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

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

               For the quarterly period ended September 30, 2003

                                       OR

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

              For the transition period from: ________ to ________

                        Commission File Number 001-13937


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


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


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


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

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

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

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

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

                         (1)  Yes  X     No __

        As of November 13, 2003, 49,096,369 shares of common stock ($.001 par
value per share) were outstanding.


                                       1

<PAGE>
<TABLE>
<CAPTION>
                                               ANTHRACITE CAPITAL, INC.,
                                                     FORM 10-Q
                                                       INDEX

PART I - FINANCIAL INFORMATION                                                                                  Page
                                                                                                                ----
<S>  <C>                                                                                                         <C>
Item 1.       Interim Financial Statements........................................................................4

              Consolidated Statements of Financial Condition
              As of September 30, 2003 (Unaudited) and December 31, 2002..........................................4

              Consolidated Statements of Operations (Unaudited)
              For the Three and Nine Months Ended September 30, 2003 and 2002.....................................5

              Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
              For the Nine Months Ended September 30, 2003........................................................6

              Consolidated Statements of Cash Flows (Unaudited)
              For the Nine Months Ended September 30, 2003 and 2002...............................................7

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

Item 2.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations..............................................................................20

Item 3.       Quantitative and Qualitative Disclosures about Market Risk.........................................39

Item 4.       Controls and Procedures............................................................................43

Part II - OTHER INFORMATION

Item 2.       Changes in Securities and Use of Proceeds..........................................................44

Item 6.       Exhibits and Reports on Form 8-K...................................................................44

SIGNATURES.......................................................................................................45
</TABLE>


                                                 2
<PAGE>



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

In addition to factors previously disclosed in Anthracite's Securities and
Exchange Commission (the "SEC") reports and those identified elsewhere in this
report, the following factors, among others, could cause actual results to
differ materially from forward-looking statements or historical performance: (1)
the introduction, withdrawal, success and timing of business initiatives and
strategies; (2) changes in political, economic or industry conditions, the
interest rate environment or financial and capital markets, which could result
in changes in the value of the Company's assets; (3) the relative and absolute
investment performance and operations of the Company's manager, BlackRock
Financial Management, Inc. (the "Manager"); (4) the impact of increased
competition; (5) the impact of capital improvement projects; (6) the impact of
future acquisitions; (7) the unfavorable resolution of legal proceedings; (8)
the extent and timing of any share repurchases; (9) the impact, extent and
timing of technological changes and the adequacy of intellectual property
protection; (10) the impact of legislative and regulatory actions and reforms
and regulatory, supervisory or enforcement actions of government agencies
relating to the Company, the Manager or The PNC Financial Services Group, Inc.;
(11) terrorist activities, which may adversely affect the general economy, real
estate, financial and capital markets, specific industries, and the Company and
the Manager; and (12) the ability of the Manager to attract and retain highly
talented professionals.

The Company's Annual Report on Form 10-K for the year ended December 31, 2002
and the Company's subsequent reports filed with the SEC, accessible on the SEC's
website at http://www.sec.gov and on the Company's website at
http://www.anthracitecapital.com, identify additional factors that can affect
forward-looking statements.


                                       3
<PAGE>

Part I - FINANCIAL INFORMATION
Item 1.  Interim Financial Statements

<TABLE>
                                     Anthracite Capital, Inc. and Subsidiaries
                                  Consolidated Statements of Financial Condition
                                         (in thousands, except share data)
<CAPTION>

                                                                            September 30, 2003             December 31, 2002
                                                                        ---------------------------    -------------------------
                                                                                (Unaudited)
ASSETS
<S>                                                                           <C>           <C>           <C>            <C>
Cash and cash equivalents                                                                   $39,577                      $24,698
Restricted cash equivalents                                                                  19,475                       84,485
Securities available-for-sale, at fair value
     Subordinated commercial mortgage-backed securities ("CMBS")             $708,762                    $602,706
     Residential mortgage backed securities ("RMBS")                          574,096                      78,717
     Investment grade securities                                              520,607                     291,639
                                                                          ------------                  -----------
Total securities available-for-sale                                                       1,803,465                      973,062
Securities held-for-trading, at fair value (RMBS)                                           300,308                    1,427,733
Commercial mortgage loans, net                                                               55,152                       65,664
Investments in real estate joint ventures                                                     7,834                        8,265
Equity investment in Carbon Capital, Inc.                                                    28,069                       14,997
Receivable for investments sold                                                              37,660                            -
Other assets                                                                                 53,736                       40,447
                                                                                        ------------                -------------
     Total Assets                                                                        $2,345,276                   $2,639,351
                                                                                        ============                =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings:
    Collateralized debt obligations ("CDO")                                  $684,875                    $684,590
    Secured by pledge of subordinated CMBS                                     94,037                       7,295
    Secured by pledge of other securities available-for-sale
      and restricted cash equivalents                                         687,347                      98,439
    Secured by pledge of securities held-for-trading                          318,914                   1,355,333
    Secured by pledge of investments in real estate joint ventures                512                       1,337
    Secured by pledge of commercial mortgage loans                             22,272                      14,667
                                                                          ------------                  ----------
Total borrowings                                                                         $1,807,957                   $2,161,661
Payable for investments purchased                                                            60,562                          524
Distributions payable                                                                        14,580                       16,589
Other liabilities                                                                            54,153                       54,361
                                                                                        ------------                -------------
     Total Liabilities                                                                   $1,937,252                   $2,233,135
                                                                                        ------------                -------------

Commitments and Contingencies

Stockholders' Equity:
Common stock, par value $0.001 per share; 400,000 shares authorized;
    48,863 shares issued and outstanding at September 30, 2003; and
    47,398 shares issued and outstanding at December 31, 2002                                   49                           47
10% Series B preferred stock, liquidation preference $43,942 at
    September 30, 2003 and $47,817 at December 31, 2002                                     33,431                       36,379
9.375% Series C preferred stock, liquidation preference $57,500 at
     September 30, 2003                                                                      55,435                       -
Additional paid-in capital                                                                  530,315                      515,180
Distributions in excess of earnings                                                       (100,224)                     (24,161)
Accumulated other comprehensive loss                                                      (110,982)                    (121,229)
                                                                                        ------------                -------------
      Total Stockholders' Equity                                                            408,024                      406,216
                                                                                        ------------                -------------
      Total Liabilities and Stockholders' Equity                                         $2,345,276                   $2,639,351
                                                                                        ============                =============

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


                                                    4
<PAGE>
<TABLE>
                                             Anthracite Capital, Inc.
                                 Consolidated Statements of Operations (Unaudited)
                                       (in thousands, except per share data)
<CAPTION>

                                                                For the Three Months Ended    For the Nine Months Ended
                                                                       September 30,                 September 30,
                                                                ---------------------------  --------------------------
                                                                    2003            2002         2003          2002
                                                                ------------   ------------  -----------   ------------
Income:
<S>                                                              <C>             <C>          <C>            <C>
    Interest from securities available-for-sale                  $  34,007       $  22,229    $  88,695      $  77,846
    Interest from commercial mortgage loans                          1,190           4,307        4,480         11,353
    Interest from trading securities                                 3,709          14,324       28,660         28,032
    Earnings from real estate joint ventures                           221             245          695            768
    Earnings from equity investment in Carbon Capital, Inc.            749             262        2,194            641
    Interest from cash and cash equivalents                            453             387          838          1,197
                                                                ------------   ------------  -----------   ------------
        Total income                                                40,329          41,754      125,562        119,837
                                                                ------------   ------------  -----------   ------------
Expenses:
    Interest                                                        20,575          14,918       56,863         35,997
    Interest-trading securities                                      1,039           3,918        6,193          9,953
    Management and incentive fee                                     2,115           2,382        7,341         10,067
    Other expenses                                                     551             701        1,724          1,774
                                                                ------------   ------------  -----------   ------------
        Total expenses                                              24,280          21,919       72,121         57,791
                                                                ------------   ------------  -----------   ------------

Other net gain (loss):
(Loss) gain on sale of available-for-sale securities                (4,704)          9,538       (1,269)         9,613
Loss on securities held-for-trading                                (28,154)        (15,948)     (43,273)       (23,848)
Foreign currency loss                                                    -            (151)           -           (380)
Loss on impairment of securities                                    (5,412)              -      (32,426)             -
                                                                ------------   ------------  -----------   ------------
       Total other net loss                                        (38,270)         (6,561)     (76,968)       (14,615)
                                                                ------------   ------------  -----------   ------------

(Loss) income before cumulative transition adjustment              (22,221)         13,274      (23,527)        47,431
                                                                ------------   ------------  -----------   ------------

Cumulative transition adjustment - SFAS 142                              -               -           -           6,327
                                                                ------------   ------------  -----------   ------------

Net (loss) income                                                  (22,221)         13,274      (23,527)        53,758

Dividends and accretion on preferred stock                           2,491           1,196        5,298          3,967
                                                                ------------   ------------  -----------   ------------

Net (loss) income to Common Stockholders                         $ (24,712)     $   12,078    $ (28,825)    $   49,791
                                                                ============   ============  ===========   ============

Net (loss) income per common share, basic:
    (Loss) income before cumulative                              $   (0.51)          $0.26    $   (0.60)    $     0.94
     transition adjustment
    Cumulative transition adjustment - SFAS 142                           -              -            -           0.14
                                                                ------------   ------------  -----------   ------------
      Net (loss) income                                          $   (0.51)     $     0.26      $(0.60)          $1.08
                                                                ============   ============  ===========   ============

Net (loss) income per common share, diluted:
    (Loss) income before cumulative transition adjustment        $   (0.51)     $     0.26    $  (0.60)          $0.94
      Cumulative transition adjustment - SFAS 142                        -              -            -            0.14
                                                                ------------   ------------  -----------   ------------
      Net (loss) income                                          $   (0.51)          $0.26    $  (0.60)      $    1.08
                                                                ============   ============  ===========   ============

Weighted average number of shares outstanding:
    Basic                                                           48,405          46,571      47,956          46,126
    Diluted                                                         48,405          46,605      47,956          46,172

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


                                       5
<PAGE>
<TABLE>

Anthracite Capital, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2003
(in thousands)
<CAPTION>
=================================================================================================================================
                                                 Series    Series               Distri-    Accumulated                   Total
                                      Common       B         C      Additional  butions       Other                      Stock-
                                       Stock,   Preferred Preferred   Paid-In  In Excess   Comprehensive  Comprehensive  holders'
                                     Par Value   Stock     Stock     Capital   Of Earnings    Loss            Loss       Equity
---------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>     <C>       <C>       <C>         <C>        <C>              <C>         <C>
Balance at December 31, 2002            $47     $36,379             $515,180    $(24,161)  $(121,229)                   $406,216


Net loss                                                                         (23,527)                  $(23,527)     (23,527)
                                                                                                          ---------

Unrealized gain on cash flow hedges                                                            1,583          1,583        1,583

Reclassification adjustments from
cash flow hedges included in
net loss                                                                                       5,845          5,845        5,845

Change in net unrealized gain on
securities available-for-sale,
net of reclassification adjustment                                                             2,819          2,819        2,819
                                                                                                         ----------
Other Comprehensive Income                                                                                   10,247
                                                                                                         ----------
Comprehensive Loss                                                                                        $ (13,280)
                                                                                                         ==========

Dividends declared-common stock                                                  (47,238)                                (47,238)

Issuance of Series C preferred
  stock                                                   $55,435                                                         55,435

Redemption of Series B
preferred stock                                  (2,948)                (926)                                             (3,874)


Dividends on preferred stock                                                      (5,298)                                 (5,298)


Issuance of common stock                     2                        16,061                                              16,063
---------------------------------------------------------------------------------------------------------------------------------


Balance at September 30, 2003              $49  $33,431   $55,435   $530,315   $(100,224)  $(110,982)                   $408,024
                                     =============================================================================================


Disclosure of reclassification
adjustment:

