**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-Q**





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





For
      the
      quarterly period ended March 31, 2007





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
              (State
                or other jurisdiction of
              incorporation
                or organization)
            13-3978906
              (I.R.S.
                Employer
              Identification
                No.)40
                East 52ndStreet, New York, New York
              (Address
                of principal executive offices)
            10022
              (Zip
                Code)





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





NOT
      APPLICABLE


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





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


(1)
            YesX
            
            No (2)
            Yes X
            
            No




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filero
            Accelerated
                filerþ
            Non-accelerated
                filero





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




(1)
              Yes __
              
              No X





At
      May 9,
      2007, 58,370,881 shares of common stock ($.001 par value per share) were
      outstanding.







ANTHRACITE
      CAPITAL, INC.


FORM
      10-Q


INDEX




PART
                  I –
                  FINANCIAL
                  INFORMATION
              PageItem
                  1.
              Financial
                  Statements
              4Consolidated
                  Statements of Financial Condition (Unaudited) At March 31, 2007
                  and
                  December 31, 2006
              4Consolidated
                  Statements of Operations (Unaudited) For the Three Months Ended
                  March 31,
                  2007 and 2006
              5Consolidated
                  Statement of Changes in Stockholders' Equity (Unaudited) For the
                  Three
                  Months Ended March 31, 2007
              6Consolidated
                  Statements of Cash Flows (Unaudited) For the Three Months Ended
                  March 31,
                  2007 and 2006
              7Notes
                  to Consolidated Financial Statements (Unaudited)
              9Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              26Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              53Item
                  4.
              Controls
                  and Procedures
              57Part
                  II –
                  OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              58Item
                  1A.
              Risk
                  Factors
              61Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              61Item
                  3.
              Defaults
                  Upon Senior Securities
              61Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              61Item
                  5.
              Other
                  Information
              61Item
                  6.
              Exhibits
              61SIGNATURES
              63




2


**Cautionary
      Statement Regarding Forward-Looking Statements**




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





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





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


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


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


(4)
      the
      impact of increased competition;


(5)
      the
      impact of future acquisitions or divestitures;


(6)
      the
      unfavorable resolution of legal proceedings;


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


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


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


(10)
      fluctuations in foreign currency exchange rates; and


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





Anthracite’s
      Annual Report on Form 10-K for the year ended December 31, 2006 and Anthracite’s
      subsequent reports filed with the SEC, accessible on the SEC's website at www.sec.gov,
      identify additional factors that can affect forward-looking
      statements.





3


Part
      I –
      FINANCIAL INFORMATION


Item
      1.  Financial
      Statements




**Anthracite
      Capital, Inc. and Subsidiaries**


**Consolidated
      Statements of Financial Condition**


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




March
                31, 2007
            
            December
                31, 2006**(unaudited)****ASSETS**Cash
                and cash equivalents
            
            
            
            
            $
            53,816
            
            
            
            
            $
            66,388Restricted
                cash equivalents
            
            
            
            
            
            8,627
            
            
            
            
            
            59,801Securities
                available-for-sale, at fair valueSubordinated
                commercial mortgage-backed securities (“CMBS”)
            
            $
            990,226
            
            
            
            
            $
            883,432Investment
                grade CMBS
            
            
            1,607,096
            
            
            
            
            
            1,588,284RMBS
            
            
            138,471
            
            
            
            
            
            144,140Total
                securities available-for-sale
            
            
            
            
            
            2,735,793
            
            
            
            
            
            2,615,856Commercial
                mortgage loan pools, at amortized cost
            
            
            
            
            
            1,257,631
            
            
            
            
            
            1,271,014Securities
                held-for-trading, at estimated fair valueCMBS
            
            
            21,492
            
            
            
            
            
            22,383RMBS
            
            
            1,001
            
            
            
            
            
            132,204Total
                securities held-for-trading
            
            
            
            
            
            22,493
            
            
            
            
            
            154,587Commercial
                mortgage loans, net
            
            
            
            
            
            674,094
            
            
            
            
            
            481,745Equity
                investments
            
            
            
            
            
            211,475
            
            
            
            
            
            182,147Derivative
                instruments, at fair value
            
            
            
            
            
            356,982
            
            
            
            
            
            317,574Other
                assets
            
            
            
            
            
            67,475
            
            
            
            
            
            69,151Total
                Assets
            
            
            
            
            $
            5,388,386
            
            
            
            
            $
            5,218,263**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Liabilities:Borrowings:Collateralized
                debt obligations (“CDOs”)
            
            $
            1,828,168
            
            
            
            
            $
            1,812,574Secured
                by pledge of subordinated CMBS
            
            
            81,763
            
            
            
