    -
Distributions payable                                                              6,090                5,796
Other liabilities                                                                  3,261                7,721
                                                                             -----------          -----------
     Total Liabilities                                                           493,458              774,666
                                                                             -----------          -----------

Commitments and Contingencies

Stockholders' Equity:
Preferred stock, par value $0.001 per share; 100,000 shares authorized;                -                    -
     No shares issued
Common stock, par value $0.001 per share; 400,000 shares authorized;
     22,378 shares issued, 20,998 shares outstanding in 1999; and
     21,365 shares issued, 19,985 shares outstanding in 1998                          22                   21
Additional paid-in capital                                                       303,562              296,836
Distributions in excess of earnings                                             (17,948)             (20,148)
Accumulated other comprehensive loss                                            (93,579)             (79,137)
Treasury stock, at cost (1,380 shares)                                          (15,843)             (15,843)
                                                                             -----------          -----------
      Total Stockholders' Equity                                                 176,214              181,729
                                                                             -----------          -----------
      Total Liabilities and Stockholders' Equity                               $ 669,672            $ 956,395
                                                                             ===========          ===========
</TABLE>

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



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

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


                                                                                             For the Period
                                      For the Three Months Ended         For the Nine         March 24,1998*
                                            September 30                 Months Ended            Through
                                         1999             1998        September 30, 1999   September 30, 1998
                                      ---------        ---------      ------------------   ------------------
<S>                                 <C>              <C>            <C>                  <C>


Interest Income:
Securities available for sale          $ 11,127        $  19,318           $ 34,075             $ 30,209
Commercial mortgage loans                 1,620              408              3,663                  408
Trading securities                          567                -              3,186                    -
Cash and cash equivalents                   104               63                404                  216
                                       --------        ---------           --------            ---------
         Total interest income           13,418           19,789             41,328               30,833
                                       --------        ---------           --------            ---------

Expenses:
Interest                                  4,919           11,708             14,553               16,090
Interest-trading securities                 607                -              4,108                    -
Management fee                            1,050            1,374              3,173                2,244
Other                                       507              244              1,541                  482
                                       --------        ---------           --------            ---------
        Total expenses                    7,083           13,326             23,375               18,816
                                       --------        ---------           --------            ---------

Other Gain (Loss):
Gain (Loss) on sale of securities
   available for sale                     (566)               22              (423)                   22
Gain on securities held for trading        739                 -              2,992                    -
Foreign currency gain (loss)                28              (32)               (55)                 (32)
                                       --------        ---------           --------            ---------
        Total other gain                   201              (10)              2,514                 (10)
                                       --------        ---------           --------            ---------

Net Income                               6,536             6,453             20,467               12,007
                                       --------        ---------           --------            ---------

Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities
  available for sale:
Unrealized holding loss arising         (3,054)         (61,295)           (14,865)             (58,748)
  during period
Less: reclassification adjustment
    for realized (gain)
loss included in net income                566              (22)               423                  (22)
                                       -------         ---------          --------             ---------
         Other comprehensive Income
            (Loss)                     (2,488)          (61,317)          (14,442)              (58,770)
                                       -------         ---------          --------             ---------

Comprehensive Income (Loss)           $  4,048         $(54,864)         $  6,025              $(46,763)
                                      =========        =========         =========             =========

Net income per share:
   Basic                              $   0.31         $   0.31          $   0.99              $   0.57
   Diluted                                0.31             0.31              0.99                  0.57

Weighted average number of shares outstanding:
   Basic                                 20,998          20,562            20,761                20,980
   Diluted                               20,998          20,562            20,761                20,980
</TABLE>

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


ANTHRACITE CAPITAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
=================================================================================================================


                                                                          Accumulated
                                      Common   Additional Distributions      Other        Treasury     Total
                                      Stock,    Paid-In     In Excess     Comprehensive    Stock,   Stockholders'
                                     Par Value  Capital   Of Earnings        Loss         At Cost     Equity
                                     ----------------------------------------------------------------------------
<S>                               <C>        <C>       <C>            <C>              <C>        <C>
Balance at December 31, 1998         $    21   $ 296,836  $ (20,148)     $  (79,137)    $ (15,843)  $ 181,729

Net income                                                    20,467                                   20,467

Change in net unrealized loss
on securities available for sale,
net of reclassification
adjustment                                                                  (14,442)                 (14,442)

Distributions declared                                      (18,267)                                 (18,267)

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

Balance at September 30, 1999        $   22    $ 303,562  $ (17,948)     $ (93,579)     $(15,843)    $ 176,214
                                     ============================================================================
</TABLE>



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



ANTHRACITE CAPITAL, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
=====================================================================================================
                                                          For the Nine Months    For the Period March
                                                                 Ended            24, 1998* Through
                                                          September 30, 1999     September 30, 1998
                                                          -------------------    --------------------
<S>                                                     <C>                    <C>

Cash flows from operating activities:

   Net income                                                  $      20,467               $   12,007

Adjustments to reconcile net income to net cash provided
by operating activities:
        Purchase of securities held for trading                  (6,056,628)                        -
        Proceeds from sales of securities held for trading         6,197,631                        -
        Premium amortization (discount accretion), net                   172                    6,557
        Noncash portion of net foreign currency loss                      55                    (920)
        Net gain on sale of securities                               (2,569)                     (22)
        Decrease (increase)  in other assets                             410                 (13,433)
        (Decrease) increase in other liabilities                     (4,460)                    6,487
                                                          -------------------    --------------------
Net cash provided by operating activities                            155,078                   10,676
                                                          -------------------    --------------------

Cash flows from investing activities:
        Purchase of securities available for sale                  (217,260)              (1,241,091)
        Funding of commercial mortgage loan                         (28,261)                 (35,131)
        Maturities of restricted cash equivalents                      3,242                        -
        Principal payments received on securities available
            for sale                                                  63,436                   53,395
        Proceeds from sales of securities available for sale          45,367                   73,524
        Payable for securities purchased                              88,133                 (50,662)
                                                          -------------------    --------------------
Net cash used in investing activities                               (45,343)              (1,199,965)
                                                          -------------------    --------------------

Cash flows from financing activities:

        Increase (decrease) in net collateralized borrowings        (89,881)                  920,584
        Proceeds from issuance of common stock, net of
           offering costs                                              6,726                  296,972
        Distributions on common stock                               (17,973)                  (5,769)
        Purchase of treasury stock                                         -                 (15,843)
        Other common stock transactions                                    -                    (231)
                                                          -------------------    --------------------
Net cash provided (used) by financing activities                   (101,128)                1,195,713
                                                          -------------------    --------------------

Net increase (decrease) in cash and cash equivalents                   8,607                    6,424

Cash and cash equivalents, beginning of period                         1,087                      200

Cash and cash equivalents, end of period                           $   9,694               $    6,624
                                                          ===================    ====================
Supplemental disclosure of cash flow information:
        Interest paid                                              $  21,675               $   12,361
                                                          ===================    ====================

Noncash financing activities:
        Net change in unrealized loss on securities
          available for sale                                      $ (14,442)              $  (58,770)
                                                          ===================    ====================
   Distributions declared, not yet paid                           $   6,089               $     7,195
                                                          ===================    ====================
</TABLE>

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



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

NOTE 1   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

The accompanying unaudited financial statements have been prepared in
conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation S-X for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These financial
statements should be read in conjunction with the annual financial
statements and notes thereto included in the Company's annual report on
Form 10-K for 1998 filed with the Securities and Exchange Commission.

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

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

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

CASH AND CASH EQUIVALENTS

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

RESTRICTED CASH EQUIVALENTS

At December 31, 1998, $3,243 of the Company's cash equivalents was pledged
to secure its collateralized borrowings and was classified as restricted
cash equivalents on the statement of financial condition. At September 30,
1999, none of the Company's cash equivalents were pledged.

SECURITIES AVAILABLE FOR SALE

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

SECURITIES HELD FOR TRADING

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

COMMERCIAL MORTGAGE LOANS

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

SHORT SALES

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of the Company's securities available for sale, securities
held for trading, and securities sold short are based on market prices
provided by certain dealers who make markets in these financial
instruments. The fair values reported reflect estimates and may not
necessarily be indicative of the amounts the Company could realize in a
current market exchange.