Unrealized holding gain                                                                                       $4,088
Reclassification for realized gains
  previously recorded as unrealized                                                                           (1,269)
                                                                                                           ----------
                                                                                                              $2,819
The accompanying notes are an integral part of these consolidated financial statements.                     ==========
</TABLE>



                                                6

<PAGE>
<TABLE>
Anthracite Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<CAPTION>
====================================================================================================================================
                                                                                                For the Nine Months Ended
                                                                                         September 30, 2003    September 30, 2002
                                                                                        -------------------------------------------
<S>                                                                                          <C>                    <C>

Cash flows from operating activities:

     Net (loss) income                                                                       $ (23,527)             $ 53,758

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

        Net sale (purchase) of trading securities                                              411,378              (470,148)
        Net loss on sale of securities                                                          44,542                14,235
        Cumulative transition adjustment                                                             -                (6,327)
        Loss on impairment of securities                                                        32,426                     -
        Premium amortization                                                                       500                 2,337
        Non-cash portion of net foreign currency gain                                                -                (1,195)
        Equity in earnings in excess of distributions from Carbon Capital, Inc.                   (990)                    -
        Decrease in other assets                                                                (2,485)              (11,486)
        (Decrease) increase in other liabilities                                                  (208)               44,758
                                                                                       ---------------------------------------

Net cash provided by (used in) operating activities                                             461,636             (374,068)
                                                                                       ---------------------------------------

Cash flows from investing activities:

     Purchase of securities available-for-sale                                              (1,808,931)             (664,545)
     Funding of commercial mortgage loans                                                      (11,520)               (3,370)
     Repayments received from commercial mortgage loans                                         12,413                12,384
     Decrease (increase) in restricted cash equivalents                                         65,010                (3,037)
     Principal payments received on securities available-for-sale                              255,389               155,929
     Distributions from real estate joint ventures in excess of equity in earnings                 431                   118
     Investment in Carbon Capital, Inc.                                                         (7,945)                    -
     Proceeds from sale of securities available-for-sale                                      1,394,664              871,427
     Net payments on hedging securities                                                         (5,643)               (7,235)
                                                                                       ---------------------------------------
Net cash (used in) provided by investing activities                                           (106,132)              361,671
                                                                                       ---------------------------------------

Cash flows from financing activities:
     Net (decrease) increase of borrowings                                                    (353,704)               40,968
     Proceeds from issuance of common stock, net of offering costs                              16,063                14,355
     Redemption of Series B preferred stock                                                     (3,874)                    -
     Proceeds from issuance of Series C preferred stock, net of offering costs                  55,435                     -
     Dividends paid on common stock                                                            (50,146)              (49,552)
     Dividends paid on preferred stock                                                          (4,399)               (3,961)
                                                                                       ---------------------------------------

Net cash (used in) provided by financing activities                                           (340,625)                1,810
                                                                                       ---------------------------------------

Net increase (decrease) in cash and cash equivalents                                            14,879               (10,587)

Cash and cash equivalents, beginning of period                                                  24,698                43,071
                                                                                       ---------------------------------------
Cash and cash equivalents, end of period                                                       $39,577              $ 32,484
                                                                                       =======================================
Supplemental disclosure of cash flow information:

     Interest paid                                                                             $63,086              $ 52,745
                                                                                       =======================================
     Investments purchased not settled                                                         $60,562              $  5,725
                                                                                       =======================================
     Investments sold not settled                                                              $37,660              $205,258
                                                                                       =======================================


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

                                                  7
<PAGE>

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

Note 1        ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

The Company's core investment activities focus on (i) investing in below
investment grade CMBS where the Company has the right to control the
foreclosure/workout process on the underlying loans, and (ii) originating high
yield commercial real estate loans. The Company also manages excess liquidity
with a portfolio of investment grade real estate related securities. This
portfolio is being reduced over time.

The accompanying unaudited consolidated financial statements have been prepared
in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation S-X for interim financial statements. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America ("GAAP") for complete
financial statements. These consolidated financial statements should be read in
conjunction with the annual consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for 2002 filed with the
Securities and Exchange Commission.

In the opinion of the Company's management, the accompanying consolidated
financial statements contain all adjustments, consisting of normal and recurring
accruals (except for the cumulative transition adjustment for SFAS 142 in the
first quarter of 2002 - see Note 2 of the consolidated financial statements),
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 consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the statements of financial condition and operations for the periods covered.
Actual results could differ from those estimates and assumptions. Significant
estimates in the consolidated financial statements include the valuation of
certain of the Company's mortgage-backed securities and certain other
investments.


Note 2         ACCOUNTING CHANGE AND NEW PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
These standards changed the accounting for business combinations by,


                                       8
<PAGE>

among other things, prohibiting the prospective use of pooling-of-interests
accounting and requiring companies to stop amortizing goodwill and certain
intangible assets with an indefinite useful life. Instead, goodwill and
intangible assets deemed to have an indefinite useful life will be subject to
an annual review for impairment. The new standards were effective for the
Company in the first quarter of 2002. Upon adoption of SFAS 142 in the first
quarter of 2002, the Company recorded a one-time, non-cash adjustment of
approximately $6,327 to write off the unamortized balance of its negative
goodwill. Such charge is non-operational in nature and is reflected as a
cumulative transition adjustment in the accompanying consolidated statement of
operations.

In November of 2002, the FASB issued Interpretation No. 45 "Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure provisions of this Interpretation were effective for
the Company's December 31, 2002 consolidated financial statements; the Company
has no guarantees requiring disclosure under this Interpretation. The initial
recognition and initial measurement provisions of this Interpretation are
applicable to guarantees issued or modified after December 31, 2002. The Company
does not believe that the initial recognition and measurement provisions of this
Interpretation will have a material effect on the Company's consolidated
financial statements.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation will be immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Company will
need to apply its provisions to any existing variable interests in variable
interest entities for financial statements issued after December 15, 2003. The
Company believes that it does not hold any investments in entities that will be
deemed variable interest entities; however, until the Company completes its
evaluation it cannot make any definitive conclusion of what effect, if any, that
the implementation of this Interpretation will have on the Company's
consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The Company's adoption of SFAS 149 on July 1, 2003, as required, had
no impact on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 addresses the standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity and requires the issuer to classify a financial instrument that is within
its scope as a liability (or asset in some circumstances). SFAS 150 became
effective for all instruments issued after May 1, 2003


                                       9
<PAGE>

and is required to be applied to all financial instruments as of July 1, 2003.
The adoption of this statement did not have a material impact on the Company's
consolidated financial statements.


Note 3        NET INCOME (LOSS) PER SHARE

Net income (loss) per share is computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic income per share is calculated by dividing net
(loss) income to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted income per share is calculated
using the weighted average number of common shares outstanding during the period
plus the additional dilutive effect, if any, of common stock equivalents. The
dilutive effect of outstanding stock options is calculated using the treasury
stock method, and the dilutive effect of preferred stock is calculated using the
"if converted" method.
<TABLE>
<CAPTION>
                                                                  For the Three Months Ended        For the Nine Months Ended
                                                                         September 30,                    September 30,
                                                                      2003            2002            2003            2002
-------------------------------------------------------------    ------------------------------   ------------------------------
<S>                                                                  <C>               <C>          <C>                <C>
Numerator:

     Net (loss) income to common stockholders before
     cumulative transition adjustment                                $(24,712)         $12,078      $(28,825)          $43,464

     Cumulative transition adjustment                                     -                  -             -             6,327
                                                                 --------------   -------------   -------------    -------------
     Numerator for basic (loss) earnings per share                    (24,712)          12,078       (28,825)           49,791
                                                                 --------------   -------------   -------------    -------------
     Numerator for diluted (loss) earnings per share                 $(24,712)         $12,078      $(28,825)          $49,791
                                                                 ==============   =============   =============    =============

Denominator:

     Denominator for basic (loss) earnings per share-
     weighted average common shares outstanding                        48,405           46,571        47,956            46,126

     Effect of 10.5% Series A senior cumulative
     redeemable preferred stock                                             -                -             -                10

     Dilutive effect of stock options                                       -               34             -                36
                                                                 --------------   -------------   -------------    -------------
     Denominator for diluted (loss) earnings per share-
     weighted average common shares outstanding and
     common share equivalents outstanding                              48,405           46,605        47,956            46,172
                                                                 ==============   =============   =============    =============

Basic net (loss) income per weighted average common share:

     (Loss) income before cumulative transition adjustment             $(0.51)           $0.26       $ (0.60)            $0.94

     Cumulative transition adjustment - SFAS 142                            -               -              -              0.14
                                                                 --------------   -------------   -------------    -------------
     Net (loss) income                                                 $(0.51)           $0.26       $ (0.60)            $1.08
                                                                 ==============   =============   =============    =============

Diluted net (loss) income per weighted average
common share and common share equivalents:

     (Loss) income before cumulative transition adjustment             $(0.51)           $0.26       $ (0.60)            $0.94

     Cumulative transition adjustment - SFAS 142                             -               -             -              0.14
                                                                 --------------   -------------   -------------    -------------
     Net (loss) income                                                 $(0.51)           $0.26       $ (0.60)            $1.08
                                                                 ==============   =============   =============    =============
</TABLE>


                                                           10
<PAGE>

Note 4        SECURITIES AVAILABLE-FOR-SALE

The Company's securities available-for-sale are carried at estimated fair value.
The amortized cost and estimated fair value of securities available-for-sale as
of September 30, 2003 are summarized as follows:

<TABLE>
<CAPTION>
                                                                             Gross            Gross          Estimated
                                                          Amortized        Unrealized      Unrealized          Fair
                   Security Description                     Cost             Gain              Loss            Value
---------------------------------------------------    ---------------- ---------------- --------------- -----------------
CMBS:
<S>                                                         <C>              <C>            <C>              <C>
CMBS interest only securities ("IOs")                       $   49,898       $  2,250       $   (319)        $   51,829
Investment grade CMBS                                          247,806          8,213         (4,686)           251,333
Non-investment grade rated subordinated securities             738,559         21,921        (76,670)           683,810
Non-rated subordinated securities                               23,515          4,954         (3,517)            24,952
Credit tenant lease                                              8,920             59               -             8,979
Investment grade REIT debt                                     190,518         18,310           (362)           208,466
                                                       ---------------- ---------------- --------------- -----------------
     Total CMBS                                              1,259,216         55,707        (85,554)         1,229,369
                                                       ---------------- ---------------- --------------- -----------------

Single-family residential mortgage-backed
securities (RMBS):
Agency adjustable rate securities                              198,025            171         (4,047)           194,149
Agency fixed rate securities                                   371,127              -         (5,919)           365,208
Residential CMOs                                                 6,259            147            (21)             6,385
Hybrid adjustable rate mortgages ("ARMs")                        8,349              5               -             8,354
                                                       ---------------- ---------------- --------------- -----------------
     Total RMBS                                                583,760            323         (9,987)           574,096
                                                       ---------------- ---------------- --------------- -----------------

                                                       ---------------- ---------------- --------------- -----------------
Total securities available-for-sale                         $1,842,976       $ 56,030       $(95,541)        $1,803,465
                                                       ================ ================ =============== =================
</TABLE>

As of September 30, 2003, an aggregate of $1,809,812 in estimated fair value of
the Company's securities available-for-sale was pledged to secure its
collateralized borrowings.

As of September 30, 2003, the anticipated weighted average yield to maturity
based upon the amortized cost of the subordinated CMBS ("Reported Yield") was
9.6% per annum. The anticipated Reported Yield of the Company's investment grade
CMBS available-for-sale was 6.0%. The anticipated Reported Yield of the
Company's RMBS available-for-sale was 3.8%. The Company's Reported Yields on its
subordinated CMBS and investment grade securities available-for-sale are based
upon a number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these include, among other things,
the rate and timing of principal payments (including prepayments, repurchases,
defaults and liquidations), the pass-through or coupon rate and interest rate
fluctuations. Additional factors that may affect the Company's Reported Yields
on its subordinated CMBS and CMBS IOs include interest payment shortfalls due to
delinquencies on the underlying mortgage loans, and the timing and magnitude of
credit losses on the mortgage loans underlying the subordinated CMBS and CMBS
IOs 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 Report Yields, discussed above and elsewhere,
will be achieved.