            
            
            48,628Secured
                by pledge of other securities available-for-sale
              and
                cash equivalents
            
            
            634,396
            
            
            
            
            
            666,275Secured
                by pledge of commercial mortgage loan pools
            
            
            1,243,124
            
            
            
            
            
            1,256,897Secured
                by pledge of securities held-for-trading
            
            
            -
            
            
            
            
            
            127,249Secured
                by pledge of commercial mortgage loans
            
            
            116,810
            
            
            
            
            
            26,570Senior
                unsecured notes
            
            
            75,000
            
            
            
            
            
            75,000Junior
                subordinated notes to subsidiary trust issuing preferred
              Securities
            
            
            180,477
            
            
            
            
            
            180,477Total
                borrowings
            
            
            
            
            
            4,159,738
            
            
            
            
            
            4,193,670Payable
                for investments purchased
            
            
            
            
            
            75,920
            
            
            
            
            
            23,796Distributions
                payable
            
            
            
            
            
            18,742
            
            
            
            
            
            17,669Derivative
                instruments, at fair value
            
            
            
            
            
            350,730
            
            
            
            
            
            304,987Other
                liabilities
            
            
            
            
            
            34,161
            
            
            
            
            
            22,032Total
                Liabilities
            
            
            
            
            
            4,639,291
            
            
            
            
            
            4,562,154Commitments
                and ContingenciesStockholders’
                Equity:Common
                Stock, par value $0.001 per share; 400,000,000 shares
              authorized;
              58,322,480
                shares issued and outstanding in 2007;
              57,830,964
                shares issued and outstanding in 2006
            
            
            
            
            
            58
            
            
            
            
            
            589.375%
                Series C Preferred stock, liquidation preference $57,500
            
            
            
            
            
            55,435
            
            
            
            
            
            55,4358.25%
                Series D Preferred stock, liquidation preference $86,250
            
            
            
            
            
            83,306
            
            
            
            
            
            -Additional
                paid-in capital
            
            
            
            
            
            635,766
            
            
            
            
            
            629,785Distributions
                in excess of earnings
            
            
            
            
            
            (113,888
            )
            
            
            
            
            (120,976
            )Accumulated
                other comprehensive income
            
            
            
            
            
            88,418
            
            
            
            
            
            91,807Total
                Stockholders’ Equity
            
            
            
            
            
            749,095
            
            
            
            
            
            656,109Total
                Liabilities and Stockholders’ Equity
            
            
            
            
            $
            5,388,386
            
            
            
            
            $
            5,218,263




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




4


**Anthracite
      Capital, Inc. and Subsidiaries**


**Consolidated
      Statements of Operations (Unaudited)**


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





For
                the three months ended March 31,2007
            
            2006Income:Interest
                from securities available-for-sale
            
            $
            46,674
            
            $
            38,897Interest
                from commercial mortgage loans
            
            
            11,166
            
            
            8,015Interest
                from commercial mortgage loan pools
            
            
            13,132
            
            
            13,227Interest
                from securities held-for-trading
            
            
            1,506
            
            
            1,925Earnings
                from equity investments
            
            
            9,956
            
            
            9,342Interest
                from cash and cash equivalents
            
            
            924
            
            
            337Total
                Income
            
            
            83,358
            
            
            71,743Expenses:Interest
            
            
            54,365
            
            
            44,632Interest
                - securities held-for-trading
            
            
            1,474
            
            
            1,893Management
                and incentive fees
            
            
            6,953
            
            
            4,219General
                and administrative expense
            
            
            1,305
            
            
            1,104Total
                Expenses
            
            
            64,097
            
            
            51,848Other
                gains:Sale
                of securities available-for-sale
            
            
            6,750
            
            
            34Securities
                held-for-trading
            
            
            (17
            )
            
            950Foreign
                currency gain
            
            
            1,484
            
            
            44Loss
                on impairment of assets
            
            
            (1,198
            )
            
            (781
            )Total
                Other Gains
            
            
            7,019
            
            
            247Net
                income
            
            
            26,280
            
            
            20,142Dividends
                on Preferred Stock
            
            
            (2,277
            )
            
            (1,348
            )Net
                income available to Common Stockholders
            
            $
            24,003
            
            $
            18,794Net
                income per common share, basic
            
            $
            0.41
            
            $
            0.33Net
                income per common share, diluted
            
            $
            0.41
            
            $
            0.33Weighted
                average number of shares outstanding:Basic
            