FORWARD COMMITMENTS

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

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

FINANCIAL FUTURES CONTRACTS - TRADING

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

HEDGING INSTRUMENTS

As part of its asset/liability management activities, the Company may enter
into financial futures contracts, short sales, interest rate swap
agreements, forward currency exchange contracts and other financial
instruments in order to hedge interest rate and foreign currency exposures
or to modify the interest rate or foreign currency characteristics of
related items in its statement of financial condition. From time to time
the Company may reduce its exposure to market interest rates by entering
into various financial instruments that shorten portfolio duration. These
financial instruments mitigate the effect of interest rates on the value of
the portfolio.

Income and expenses from interest rate swap agreements that are, for
accounting purposes, designated as hedging securities available for sale,
are recognized as a net adjustment to the interest income of the hedged
item. During the term of the interest rate swap agreements, changes in fair
value are recognized on the statement of financial condition and included
among assets (if there is an unrealized gain) or among liabilities (if
there is an unrealized loss). A corresponding amount is included as a
component of accumulated other comprehensive income (loss) in stockholders'
equity. If the underlying hedged securities are sold, the amount of
unrealized gain or loss in accumulated other comprehensive income (loss)
relating to the corresponding interest rate swap agreement is included in
the determination of gain or loss on the sale of the securities. If
interest rate swap agreements are terminated, the associated gain or loss
is deferred over the remaining term of the agreement, provided that the
underlying hedged item still exists. The Company had no interest rate swap
agreements outstanding at September 30, 1999 and December 31, 1998.

Financial future contracts that are, for accounting purposes, designated as
hedging securities available for sale are carried at fair value, with
changes in fair value included in other comprehensive income (loss).
Realized gains or losses on closed contracts are recognized as a net
adjustment to the basis of the underlying hedged security. See Note 9 for a
description of the financial futures contracts open as of September 30,
1999.

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

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

FOREIGN CURRENCIES

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

NET INCOME PER SHARE

Net income per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, and is
calculated on the basis of the weighted average number of common shares
outstanding during the period plus the additional dilutive effect of common
stock equivalents. The dilutive effect of outstanding stock options is
calculated using the treasury stock method.

INCOME TAXES

The Company intends to elect to be taxed as a Real Estate Investment Trust
("REIT") and to comply with the provisions of the Internal Revenue Code of
1986, as amended, with respect thereto. Accordingly, the Company generally
will not be subject to Federal income tax to the extent of its
distributions to stockholders and as long as certain asset, income and
stock ownership tests are met.

COMPREHENSIVE INCOME

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

RECENT ACCOUNTING PRONOUNCEMENT

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

The Company is required to implement SFAS 133 by January 1, 2001. Company
management is evaluating the impact that this statement will have on its
hedging strategies and use of derivative instruments and does not believe
that implementation will have a material effect on the Company's financial
statements based on its current hedging strategies.

RECLASSIFICATIONS

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

NOTE 2   SECURITIES AVAILABLE FOR SALE

The Company's securities available for sale are carried at estimated fair
value. The amortized cost and estimated fair value of securities available
for sale at September 30, 1999 are summarized as follows:

<TABLE>
<CAPTION>

                                                                                  Gross     Estimated
                                                                     Amortized  Unrealized     Fair
               Security Description                                     Cost       Loss        Value
  -----------------------------------------------------------------------------------------------------
<S>                                             <C>        <C>          <C>

  Commercial mortgage-backed securities ("CMBS"):
  Non-investment grade rated subordinated securities                 $ 316,624  $ (82,565)   $ 234,059

  Non-rated subordinated securities                                     38,169     (9,322)      28,847
                                                                    -----------------------------------
     Total CMBS                                                        354,793    (91,887)     262,906
                                                                    -----------------------------------
  Single-family residential mortgage-backed securities ("RMBS"):
  Agency adjustable rate securities                                     62,777          76      62,853
  Agency fixed rate securities                                         178,288     (1,423)     176,865
  Privately issued investment grade rated fixed
     rate securities                                                    84,261     (1,005)      83,256
                                                                    -----------------------------------
     Total RMBS                                                        325,326     (2,352)     322,974
                                                                    -----------------------------------
  Agency insured project loan                                            3,211       (186)       3,025
                                                                    ===================================
     Total securities available for sale                             $ 683,330  $ (94,425)   $ 588,905
                                                                    ===================================
</TABLE>

At September 30, 1999, an aggregate of $439,319 in estimated fair value of
the Company's securities available for sale were pledged to secure its
collateralized borrowings and its obligation to brokers as clearing
deposits.

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

<TABLE>
<CAPTION>

                                                                                  Gross      Gross    Estimated
                                                                     Amortized Unrealized Unrealized    Fair
            Security Description                                        Cost       Gain       Loss      Value
  -------------------------------------------------------------------------------------------------------------
<S>                                                                <C>       <C>        <C>         <C>
  Commercial mortgage-backed securities ("CMBS"):
  Non-investment grade rated subordinated securities                  $ 314,209           $ (65,475)  $ 248,734

  Non-rated subordinated securities                                      38,200             (13,916)     24,284
                                                                    -------------------------------------------
     Total CMBS                                                         352,409             (79,391)    273,018
                                                                    -------------------------------------------
  Single-family residential mortgage-backed securities ("RMBS"):
  Agency adjustable rate securities                                      17,977   $   22                17,999
  Agency fixed rate securities                                           13,022        1                13,023
  Privately issued investment grade rated
     fixed rate securities                                              157,571      278       (96)    157,753
                                                                    -------------------------------------------
     Total RMBS                                                         188,570      301       (96)    188,775
                                                                    -------------------------------------------
  Agency insured project loan                                             3,226       49                 3,275
                                                                    ===========================================
     Total securities available for sale                              $ 544,205   $  350  $(79,487)  $ 465,068
                                                                    ===========================================
</TABLE>

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

As of September 30, 1999, there were 1,564 loans underlying the
subordinated CMBS held by the Company with a principal balance of
$8,668,966.

The aggregate estimated fair value by underlying credit rating of the
Company's securities available for sale at September 30, 1999 is as
follows:

                                                    Estimated
         Security Rating                            Fair Value   Percentage
  --------------------------------------------------------------------------
  Agency and agency insured
      securities                                    $242,743         41.2%
  AAA                                                 83,256          14.1
  BB+                                                 23,626           4.0
  BB                                                  22,536           3.8
  BB-                                                 52,131           8.9
  B+                                                   8,114           1.4
  B                                                   83,170          14.1
  B-                                                  30,637           5.2
  CCC                                                 13,842           2.4
  Not rated                                           28,847           4.9
                                                 ==========================
  Total securities available for sale               $588,905          100%
                                                 ==========================

As of September 30, 1999 the mortgage loans underlying the subordinated
CMBS held by the Company were secured by properties of the types and at the
locations identified below:

  Property Type  Percentage(1)  Geographic Location     Percentage (1)
  --------------------------------------------------------------------
  Multifamily           29.7%   California                 12.6%
  Retail                 27.6   Texas                       10.7
  Office                 16.3   New York                     9.6
  Lodging                 9.9   Florida                      6.2
  Other                  16.5   Other (2)                   60.9
                ==============                    ==============
  Total                 100.0%  Total                     100.0%
                ==============                    ==============

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

The following table sets forth certain information relating to the
aggregate principal balance and payment status of delinquent mortgage loans
underlying the subordinated CMBS held by the company as of September 30,
1999:

                                   Principal       Number
                                      Amount      of Loans
                                   ---------      --------
   Past due 30 to 60 days            $ 8,685          4
   Past due 60 to 90 days             12,133          1
   Past due 90 days or more           45,011          6
                                   ---------      --------
   Total past due                   $ 65,829         11
                                   =========      ========

Subsequent to September 30, 1999, one loan in the principal amount of
$22,433 which was past due 90 days was restructured. Based upon the outcome
of these restructuring discussions the Company does not believe any
adjustment is currently required to its aggregate portfolio loss estimates.
The remaining mortgage loans comprise 0.501% of the aggregate principal
balance and .639% of the number of the mortgage loans underlying the
Company's subordinated CMBS. These loans have been transferred to
special servicing at the Company's direction and will remain in
special servicing status until such time as the loan is paid off or can be
deemed to be unimpaired. The servicers of the delinquent loans are
currently in negotiations with the relevant borrowers to resolve payment
deficiencies and/or have initiated foreclosure. The party which originally
contributed a loan with a principal balance of $9,085 and is currently past
due 90 days or more, has indemnified the CMBS trust against a loss up to
$1,300. This indemnification will mitigate any potential loss in the
restructuring of the loan. No assurance can be given that these negotiations
will result in the deficiencies on these loans being paid in full.