                                      11

<PAGE>


During the third quarter of 2003, the Company determined it is unlikely that
further payments will be received from a franchise loan backed security and
wrote this security down to zero, despite its par balance of $16,366 as of
September 30, 2003. As a result, the Company recorded an impairment charge for
the quarter of $5,412 ($0.11 per share). The market value of this franchise loan
backed security had previously been reduced in the second quarter of 2003.

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

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, 2003:

 ----------------------------------------------------------------------------
|                                                 |     September 30, 2003    |
| ------------------------------------------------|---------------------------|
|                              |                  |  Number of   |    % of    |
|                              |   Principal*     |    Loans     | Collateral |
| -----------------------------|------------------|--------------|------------|
| Past due 30 days to 60 days  |       $13,325    |        4     |    0.12%   |
| -----------------------------|------------------|--------------|------------|
| Past due 60 days to 90 days  |         6,470    |        3     |    0.06    |
| -----------------------------|------------------|--------------|------------|
| Past due 90 days or more     |       125,261    |       16     |    1.12    |
| -----------------------------|------------------|--------------|------------|
| Real estate owned ("REO")    |        18,773    |        4     |    0.17    |
| -----------------------------|------------------|--------------|------------|
| Total delinquent             |       163,829    |       27     |    1.47    |
|  ----------------------------|------------------|--------------|------------|
| Total principal balance      |   $11,161,373    |    2,161     |            |
 ------------------------------------------------------------------------------
* Of this total $305,471 of loans have been "defeased" and are now secured
  by Treasury securities, thereby removing real estate and borrower risk.


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


Note 5        SECURITIES HELD-FOR-TRADING

Securities held-for-trading reflect investments that the Company may make for
short periods of time. The Company may acquire long or short positions in U.S.
Treasury or agency securities, forward commitments to purchase such securities,
financial futures contracts, interest rate swap agreements and other fixed
income or fixed income derivative securities.

The Company's securities held-for-trading are carried at estimated fair value.
At September 30, 2003, the Company's securities held-for-trading consisted of
Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Associates ("FNMA") mortgage pools with an estimated fair value of $330,561,
and a short forward commitment with an estimated fair value of ($30,253).


                                      12
<PAGE>

These mortgage pools consist of hybrid ARMs, which bear interest at fixed rates
for a specified period, generally less than 10 years, after which the rates are
periodically reset to market; and whole pools, which have a fixed coupon over
the life of the security.

For the three and nine months ended September 30, 2003, losses on securities
held-for-trading in the consolidated statements of operations of $28,154 and
$43,273, respectively, are largely attributable to the Company's repositioning
and reduction of the RMBS portfolio and associated hedges. The Company's
longstanding policy has been to maintain limits on the exposure of the Company's
equity to changes in long-term rates as well as the exposure of earnings to
changes in short-term funding rates.


Note 6        COMMON STOCK

On March 6, 2003, the Company declared dividends to common stockholders of $0.35
per share, which were paid on April 30, 2003 to stockholders of record on March
31, 2003. For U.S. Federal income tax purposes, the dividends are expected to be
ordinary income to the Company's stockholders.

On May 20, 2003, the Company declared dividends to common stockholders of $0.35
per share, which were paid on July 31, 2003 to stockholders of record on June
30, 2003. For U.S. Federal income tax purposes, the dividends are expected to be
ordinary income to the Company's stockholders.

On September 25, 2003, the Company declared dividends to common stockholders of
$0.28 per share, which were paid on October 31, 2003 to stockholders of record
on September 30, 2003. For U.S. Federal income tax purposes, the dividends are
expected to be ordinary income to the Company's stockholders.

For the nine months ended September 30, 2003, the Company issued 1,355,006
shares of common stock of the Company, par value $0.001 per share (the "Common
Stock"), under its Dividend Reinvestment and Stock Purchase Plan. Net proceeds
to the Company were approximately $15,113. For the nine months ended September
30, 2002, the Company issued 1,132,314 shares of Common Stock, under its
Dividend Reinvestment and Stock Purchase Plan. Net proceeds to the Company were
approximately $12,546.

For the nine months ended September 30, 2003, the Company issued 45,000 shares
of Common Stock under a sale agency agreement with Brinson Patrick Securities
Corporation. Net proceeds to the Company were approximately $497.

In March 2002, the remaining 10,000 shares of the Company's 10.5% Series A
Senior Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") were
converted to 34,427 shares of Common Stock at a price of $7.26 per share in
accordance with the terms of the Series A Preferred Stock.


                                      13
<PAGE>

Note 7        PREFERRED STOCK

On May 29, 2003, the Company authorized and issued 2,300,000 shares of 9.375%
Series C Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"), par
value $0.001 per share, including 300,000 shares of Series C Preferred Stock
issued pursuant to an option granted to the underwriters to cover
over-allotments. The Series C Preferred Stock is perpetual, carries a 9.375%
coupon and has a preference in liquidation of $57,500. The aggregate net
proceeds to the Company (after deducting underwriting fees and expenses) were
approximately $55,435.

On May 29, 2003, the Company redeemed 155,000 shares of the Company's 10% Series
B Cumulative Convertible Redeemable Preferred Stock, par value $0.001 per share
(the "Series B Preferred Stock"), at its liquidation value of $25 per share.


Note 8        TRANSACTIONS WITH AFFILIATES

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

On March 6, 2003, the unaffiliated directors approved an extension of the
Management Agreement from its expiration of March 27, 2003 for one year through
March 31, 2004. The terms of the renewed agreement are similar to the prior
agreement except for the incentive fee calculation which provides for a rolling
four-quarter high watermark rather than a quarterly calculation. In determining
the rolling four-quarter high watermark, the Company calculates the incentive
fee, as defined, based upon the current and prior three quarters' net income
(loss). The Manager would be paid an incentive fee in the current quarter if the
Yearly Incentive Fee ("Yearly Incentive Fee") is greater than what was paid to
the Manager in the prior three quarters cumulatively. The Company commenced the
phase-in of the rolling four-quarter high watermark during the second quarter of
2003. Calculation of the incentive fee is based on GAAP and adjusted to exclude
special one-time events pursuant to changes in GAAP accounting pronouncements
after discussion between the Manager and the unaffiliated directors. The high
watermark is based on the existing incentive fee hurdle, which provides for the
Manager to be paid 25% of the amount of earnings (calculated in accordance with
GAAP) per share that exceeds the product of the adjusted issue price of the
Company's common stock per share ($11.38 as of September 30, 2003) and the
greater of 9.5% or 350 basis points over the ten-year Treasury note, which
equates to an annual net income threshold of $1.08 per share.


                                      14
<PAGE>

The Company pays the Manager an annual base management fee equal to a percentage
of the average invested assets of the Company as defined in the Management
Agreement. The base management fee 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 0.20% of average invested assets rated above BB+.
During the third quarter of 2003, the Manager agreed to reduce the management
fees by 20% from its calculated amount for the third quarter of 2003. This
reduction resulted in $529 of savings for the third quarter of 2003. The Manager
will maintain a 20% reduction from the calculated amounts for the fourth quarter
of 2003 and the first quarter of 2004.

The Company incurred $2,115 and $7,341 in base management fees in accordance
with the terms of the Management Agreement for the three and nine months ended
September 30, 2003, respectively, and $2,376 and $6,872 in base management fees
for the three and nine months ended September 30, 2002, respectively. In
accordance with the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $11 and $29 for certain expenses incurred on
behalf of the Company during the three and nine months ended September 30, 2003,
respectively, and $0 and $11 for the three and nine months ended September 30,
2002, respectively.

Pursuant to the March 25, 2002 one-year Management Agreement extension, the
incentive fee paid to the Manager was based on 25% of earnings (calculated in
accordance with GAAP) of the Company. For purposes of calculating the incentive
fee during 2002, the cumulative transition adjustment of $6,327 resulting from
the Company's adoption of SFAS 142 was excluded from earnings in its entirety
and included using an amortization period of three years. The Company incurred
$6 and $3,195 in incentive compensation for the three and nine months ended
September 30, 2002, respectively. There was no incentive fee due to the Manager
for the three or nine months ended September 30, 2003.

The Company has an administration agreement with the Manager. Under the terms of
the administration agreement, the Manager provides financial reporting, audit
coordination and accounting oversight services to the Company. The agreement
became effective January 1, 1999 and can be cancelled upon 60-day written notice
by either party. The Company pays the Manager a monthly administrative fee at an
annual rate of 0.06% of the first $125 million of average net assets, 0.04% of
the next $125 million of average net assets and 0.03% of average net assets in
excess of $250 million subject to a minimum annual fee of $120. For the three
and nine months ended September 30, 2003, the administration fee was $44 and
$130, respectively. For the three and nine months ended September 30, 2002, the
administration fee was $42 and $128, respectively.

The Company has entered into a $50 million commitment to acquire shares in
Carbon Capital, Inc. ("Carbon"), a private commercial real estate income
opportunity fund managed by the Manager. The period during which the Company may
be required to purchase shares under the commitment expires in July 2004. On
September 30, 2003, the Company owned 18.8% of the outstanding shares in Carbon.
The Company's remaining commitment at September 30, 2003 was $23,034.

On May 15, 2000, the Company completed the acquisition of CORE Cap, Inc. The
merger was a stock for stock acquisition where the Company issued 4,180,552
shares of Common Stock and 2,261,000 shares of Series B Preferred Stock. At the
time of the CORE Cap acquisition, the Manager agreed to pay GMAC (CORE Cap,
Inc.'s external advisor) $12,500 over a ten-year period (the


                                      15
<PAGE>

"Installment Payment") to purchase the right to manage the assets under the
existing management contract (the "GMAC Contract"). The GMAC Contract had to
be terminated in order to allow for the Company to complete the merger, as the
Company's Management Agreement with the Manager did not provide for multiple
managers. As a result, the Manager offered to buy-out the GMAC Contract as the
Manager estimated it would receive incremental fees above and beyond the
Installment Payment, and thus was willing to pay for, and separately
negotiate, the termination of the GMAC Contract. Accordingly, the value of the
Installment Payment was not considered in the Company's allocation of its
purchase price to the net assets acquired in the acquisition of CORE Cap, Inc.
The Company agreed that should the Management Agreement with its Manager be
terminated, not renewed or not extended for any reason other than for cause,
the Company would pay to the Manager an amount equal to the Installment
Payment less the sum of all payments made by the Manager to GMAC. As of
September 30, 2003, the Installment Payment would be $8,000 payable over seven
years. The Company does not accrue for this contingent liability.


Note 9         BORROWINGS

Certain information with respect to the Company's collateralized borrowings at
September 30, 2003 is summarized as follows:

<TABLE>
<CAPTION>
                              Lines of         Reverse                                 Total
                             Credit and      Repurchase      Collateralized       Collateralized
                             Term Loans      Agreements     Debt Obligations        Borrowings
                            -----------------------------------------------------------------------
<S>                              <C>           <C>                 <C>               <C>
Outstanding borrowings           $73,964       $1,049,118          $684,875          $1,807,957
Weighted average
    borrowing rate                 2.54%            1.16%             6.60%               3.28%
Weighted average
    remaining maturity          559 days          20 days        3,125 days          1,219 days
Estimated fair value of
    assets pledged              $130,809       $1,131,038          $775,328          $2,037,175
</TABLE>

As of September 30, 2003, the Company's collateralized borrowings had the
following remaining maturities:

<TABLE>
<CAPTION>
                          Lines of          Reverse                                    Total
                       Credit and Term    Repurchase       Collateralized Debt     Collateralized
                            Loans         Agreements          Obligations            Borrowings
                     -----------------------------------------------------------------------------
<S>                       <C>               <C>                  <C>               <C>
Within 30 days            $     -           $1,049,118           $      -          $1,049,118
31 to 59 days                   -                    -                  -                   -
Over 60 days               73,964                    -            684,875             758,839
                     =============================================================================
                          $73,964           $1,049,118           $684,875          $1,807,957
                     =============================================================================
</TABLE>

Under the lines of credit and the reverse repurchase agreements, the respective
lenders retain 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.