            
            57,853,694
            
            
            56,671,961Diluted
            
            
            58,139,455
            
            
            56,677,680Dividend
                declared per share of Common Stock
            
            $
            0.29
            
            $
            0.28





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




5


**Anthracite
      Capital, Inc. and Subsidiaries**


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


**For
      the Three Months Ended March 31, 2007**


**(in
      thousands)**




Common
              Stock,
              Par
                Value
            
            SeriesC
              Preferred
              Stock
            
            SeriesD
              Preferred
              Stock
            
            Additional
              Paid-In
              Capital
            
            Distributions
              In
                Excess
              Of
                Earnings
            
            Accumulated
              Other
              Comprehensive
              Income
                (Loss)
            
            Comprehensive
              Income
            
            Total
              Stockholders'
              EquityBalance
                at January 1, 2007
            
            $
            58
            
            $
            55,435
            
            
            
            
            $
            629,785
            
            $
            (120,976
            )
            $
            91,807
            
            
            
            
            $
            656,109Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            26,280
            
            
            
            
            $
            26,280
            
            
            26,280Unrealized
                gain on cash flow hedges
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,920
            )
            
            (4,920
            )
            
            (4,920
            )Reclassification
                adjustments from cash flow hedges included in net loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            408
            
            
            408
            
            
            408Foreign
                currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            61
            
            
            61
            
            
            61Change
                in net unrealized gain on securities available-for-sale, net of
                reclassification adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,062
            
            
            1,062
            
            
            1,062Other
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,389
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,891Dividends
                declared-common stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (16,915
            )
            
            
            
            
            
            
            
            (16,914
            )Dividends
                on preferred stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,277
            )
            
            
            
            
            
            
            
            (2,278
            )Issuance
                of common stock
            
            
            -
            
            
            
            
            
            
            
            
            5,981
            
            
            
            
            
            
            
            
            
            
            
            5,981Issuance
                of preferred stock
            
            
            
            
            
            
            
            $
            83,306
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            83,306Balance
                at March 31, 2007
            
            $
            58
            
            $
            55,435
            
            $
            83,306
            
            $
            635,766
            
            $
            (113,888
            )
            $
            88,418
            
            
            
            
            $
            749,095





**Disclosure
                of reclassification adjustment:**
            
            For
                the three months
              ended
                March 31,2007Unrealized
                holding gain (loss) on securities available-for-sale
            
            $
            (5,688
            )Reclassification
                for realized gains previously recorded as unrealized
            
            
            6,750$
            1,062





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




6


**Anthracite
      Capital, Inc. and Subsidiaries**


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


**(in
      thousands)**




For
                the Three
              Months
                Ended
              March
                31,2007
            
            For
                the Three
              Months
                Ended
              March
                31, 2006Cash
                flows from operating activities:Net
                income
            
            $
            26,280
            
            $
            20,142Adjustments
                to reconcile net income to net cash provided by operating activities:Decrease
                in trading securities
            
            
            132,076
            
            
            11,904Net
                (gain) on sale of securities
            
            
            (6,733
            )
            
            (984
            )Earnings
                from subsidiary trust
            
            
            (103
            )
            
            (79
            )Distributions
                from subsidiary trust
            
            
            105
            
            
            51Earnings
                from equity investments
            
            
            (9,956
            )
            
            (9,342
            )Distributions
                of earnings from equity investments
            
            
            3,637
            
            
            6,862Amortization
                of collateralized debt obligation issuance costs
            
            
            819
            
            
            553Amortization
                of junior subordinated note issuance costs
            
            
            46
            
            
            30Amortization
                of senior unsecured notes issuance costs
            
            
            34
            
            
            -(Discount
                accretion) Premium amortization, net
            
            
            (634
            )
            
            136Loss
                on impairment of assets
            
            
            1,198
            
            
            781Unrealized
                net foreign currency gain
            
            
            (563
            )
            
            (390
            )Non-cash
                management and incentive fees
            
            
            709
            
            
            351Proceeds
                from sale of interest rate swap agreements
            
            
            1,693
            
            
            -Decrease
                in other assets
            
            
            1,590
            
            
            16,329Increase
                (decrease) in other liabilities
            
            
            15,853
            
            
            (3,445
            )Net
                cash provided by operating activities
            
            
            166,051
            
            
            42,899Cash
                flows from investing activities:Purchase
                of securities available-for-sale
            
            
            (125,060
            )
            
            (322,642
            )Proceeds
                from sale of securities available-for-sale
            
            
            48,984
            
            
            -Principal
                payments received on securities available-for-sale
            
            
            14,504
            
            
            12,538Repayments
                received from commercial mortgage loan pools
            
            
            10,064
            
            
            2,115Purchase
                of real estate held-for-sale
            
            
            -
            
            
            (5,435
            )Funding
                of commercial mortgage loans
            
            
            (194,509
            )
            