To the extent that realized losses, if any, or such resolutions differ
significantly from the Company's original loss estimates, it may be
necessary to reduce the projected GAAP 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 GAAP yields are
appropriate.

The subordinated CMBS held by the Company consist of subordinated
securities collateralized by adjustable and fixed rate commercial and
multifamily mortgage loans. The RMBS held by the Company consist of
adjustable rate and fixed rate residential pass-through or mortgage-backed
securities collateralized by adjustable and fixed rate single-family
residential mortgage loans. Agency RMBS were issued by Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA)
or Government National Mortgage Association (GNMA). Privately issued RMBS
were issued by entities other than FHLMC, FNMA or GNMA. The agency insured
project loan held by the Company consists of a participation interest in a
mortgage loan which is 99% guaranteed by the Federal Housing Administration
(FHA). The Company's securities available for sale are subject to credit,
interest rate and/or prepayment risks.

The subordinated CMBS owned by the Company provide credit support to the
more senior classes of the related commercial securitization. Cash flow
from the mortgages underlying the CMBS generally is allocated first to the
senior classes, with the most senior class having a priority entitlement to
cash flow. Then, any remaining cash flow is allocated generally among the
other CMBS classes in order of their relative seniority. To the extent
there are defaults and unrecoverable losses on the underlying mortgages,
resulting in reduced cash flows, the most subordinated CMBS class will bear
this loss first. To the extent there are losses in excess of the most
subordinated class's, stated entitlement to principal and interest, then
the remaining CMBS classes will bear such losses in order of their relative
subordination.

As of September 30, 1999, the anticipated weighted average unleveraged
yield to maturity for GAAP purposes of the Company's CMBS was 9.53% per
annum and of the Company's other securities available for sale was 6.67%
per annum. The Company's anticipated yields to maturity on its CMBS and
other securities available for sale are based upon a number of assumptions
that are subject to certain business and economic uncertainties and
contingencies. Examples of these include, among other things, the rate and
timing of principal payments (including prepayments, repurchases, defaults
and liquidations), the pass-through or coupon rate and interest rate
fluctuations. Additional factors that may affect the Company's anticipated
yields to maturity on its CMBS include interest payment shortfalls due to
delinquencies on the underlying mortgage loans, and the timing and
magnitude of expected credit losses on the mortgage loans underlying the
CMBS that are a result of the general condition of the real estate market
(including competition for tenants and their related credit quality) and
changes in market rental rates. As these uncertainties and contingencies
are difficult to predict and are subject to future events which may alter
these assumptions, no assurance can be given that the anticipated yields to
maturity, discussed above and elsewhere, will be achieved.

The agency adjustable rate RMBS held by the Company are subject to periodic
and lifetime caps that limit the amount such securities' interest rates can
change during any given period and over the life of the loan.

At September 30, 1999, the unamortized net discount on securities available
for sale was $199,031, which represented 25% of the then remaining face
amount of such securities.

During the three months and nine months ended September 30, 1999, the
Company sold a portion of its securities available for sale for total
proceeds of $23,855 and $45,367, respectively, resulting in realized losses
of $566 and $423, respectively.

NOTE 3  SECURITIES HELD FOR TRADING

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

The Company's securities held for trading are carried at estimated fair
value. At September 30, 1999, the Company did not have any long or short
positions in securities held for trading. At December 31, 1998, the
Company's securities held for trading consisted of U.S. Treasury securities
with an estimated fair value of $166,835 and held short positions
consisting of U.S. Treasury securities and an agency fixed rate note with
estimated fair values of $(223,757) and $(51,328), respectively.

During the three months and nine months ended September 30, 1999, aggregate
net realized gains on securities held for trading were $739 and $2,992,
respectively.

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

NOTE 4   COMMERCIAL MORTGAGE LOANS

On August 26, 1998, the Company along with a syndicate of other lenders
originated a loan secured by a second lien on five luxury hotels in London,
England and vicinity. The loan has a five-year maturity and may be prepaid
at any time. The loan is denominated in pounds sterling and bears interest
at a rate based upon the London Interbank Offered Rate (LIBOR) for pounds
sterling plus approximately 4%. The Company's investment in the loan is
carried at amortized cost and translated into U.S. dollars at the exchange
rate in effect on the reporting date. The amortized cost and certain
additional information with respect to the Company's investment in the loan
at September 30, 1999 (at the exchange rate in effect on that date) are
summarized as follows:

  Interest Principal Unamortized  Amortized
   Rate    Balance    Discount      Cost
  -------------------------------------------
    9.59%   $35,346       $ (67)   $ 35,279

The exchange rate for the British pound at September 30, 1999 was
0.607423 pounds sterling to US$1.00.

The loan is denominated in the principal amount of 21,470 pounds sterling,
which based upon the September 30, 1999 exchange rate is equal to $35,346.
The market value of this loan is $31,666. At September 30, 1999, the entire
principal balance of the Company's investment in the loan was pledged to
secure line of credit borrowings of $22,805 included in collateralized
borrowings, and the borrower had made all payments when due.

Through September 30, 1999, the Company had funded $28,261 under a
commitment outstanding to fund a $35,000 floating rate commercial real
estate construction loan secured by a second mortgage. The subject property
is an office complex located in Santa Monica, California. The Company
received a $175 commitment fee relating to the commitment, which is being
amortized into income over the two-and-one-half year life of the loan. At
September 30, 1999, the interest rate on amounts funded under the
commitment was 11.88% and the borrower had made all payments when due.
During the fourth quarter of 1999, the Company funded an additional $6,536
of this commitment.

NOTE 5   COMMON STOCK

On each of March 17, June 17 and September 16, 1999, the Company declared
distributions to its stockholders of $0.29 per share, which were paid on
April 15, July 15 and October 15, 1999 to stockholders of record on March
31, June 30 and September 30, 1999.

During the first quarter of 1999, the Company issued 1,013,326 shares of
common stock under its Dividend Reinvestment and Stock Purchase Plan
("DRSP") and received total proceeds of $6,726. No shares were issued under
the DRSP during the second and third quarters of 1999.

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

During the period from October 1, 1999 through November 10, 1999 the
Company repurchased 34,300 shares of its common stock for $215 in open
market transactions. Such purchases were made at an average price of $6.33
per share (including commissions). During the three months ended September
30, 1998 the Company repurchased 1,380,100 shares of its common stock for
$15,843 in open market transactions. Such purchases were made at an average
price of $11.53 per share (including commissions). As of November 10, 1999,
the remaining number of shares authorized for repurchase is 2,722,119.

NOTE 6   TRANSACTIONS WITH AFFILIATES

The Company has a Management Agreement (the "Management Agreement") with
BlackRock Financial Management, Inc. (the "Manager"), a majority owned
indirect subsidiary of PNC Bank Corp. ("PNC") and the employer of certain
directors and officers of the Company, under which the Manager manages the
Company's day-to-day operations, subject to the direction and oversight of
the Company's Board of Directors. The initial two year term of the
Management Agreement expires in March 2000 and is subject to extension with
the approval of a majority of the unaffiliated directors. The Company pays
the Manager an annual base management fee equal to a percentage of the
Average Invested Assets of the Company as further defined in the Management
Agreement. The base management fee is equal to 1% per annum of the Average
Invested Assets rated less than BB- or not rated, 0.75% of Average Invested
Assets rated BB- to BB+, and 0.35% of Average Invested Assets rated above
BB+.

The Company accrued $1,050 and $3,173 and $2,244 in base management fees in
accordance with the terms of the Management Agreement for the three months
and nine months ended September 30, 1999, and for the period March 24, 1998
to September 30, 1998, respectively. The amount payable for base management
fees is included in other liabilities in the statement of financial
condition.