                                      16
<PAGE>

The Company is subject to various covenants in its lines of credit, including
maintaining a minimum GAAP net worth of $305,000, a debt-to-equity ratio not to
exceed 5.5 to 1, a minimum cash requirement based upon certain debt to equity
ratios, a minimum debt service coverage ratio of 1.5, and a minimum liquidity
reserve of $10,000. As a result of the loss incurred for the third quarter of
2003, the Company did not maintain the minimum debt service coverage ratio for
the quarter of 1.5 required by one of its lenders; the respective lender agreed
to waive this requirement. As of September 30, 2003, the Company was in
compliance with all other covenants.


Note 10      DERIVATIVE INSTRUMENTS

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the consolidated
statement of financial condition at fair value. If the derivative is designated
as a fair value hedge, the changes in the fair value of the derivative and of
the hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions of
change in the fair value of the derivative are recorded in other comprehensive
income ("OCI") and ineffective portions of changes in the fair value are
recognized in earnings.

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

As of September 30, 2003, the Company had interest rate swaps with notional
amounts aggregating $1,167,265 that were designated as cash flow hedges of
borrowings under reverse repurchase agreements. Their aggregate fair value was a
$41,259 liability included in other liabilities in the consolidated statements
of financial condition. For the nine months ended September 30, 2003, the net
change in the fair value of the interest rate swaps was an increase of $1,408,
of which $175 was deemed ineffective and is included as an increase of interest
expense and $1,583 was recorded as an addition to OCI. As of September 30, 2003,
the $1,167,265 notional of swaps which were designated as cash flow hedges had a
weighted average remaining term of 5.65 years.

As of September 30, 2002, the Company had interest rate swaps with notional
amounts aggregating $866,473 that were designated as cash flow hedges. Their
aggregate fair value was a $56,606 liability included in other liabilities on
the statement of financial condition. For the nine months ended September 30,
2002, the net change in the fair value of the interest rate swaps was a net
decrease of $54,503 of which $126 was deemed ineffective and is included as a
reduction of interest expense and $54,629 was recorded as a reduction of OCI. As
of September 30, 2002, the $866,473 notional amount of the swaps had a weighted
average remaining term of 5.15 years.

During the nine months ended September 30, 2003, the Company terminated one
of its interest rate swaps with a notional amount of $200,000 that was
designated as a cash flow hedge of borrowings under reverse


                                      17
<PAGE>

repurchase agreements. The Company will reclassify from OCI as an increase to
interest expense the $1,593 loss in value incurred, over 1.9 years, which was
the remaining term of the swap at the time it was closed out. For the three
and nine months ended September 30, 2003, $212 and $264, respectively, were
reclassified as an increase to interest expense and $212 will be reclassified
as an increase to interest expense during each quarter for the next 12 months.

During the nine months ended September 30, 2002, the Company closed two of its
interest rate swaps with a notional amount of $103,000, which were designated as
a cash flow hedge of borrowings under reverse repurchase agreements. The Company
will amortize as an increase of interest expense the $2,268 loss in value
included in OCI incurred upon closure of the swaps over their remaining terms.
The amortized cost of $4,585 related to the purchase of the swap, will continue
to be amortized as a decrease of interest income over the remaining term of the
swap.

As of September 30, 2003, the Company had four interest rate swaps with notional
amounts aggregating $611,545 designated as trading derivatives. Their aggregate
fair value was a $312 liability included in other liabilities in the
consolidated statements of financial condition. For the nine months ended
September 30, 2003, the change in fair value for these trading derivatives was a
decrease of $852 and is included as an addition to loss on securities
held-for-trading in the consolidated statements of operations. As of September
30, 2003, the $611,545 notional of swaps which were designated as trading
derivatives had a weighted average remaining term of 4.31 years.

As of September 30, 2002, the Company had interest rate swaps with notional
amounts aggregating $312,145 designated as trading derivatives. Their aggregate
fair value at September 30, 2002 of $(2,097) is included in other liabilities.
For the nine months ended September 30, 2002, the change in fair value for these
trading derivatives was a decrease of $309 and is included as an addition to
loss on securities held for trading in the consolidated statement of operations.
As of September 30, 2002, the $312,145 notional of swaps had a weighted average
remaining term of 4.65 years.

Occasionally, counterparties will require the Company or the Company will
require counterparties to provide collateral for the interest rate swap
agreements in the form of margin deposits. Net deposits are recorded as a
component of either other assets or other liabilities. Should the counterparty
fail to return deposits paid, the Company would be at risk for the fair market
value of that agreement. At September 30, 2003 and 2002, the balance of such net
margin deposits owed to counterparties as collateral under these agreements
totaled $18,677 and $25,163, respectively. The Company does not anticipate
non-performance by any counterparty.

The contracts identified in the remaining portion of this note have been entered
into to limit the Company's mark to market exposure to changes in long-term
interest rates.

At September 30, 2003, the Company had outstanding short positions of 1,653
ten-year U.S. Treasury Note future contracts expiring in December 2003, which
represented $165,300 in face amount of U.S. Treasury Notes. The estimated fair
value of these contracts was approximately $(179,896) included in other assets
at September 30, 2003, and the change in fair value related to these contracts
is included as a component of loss on securities held-for-trading in the
consolidated statements of operations.


                                    18
<PAGE>

At September 30, 2002, the Company had outstanding short positions of 261
five-year U.S. Treasury Note future contracts and 921 ten-year U.S. Treasury
Note future contracts expiring in December 2002, which represented $26,100 and
$92,100 in face amount of U.S. Treasury Notes, respectively; and an interest
rate cap with a notional amount of $85,000. The estimated fair value of these
contracts which aggregated approximately $(132,000) at September 30, 2002 was
included in securities held for trading, and the change in fair value related to
these contracts is included as a component of loss on securities held for
trading.

As of September 30, 2002 the Company entered into an agreement to exchange
(pound)8,831 (pounds sterling) for $13,662 (U.S. dollars) on January 21, 2003.
The contract was intended to economically hedge currency risk in connection
with the Company's investment in the London Loan, which is denominated in
pounds sterling. The estimated fair value of the forward currency exchange
contract was a liability of $159 at September 30, 2002 and was recognized as
a reduction of foreign currency losses for the nine months ended September 30,
2002. 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 counter party to
the forward currency exchange contracts. At September 30, 2002, the balance of
such net margin deposits owed to counterparties as collateral under these
agreements totaled $2,300.


Note 11      SUBSEQUENT EVENTS

Subsequent to September 30, 2003, the Company acquired a mezzanine real estate
loan which increased its commercial real estate loans by $7,000. In addition,
the Company reduced its RMBS portfolio by an additional $130,000 through sales
of securities.


                                    19
<PAGE>


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

All dollar figures are expressed in thousands, except share or per share
amounts.

I.       General

The Company is a finance company organized as a Real Estate Investment Trust
("REIT") that earns income based on the difference between the yield on its
assets and the cost of its liabilities. The Company's primary long-term
objective is to distribute dividends supported by earnings. To the extent the
Company's earnings change based on changes in asset levels, funding rates,
available reinvestment rates, expected losses on credit sensitive positions and
changes in risk or market conditions, shareholders can expect dividends to be
adjusted accordingly. Over the long term, the Company's earnings are primarily
maintained by consistent credit performance on its commercial real estate
investments, stability of the capital structure and reinvestment rates. The
Company's commercial real estate credit performance has been within
expectations. Delinquencies and losses realized will continue to rise as the
portfolio matures but the Company believes it has adequate loss reserves
reflected in its loss adjusted yields.

The Company's capital structure strategy is to issue liabilities that match the
cash flow characteristics of its portfolio of investments through the issuance
of collateralized debt obligations ("CDOs") in conjunction with fixed rate
preferred stock offerings and common stock offerings. At the end of the third
quarter of 2003, the Company decided to accelerate its strategic reduction of
residential mortgage backed securities ("RMBS") due to the volatility of
interest rates and structural changes in the RMBS market. See "Item
3-Quantitative and Qualitative Disclosures about Market Risk" for a discussion
of interest rates and their effect on earnings and book value.

The Company continues to maintain a positive, though controlled, exposure to
both long- and short-term rates through its active hedging strategies. The
Company also will continue to seek out the best long-term matched financing
solutions to lock in attractive spreads on the Company's commercial real estate
securities portfolio, which the Company believes will likely be through another
CDO transaction as the market continues to offer opportunities to issue
cost-effective debt.

For the quarter ended September 30, 2003, the Company recorded a net loss of
$0.51 per share. For the quarter ended September 30, 2002, the Company recorded
net income of $0.26 per share. Included in the net loss for the third quarter of
2003 are realized and unrealized gains and losses that net to a loss of $34,019
($0.70 per share), which are attributable to the RMBS portfolio and expenses of
hedging that portfolio.

Net loss for the quarter also includes a write down of $5,412 ($0.11 per share)
on a franchise loan backed security. The Company determined it is unlikely that
further payments will be received from this franchise loan backed security and
wrote this security down to zero, despite its par balance of $16,366 as of
September 30, 2003. The write down of $0.11 per share had only a $0.02 per share
effect on the Company's net asset value ("NAV") at September 30, 2003 compared
to the NAV at June 30, 2003.

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


                                    20
<PAGE>

The Company considers its commercial real estate securities to be commercial
mortgage backed securities ("CMBS") and investment grade REIT debt. The
commercial real estate securities portfolio represents broad exposure to
commercial real estate lending and provides diversification and high yields that
are adjusted for anticipated losses over a long period of time (typically, a
ten-year weighted average life). These investments generally take the form of
CMBS. A CMBS investment represents an interest in a pool of commercial mortgages
that are aggregated in a trust. The cash flow from the pool is used to pay
principal and interest to the trust. The Company purchases mainly the below
investment grade securities issued by these trusts. Each class of CMBS receives
its designated amount of par along with a monthly interest coupon. These
securities can be financed through the issuance of secured debt that matches the
life of the investment through the issuance of CDOs. This match funding strategy
eliminates the interest rate risk inherent in holding these types of assets.
Commercial real estate loans provide attractive risk adjusted returns over
shorter periods of time (typically, a three to five year weighted average life)
through investments in loans secured by specific property types in specific
regions. This asset class is financed with committed credit facilities which
significantly reduces interest rate risk of financing this asset class.

Historically, the Company has invested its excess liquidity in a portfolio of
RMBS. The continued volatility of this asset class is not consistent with the
Company's objective of maintaining stable earnings and so is being reduced over
time to represent less than 25% of the Company's total portfolio within the next
few quarters, subject to the availability of high yield real estate assets and
other market conditions. In addition, the Company must maintain 55% of its total
assets in qualifying real estate assets for regulatory purposes. Currently the
RMBS portfolio provides a significant portion of this requirement.

The following table illustrates the mix of the Company's asset types as of
September 30, 2003 and December 31, 2002:

<TABLE>
<CAPTION>
                                                        Carrying Value as of
                                             September 30, 2003      December 31, 2002
                                              Amount        %         Amount        %
                                           ------------------------------------------------
<S>                                           <C>            <C>        <C>          <C>
Commercial real estate securities             $1,229,369     56.0%      $894,345      35.9%
Commercial real estate loans(1)                   91,055       4.2        88,926       3.6
Residential mortgage backed securities           874,404      39.8     1,506,450      60.5
                                           ------------------------------------------------

Total                                         $2,194,828    100.0%    $2,489,721    100.0%
                                           ------------------------------------------------
(1) Includes real estate joint ventures and equity investments.
</TABLE>


Commercial Real Estate Securities Portfolio Activity

The Company continues to increase its investments in commercial real estate debt
securities. Commercial real estate debt securities include below investment
grade CMBS, as well as investment grade CMBS and REIT debt. During the nine
months ended September 30, 2003, the Company increased total assets in this
sector by 37% from $894,345 to $1,229,369.