            (48,883
            )Repayments
                received from commercial mortgage loans
            
            
            9,478
            
            
            48,385Decrease
                in restricted cash equivalents
            
            
            51,174
            
            
            117Return
                of capital from equity investments
            
            
            -
            
            
            11,857Investment
                in equity investments
            
            
            (23,009
            )
            
            (48,216
            )Net
                cash used in investing activities
            
            
            (208,374
            )
            
            (350,104
            )Cash
                flows from financing activities:Net
                (decrease) increase in borrowings under reverse repurchase agreements
                and
              credit
                facilities
            
            
            (36,630
            )
            
            210,619Repayments
                of borrowings secured by commercial mortgage loan pools
            
            
            (10,140
            )
            
            (1,908
            )Issuance
                of collateralized debt obligations
            
            
            11,476
            
            
            -Repayments
                of collateralized debt obligations
            
            
            (851
            )
            
            (603
            )Issuance
                costs for collateralized debt obligations
            
            
            (838
            )
            
            -Issuance
                of junior subordinated notes to subsidiary trust
            
            
            -
            
            
            100,000Issuance
                costs of junior subordinated notes
            
            
            -
            
            
            (3,075
            )Dividends
                paid on preferred stock
            
            
            (1,348
            )
            
            (1,348
            )Proceeds
                from issuance of preferred stock, net of offering costs
            
            
            83,306
            
            
            -Proceeds
                from issuance of common stock, net of offering costs
            
            
            1,548
            
            
            6,329Dividends
                paid on common stock
            
            
            (16,772
            )
            
            (15,775
            )Net
                cash provided by financing activities
            
            
            29,751
            
            
            294,239




Net
                decrease in cash and cash equivalents
            
            
            (12,572
            )
            
            (12,966
            )Cash
                and cash equivalents, beginning of period
            
            
            66,388
            
            
            40,556Cash
                and cash equivalents, end of period
            
            $
            53,816
            
            $
            27,590





2007
            
            2006Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            52,910
            
            $
            44,129Investments
                purchased not settled
            
            $
            54,562
            
            $
            20,660Commercial
                mortgage loans purchased not settled
            
            $
            21,358
            
            
            -Supplemental
                disclosure of non-cash investing and financing activities:Investment
                in subsidiary trust
            
            
            -
            
            $
            3,097Incentive
                fees paid by the issuance of common stock
            
            $
            4,433
            
            $
            1,287








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




7


**Anthracite
      Capital, Inc. and Subsidiaries**


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


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





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





Anthracite
      Capital, Inc., a Maryland corporation, and its subsidiaries (the "Company")
      is a
      specialty finance company that invests in commercial real estate assets on
      a
      global basis. The Company primarily generates income based on the spread between
      the interest income, gains and net operating income on its commercial real
      estate assets and the interest expense from borrowings to finance its
      investments. The Company seeks to earn high returns on a risk-adjusted basis
      to
      support a consistent quarterly dividend. The Company has elected to be taxed
      as
      a real estate investment trust (“REIT”) under the United States Internal Revenue
      Code of 1986, as amended (the "Code") and, therefore, its income is largely
      exempt from corporate taxation. The Company commenced operations on March 24,
      1998.





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


1)  Commercial
      Real Estate Securities


2)  Commercial
      Real Estate Loans


3)  Commercial
      Real Estate Equity





The
      accompanying March 31, 2007 unaudited consolidated financial statements have
      been prepared in conformity with the instructions to Form 10-Q and Article
      10,
      Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
      they
      do not include all of the information and footnotes required by accounting
      principles generally accepted in the United States of America (“GAAP”) for
      complete financial statements. In the opinion of management, all adjustments
      (which include only normal recurring adjustments) necessary to present fairly
      the financial position, results of operations and changes in cash flows have
      been made. These consolidated financial statements should be read in conjunction
      with the annual audited financial statements and notes thereto included in
      the
      Company’s annual report on Form 10-K for the year ended December 31, 2006 filed
      with the Securities and Exchange Commission (the “SEC”).





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





***Recent
      Accounting Developments***





*Fair
      Value Accounting*





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 permits entities to choose to measure eligible financial instruments
      at
      fair value. The unrealized gains and losses on items for which the fair value
      option has been elected should be reported in earnings. The decision to elect
      the fair value options is determined on an instrument-by-instrument basis,
      it
      should be applied to an entire instrument, and it is irrevocable. Assets and
      liabilities measured at fair value pursuant to the fair value option should
      be
      reported separately in the balance sheet from those instruments measured using
      another measurement attribute. SFAS No. 159 is effective as of the beginning
      of
      the first fiscal year that begins after November 15, 2007. The Company is
      currently analyzing the potential impact of adoption of SFAS No.
      159.