The Company will also pay the Manager, as incentive compensation, an amount
equal to 25% of the Funds from Operations of the Company plus gains (minus
losses) from debt restructuring and sales of property, before incentive
compensation, in excess of the amount that would produce an annualized
Return on Equity equal to 3.5% over the Ten-Year U.S. Treasury Rate as
further defined in the Management Agreement. For purposes of the incentive
compensation calculation, equity is generally defined as proceeds from
issuance of common stock before underwriting discounts and commissions and
other costs of issuance. The Company has not accrued for or paid the
Manager any incentive compensation since it commenced operations.

On March 17, 1999, the Company's Board of Directors approved an
Administration Agreement with the Manager and the termination of a previous
agreement with an unaffiliated third party. Under the terms of the
Administration Agreement, the Manager will provide financial reporting,
audit coordination and accounting oversight services. The Company will pay
the Manager a monthly administrative fee at an annual rate of 0.06% of the
first $125 million of average net assets, 0.04% of the next $125 million of
average net assets and 0.03% of average net assets in excess of $250
million subject to a minimum annual fee of $120. The terms of the
Administrative Agreement are substantially similar to the terms of the
previous agreement. For the three months and nine months ended September
30, 1999, the administration fee was $30 and $90, respectively.

On March 19 and September 13, 1999, the Company purchased certificates
representing 1% interests in Midland Commercial Mortgage Owner Trust I and
Midland Commercial Mortgage Owner Trust II (the "Trusts") for a total of
$1,377 and $2,417 from Midland Loan Services, Inc. ("Midland"), a wholly
owned indirect subsidiary of PNC and the depositor to the Trusts,
respectively. The assets of the Trusts consisted of commercial mortgage
loans originated or acquired by Midland. In connection with this
transaction, the Company entered into a $4,500 committed line of credit
from PNC Funding Corp., a wholly owned indirect subsidiary of PNC, to
borrow up to 90% of the fair market value of the Company's interest in the
Trust. Outstanding borrowings against this line of credit bear interest at
a LIBOR based variable rate. On June 30, 1999, the Company's interest in
the Midland Commercial Mortgage Owner Trust I was sold for $1,400 resulting
in a realized gain of $23. The Company paid interest of approximately $28
to PNC Funding Corp. during the nine months ended September 30, 1999.

NOTE 7   STOCK OPTIONS

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

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

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

In addition to the foregoing, on March 17, 1999 pursuant to the 1998 Stock
Option Plan, options to purchase 270,000 shares of the Company's common
stock were granted to certain officers of the Company and employees of the
Manager who provide services to the Company. The exercise price of these
options is $8.44 per share. The remaining contractual life of each option
is approximately 10 years. The options vest in two equal installments on
March 31, 2000 and March 31, 2001. None of these options were exercised or
expired during 1999.

Options to purchase 246,544 shares of the Company's common stock that were
granted to certain officers, directors and employees of the Company and the
Manager in connection with the Company's initial public offering expired on
March 30, 1999; none were exercised during 1998 or 1999.

NOTE 8   BORROWINGS

The Company's borrowings consist of lines of credit borrowings and reverse
repurchase agreements.

During 1998, the Company entered into a Master Assignment Agreement, as
amended, and the related Note, which provide financing for the Company's
investments. The agreement, which is with Merrill Lynch Mortgage Capital
Inc. ("Merrill Lynch"), permits the Company to borrow up to $400,000, and
was to terminate on August 20, 1999. During 1999, Merrill Lynch extended
the termination date of the Master Assignment Agreement to August 20, 2000
and reduced the availability under the Master Assignment Agreement to
$200,000. As of September 30, 1999 the outstanding borrowings under this
line of credit were $65,005. The agreement requires assets to be pledged as
collateral, which may consist of rated CMBS, rated RMBS, residential and
commercial mortgage loans, and certain other assets. Outstanding borrowings
under this line of credit bear interest at a LIBOR based variable rate.

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

In June 1999, the Company closed a $17,500, three year term financing
secured by the Company's $35,000 commercial real estate construction loan.
As of September 30, 1999, the Company had drawn $5,175 under this loan.
Subsequent to September 30, 1999, the Company borrowed an additional
$8,955.

On July 19, 1999, the Company entered into a $185,000 committed credit
facility with Deutsche Bank, AG. The facility has a two-year term with a
one-year extension at the Company's option. The facility can be used to
replace existing reverse repurchase agreement borrowings and finance the
acquisition of mortgage backed securities and loan investments which will
be used to collateralize borrowings under this facility. As of September
30, 1999, no amounts are drawn under this facility. Subsequent to September
30, 1999, the Company borrowed $5,022 under this loan.

The Company is subject to various financial covenants in its lines of
credit, including maintaining a minimum GAAP net worth of $140,000 and a
debt-to-equity ratio not to exceed 4.5 to 1, as well as a covenant that the
Company's GAAP net worth will not decline by more than 37 percent over any
two consecutive fiscal quarters. At September 30, 1999, the Company was in
compliance with all such covenants.

Certain information with respect to the Company's collateralized borrowings
at September 30, 1999 is summarized as follows:

<TABLE>
<CAPTION>
                                               Lines of        Reverse            Total
                                              Credit and      Repurchase      Collateralized
                                               Term Loan      Agreements        Borrowings
                                          --------------------------------------------------
<S>                                        <C>              <C>             <C>
  Outstanding borrowings                         $ 70,180        $ 325,794         $ 395,974
  Weighted average borrowing rate                   6.49%            5.77%             5.90%
  Weighted average remaining  maturity                333               25           79 Days
  Estimated fair value of assets  pledged       $ 116,246        $ 361,730         $ 477,976
</TABLE>

At September 30, 1999, $22,805 of borrowings outstanding under the lines of
credit were denominated in pounds sterling.

At September 30, 1999, the Company's collateralized borrowings had the
following remaining maturities:

<TABLE>
<CAPTION>
                                    Lines of       Reverse                 Total
                                   Credit and      Repurchase         Collateralized
                                   Term Loan       Agreements            Borrowings
                                 ----------------------------------------------------
<S>                           <C>               <C>                 <C>
  Within 30 days                           $0       $ 322,744           $ 322,744
  31 to 59 days                             0           3,050               3,050
  Over 60 days                         70,180               0              70,180
                                 ====================================================
                                      $70,180       $ 325,794           $ 395,974
                                 ====================================================
</TABLE>

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

NOTE 9   HEDGING INSTRUMENTS

The Company has entered into forward currency exchange contracts pursuant
to which it has agreed to exchange 8,000 pounds sterling for $12,702
(U.S. dollars) on January 18, 2000. In certain circumstances, the
Company may be required to provide collateral to secure its obligations
under the forward currency exchange contracts, or may be entitled to
receive collateral from the counterparty to the forward currency exchange
contracts. At September 30, 1999, no collateral was required under the
forward currency exchange contracts. The estimated fair value of the
forward currency exchange contracts was $(475) at September 30, 1999.

At September 30, 1999, the Company had outstanding, a short position of 81
thirty-year U.S. Treasury Bond future contracts and 1,060 five-year U.S.
Treasury Note future contracts expiring in December 30 and December 31,
1999, that represented $81,000 and $1,060,000 in face amount of U.S.
Treasury Bonds and Notes, respectively. The estimated fair value of these
contracts was approximately $123 at September 30, 1999.

NOTE 10   COMMITMENTS AND CONTINGENCIES

Through September 30, 1999, the Company had funded $28,261 under a
commitment outstanding to fund a $35,000 floating rate construction loan.
During the fourth quarter of 1999, the Company funded an additional $6,536
of this commitment. See Note 4.

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

GENERAL: The Company was organized in November 1997 to invest in a
diversified portfolio of multifamily, commercial and residential mortgage
loans, mortgage-backed securities and other real estate related assets in
the U.S. and non-U.S. markets. In March 1998, the Company received $296.9
million of net proceeds from the initial public offering of 20,000,000
shares and the private placement of 1,365,198 shares of its common stock,
which the Company used to acquire its initial portfolio of investments. The
Company commenced operations on March 24, 1998.