                                    21
<PAGE>

Included in the Company's December 10, 2002 collateralized debt obligation ("CDO
II") was a ramp facility to fund the purchase of $50,000 of par of below
investment grade CMBS by September 30, 2003. The increase in commercial real
estate securities for the nine months ended September 30, 2003 includes $50,000
of par of CMBS that was purchased with proceeds from the ramp facility. In
August 2003, this ramp was fully utilized when the Company acquired $62,111 of
par of a 2003 vintage controlling class CMBS transaction. The Company considers
the CMBS securities where it maintains the right to control the
foreclosure/workout process on the underlying loans its controlling class CMBS
("Controlling Class CMBS"). This acquisition is the Company's ninth Controlling
Class CMBS transaction. The total par of the underlying loans in this
transaction is $1,183,080; the underlying loan loss expectation is estimated at
2.35% and the loss-adjusted yield on the securities rated B- and lower in
aggregate is 11.36%. The non-rated and B- rated tranches of this transaction
were purchased to yield an initial cash-on-cash return of 21.17% and 18.86%,
respectively, and loss-adjusted yields of 9.00% and 14.42%, respectively.

The following table details the par, fair market value, adjusted purchase price
and loss adjusted yield of the Company's commercial real estate securities
included in the two CDOs as of September 30, 2003:

<TABLE>
<CAPTION>
                                                                                   Adjusted                   Loss
                                                     Fair Market     Dollar        Purchase       Dollar     Adjusted
                                         Par            Value        Price          Price         Price       Yield
                                   ------------------------------------------------------------------------------------
<S>                                      <C>             <C>          <C>           <C>           <C>           <C>
Investment grade CMBS                    $47,730         $52,690      110.39        $46,755       97.96         7.6%
Investment grade REIT debt               171,545         192,568      112.26        174,258      101.58         6.5
CMBS rated BB+ to B                      630,264         499,470       79.25        514,276       81.60         9.2
Credit tenant lease                        8,927           8,979      100.58          8,920       99.92         6.1
                                   ------------------------------------------------------------------------------------
Total                                   $858,466        $753,707       87.80       $744,209       86.69         8.5%
                                   ====================================================================================
</TABLE>

The following table details the par, fair market value, adjusted purchase price
and loss adjusted yield of the Company's commercial real estate securities
exclusive of the two CDOs as of September 30, 2003:

<TABLE>
<CAPTION>
                                                                                   Adjusted                   Loss
                                                     Fair Market     Dollar        Purchase       Dollar     Adjusted
                                         Par            Value        Price          Price         Price       Yield
                                   ------------------------------------------------------------------------------------
<S>                                      <C>             <C>          <C>           <C>           <C>           <C>
Investment grade CMBS                    $200,278       $195,324       97.53      $197,802          98.76       4.6%
Investment grade REIT debt                 15,000         15,897      105.98        16,261         108.40       4.6
CMBS rated BB+ to B                       174,306        124,320       71.32       140,213          80.44       8.9
                                   ------------------------------------------------------------------------------------
Sub-Total                                 389,584        335,541       86.13       354,276          90.94       6.3%
                                   ------------------------------------------------------------------------------------
CMBS rated B- or lower                    304,370         84,972       27.92       107,584          35.35      12.6
CMBS IOs                                1,342,744         51,830        3.86        49,898           3.72       8.8
Other                                       4,000          3,319       82.98         3,251          81.27       7.0
                                   ------------------------------------------------------------------------------------
Total                                  $2,040,698       $475,662       23.31      $515,009          25.24       7.9%
                                   ====================================================================================
</TABLE>

Below Investment Grade CMBS and Underlying Loan Performance

The Company divides its below investment grade CMBS investments into two
portfolios: the nine Controlling Class CMBS and other below investment grade
CMBS. The distinction between the two portfolios is whether the Company has
controlling class rights. This form of ownership does not alter


                                    22
<PAGE>

the fact that the Company bears full credit risk of the underlying loan
portfolio for the Controlling Class CMBS and limited credit risk for the
other below investment grade CMBS. The Company's risk process treats all of
the loans in Controlling Class CMBS as if owned directly. The Company
estimates credit loss expectations for these securities after detailed
underwriting of all loans in the Controlling Class pool.

At September 30, 2003, the Company owned Controlling Class CMBS in nine separate
transactions with a market value of $435,428 and a par of $805,044. The total
principal amount of commercial real estate loans underlying these transactions
at their respective acquisition dates was $12,705,741, and the Company computes
its loss adjusted yield assuming $260,817, or 2.05%, would be uncollectable. As
of September 30, 2003, the remaining principal amount of the commercial real
estate loans after paydowns, amortization and defeasance was $11,161,373, and of
the $260,817 of assumed losses, $51,737 has been realized; therefore, $209,080,
or 80%, of the assumed losses have not been realized. The $51,737 includes
losses of $6,999 on loans deemed uncollectable during the third quarter and
includes $7,169 for a pending real estate owned liquidation. The average
severity of all loan losses recognized through September 30, 2003 was 32%. Loan
loss severity is the loss from the underlying loans which the Company incurs,
including unpaid interest, late fees and servicer advances, when an underlying
loan is subject to workout with the loan servicer. Realized losses are expected
to increase on the underlying loans as the portfolio ages. Special servicer
expenses are also expected to increase as the portfolio matures.

The Company's loss expectations by vintage year are described in the following
table. The Company acquired these assets in the same year as the vintage
indicated. The Company did not acquire Controlling Class CMBS in 2000 or 2002.

                       Loss           Underlying Loan
                    Expectation           Balance            % of Collateral
                --------------------------------------------------------------
    1998              $166,639          $8,826,676              1.89%
    1999                19,451             760,414              2.56%
    2001                23,797             929,182              2.56%
    2003                50,930           2,189,469              2.33%
                --------------------------------------------------------------
                      $260,817         $12,705,741              2.05%

The Company's other below investment grade CMBS have no rights to control the
workout and/or disposition of underlying loan defaults; however, they are not
the first to absorb losses from defaulted loans in the underlying pools. The
total par of the other below investment grade CMBS is $302,296 and the fair
market value is $269,350.

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

The Company considers delinquency and loss information from the Lehman Brothers
Conduit Guide to be the most relevant measure of credit performance and market
conditions applicable to its Controlling Class CMBS holdings. The year of
issuance, or vintage year, is important, as older loan pools will tend


                                    23
<PAGE>

to have more delinquencies than newly underwritten loans and different
vintages will have different credit performance based on the real estate
credit cycle.

Morgan Stanley & Co., Inc. also tracks CMBS loan delinquencies for specific CMBS
transactions with more than $200,000 of collateral and that have been seasoned
for at least one year. This seasoning criterion will generally adjust for the
lower delinquencies that occur in newly originated collateral. As of September
30, 2003, the Morgan Stanley index indicated that delinquencies on 227
securitizations was 2.39%, and as of June 30, 2003, this same index indicated
that delinquencies on 219 securitizations was 2.19%. See Item 3 - "Quantitative
and Qualitative Disclosures About Market Risks" for a detailed discussion of how
delinquencies and loan losses affect the Company.

The table below shows current delinquency and underlying loan losses recognized
on the Company's Controlling Class CMBS and the Lehman Brothers September 2003
Conduit Guide delinquency statistics by vintage year.

<TABLE>
<CAPTION>
                                                                    The Lehman Brothers September
                                As of September 30, 2003                  2003 Conduit Guide
                            ------------------------------------------------------------------------
                                                      Losses                              Losses
                                                    Recognized        Delinquency        Recognized
                             Delinquency as a         as % of          as a % of          % of as
                             % of Underlying         Underlying       Underlying        Underlying
                                Loans                  Loans*            Loans             Loans*
                            ------------------------------------------------------------------------
<S>                                 <C>                  <C>             <C>                <C>
 1998 Transactions                  2.06%                0.54%           2.63%              0.47%
 1999 Transactions                  0.32%                0.50%           2.06%              0.20%
 2001 Transactions                  0.00%                0.00%           0.95%              0.06%
 2003 Transactions                  0.00%                0.00%           0.05%              0.00%
                            ------------------------------------------------------------------------
 Average-All Transactions           1.37%                0.41%           1.95%              0.34%
                            ------------------------------------------------------------------------

 As of June 30, 2003                1.74%                0.34%           1.84%              0.33%
</TABLE>

    * Delinquency statistics are weighted by the Company's current loan
      balance, and loss statistics are weighted by cutoff principal balance


                                    24
<PAGE>


The Company's investment in its nine Controlling Class CMBS by credit rating
category at September 30, 2003 is as follows:

<TABLE>
<CAPTION>
                     Fair Market   Dollar       Adjusted       Dollar     Subordination
            Par         Value       Price    Purchase Price     Price         Level
         ----------------------------------------------------------------------------------
<S>          <C>          <C>         <C>             <C>         <C>         <C>
BB+          $84,503      $73,316     $86.76          $72,433     $85.72      7.45%
BB            89,945       75,490      83.93           76,577      85.14      5.99
BB-          101,393       71,485      70.50           80,647      79.54      5.03
B+            44,314       29,004      65.45           30,928      69.79      3.40
B            182,119      105,161      57.74          132,415      72.71      3.01
B-            95,221       42,392      44.52           58,477      61.41      1.81
CCC           79,212       17,628      22.25           25,593      32.31      1.15
NR           128,337       20,952      16.33           19,870      15.48       n/a
         ----------------------------------------------------------------------------------
Total       $805,044     $435,428     $54.09         $496,940     $61.73
</TABLE>

The Company's investment in its seven Controlling Class CMBS by credit rating
category at December 31, 2002 is as follows:

<TABLE>
<CAPTION>
                       Fair Market   Dollar       Adjusted       Dollar     Subordination
              Par         Value       Price    Purchase Price     Price         Level
         -----------------------------------------------------------------------------------
<S>            <C>          <C>          <C>            <C>          <C>        <C>
BB+            $65,159      $56,543      86.78          $56,181      86.22      8.26%
BB              58,170       48,674      83.68           48,560      83.48      6.73
BB-             84,972       59,415      69.92           68,623      80.76      5.48
B+              32,329       21,533      66.61           23,173      71.68      3.72
B              168,435       99,815      59.26          125,197      74.33      3.35
B-              87,231       40,335      46.24           53,415      61.23      2.32
CCC             70,407       17,715      25.16           28,942      41.11      1.46
NR             123,269       23,512      19.07           32,420      26.30       n/a
         -----------------------------------------------------------------------------------
Total         $689,972     $367,542      53.27         $436,511      63.26
</TABLE>

Additionally, the Company is continuing to perform a detailed re-underwriting
for a significant amount of the underlying loans from its 1998 vintage CMBS over
the next 12 months. Upon completion, the Company may determine that its Reported
Yields and book values need to be adjusted. The result of assuming greater
losses, if that were the conclusion, would be an other than temporary writedown
of CMBS to their market value which would include the realization of the amounts
currently carried as unrealized losses on the Company's consolidated statements
of financial condition. The result of assuming lower losses, if that were the
conclusion, would be to increase the yield on the security, which in turn would
increase income. The Company believes that re-underwriting underlying loans
periodically provides the appropriate discipline to evaluate the Company's
underwriting practices.

See Item 3 -"Quantitative and Qualitative Disclosures About Market Risk" for a
discussion of how differences between estimated and actual losses could affect
the Company's earnings.


                                    25
<PAGE>

Of the 27 delinquent loans shown on the chart in Note 4 of the consolidated
financial statements, three loans were real estate owned and being marketed for
sale and the remaining 24 loans were in some form of workout negotiations.

During the third quarter of 2003, the underlying loans were paid down by
$102,688. Pay down proceeds are distributed to the highest rated CMBS class
first and reduce the percent of total underlying collateral represented by each
rating category.