8


*Reverse
      Repurchase Agreements*





Accounting
      standard setters are currently reviewing the
      treatment of transactions where mortgage-backed securities purchased from a
      particular counterparty are financed via a repurchase agreement with the same
      counterparty. Currently, the Company records such assets and the related
      financing gross on its consolidated statement of financial condition, and the
      corresponding interest income and interest expense gross on the consolidated
      statement of operations. Any change in fair value of the security is reported
      through other comprehensive income pursuant to SFAS No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities,* because
      the security is classified as available-for-sale. However, in a transaction
      where the mortgage-backed securities are acquired from and financed under a
      repurchase agreement with the same counterparty, the acquisition may not qualify
      as a sale from the seller's perspective under the provisions of SFAS No. 140.
      In
      such cases, the seller may be required to continue to consolidate the assets
      sold to the Company, based on their continuing involvement with such
      investments. Depending on the ultimate outcome of the accounting
      standard setters’ deliberations,
      the Company may be precluded from presenting the assets gross on the Company’s
      consolidated statement of financial condition and should instead be treating
      the
      Company’s net investment in such assets as a derivative.  If it is
      determined that these transactions should be treated as investments in
      derivatives, the derivative instruments entered into by the Company to hedge
      the
      Company's interest rate exposure with respect to the borrowings under the
      associated repurchase agreements may no longer qualify for hedge accounting,
      and
      would then, as with the underlying asset transactions, also be marked to market
      through the consolidated statement of operations.  This potential change in
      accounting treatment does not affect the economics of the transactions but
      does
      affect how the transactions would be reported on the Company’s consolidated
      financial statements. The Company's cash
      flows, liquidity and ability to pay a dividend would be unchanged, and the
      Company does not believe its REIT taxable income or REIT status would be
      affected. The Company believes net equity would not be materially affected.
      At
      March 31, 2007, the Company has identified available-for-sale securities with
      a
      fair value of approximately $49,007 which had been purchased from and financed
      with reverse repurchase agreements totaling approximately $37,962 with the
      same
      counterparty since their purchase.  If the Company were to change the
      current accounting treatment for these transactions at March 31, 2007, total
      assets and total liabilities would be reduced by approximately
      $37,962.





*Variable
      Interest Entities*





The
      consolidated financial statements include the financial statements of Anthracite
      Capital, Inc. and its subsidiaries, which are wholly owned or controlled by
      the
      Company or entities which are variable interest entitites (“VIEs”) in which the
      Company is the primary beneficiary under FASB Interpretation No. 46, *Consolidation
      of Variable Interest Entities* (revised
      December 2003) (“FIN 46R”). FIN 46R requires a VIE to be consolidated by its
      primary beneficiary. The primary beneficiary is the party that absorbs the
      majority of the VIE’s anticipated losses and/or the majority of the expected
      returns. All inter-company balances and transactions have been eliminated in
      consolidation.





9


The
      Company considers the CMBS securities where it maintains the right to influence
      the foreclosure/workout process on the underlying loans its controlling class
      CMBS (“Controlling Class”). The Company has analyzed the governing pooling and
      servicing agreements for each of its Controlling Class CMBS and believes that
      the terms are industry standard and are consistent with the qualifying
      special-purpose entity (“QSPE”) criteria. However, there is uncertainty with
      respect to QSPE treatment due to ongoing review by accounting standard setters,
      potential actions by various parties involved with the QSPE, as well as varying
      and evolving interpretations of the QSPE criteria under SFAS No. 140.
      Future guidance from the accounting standard setters may require the Company
      to
      consolidate CMBS trusts in which the Company has invested.





*Certain
      Hybrid Financial Instruments*





In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments* ,
      which
      amends SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* and SFAS
      No. 140. The Statement provides, among other things, that:




·  For
      embedded derivatives which would otherwise be required to be bifurcated from
      their host contracts and accounted for at fair value in accordance with SFAS
      No.
      133, an irrevocable election may be made on an instrument-by-instrument basis,
      to be measured as hybrid financial instrument at fair value in its entirety,
      with changes in fair value recognized in earnings.


·  Concentrations
      of credit risk in the form of subordination are not considered embedded
      derivatives.


·  Clarification
      regarding interest-only strips and principal-only strips are not subject to
      the
      requirements of SFAS No. 133.