The Company is a real estate finance company that generates income based on
the spread between the interest income on its investments and the interest
expense from borrowings used to finance its investments. Because the
Company has elected to be taxed as a REIT its income is largely exempt from
corporate taxation and the Company is able to generate a higher level of
net interest earnings than otherwise obtainable by a taxable corporation
making similar investments. The principal risks that the Company takes are
a) credit risk on the high yield real estate loans and securities it
underwrites, b) interest rate risk on the spread between the rates
(typically one month LIBOR) at which the Company borrows and the generally
longer term rates (as represented by the U.S. Ten Year Treasury) at which
the Company lends; and c) funding risk in the amount and cost of debt
financing employed by the Company over time versus the level of such
funding that is sustainable by the financing markets. These risks are
discussed in more detail in Item 3, Quantitative and Qualitative
Disclosures About Market Risk and under Capital Resources and Liquidity.

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

MARKET CONDITIONS: During the third quarter of 1999 the market for high
yield CMBS and commercial loans remained relatively stable. The recovery of
below investment grade CMBS prices from the lows of 1998 has been seen to a
modest degree and credit fundamentals remain strong. Delinquencies reported
by the American Council of Life Insurers continued to decline to new lows
as the U.S. economy continued to turn in strong performance.

During the third quarter of 1999 the yield on the ten-year U.S. Treasury
Note increased by 10 basis points from 5.78% to 5.88% while spreads between
below investment grade sectors of the CMBS markets and the ten-year U.S.
Treasury Note widened modestly across rating categories. Technical factors
which affect the value of below investment grade CMBS are divided between
declining supply of product (positive) and continued uncertainty among
mortgage REITS and other suppliers of capital to the sector (negative). New
participants have not yet entered the market to drive spreads tighter,
despite low levels of commercial mortgage delinquency and attractive
spreads to comparably rated alternatives. The chart below compares the
credit spreads for BB rated CMBS to BB rated corporate bonds.

                                Average Credit Spreads (in basis points)*
                                -----------------------------------------
                                BB CMBS       BB Corporate       Difference
                                -------       ------------       ----------
  As of September 30, 1999        588             349               239
  As of June 30, 1999             525             326               199
  As of December 31, 1998         645             362               283

*    Source - Lehman Brothers CMBS High Yield BB Index & Lehman Brothers
     High Yield BB Index

The increase in interest rates in the third quarter led to a decline in the
value of the Company's investment portfolio since June 30, 1999. The
unrealized loss on the Company's holdings of subordinated CMBS increased
from $89,156 at June 30, 1999 to $91,806 at September 30, 1999. This
decline in the value of the investment portfolio represents current market
valuation changes, which the Company believes are not permanent losses.
Real estate credit fundamentals remained solid and the Company believes
there has been no material change in the credit quality of its portfolio.

The Company purchased its CMBS portfolio at various times throughout 1998
at prices that reflect an assumption that credit losses will occur. As the
portfolio matures the Company expects to receive its original purchase
price back over time provided the credit losses experienced are not greater
than the credit losses assumed. The original purchase price net of
liabilities of the CMBS portfolio as of 9/30/99 was $9.53 per share. The
original purchase price net of liabilities of the entire portfolio
including loans, non credit sensitive securities, and other assets was
$12.74. See Item 3 for a more detailed description of the effect of changes
in interest rates on the Company's portfolio.

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

                                 Ten Year            One month
                          U.S Treasury Securities      LIBOR       Difference

 September 30, 1999               5.88%                5.41%         0.48%
 June 30, 1999                    5.78%                5.22%         0.58%
 December 31, 1998                4.66%                5.06%        (0.40%)
 September 30, 1998               4.42%                5.38%        (0.96%)

The increase in LIBOR from June 30, 1999 to September 30, 1999 had a slight
negative impact on the Company's financing costs. At the end of October
1999, the ten-year U.S. Treasury yield had increased from its September 30,
1999 level to 6.02%, while one month LIBOR remained unchanged during the
same period.

RECENT EVENTS: Subsequent to quarter-end, the Company applied a portion of
its cash on hand to fund approximately $6,536 of its commitment outstanding
to originate a $35,000 floating rate commercial real estate construction
loan secured by a second mortgage (see Note 4 to the accompanying financial
statements). The Company funded its commitment through a combination of
existing cash on hand, and borrowings through its $17,500 term financing.
The balance remaining to be funded is $203.

Subsequent to quarter-end the Company commenced documentation on a new $50
million two-year financing facility to provide additional flexibility for
funding new investments. This new facility will increase unused, multi-year
facilities closed in 1999 to over $240 million, and will provide
significant back-up to existing borrowings and capacity for additional
investing.

As of September 30, 1999 the full amount of the Company's $185,000
committed credit facility with Deutsche Bank, AG was available. Subsequent
to quarter end, $5,022 was borrowed under this facility.

During the period from October 1, 1999 through November 10, 1999 the
Company repurchased 34,300 shares of its common stock for $215 in open
market transactions. Such purchases were made at an average price of $6.33
per share (including commissions).

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

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

The Company's FFO for the three months and nine months ended September 30,
1999 was $6,536 and $20,467, respectively, which was the same as its
reported GAAP net income for such periods. The Company reported cash flows
provided by operating activities of $155,078, cash flows used in investing
activities of $45,343 and cash flows used in financing activities of
$101,128 in its statement of cash flows for the nine months ended September
30, 1999.

RESULTS OF OPERATIONS

Net income for the three months and nine months ended September 30, 1999
was $6,536 or $0.31 per share (basic and diluted) and $20,467 or $0.99 per
share (basic and diluted), respectively, as compared with $6,453 or $0.31
per share (basic and diluted) and $12,007 or $0.57 per share (basic and
diluted) for the three months ended September 30, 1998 and for the period
March 24, 1998 (commencement of operations) to September 30, 1998,
respectively. Because the Company was in the process of initially acquiring
its investment portfolio during the 1998 periods, the results of operations
for those periods are not comparable to the 1999 results.

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

<TABLE>
<CAPTION>
                                       For the Three Months Ended September
                                                     30, 1999
                                    ---------------------------------------------
                                      Interest        Average      Annualized
                                       Income         Balance        Yield
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  CMBS                                  $ 8,373      $ 352,923        9.49%
  Other securities available for sale     2,754        206,881        5.32%
  Commercial mortgage loans               1,620         56,264       11.52%
  Cash and cash equivalents                 104          7,785        5.34%
                                    =============================================
  Total                                $ 12,851      $ 623,853        8.24%
                                    =============================================

<CAPTION>

                                        For the Nine Months Ended September
                                                     30, 1999
                                    ---------------------------------------------
                                      Interest        Average      Annualized
                                       Income         Balance        Yield
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  CMBS                                 $ 25,112      $ 352,880        9.49%
  Other securities available for sale     8,963        201,547        5.93%
  Commercial mortgage loans               3,663         46,373       10.53%
  Cash and cash equivalents                 404         10,630        5.10%
                                    =============================================
  Total                                $ 38,142      $ 611,430        8.32%
                                    =============================================
</TABLE>

In addition to the foregoing, the Company earned $567 and $3,186 in
interest income from securities held for trading during the three months
and nine months ended September 30, 1999, respectively. There was no
trading activity during the comparable periods of 1998.

<TABLE>
<CAPTION>
                                    For the Three Months Ended September 30,  1998
                                    ---------------------------------------------
                                       Interest       Average       Annualized
                                        Income        Balance          Yield
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  Securities available for sale       $ 19,318     $1,047,990          7.31%
  Commercial mortgage loans                408         14,462         11.19%
  Cash and cash equivalents                 63          4,436          5.61%
                                    =============================================
  Total                               $ 19,789     $1,066,888          7.36%
                                    =============================================

<CAPTION>

                                            For the Period March 24, 1998
                                              Through September 30, 1998
                                    ---------------------------------------------
                                       Interest       Average       Annualized
                                        Income        Balance          Yield
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  Securities available for sale       $ 30,209      $ 789,280          7.31%
  Commercial mortgage loans                408          6,966         11.91%
  Cash and cash equivalents                216          7,413          5.57%
                                     =============================================
  Total                               $ 30,833      $ 803,659          7.33%
                                    =============================================
</TABLE>

INTEREST EXPENSE: The following tables sets forth information regarding the
total amount of interest expense from certain of the Company's
collateralized borrowings and the resultant average rates. Information is
based on daily average balances during the period.