The Company manages its credit risk through disciplined underwriting,
diversification, active monitoring of loan performance and exercise of its right
to control the workout process as early as possible. The Company maintains
diversification of credit exposures through its underwriting process and can
shift its focus in future investments by adjusting the mix of loans in
subsequent acquisitions. The comparative profiles of the loans underlying the
Company's CMBS by property type as of September 30, 2003 and December 31, 2002
is as follows:

                          9/30/03 Exposure              12/31/02 Exposure
 ------------------------------------------------------------------------------
 Property Type        Loan Balance*   % of Total    Loan Balance     % of Total
 ------------------------------------------------------------------------------
 Multifamily           $3,825,755       33.3%       $3,302,387           34.4%
 Retail                 3,464,539        30.2        2,704,952            28.1
 Office                 2,301,458        20.1        1,809,519            18.8
 Lodging                  791,571         6.9          834,854             8.7
 Industrial               717,382         6.3          589,044             6.1
 Healthcare               340,423         3.0          346,298             3.6
 Parking                   25,716         0.2           29,743             0.3
                 --------------------------------------------------------------
 Total                $11,466,844        100%       $9,616,797            100%
                 ==============================================================
 *  Of this total $305,471 of loans have been "defeased" and are now secured
    by Treasury securities, thereby removing real estate and borrower risk.


As of September 30, 2003, the fair market value of the Company's holdings of
subordinated CMBS is $53,312 lower than the adjusted cost for these securities.
This difference relates primarily to 1998 vintage CMBS transactions. The decline
in the value of the investment portfolio represents market valuation changes
since the third quarter of 1998 and is not due to actual credit experience or
credit expectations. The adjusted purchase price of the Company's Controlling
Class CMBS portfolio as of September 30, 2003 represents approximately 62% of
its par amount. The market value of the Company's Controlling Class CMBS
portfolio as of September 30, 2003 represents approximately 54% of its par
amount. As the portfolio matures, the Company expects to recoup the unrealized
losses, provided that the actual credit losses experienced for each class of
security in a transaction are not greater than the credit losses assumed in the
purchase analysis of those individual securities.

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

                                    26
<PAGE>

The Company's income for its Controlling Class CMBS is computed based upon a
yield which assumes credit losses. The yield to compute the Company's taxable
income does not assume the occurrence of credit losses, as a loss can only be
deducted for tax purposes when it has occurred. As a result, for the years ended
December 31, 1998 through the nine months ended September 30, 2003, the
Company's income accrued on its CMBS assets was approximately $26,250 lower than
the taxable income accrued on the CMBS assets.

Commercial Real Estate Loan Activity

The Company's commercial real estate loan portfolio generally emphasizes larger
transactions located in metropolitan markets, as compared to the typical loan in
the CMBS portfolio. The commercial real estate loan portfolio is performing
within underwritten expectations. The Company has determined it is not necessary
to establish a loan loss reserve for this portfolio.

Commercial real estate loans include the Company's investment in Carbon Capital,
Inc., a company managed by the Manager that invests in mezzanine debt loans. The
total amount of commercial real estate loans increased by $9,085 to $91,055
during the third quarter of 2003, representing an 11.1% increase. This includes
a $9,402 increase in the Company's funding of Carbon Capital, Inc. to $26,965.
For the nine months ended September 30, 2003, the commercial real estate loan
portfolio increased by $2,129 or 2.4%. Subsequent to September 30, 2003, the
Company increased its commercial real estate loans by $7,000 as it acquired a
mezzanine real estate loan.

On June 30, 2003, the Company's loan on a Los Angeles office building matured.
Upon transfer of the asset securing the Los Angeles loan and pursuant to the
loan documents, the Company was entitled to a supplemental exit fee that was to
be paid upon repayment of the loan. The borrower has refused to pay the
supplemental exit fee. The Company filed suit on July 15, 2003 against the
co-borrowers, MP-555 West Fifth Mezzanine, LLC and MP-808 South Olive Mezzanine,
LLC, which are both affiliates of Maguire Properties, Inc (NYSE: MPG). The suit
also names the Guarantor, Robert F. Maguire, III.

The following table summarizes the Company's commercial real estate loan
portfolio by property type including the Company's pro rata share of Carbon
Capital, Inc. as of September 30, 2003 and December 31, 2002:

<TABLE>
<CAPTION>
                          September 30, 2003                       December 31, 2002
                --------------------------------------------------------------------------------
                                             Weighted                                Weighted
                                             Average                                  Average
                      Par Outstanding        Coupon            Par Outstanding        Coupon
 Property       --------------------------------------------------------------------------------
  Type               Amount           %         %             Amount        %            %
------------------------------------------------------------------------------------------------
<S>                   <C>            <C>       <C>           <C>          <C>           <C>
Office                $62,423        57.7%     8.4%          $ 88,987     78.9%         9.2%
Hotel                  21,531        19.9      7.8             12,220     10.8          9.0
Multifamily            17,652        16.3      9.8              5,361      4.8          3.6
Mixed-Use               6,580         6.1      8.8                  -        -            -
Retail                      -           -        -              6,226      5.5         10.0
                --------------------------------------------------------------------------------
Total                $108,186      100.0%     9.1%           $112,794    100.0%         9.5%
                --------------------------------------------------------------------------------
</TABLE>


                                    27
<PAGE>

Residential Mortgage Backed Securities

A low interest rate environment in the first half of 2003 produced record
prepayments causing significant yield compression for all RMBS products. At the
end of the second quarter and into the third quarter of 2003, a sharp rise in
interest rates added to the turmoil. According to data prepared by Lehman
Brothers, the RMBS index turned in its worst performance ever during the month
of July 2003.

The market value of the Company's RMBS portfolio was $874,404 at September 30,
2003. In addition to the reduction from $888,878 as of June 30, 2003, the
composition and risk of this portfolio has changed significantly. The Company
realized losses during the third quarter of 2003 as it repositioned its RMBS
portfolio. As part of the continuing effort to reduce interest rate risk in the
RMBS portfolio, during the third quarter of 2003, the Company sold $486,574 of
fixed rate RMBS and purchased $484,840 of hybrid adjustable rate mortgage
("ARM") product. The hybrid ARMs are expected to have less volatility in a
rising interest rate environment. Total RMBS holdings are expected to continue
to decline from their current level of 39.1% to represent less than 25% of the
Company's total portfolio within the next few quarters subject to the
availability of high yield real estate assets and other market conditions.
Subsequent to September 30, 2003, the Company's RMBS portfolio was reduced by an
additional $130,000.

The Company also entered into $440,000 of notional par of interest rate swaps
and $165,300 of notional par of ten-year Treasury futures to reduce exposure to
rising interest rates. Each of these hedging instruments was designated as
held-for-trading; therefore, changes in their value were marked to market in the
Company's consolidated statements of operations. This action significantly
reduced the interest rate sensitivity of the Company's RMBS portfolio. The loss
in value of the hedges greatly exceeded the change in value of the assets in the
held-for-trading account, resulting in $0.21 per share of losses for the quarter
ended September 30, 2003, which are recorded directly in the consolidated
statements of operations rather than accumulated other comprehensive loss in the
consolidated statements of financial condition. Hedges designated as
held-for-trading are expected to create greater income volatility but should
provide greater book value stability.

While the Company intends to limit its investment in RMBS, its ability to do so
may be hampered in the near term by the Company's requirement to maintain 55% of
its assets as qualified real estate in order to qualify for exclusion from
regulation as an investment company under the Investment Company Act of 1940.
Subsequent to September 30, 2003, the Company reduced its RMBS portfolio by an
additional $130,000.


                                    28
<PAGE>

A breakdown of the RMBS portfolio income performance for the three and nine
months ended September 30, 2003 is as follows:

                       For the three months ended     For the nine months ended
                          September 30, 2003             September  30, 2003
                       ------------------------------------------------------
Interest Income                $11,591                          $45,626
Interest Expense*              (9,004)                         (26,811)
                       ------------------------------------------------------
Net Interest Income             2,587                           18,815
                       ------------------------------------------------------
Realized (loss)               (23,981)                         (34,581)
Unrealized (loss)
  in value                    (10,038)                         (11,263)
                       ------------------------------------------------------
Net Loss from RMBS           $(31,432)                        $(27,029)
                       ------------------------------------------------------
Net Loss Per Share             $(0.65)                          $(0.56)
                       ======================================================

        * Includes hedging expense

Recent Events

Subsequent to September 30, 2003, the Company acquired a mezzanine real estate
loan which increased its commercial real estate loans by $7,000. In addition,
the Company reduced its RMBS portfolio by an additional $130,000 through sales
of securities.


II.      Results of Operations

Net loss for the three and nine months ended September 30, 2003 was $(22,221) or
$(0.51) per share (basic and diluted) and $(23,527) or $(0.60) per share (basic
and diluted), respectively. Net income for the three and nine months ended
September 30, 2002 was $13,274 or $0.26 per share (basic and diluted) and
$53,758 or $1.08 per share (basic and diluted), respectively. The decrease in
net income from 2002 to 2003 is primarily due to an impairment charge on the
Company's below investment grade CMBS securities and losses on securities
held-for-trading.

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

                                            For the Three Months
                                             Ended September 30,
                                        2003                    2002
                               ------------------------------------------------
                                      Interest                Interest
                                       Income                  Income
                               ------------------------------------------------
CMBS                                  $18,959                  $12,682
Other securities                       15,048                    9,547
Commercial mortgage loans               1,190                    4,307
Cash and cash equivalents                 453                      387
                               ------------------------------------------------
Total                                 $35,650                  $26,923
                               ================================================



                                    29

<PAGE>

                                           For the Nine Months Ended
                                                September 30,
                                        2003                    2002
                               ------------------------------------------------
                                      Interest                Interest
                                       Income                  Income
                               ------------------------------------------------
CMBS                                   $54,191                  $40,431
Other securities                        34,504                   37,415
Commercial mortgage loans                4,480                   11,353
Cash and cash equivalents                  838                    1,197
                               ------------------------------------------------
Total                                  $94,013                  $90,396
                               ================================================


In addition to the foregoing, the Company earned $3,709 and $28,660 in interest
income from securities held-for-trading, $221 and $695 in earnings from real
estate joint ventures and $749 and $2,194 in earnings from an equity investment
for the three and nine months ended September 30, 2003, respectively. The
Company earned $14,324 and $28,032 in interest income from securities
held-for-trading, $245 and $768 in earnings from real estate joint ventures, and
$262 and $641 in earnings from an equity investment for the three and nine
months ended September 30, 2002, respectively.

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

                                        For the Three Months Ended
                                               September 30,
                                         2003                     2002
                                   --------------------------------------------
                                     Interest                  Interest
                                     Expense                   Expense
                                   --------------------------------------------
Reverse repurchase agreements            $4,704                  $8,088
Lines of credit and term loan               390                     413
CDO liabilities                           6,588                   4,397
                                   --------------------------------------------
Total                                   $11,682                 $12,898
                                   ============================================

                                         For the Nine Months Ended
                                               September 30,
                                       2003                     2002
                                   --------------------------------------------
                                     Interest                  Interest
                                     Expense                   Expense
                                   --------------------------------------------
Reverse repurchase agreements           $15,769                 $24,097
Lines of credit and term loan               743                   1,924
CDO liabilities                          20,213                   5,773
                                   --------------------------------------------
Total                                   $36,725                 $31,794
                                   ============================================

The foregoing interest expense amounts for the three and nine months ended
September 30, 2003 do not include $(66) and $175, respectively, of interest
expense related to hedge ineffectiveness, $9,994 and


                                    30
<PAGE>

$26,135, respectively, of interest expense related to swaps and $4 and $21,
respectively, of interest expense related to real estate joint ventures.
For the three and nine months ended September 30, 2002, the interest
expense amounts do not include $86 and $(126), respectively, of interest
expense related to hedge ineffectiveness, $5,836 and $14,230, respectively,
of interest expense related to swaps and $16 and $52, respectively, of
interest expense related to real estate joint ventures. There is no
interest expense related to the equity investment for the three and nine
month periods ending September 30, 2003 and 2002. See Note 10 of the
consolidated financial statements, Derivative Instruments, for a further
description of the Company's hedge ineffectiveness.