SFAS
      No.
      155 is effective for all financial instruments acquired, issued or subject
      to
      remeasurement after the beginning of an entity’s first fiscal year that begins
      after September 15, 2006. Upon adoption, differences between the total carrying
      amount of the individual components of an existing bifurcated hybrid financial
      instrument and the fair value of the combined hybrid financial instrument should
      be recognized as a cumulative effect adjustment to beginning retained earnings.
      Prior periods should not be restated. The adoption of SFAS No. 155 on January
      1,
      2007 did not have a material impact on the Company’s consolidated financial
      statements.




*Accounting
      for Uncertainty in Income Taxes*





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes and Related Implementation
      Issues* (“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in a Company’s financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      prescribes a threshold and measurement attribute for recognition in the
      financial statements of an asset or liability resulting from a tax position
      taken or expected to be taken in a tax return. FIN 48 also provides guidance
      on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. FIN 48 is effective as of the beginning
      of
      fiscal years that begin after December 15, 2006. The adoption of FIN 48 on
      January 1, 2007 did not have a material impact on the Company’s consolidated
      financial statements.





*Fair
      Value Measurements*





In
      September 2006, the FASB issued SFAS No. 157 which defines fair value,
      establishes a framework for measuring fair value and requires enhanced
      disclosures about fair value measurements. SFAS No. 157 requires companies
      to
      disclose the fair value of its financial instruments according to a fair value
      hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are
      required to provide enhanced disclosure regarding instruments in the level
      3
      category (which require significant management judgment), including a
      reconciliation of the beginning and ending balances separately for each major
      category of assets and liabilities. SFAS No. 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007 and all
      interim periods within those fiscal years. The Company is currently evaluating
      the impact of adopting SFAS No. 157.





10





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





Net
      income per share is computed in accordance with SFAS No. 128, *Earnings
      Per Share* (“SFAS
      No. 128”). Basic income per share is calculated by dividing net income available
      to common stockholders by the weighted average number of shares of Common Stock
      outstanding during the period. Diluted income per share is calculated using
      the
      weighted average number of shares of Common Stock outstanding during the period
      plus the additional dilutive effect of common stock equivalents. The dilutive
      effect of outstanding stock options is calculated using the treasury stock
      method.




For
                the three months ended March
                31,2007
            
            2006Numerator:Net
                income available to common stockholders
            
            $
            24,003
            
            $
            18,794Numerator
                for basic and diluted earnings per share
            
            $
            24,003
            
            $
            18,794Denominator:Denominator
                for basic earnings per share—weighted average
              common
                shares outstanding
            
            
            57,853,694
            
            
            56,671,961Dilutive
                effect of stock options
            
            
            3,032
            
            
            5,718Dilutive
                effect of stock based incentive fee
            
            
            282,729
            
            
            -Denominator
                for diluted earnings per share—weighted average common shares outstanding
                and common stock equivalents outstanding
            
            
            58,139,455
            
            
            56,677,680Basic
                net income per weighted average common share:
            
            $
            0.41
            
            $
            0.33Diluted
                net income per weighted average common stock
              and
                common stock equivalents:
            
            $
            0.41
            
            $
            0.33





Total
      anti-dilutive stock options and warrants excluded from the calculation of net
      income per share were 1,380,151 and 1,384,151 for the three months ended March
      31, 2007, and 2006, respectively. ****





11


**Note
      3**   **SECURITIES
      AVAILABLE-FOR-SALE**





The
      Company's securities available-for-sale are carried at estimated fair value.
      The
      amortized cost and estimated fair value of securities available-for-sale at
      March 31, 2007 are summarized as follows:




Security
                Description
            
            Amortized
              Cost
            
            Gross
              Unrealized
              Gain
            
            Gross
              Unrealized
              Loss
            
            Estimated
              Fair
              ValueCMBS:CMBS
                interest only securities (“IOs”)
            
            $
            65,365
            
            $
            1,023
            
            $
            (1,848
            )
            $
            64,541Investment
                grade CMBS
            
            
            780,874
            
            
            48,518
            
            
            (8,265
            )
            
            821,126Non-investment
                grade rated subordinated securities
            
            
            747,042
            
            
            54,299
            
            
            (8,418
            )
            
            792,924Non-rated
                subordinated securities
            
            
            116,473
            
            
            9,509
            
            
            (435
            )
            
            125,547Credit
                tenant leases
            
            
            24,292
            
            
            438
            
            
            (443
            )
            
            24,288Investment
                grade REIT debt
            
            
            247,870
            
            
            5,671
            
            
            (2,380
            )
            
            251,161Multifamily
                agency securities
            
            
            447,547
            
            
            3,302
            
            
            (4,869
            )
            