<TABLE>
<CAPTION>
                                    For the Three Months Ended September 30, 1999
                                    ---------------------------------------------
                                      Interest        Average      Annualized
                                       Expense        Balance         Rate
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  Reverse repurchase agreements         $ 4,133      $ 278,045        5.90%
  Lines of credit and term loan             786         48,136        6.48
                                    =============================================
  Total                                 $ 4,919      $ 326,181        6.03%
                                    =============================================

<CAPTION>

                                        For the Nine Months Ended September
                                                     30, 1999
                                    ---------------------------------------------
                                      Interest        Average      Annualized
                                       Expense        Balance         Rate
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  Reverse repurchase agreements        $ 10,765      $ 251,390        5.75%
  Lines of credit and term loan           3,788         80,959        6.28%
                                    =============================================
  Total                                $ 14,553      $ 332,349        5.84%
                                    =============================================
</TABLE>

In addition to the foregoing, the Company incurred $607 and $4,108 in
interest expense from collateralized borrowings relating to its securities
held for trading and securities sold short during the three months and nine
months ended September 30, 1999, respectively. No such interest was
incurred during the comparable periods of 1998.

<TABLE>
<CAPTION>
                                       For the Three Months Ended September 30,
                                                         1998
                                    ---------------------------------------------
                                       Interest       Average       Annualized
                                        Expense       Balance          Rate
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  Reverse repurchase agreements        $ 11,460      $ 763,529        5.96%
  Lines of credit borrowings                248         11,118        8.81%
                                    =============================================
  Total                                $ 11,708      $ 774,647        6.00%
                                    =============================================
<CAPTION>

                                            For the Period March 24, 1998
                                              Through September 30, 1998
                                    ---------------------------------------------
                                       Interest       Average       Annualized
                                        Expense       Balance          Rate
                                    ---------------------------------------------
<S>                               <C>              <C>           <C>
  Reverse repurchase agreements        $ 15,842      $ 515,965        5.87%
  Lines of credit borrowings                248          5,355        8.87%
                                    =============================================
  Total                                $ 16,090      $ 521,320        5.90%
                                    =============================================
</TABLE>

NET INTEREST MARGIN AND NET INTEREST SPREAD FROM THE OPERATING PORTFOLIO:
The Company considers its operating portfolio to consist of its securities
available for sale, its commercial mortgage loans and its cash and cash
equivalents because these assets relate to its core strategy of acquiring
and originating high yield loans and securities backed by commercial real
estate, while at the same time maintaining a portfolio of liquid investment
grade securities to enhance the Company's liquidity.

Net interest margin from the operating portfolio is annualized net interest
income from the portfolio divided by the market value of interest-earning
assets in the portfolio. Net interest income from the operating portfolio
is total interest income from the portfolio less interest expense relating
to collateralized borrowings. Net interest spread from the operating
portfolio 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 from the portfolio divided by average amortized cost of
interest earning assets in the portfolio. The average cost of funds is
interest expense from the portfolio divided by average outstanding
collateralized borrowings.

The following chart describes the interest income, interest expense, net
  interest margin, and net interest spread for the Company's assets.

<TABLE>
<CAPTION>

                                                                                    For the Period
                          For the Three Months Ended         For the Nine           March 24,1998*
                                  September 30               Months Ended              Through
                              1999         1998          September 30,  1999       September 30, 1998
                              -----        -----        --------------------       ------------------
<S>                     <C>             <C>            <C>                      <C>
   Interest Income           $12,851      $19,789              $38,142                  $30,833
   Interest Expense           $4,919      $11,708              $14,553                  $16,090
   Net Interest Margin        6.14%        3.00%                 6.17%                    3.51%
   Net Interest Spread        2.31%        1.27%                 2.73%                    1.09%
</TABLE>

OTHER EXPENSES: Expenses other than interest expense consist primarily of
management fees and general and administrative expenses. Management fees of
$1,050 and $3,173 for the three months and nine months ended September 30,
1999, respectively and $1,374 and $2,244 for the three months ended
September 30, 1998 and the period March 24, 1998 through September 30,
1998, respectively, were comprised solely of the base management fee paid
to the Manager for such periods (as provided pursuant to the management
agreement between the Manager and the Company), as the Manager earned no
incentive fee for such periods. Other expenses of $507 and $1,541 for the
three months and nine months ended September 30, 1999, respectively, and of
$244 and $482 for the three months ended September 30, 1998 and the period
March 24, 1998 through September 30, 1998, respectively, were comprised of
accounting agent fees, custodial agent fees, directors' fees, fees for
professional services, insurance premiums, broken deal expenses, due
diligence costs and other miscellaneous expenses.

OTHER GAIN (LOSS): During the three months and nine months ended September
30, 1999, the Company sold a portion of its securities available for sale
for total proceeds of $23,855 and $45,367, resulting in realized losses of
$566 and $423, respectively. Securities sales during 1998 were not
significant. The gain on securities held for trading of $739 and $2,992 for
the three months and nine months ended September 30, 1999, respectively,
consisted primarily of realized and unrealized gains and losses on U.S.
Treasury and agency securities, forward commitments to purchase or sell
agency RMBS, and financial futures contracts. The foreign currency gain of
$28 and loss of $55 for the three months and nine months ended September
30, 1999, respectively, and loss of $32 for the three months ended
September 30, 1998 and the period March 24, 1998 through September 30, 1998
relates to the Company's net investment in a commercial mortgage loan
denominated in pounds sterling.

DISTRIBUTIONS DECLARED: On each of March 17, June 15 and September 16, 1999
the Company declared distributions to its stockholders totaling $6,089 or
$0.29 per share, which were paid on April 15, July 15 and October 15, 1999
to stockholders of record on March 31, June 30 and September 30, 1999,
respectively. On June 15 and September 2, 1998, the Company declared
dividends to its stockholders totaling $5,769 or $0.27 per share and $7,195
or $0.36 per share, which were paid on July 15, 1998 and September 30, 1998
to stockholders of record on June 30 and October 15, 1998, respectively.

TAX BASIS NET INCOME AND GAAP NET INCOME: Net income as calculated for tax
purposes (tax basis net income) was estimated at $9,739 and $25,342, or
$0.46 and $1.22 per share (basic and diluted), for the three months and
nine months ended September 30, 1999, respectively, compared to net income
as calculated in accordance with generally accepted accounting principles
(GAAP) of $6,536 and $20,467, or $0.31 and $0.99 per share (basic and
diluted), for the three months and nine months ended September 30, 1999,
respectively.

Net income as calculated for tax purposes (tax basis income) was $7,421, or
$0.36 per share (basic and diluted), for the three months ended September
30, 1998 and $13,246, or $0.63 per share (basic and diluted), for the
period March 24, 1998 through September 30, 1998, compared to net income as
calculated in accordance with generally accepted accounting principles
(GAAP) of $6,453, or $0.31 per share (basic and diluted), for the three
months ended September 30, 1998 and $12,007, or $0.57 per share (basic and
diluted), for the period March 24, 1998 through September 30, 1998.

For tax purposes the fourth quarter 1998 dividend of $0.29 is treated as a
1999 distribution. Thus, for tax purposes the total distributions paid year
to date in 1999 is $1.16.

Differences between tax basis net income and GAAP net income arise for
various reasons. For example, in computing income from its subordinated
CMBS for GAAP purposes, the Company takes into account estimated credit
losses on the underlying loans whereas for tax basis income purposes, only
actual credit losses are taken into account. Certain general and
administrative expenses may differ due to differing treatment of the
deductibility of such expenses for tax basis income. Also, differences
could arise in the treatment of premium and discount amortization on the
Company's securities available for sale.

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

<TABLE>
<CAPTION>
                                                        For the Three          For the Nine Months
                                                        Months Ended                 Ended
                                                       September 30, 1999       September 30, 1999
                                                    -----------------------------------------------
<S>                                                <C>                      <C>
  GAAP net income                                                 $ 6,536                 $ 20,467
  Subordinate CMBS income differences                               2,831                    4,875
  General and administrative expense differences                      372                        -
                                                    ==============================================
  Tax basis net income                                            $ 9,739                 $ 25,342
                                                    ==============================================
<CAPTION>
                                                                               For the Period March
                                                          For the Three               24, 1998
                                                           Months Ended               Through
                                                       September 30, 1998       September 30, 1998
                                                    -----------------------------------------------
<S>                                                <C>                      <C>
  GAAP net income                                                $  6,453                 $ 12,007
  Subordinate CMBS interests income differentials                     628                      771
  General and administrative expense differences                      148                      276
  Other                                                               192                      192
                                                    ==============================================
  Tax basis net income                                           $  7,421                 $ 13,246
                                                    ==============================================
</TABLE>

CHANGES IN FINANCIAL CONDITION

SECURITIES AVAILABLE FOR SALE: At September 30, 1999 and December 31, 1998
an aggregate of $93,579 and $79,137, respectively, in unrealized losses on
securities available for sale were included as a component of accumulated
other comprehensive (loss) in stockholders' equity.