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

Net interest margin from the portfolio is annualized net interest income from
the portfolio divided by the average market value of interest-earning assets in
the portfolio. Net interest income from the portfolio is total interest income
from the portfolio less interest expense relating to collateralized borrowings.
Net interest spread from the 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 market value 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 table summarizes the interest income, interest expense, net
interest margin and net interest spread for the Company's portfolio for the
three and nine months ended September 30, 2003 and 2002. The interest income and
interest expense amounts exclude income and expense related to real estate joint
ventures, equity investment and hedge ineffectiveness.

                                For the Three Months Ended September 30,
                                      2003                     2002
                               -------------------------------------------
 Interest income                    $39,359                  $41,247
 Interest expense                   $21,676                  $18,737
 Net interest margin                 2.87%                    4.26%
 Net interest spread                 2.53%                    4.23%

Other Expenses: Expenses other than interest expense consist primarily of
management fees and general and administrative expenses. Management fees paid to
BlackRock Financial Management, Inc. (the "Manager") of $2,115 and $7,341 for
the three and nine months ended September 30, 2003, respectively, and were
solely base management fees. During the third quarter of 2003, the Manager
agreed to reduce the management fees by 20% for the third quarter of 2003 and
the subsequent two quarters. This reduction resulted in $529 of savings for the
third quarter of 2003. The Company incurred $2,376 and $6,872 in base management
fees and $6 and $3,195 in incentive compensation for the three and nine months
ended September 30, 2002, respectively. Other expenses/income of $551 and $1,724
for the three and nine months ended September 30, 2003, respectively, and $701
and $1,774 for the three and nine months ended September 30, 2002, respectively,
were comprised of accounting agent fees, custodial agent fees, directors' fees,
fees for professional services, insurance premiums and due diligence costs.


                                    31
<PAGE>

Other Net Gain (Loss): During the nine months ended September 30, 2003 and 2002,
the Company sold a portion of its securities available-for-sale for total
proceeds of $1,394,664 and $871,427, respectively, resulting in a realized
(loss)/gain of $(4,704) and $9,538 for the nine months ended September 30, 2003
and 2002, respectively. The losses on securities held-for-trading were $(28,154)
and $(15,948) for the three months ended June 30, 2003 and 2002, respectively,
and $(43,273) and $(23,848) for the nine months ended September 30, 2003 and
2002, respectively. The foreign currency losses of $(151) for the three months
ended September 30, 2002 and $(380) for the nine months ended September 30, 2002
relate to the Company's net investment in a commercial mortgage loan denominated
in pounds sterling and associated hedging, which was subsequently paid off in
December 2002.

Dividends Declared: On September 24, 2003, the Company declared dividends to
common stockholders of $.28 per share, which were paid on October 31, 2003 to
stockholders of record on September 30, 2003. The Company declared a dividend on
September 24, 2003 for the 10% Series B Cumulative Convertible Redeemable
Preferred Stock, par value $0.001 per share (the "Series B Preferred Stock"),
with a record and payable date of September 30, 2003. The Company declared a
dividend on September 24, 2003 for the 9.375% Series C Cumulative Redeemable
Preferred Stock ("Series C Preferred Stock"), par value $0.001 per share, with a
record date of October 10, 2003 and payable date of October 31, 2003.


                                    32
<PAGE>


Changes in Financial Condition

Securities Available-for-sale: The Company's securities available-for-sale,
which are carried at estimated fair value, included the following at September
30, 2003 and December 31, 2002:

<TABLE>
<CAPTION>
                                                  September 30,                       December 31,
                                                 2003 Estimated                      2002 Estimated
                                                      Fair                                Fair
        Security Description                          Value         Percentage            Value         Percentage
  -------------------------------------------------------------------------------------------------------------------
  Commercial mortgage-backed securities:
<S>                                                    <C>               <C>             <C>               <C>
  CMBS IOs                                             $51,829           2.9%            $43,634           4.5%
  Investment grade CMBS                                251,333          13.9              55,120           5.7
  Non-investment grade rated
  subordinated securities                              683,810          37.9             577,371          59.3
  Non-rated subordinated securities                     24,952           1.4              25,335           2.7
  Credit tenant lease                                    8,979           0.5               9,063           0.9
  Investment grade REIT debt                           208,466          11.6             183,822          18.9
                                                 --------------------------------------------------------------------
       Total CMBS                                    1,229,369          68.2             894,345          92.0
                                                 --------------------------------------------------------------------

  Single-family residential mortgage-
  backed securities:
  Agency adjustable rate securities                    194,149          10.8              41,299           4.2
  Agency fixed rate securities                         365,208          20.2               8,833           0.9
  Residential CMOs                                       6,385           0.4              13,834           1.4
  Hybrid ARMs                                            8,354           0.4              14,751           1.5
                                                 --------------------------------------------------------------------
       Total RMBS                                      574,096          31.8              78,717           8.0
                                                 --------------------------------------------------------------------

                                                 --------------------------------------------------------------------
  Total securities available-for-sale               $1,803,465        100.0%            $973,062        100.0%
                                                 ====================================================================
</TABLE>

The increase in the CMBS and investment grade REIT debt is attributable to
acquisitions made due to the attractive opportunities available to the Company
to match fund these assets in its two CDOs. The increase in the RMBS from
December 31, 2002 is attributable to the March 31, 2003 redesignation of RMBS
securities from trading to available-for-sale.

Borrowings: As of September 30, 2003, the Company's debt consisted of CDOs,
line-of-credit borrowings and reverse repurchase agreements, collateralized
by a pledge of most of the Company's securities available-for-sale,
securities held-for-trading and its commercial mortgage loans. The
Company's financial flexibility is affected by its ability to renew or
replace on a continuous basis its maturing short-term borrowings. As of
September 30, 2003, the Company had obtained financing in amounts and at
interest rates consistent with the Company's short-term financing objectives.

Under the lines of credit and reverse repurchase agreements, the lender
retains the right to mark the underlying collateral to market value. A
reduction in the value of its pledged assets would require the


                                    33
<PAGE>

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, 2003
                                           -----------------------------------------------------------------

                                            September 30, 2003       Maximum              Range of
                                                 Balance             Balance             Maturities
                                           -----------------------------------------------------------------
<S>                                               <C>                <C>                <C>    <C>
Collateralized debt obligations                   $684,875           $684,875           8.2 to 9.9 years
Reverse repurchase agreements                    1,049,118          1,858,434             2 to 29 days
Line of credit and term loan borrowings             73,964             73,964            192 to 654 days
                                           -----------------------------------------------------------------
</TABLE>

Hedging Instruments: From time to time, the Company may reduce its exposure to
market interest rates by entering into various financial instruments that adjust
portfolio duration. These financial instruments are intended to mitigate the
effect of changes in interest rates on the value of certain assets in the
Company's portfolio. At September 30, 2003, the Company had outstanding short
positions of 1,653 ten-year U.S. Treasury Note future contracts. At December 31,
2002, the Company had outstanding short positions of 3,166 five-year and 1,126
ten-year U.S. Treasury Note future contracts.

As of September 30, 2003 and December 31, 2002, the Company's interest rate swap
agreements had unamortized costs of zero and consisted of the following:

                                             September 30, 2003
                                                                 Weighted
                                                                  Average
                                    Notional       Estimated      Remaining
                                      Value         Fair Value     Term
                                   ----------------------------------------
    Interest rate swaps              $1,150,400     $(10,233)   3.22 years
    Interest rate swaps - CDO           628,410      (31,338)   9.43 years
                                   ----------------------------------------
    Total                            $1,778,810     $(41,571)   5.41 years
                                   ========================================


                                              December 31, 2002
                                                                 Weighted
                                                                  Average
                                    Notional       Estimated      Remaining
                                      Value         Fair Value     Term
                                   ----------------------------------------
    Interest rate swaps                $489,000     $(11,948)    1.79 years
    Interest rate swaps - CDO           653,832      (33,654)    9.60 years
                                   ----------------------------------------
    Total                            $1,142,832     $(45,602)    6.31 years
                                   ========================================



                                    34
<PAGE>

As of September 30, 2003, the Company had designated $1,167,265 notional of the
interest rate swap agreements as cash flow hedges. As of December 31, 2002, the
Company had designated $771,287 notional of the interest rate swap agreements as
cash flow hedges.

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 Company's primary sources of funds for liquidity consist
of collateralized borrowings, principal and interest payments on and maturities
of securities available-for-sale, securities held-for-trading and commercial
mortgage loans and proceeds from the maturity or sales thereof.

To the extent that the Company may become unable to maintain its borrowings at
their current level due to changes in the financing markets for the Company's
assets, the Company may be required to sell assets in order to achieve lower
borrowing levels. In this event, the Company's level of net income would
decline. The Company's principal strategies for mitigating this risk are to
maintain portfolio leverage at levels it believes are sustainable and to
diversify the sources and types of available borrowing and capital. The Company
has utilized committed bank facilities and preferred stock offerings and may
consider resecuritization or other achievable term funding of existing assets.
At September 30, 2003, the Company's CDOs made up 39% of the Company's
liabilities, and were match funded against the CDO collateral.

On May 29, 2003, the Company authorized and issued 2,300,000 shares of Series C
Preferred Stock, par value $0.001 per share. The Series C Preferred Stock is
perpetual, carries a 9.375% coupon, and has a preference in liquidation of
$57,500. The aggregate net proceeds to the Company (after deducting underwriting
fees and expenses) were approximately $55,513.

On May 29, 2003, the Company redeemed 155,000 shares of the Company's Series B
Preferred Stock at its liquidation value of $25 per share.

In March 2002, the holder of the Company's Series A Preferred Stock converted
its remaining 10,000 shares of the Series A Preferred Stock into 34,427 shares
of Common Stock at a price of $7.26 per share pursuant to the terms of such
preferred stock, which is $0.09 per share lower than the original conversion
price due to the effects of anti-dilution provisions in the Series A Preferred
Stock.

For the nine months ended September 30, 2003, the Company issued 1,355,006
shares of Common Stock under its Dividend Reinvestment and Stock Purchase Plan.
Net proceeds to the Company were approximately $7,416 and $15,113, respectively.

For the nine months ended September 30, 2003, the Company issued 45,000 shares
of common stock of the Company, par value $0.001 per share (the "Common Stock")
under a sale agency agreement with Brinson Patrick Securities Corporation. Net
proceeds to the Company were approximately $497.

As of September 30, 2003, $118,641 of the Company's $185,000 committed credit
facility with Deutsche Bank, AG was available for future borrowings. As of
September 30, 2003, $67,395 of the Company's $75,000 committed credit facility
with Greenwich Capital, Inc, was available for future borrowings.

                                    35
<PAGE>

The Company's operating activities provided (used) cash flows of $462,067 and
$(373,950) during the nine months ended September 30, 2003 and 2002,
respectively, primarily through net income (loss) and sales of trading
securities in excess of purchases.

The Company's investing activities (used) provided cash flows totaling
$(106,563) and $361,553 during the nine months ended September 30, 2003 and
2002, respectively, primarily to purchase securities available-for-sale offset
by significant sales of those securities.

The Company's financing activities (used) provided $(340,625) and $1,810 during
the nine months ended September 30, 2003 and 2002, respectively, primarily from
reductions of the level of short-term borrowings, partially offset by the Series
C Preferred Stock offering in 2003.

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 have, sufficient cash flows from
its portfolio to fund dividends to stockholders.

The Company is subject to various covenants in its lines of credit, including
maintaining a minimum GAAP net worth of $305,000, a debt-to-equity ratio not to
exceed 5.5 to 1, a minimum cash requirement based upon certain debt to equity
ratios, a minimum debt service coverage ratio of 1.5 and a minimum liquidity
reserve of $10,000. As a result of the loss incurred for the third quarter of
2003, the Company did not maintain the minimum debt service coverage ratio for
the quarter of 1.5 required by one of its lenders; however, the respective
lender agreed to waive this requirement. As of September 30, 2003, the Company
was in compliance with all other covenants.