            445,980CDO
                investments
            
            
            69,763
            
            
            4,652
            
            
            (2,659
            )
            
            71,755Total
                CMBS
            
            
            2,499,226
            
            
            127,412
            
            
            (29,317
            )
            
            2,597,322RMBS:Agency
                adjustable rate securities
            
            
            1,659
            
            
            18
            
            
            -
            
            
            1,677Residential
                CMOs
            
            
            126,173
            
            
            582
            
            
            (807
            )
            
            125,948Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            11,062
            
            
            -
            
            
            (217
            )
            
            10,846Total
                RMBS
            
            
            138,894
            
            
            600
            
            
            (1,024
            )
            
            138,471Total
                securities available-for-sale
            
            $
            2,638,120
            
            $
            128,012
            
            $
            (30,341
            )
            $
            2,735,793





At
      March
      31, 2007, the Company’s securities available-for-sale included non-U.S. dollar
      denominated assets with an estimated fair value of $259,463.





At
      March
      31, 2007, an aggregate of $2,445,033 in estimated fair value of the Company's
      securities available-for-sale was pledged to secure its collateralized
      borrowings.





12




The
      following table shows the Company’s fair value and gross unrealized losses,
      aggregated by investment category and length of time that individual securities
      have been in a continuous unrealized loss position, at March 31,
      2007.




Less
                than 12 Months
            
            12
                Months or More
            
            TotalEstimated
              Fair
              Value
            
            Gross
              Unrealized
              Losses
            
            Estimated
              Fair
              Value
            
            Gross
              Unrealized
              Losses
            
            Estimated
              Fair
              Value
            
            Gross
              Unrealized
              LossesCMBS
                IOs
            
            $
            18,429
            
            $
            (337
            )
            $
            24,785
            
            $
            (1,511
            )
            $
            43,214
            
            $
            (1,848
            )Investment
                grade CMBS
            
            
            54,859
            
            
            (1,190
            )
            
            140,229
            
            
            (7,075
            )
            
            195,088
            
            
            (8,265
            )Non-investment
                grade rated subordinated securities
            
            
            155,106
            
            
            (4,037
            )
            
            127,679
            
            
            (4,381
            )
            
            282,785
            
            
            (8,418
            )Non-rated
                subordinated securities
            
            
            12,277
            
            
            (397
            )
            
            2,505
            
            
            (38
            )
            
            14,782
            
            
            (435
            )Credit
                tenant leases
            
            
            -
            
            
            -
            
            
            15,796
            
            
            (443
            )
            
            15,796
            
            
            (443
            )Investment
                grade REIT debt
            
            
            15,460
            
            
            (33
            )
            
            73,323
            
            
            (2,347
            )
            
            88,783
            
            
            (2,380
            )Multifamily
                agency securities
            
            
            -
            
            
            -
            
            
            277,631
            
            
            (4,869
            )
            
            277,631
            
            
            (4,869
            )CDO
                investments
            
            
            35,821
            
            
            (2,659
            )
            
            -
            
            
            -
            
            
            35,821
            
            
            (2,659
            )Residential
                CMOs
            
            
            -
            
            
            -
            
            
            86,599
            
            
            (807
            )
            
            86,599
            
            
            (807
            )Hybrid
                ARMs
            
            
            -
            
            
            -
            
            
            10,845
            
            
            (217
            )
            
            10,845
            
            
            (217
            )Total
                temporarily impaired securities
            
            $
            291,952
            
            $
            (8,653
            )
            $
            759,392
            
            $
            (21,688
            )
            $
            1,051,344
            
            $
            (30,341
            )






The
      temporary impairment of the available-for-sale securities results from the
      fair
      value of the securities falling below the amortized cost basis. These unrealized
      losses are primarily the result of market factors other than credit impairment
      and the Company believes the carrying value of the securities are fully
      recoverable over their expected holding period. Management possesses both the
      intent and the ability to hold the securities until the Company has recovered
      the amortized cost. As such, management does not believe any of the securities
      are other than temporarily impaired.