The Company's securities available for sale, which are carried at estimated
fair value, included the following at September 30, 1999:
<TABLE>
<CAPTION>

                                                        Estimated
                                                           Fair
          Security Description                             Value         Percentage
-----------------------------------------------------------------------------------
<S>                                                   <C>               <C>
  Commercial mortgage-backed securities:
  Non-investment grade rated subordinated securities    $ 234,058           39.8%
  Non-rated subordinated securities                        28,847            4.9
                                          ----------------------------------------
    Total CMBS                                            262,905           44.7
                                          ----------------------------------------

  Single-family residential mortgage-backed securities:
  ("RMBS"):
  Agency adjustable rate securities                        62,853             10.7
  Agency fixed rate securities                            176,865             30.0
  Privately issued investment grade
    rated fixed rate securities                            83,256             14.1
                                          ----------------------------------------
    Total RMBS                                            322,974             54.8
                                          ----------------------------------------
  Agency insured project loan                               3,026              0.5
                                          ========================================
  Total securities available for sale                   $ 588,905           100.0%
                                          ========================================
</TABLE>

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

<TABLE>
<CAPTION>

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

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

COLLATERALIZED BORROWINGS: To date, the Company's debt has consisted of
lines of credit borrowings and reverse repurchase agreements, which have
been collateralized by a pledge of most of the Company's securities
available for sale, securities held for trading and its commercial mortgage
loan denominated in pounds sterling. The Company's financial flexibility is
affected by its ability to renew or replace on a continuous basis its
maturing collateralized borrowings.

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

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

<TABLE>
<CAPTION>
                                         For the Nine Months Ended September 30, 1999
                                      -------------------------------------------------
                                       September 30, 1999    Maximum         Range of
                                            Balance          Balance         Maturities
                                       ------------------------------------------------
<S>                                 <C>                   <C>          <C>
  Reverse repurchase  agreements                $ 325,794  $ 345,807      12 to 32 days
  Line of credit borrowings                        70,180    142,793      306 to 671 days
</TABLE>

Subsequent to quarter-end the Company commenced documentation on a new $50
million two-year financing facility to provide additional flexibility for
funding new investments. This new facility will increase unused, multi-year
facilities closed in 1999 to over $240 million, and will provide
significant back-up to existing borrowings and capacity for additional
investing.

HEDGING INSTRUMENTS: The Company's hedging policy with regard to its
sterling denominated commercial mortgage loan is to minimize its exposure
to fluctuations in the sterling exchange rate. The Company has entered into
forward currency exchange contracts pursuant to which it has agreed to
exchange 8,000 pounds sterling for $12,702 (U.S. dollars) on January 10,
2000. In certain circumstances, the Company may be required to provide
collateral to secure its obligations under the forward currency
exchange contracts, or may be entitled to receive collateral from the
counterparty to the forward currency exchange contracts. At September 30,
1999, no collateral was required under the forward currency exchange
contracts. The estimated fair value of the forward currency exchange
contracts was $(475) at September 30, 1999.

From time to time the Company may reduce its exposure to market interest
rates by entering into various financial instruments that shorten portfolio
duration. These financial instruments mitigate the effect of interest rates
on the value of the portfolio. At September 30, 1999, the Company had
outstanding, a short position of 81 thirty-year U.S. Treasury Bond future
contracts and 1,060 five-year U.S. Treasury Note future contracts expiring
in December 30 and December 31, 1999, that represented $81,000 and
$1,060,000 in face amount of U.S. Treasury Bond and Notes, respectively.
The estimated fair value of these contracts was approximately $123 at
September 30, 1999.

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

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

On March 31, 1999 the Company filed a $200,000 shelf registration statement
with the SEC. The shelf registration statement will permit the Company to
issue a variety of debt and equity securities in the public markets should
appropriate opportunities arise. The Company is currently contemplating the
issuance of convertible preferred stock with registration rights under this
shelf registration.

As of September 30, 1999 the full amount of the Company's $185,000
committed credit facility with Deutsche Bank, AG was available. Subsequent
to quarter end, $5,022 was borrowed under this facility. Subsequent to
quarter end the company commenced documentation on a $50 million two year
facility with another lender.

The Company's operating activities provided cash flows of $155,078 during
the nine months ended September 30, 1999, primarily through sales of
trading securities in excess of purchases.

The Company's investing activities used cash flows totaling $45,343 during
the nine months ended September 30, 1999, primarily to purchase securities
available for sale and to fund a commercial mortgage loan.

The Company's financing activities used $101,128 during the nine months
ended September 30, 1999, primarily to reduce the level of short-term
borrowings related to the Company's trading portfolio.

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

The Company is subject to various financial covenants in its lines of
credit, including maintaining a minimum GAAP net worth of $140,000 and a
debt-to-equity ratio not to exceed 4.5 to 1, as well as a covenant that the
Company's GAAP net worth will not decline by more than 37 percent over any
two consecutive fiscal quarters. At September 30, 1999, the Company was in
compliance with all such covenants.

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

REIT STATUS: The Company intends to elect to be taxed as a REIT and to
comply with the provisions of the Internal Revenue Code of 1986, as
amended, with respect thereto. Accordingly, the Company generally will not
be subject to Federal income tax to the extent of its distributions to
stockholders and as long as certain asset, income and stock ownership tests
are met. The Company may, however, be subject to tax at corporate rates on
net income or capital gains not distributed.

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

YEAR 2000 READINESS DISCLOSURE: The Company has evaluated its information
technology infrastructure and other systems for Year 2000 readiness.
Substantially all of the Company's infrastructure and systems are supplied
by the Manager. The Manager has advised the Company that it has evaluated
whether such systems are Year 2000 ready.

The Manager has advised the Company that it has established a plan for
minimizing the risks posed by the Year 2000 problem. For its internal
systems, the Manager established a plan to test systems for Year 2000
readiness, remediate such systems where necessary, and validate its
remediation efforts to confirm Year 2000 readiness. With respect to
products and services provided by third parties, the Manager established a
plan to learn from the third parties whether their products and services
are Year 2000 ready and upgrade to Year 2000 ready products and services
where necessary. In addition, the Manager has developed contingency plans
for all mission critical systems.

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

The Manager has advised the Company that it expects to incur costs of up to
$1,000 to complete the evaluation and modification of its systems as may be
necessary to achieve Year 2000 readiness. The Company may be required to
bear a portion of the costs incurred by the Manager in this regard.
Approximately $875 has been expended by the Manager as of September 30,
1999. There can be no assurance that the costs will not exceed the amount
referred to above.

The Manager has advised the Company that it has completed a contingency
plan for the possible Year 2000 failure of its mission critical systems or
suppliers and is in the process of implementing the contingency plan. In
addition to the contingency plan, the Manager has informed the Company that
it has developed a plan for checking its critical systems on January 1 and
2, 2000 to determine whether such systems will continue to operate on
Monday, January 3, 2000 when business resumes. There can be no assurance
that such a plan or the Manager's contingency plan will be successful in
preventing a disruption of the Company's operations.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Changes in the general level of the U.S. Treasury yield curve can have
significant effects on the market value of the Company's portfolio. The
majority of the Company's assets are fixed rate securities valued based on
a market credit spread to U.S. Treasuries. As U.S. Treasury securities are
priced to a higher yield and/or the spread to U.S. Treasuries used to price
the Company's assets is increased, the market value of the Company's
portfolio may decline. Conversely, as U.S. Treasury securities are priced
to a lower yield and/or the spread to U.S. Treasuries used to price the
Company's assets is decreased, the market value of the Company's portfolio
may increase.