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

Contingent Liability

On May 15, 2000, the Company completed the acquisition of CORE Cap, Inc.
The merger was a stock for stock acquisition where the Company issued
4,180,552 shares of Common Stock and 2,261,000 shares of Series B Preferred
Stock. At the time of the CORE Cap acquisition, the Manager agreed to pay
GMAC (CORE Cap, Inc.'s external advisor) $12,500 over a ten-year period
(the "Installment Payment") to purchase the right to manage the assets
under the existing management contract (the "GMAC Contract"). The GMAC
Contract had to be terminated in order to allow for the Company to complete
the merger, as the Company's Management Agreement with the Manager did not
provide for multiple managers. As a result, the Manager offered to buy-out
the GMAC Contract as the Manager estimated it would receive incremental
fees above and beyond the Installment Payment, and thus was willing to pay
for, and separately negotiate, the termination of the GMAC


                                    36
<PAGE>

Contract. Accordingly, the value of the Installment Payment was not
considered in the Company's allocation of its purchase price to the net
assets acquired in the acquisition of CORE Cap, Inc. The Company agreed
that should the Management Agreement with its Manager be terminated, not
renewed or not extended for any reason other than for cause, the Company
would pay to the Manager an amount equal to the Installment Payment less
the sum of all payments made by the Manager to GMAC. As of September 30,
2003, the Installment Payment would be $8,000 payable over seven years. The
Company does not accrue for this contingent liability.

Transactions with Affiliates

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

On March 6, 2003, the unaffiliated directors approved an extension of the
Management Agreement from its expiration of March 27, 2003 for one year through
March 31, 2004. The terms of the renewed agreement are similar to the prior
agreement except for the incentive fee calculation which provides for a rolling
four-quarter high watermark rather than a quarterly calculation. In determining
the rolling four-quarter high watermark, the Company calculates the incentive
fee as defined, based upon the current and prior three quarters' net income
(loss). The Manager would be paid an incentive fee in the current quarter if the
Yearly Incentive Fee is greater than what was paid to the Manager in the prior
three quarters cumulatively. The Company commenced the phase-in of the rolling
four-quarter high watermark commencing during the second quarter of 2003.
Calculation of the incentive fee is based on GAAP and adjusted to exclude
special one-time events pursuant to changes in GAAP accounting pronouncements
after discussion between the Manager and the unaffiliated directors. The high
watermark is based on the existing incentive fee hurdle, which provides for the
Manager to be paid 25% of the amount of earnings (calculated in accordance with
GAAP) per share that exceeds the product of the adjusted issue price of the
Company's common stock per share ($11.38 as of September 30, 2003) and the
greater of 9.5% or 350 basis points over the ten-year Treasury note, which
equates to an annual net income threshold of $1.08 per share.

The Company pays the Manager an annual base management fee equal to a percentage
of the average invested assets of the Company as defined in the Management
Agreement. The base management fee 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 0.20% of average invested assets rated above BB+.
During the third quarter of 2003, the Manager agreed to reduce the management
fees by 20% for the third quarter of 2003 and the subsequent two quarters. This
reduction resulted in $529 of savings for the third quarter of 2003.


                                    37

<PAGE>

The Company incurred $2,115 and $7,341 in base management fees in accordance
with the terms of the Management Agreement for the three and nine months ended
September 30, 2003, respectively, and $2,376 and $6,872 in base management fees
for the three and nine months ended September 30, 2002, respectively. In
accordance with the provisions of the Management Agreement, the Company recorded
reimbursements to the Manager of $11 and $29 for certain expenses incurred on
behalf of the Company during the three and nine months ended September 30, 2003,
respectively, and $0 and $11 for the three and nine months ended September 30,
2002, respectively.

Pursuant to the March 25, 2002 one-year Management Agreement extension, the
incentive fee paid to the Manager was based on 25% of earnings (calculated in
accordance with GAAP) of the Company. For purposes of calculating the incentive
fee during 2002, the cumulative transition adjustment of $6,327 resulting from
the Company's adoption of SFAS 142 was excluded from earnings in its entirety
and included using an amortization period of three years. The Company incurred
$6 and $3,195 in incentive compensation for the three and nine months ended
September 30, 2002. There was no incentive fee due to the Manager for the three
or nine months ended September 30, 2003.

The Company has an administration agreement with the Manager. Under the terms of
the administration agreement, the Manager provides financial reporting, audit
coordination and accounting oversight services to the Company. The Company pays
the Manager a monthly administrative fee at an annual rate of 0.06% of the first
$125 million of average net assets, 0.04% of the next $125 million of average
net assets and 0.03% of average net assets in excess of $250 million subject to
a minimum annual fee of $120. For the three and nine months ended September 30,
2003, the administration fee was $44 and $130, respectively. For the three and
nine months ended September 30, 2002, the administration fee was $42 and $128,
respectively.

The Company has entered into a $50 million commitment to acquire shares in
Carbon Capital, Inc. ("Carbon"), a private commercial real estate income
opportunity fund managed by the Manager. The period during which the Company may
be required to purchase shares under the commitment expires in July 2004. On
September 30, 2003, the Company owned 18.8% of the outstanding shares in Carbon.
The Company's remaining commitment at September 30, 2003 was $23,034.

REIT Status

The Company has elected to be taxed as a REIT and therefore must comply with the
provisions of the Internal Revenue Code of 1986 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 or at excise tax rates on net income or capital gains
not distributed.


                                    38
<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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


                                    39
<PAGE>

Company's objective is to acquire assets with match funded liabilities that
will reduce or eliminate interest rate risk associated with financing these
assets. The primary risks associated with financing these assets are mark
to market risk and short-term rate risk. Examples of this include 30-day
repurchase agreements and committed borrowing facilities. Certain secured
financing arrangements provide for an advance rate based upon a percentage
of the market value of the asset being financed . Market movements that
cause asset values to decline will require a margin call or a cash payment
to maintain the relationship between asset value and amount borrowed. A
cash flow based CDO is an example of a secured financing vehicle that does
not require a mark to market to establish or maintain a level of financing.
The Company also monitors the interest rate sensitivity of net assets
financed in a way that requires a mark to market. The duration of that
portfolio was 1.73 years as of September 30, 2003.

The following tables quantify the potential changes in the book value of the
Company's Common Stock and net earnings per share of common stock under various
interest rates and credit spread scenarios. In prior quarters, the Company
reported interest rate sensitivity of the value of its portfolio in terms of net
portfolio value, which was defined as total interest earning assets less
interest bearing liabilities. This change will incorporate the effect of the
increased amount of preferred stock in relation to the net capital of the
Company. This Company's reported book value incorporates the market value of the
Company's interest bearing assets but it does not incorporate the market value
of the Company's interest bearing liabilities. The fixed rate interest bearing
liabilities and preferred stock will generally reduce the actual interest rate
risk of the Company from a pure economic perspective even though changes in the
value of these liabilities are not reflected in the Company's book value. The
Company seeks to maintain economic duration within a band of 3.25 to 4.75 years.

Earnings per share is evaluated using the assumptions that interest rates, as
defined by the LIBOR curve, increase or decrease and that the yield curves of
the LIBOR rate shocks will be parallel to each other. Market value in this
scenario is calculated using the assumption that the U.S. Treasury yield curve
remains constant even though changes in both long and short-term interest rates
can occur simultaneously.

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, 2003. Actual
results could differ significantly from these estimates.

                       Projected Percentage Change In
                    Reported Book Value of Common Stock
                 Given U.S. Treasury Yield Curve Movements

                  Change in               Projected Change in
            Treasury Yield Curve,       Reported Book Value of
               +/- Basis Points              Common Stock
          ------------------------------------------------------
                     -200                        9.1%
                     -100                        5.5%
                     -50                         3.0%
                  Base Case
                     +50                        (3.4%)
                     +100                       (7.3%)
                     +200                       (16.3%)



                                    40

<PAGE>


                       Projected Percentage Change In
                       Given Credit Spread Movements

                    Change in                Projected Change in
                 Credit Spreads,           Reported Book Value of
                 +/- Basis Points               Common Stock
             ------------------------------------------------------
                       -200                         17.8%
                       -100                         9.8%
                       -50                          5.1%
                    Base Case                         0
                       +50                         (5.6%)
                       +100                        (11.6%)
                       +200                        (25.0%)



                       Projected Percentage Change In
                             Earnings Per Share
                           Given LIBOR Movements

                 Change in LIBOR,           Projected Change in
                 +/- Basis Points            Earnings per Share
             ------------------------------------------------------
                       -100                       $(0.006)
                       -50                        $(0.003)
                    Base Case                        0
                       +50                         $0.003
                       +100                        $0.006
                       +200                        $0.012

The aggregate sensitivity to short-term rates has declined significantly from a
projected change in portfolio net interest income per share of $(0.05) for a 50
basis point increase at September 30, 2002.

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

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


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<PAGE>

to changes in these assumptions. The lowest rated securities (B- or lower)
are generally more sensitive to changes in timing of actual losses. The
higher rated securities (B or higher) are more sensitive to the severity of
losses.

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

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

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

For purposes of illustration, a doubling of the losses in the Company's
Controlling Class CMBS, without a significant acceleration of those losses,
would reduce GAAP income going forward by approximately $0.25 per share of
Common Stock per year and cause a significant write down at the time the loss
assumption is changed. The amount of the write down depends on several
factors, including which securities are most affected at the time of the write
down, but is estimated to be in the range of $0.80 to $1.10 per share based on
a doubling of expected losses. A significant acceleration of the timing of
these losses would cause the Company's net income to decrease. The Company's
exposure to a write down is mitigated by the fact that most of these assets
are financed on a non-recourse basis in the Company's CDOs, where a
significant portion of the risk of loss is transferred to the CDO bondholders.
Securities with a total market value of $744,966 are collateralizing the CDO
borrowings of $684,875. As of September 30, 2003, $60,091 ($1.24 per share) is
the Company's mark to market equity in the two CDOs. The CDO borrowings are
not marked to market in accordance with GAAP even though their economic value
will change in response to changes in interest rates and/or credit spreads.

Asset and Liability Management: Asset and liability management is concerned
with the timing and magnitude of the repricing and/or maturing of assets and
liabilities. It is the Company's objective to attempt to control risks
associated with interest rate movements. In general, management's strategy is
to match the term of the Company's liabilities as closely as possible with the
expected holding period of the


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<PAGE>

Company's assets. This is less important for those assets in the Company's
portfolio considered liquid as there is a very stable market for the
financing of these securities.

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


ITEM 4.       CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.

(b) Internal Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.



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<PAGE>

Part II - OTHER INFORMATION

ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 25, 2003, the Company issued 7,700 shares of Common Stock for an
aggregate amount of $65,162 to a director of the Company and a former director
of a company that was acquired by the Company pursuant to the exercise of stock
options held by such director. These shares were issued in a private placement
pursuant to Section 4(2) of the Securities Act of 1933, as amended.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

31.1      Certification of Chief Executive Officer pursuant to Rules 13a-14(a)
          and 15d-14(a) promulgated under the Securities Exchange Act of 1934,
          as amended.

31.2      Certification of Chief Financial Officer pursuant to Rules 13a-14(a)
          and 15d-14(a) promulgated under the Securities Exchange Act of 1934,
          as amended.

32.1      Certification of Chief Executive Officer and Chief Financial Officer
          pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On August 6, 2003, the Company filed a Current Report on Form 8-K to report
under Item 5 the Company's earnings for the quarter ended June 30, 2003.

On September 25, 2003, the Company filed a Current Report on Form 8-K to
report under Item 5 the Company's announcement of an acceleration of its
strategic reduction in residential mortgage backed securities, as well as
the declaration of a cash dividend on the Common Stock for the quarter
ending September 30, 2003.


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<PAGE>

                                   SIGNATURES


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



                                         ANTHRACITE CAPITAL, INC.



Dated:  November 14, 2003                By:  /s/ Hugh R. Frater
                                              ---------------------------------
                                         Name:  Hugh R. Frater
                                         Title: President and Chief Executive
                                                Officer





Dated:  November 14, 200                 By: /s/ Richard M. Shea
                                              ---------------------------------
                                         Name:  Richard M. Shea
                                         Title: Chief Operating Officer
                                                and Chief Financial Officer


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