Changes in the market value of the Company's portfolio may affect the
Company's net income or cash flow directly through their impact on
unrealized gains or losses on securities held for trading or indirectly
through their impact on the Company's ability to borrow. Changes in the
level of the U.S. Treasury yield curve can also affect, among other things,
the prepayment assumptions used to value certain of the Company's
securities and the Company's ability to realize gains from the sale of such
assets. In addition, changes in the general level of LIBOR money market
rates can affect the Company's net interest income. The majority of the
Company's liabilities are floating rate based on a market spread to U.S.
LIBOR. As the level of LIBOR increases or decreases, the Company's interest
expense will move in the same direction.

The Company may utilize a variety of financial instruments, including
interest rate swaps, caps, floors and other interest rate exchange
contracts, in order to limit the effects of fluctuations in interest rates
on its operations. The use of these types of derivatives to hedge
interest-earning assets and/or interest-bearing liabilities carries certain
risks, including the risk that losses on a hedge position will reduce the
funds available for payments to holders of securities and, indeed, that
such losses may exceed the amount invested in such instruments. A hedge may
not perform its intended purpose of offsetting losses or increased costs.
Moreover, with respect to certain of the instruments used as hedges, the
Company is exposed to the risk that the counterparties with which the
Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an
offsetting transaction with respect to an open position.

If the Company anticipates that the income from any such hedging
transaction will not be qualifying income for REIT income test purposes,
the Company may conduct part or all of its hedging activities through a
to-be-formed corporate subsidiary that is fully subject to federal
corporate income taxation. The profitability of the Company may be
adversely affected during any period as a result of changing interest
rates.

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

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

All changes in income and value are measured as percentage changes from the
respective values calculated in the scenario labeled as "Base Case". The
base interest rate scenario assumes interest rates as of September 30,
1999. Actual results could differ significantly from these estimates.

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

              Change in Treasury Yield          Projected Change in
              Curve, +/- Basis Points       Portfolio Net Market Value
          ------------------------------------------------------------
                       -300                         26.8%
                       -200                         18.1%
                       -100                          9.2%
                     Base Case                         0
                       +100                        (9.4)%
                       +200                       (19.0)%
                       +300                       (28.9)%


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

             Change in Credit Spreads,           Projected Change in
                  +/- Basis Points            Portfolio Net Market Value
         -------------------------------------------------------------------
                         -300                        35.8%
                         -200                        22.5%
                         -100                        10.7%
                       Base Case                        0
                         +100                       (9.6)%
                         +200                      (18.2)%
                         +300                      (26.0)%


        PROJECTED PERCENTAGE CHANGE IN PORTFOLIO NET INTEREST INCOME
                           GIVEN LIBOR MOVEMENTS

                                                     Projected Change
                    Change in LIBOR,                  in Portfolio
                    +/- Basis Points               Net Interest Income
             ------------------------------------------------------------
                         -200                             21.7%
                         -100                             10.9%
                       Base Case                             0
                         +100                           (11.0)%
                         +200                           (22.1)%

For purposes of illustration, if LIBOR had been 100 basis points higher for the
entire 3rd quarter of 1999, the Company's income would have been $0.03
lower.

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 American economy, and other factors
beyond the control of the Company.

All loans are subject to a certain probability of default. The nature of
the CMBS assets owned are such that all losses experienced by a pool of
mortgages will be borne by the Company. Changes in the expected default
rates of the underlying mortgages will significantly affect the value of
the Company, the income it accrues and the cash flow it receives. An
increase in default rates will reduce the book value of the Company's
assets and the Company earnings and cash flow available to fund operations
and pay dividends.

The Company manages credit risk through the underwriting process,
establishing loss assumptions, and careful monitoring of loan performance.
Before acquiring a security that represents a pool of loans, the company
will perform a rigorous analysis of the quality of substantially all of the
loans proposed for that security. As a result of this analysis, loans with
unacceptable risk profiles will be removed from the proposed security.
Information from this review is then used to establish loss assumptions.
The Company will assume that a certain portion of the loans will default
and calculate an expected, or loss adjusted yield based on that assumption.
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 timing experience is
likely to cause a reduction in the expected yield, and therefore reduce the
earnings of the Company and may require a significant write down of assets.

For purposes of illustration, a doubling of the losses in the Company's
credit sensitive portfolio, without a significant acceleration of those
losses would reduce the expected yield from 9.49% to 8.28%. This would
reduce GAAP income going forward and cause a significant write down in
assets at the time the loss assumption is changed. This one-time write down
would be approximately $0.35 per share, and GAAP income would be reduced by
approximately $0.22 per share per annum.

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

The Company uses interest rate duration as its primary measure of interest
rate risk. This metric, expressed when considering any existing leverage,
allows the Company's management to approximate changes in the net market
value of the Company's portfolio given potential changes in the U.S.
Treasury yield curve. Interest rate duration considers both assets and
liabilities. As of September 30, 1999, the Company's duration on equity was
approximately 10.4 years. This implies that a parallel shift of the U.S.
Treasury yield curve of 100 basis points would cause the Company's net
asset value to increase or decrease by approximately 10.4%.

Because the Company's assets, and their markets, have other, more complex
sensitivities to interest rates, the Company's management believes that
this metric represents a good approximation of the change in portfolio net
market value in response to changes in interest rates, though actual
performance may vary due to changes in prepayments, credit spreads and the
cost of increased market volatility. At September 30, 1999, the Company had
outstanding, a short position of 81 thirty-year U.S. Treasury Bond future
contracts and 1,060 five-year U.S. Treasury Note future contracts expiring
in December 30 and December 31, 1999, that represented $81,000 and
$1,060,000 in face amount of U.S. Treasury Bond and Notes, respectively.
These short future contracts mitigate the effect of interest rates on the
value of the portfolio.

Other methods for evaluating interest rate risk, such as interest rate
sensitivity "gap" (defined as the difference between interest-earning
assets and interest-bearing liabilities maturing or repricing within a
given time period), are used but are considered of lesser significance in
the daily management of the Company's portfolio. The majority of the
Company's assets pay a fixed coupon and the income from such assets are
relatively unaffected by interest rate changes.

The majority of the Company's liabilities are borrowings under its lines of
credit or reverse repurchase agreements that bear interest at variable
rates that reset monthly. Given this relationship between assets and
liabilities, the Company's interest rate sensitivity gap is highly
negative. This implies that a period of falling short-term interest rates
will tend to increase the Company's net interest income while a period of
rising short-term interest rates will tend to reduce the Company's net
interest income. Management considers this relationship when reviewing the
Company's hedging strategies. Different types of assets and liabilities
with the same or similar maturities react differently to changes in overall
market rates or conditions; therefore, changes in interest rates may affect
the Company's net interest income positively or negatively even if the
Company were to be perfectly matched in each maturity category.

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

FORWARD-LOOKING STATEMENTS: Certain statements contained herein are not,
and certain statements contained in future filings by the Company with the
SEC, in the Company's press releases or in the Company's other public or
shareholder communications may not be, based on historical facts and are
"Forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements which are based
on various assumptions (some of which are beyond the Company's control),
may be identified by reference to a future period or periods, or by the use
of forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms, or
the negative of those terms. Actual results could differ materially from
those set forth in forward-looking statements due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the Company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in prevailing interest rates, acquisitions and the integration of
acquired businesses, credit risk management, asset/liability management,
the financial and securities markets and the availability of and costs
associated with sources of liquidity. The Company does not undertake, and
specifically disclaims any obligation, to publicly release the result of
any revisions which may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.


Part II - OTHER INFORMATION

Item 1. Legal Proceedings

At September 30, 1999 there were no pending legal proceedings to which the
Company was a party or of which any of its property was subject.

Item 2. Changes in Securities and Use of Proceeds

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 27.1 - Financial Data Schedule (filed herewith)

(b) Reports on Form 8-K

None



SIGNATURES


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






                               ANTHRACITE CAPITAL, INC.



Dated: November 12, 1999
                               By: /s/ Hugh R. Frater
                                   --------------------------------------------
                               Name: Hugh R. Frater
                               Title:
                               President and Chief Executive Officer
                               (authorized officer of registrant)


Dated:  November 12 1999
                               By: /s/ Richard M. Shea
                                   --------------------------------------------
                               Name: Richard M. Shea
                               Title:
                               Chief Operating Officer and Chief
                               Financial Officer (principal accounting officer)