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





At
      March
      31, 2007, the anticipated weighted average unlevered yield based upon the
      adjusted cost of the Company's entire subordinated CMBS portfolio was 10.2%
      per
      annum. The anticipated reported yield of the Company's investment grade
      securities available-for-sale was 6.2%. The Company's anticipated yields to
      maturity on its subordinated CMBS and other securities available-for-sale are
      based upon a number of assumptions that are subject to certain business and
      economic uncertainties and contingencies. Examples of these include, among
      other
      things, the rate and timing of principal payments (including prepayments,
      repurchases, defaults, liquidations, and related expenses), the pass-through
      or
      coupon rate, and interest rate fluctuations. Additional factors that may affect
      the Company's anticipated yields to maturity on its Controlling Class CMBS
      include interest payment shortfalls due to delinquencies on the underlying
      mortgage loans, and the timing and magnitude of credit losses on the mortgage
      loans underlying the Controlling Class CMBS that are a result of the general
      condition of the real estate market (including competition for tenants and
      their
      related credit quality), and changes in market rental rates. As these
      uncertainties and contingencies are difficult to predict and are subject to
      future events that may alter these assumptions, no assurance can be given that
      the anticipated yields to maturity, discussed above and elsewhere, will be
      achieved.




13





The
      RMBS
      held by the Company consist of adjustable rate and fixed rate residential
      pass-through or mortgage-backed securities collateralized by adjustable and
      fixed rate single-family residential mortgage loans. All of the Company’s RMBS
      were issued by FHLMC, FNMA or GNMA. The Company does not have any subprime
      exposure. The Company's securities available-for-sale are subject to credit,
      interest rate, and/or prepayment risks. The agency adjustable rate RMBS held
      by
      the Company are subject to periodic and lifetime caps that limit the amount
      the
      interest rates of such securities can change during any given period and over
      the life of the loan. At March 31, 2007, adjustable rate RMBS with an estimated
      fair value of $138,471 was included in securities available-for-sale on the
      consolidated statements of financial condition.





During
      the first quarter of 2007, the Company sold securities available-for-sale for
      total proceeds of $48,984, resulting in a realized gain of $6,630. During the
      first quarter of 2006, the Company realized gains of $34 on securities
      available-for-sale




**Note
      4**   **IMPAIRMENTS
      - CMBS**





The
      Company updates its estimated cash flows for securities subject to Emerging
      Issues Task Force Issue 99-20, *Recognition
      of Interest Income and Impairment on Purchased and Retained Beneficial Interests
      in Securitized Financial Assets* (“EITF
      99-20”) on a quarterly basis. The Company compares the yields resulting from the
      updated cash flows to the current accrual yields. An impairment charge is
      required under EITF 99-20 if the updated yield is lower than the current accrual
      yield and the security has a market value less than its adjusted purchase price.
      The Company carries all these securities at their market value on its
      consolidated statement of financial condition.





For
      the
      three months ended March 31, 2007, the Company had fifteen CMBS that required
      an
      impairment of $1,198. For the three months ended March 31, 2006, the Company
      had
      two CMBS that required an impairment of $781. The decline in the updated yields
      that caused the impairments is not related to increases in losses but rather
      changes in the timing of credit losses and prepayments. Based on current
      economic conditions, the Company believes the impairments will be recovered
      over
      the remaining life of the bonds.




**Note
      5**   **COMMERCIAL
      MORTGAGE LOAN POOLS**





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





14


Approximately
      45% of the par amount of the commercial mortgage loan pool is comprised of
      investment grade loans and the remaining 55% are unrated. For income recognition
      purposes, the Company considers the investment grade and unrated commercial
      mortgage loans in the pool as single assets reflecting the credit assumptions
      made in establishing loss adjusted yields for Controlling Class securities.
      The
      Company has taken into account the credit quality of the underlying loans in
      formulating its loss assumptions. Credit losses assumed on the entire pool
      are
      1.40% of the principal balance, or 2.53% of the unrated principal balance.





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




**Note
      6**   **COMMERCIAL
      MORTGAGE LOANS**





The
      following table summarizes the Company’s commercial real estate loan portfolio
      by property type at March 31, 2007 and December 31, 2006:




Loan
                Outstanding
            
            Weighted
                AverageMarch
                31, 2007
            
            
            December
                31, 2006
            
            YieldProperty
                Type
            
            Amount
            
            %
            
            
            Amount
            
            %
            
            2007
            
            2006Office
            
            $
            133,449
            
            
            19.8
            %
            
            $
            130,016
            
            
            27.0
            %
            
            8.3
            %
            
            8.2
            %Residential
            
            
            121,572
            
            
            18.0
            
            
            
            57,917
            
            
            12.0
            
            
            9.4
            
            
            10.7Retail
            
            
            319,632
            
            
            47.4
            
            
            
            194,938
            
            
            40.5
            
            
            7.2
            
            
            7.7Hotel
            
            
            38,402
            
            
            5.7
            
            
            
            38,899
            
            
            8.1
            
            
            10.1
            
            
            10.0Storage
            
            
            33,912
            
            
            5.0
            
            
            
            34,009
            
            
            7.1
            
            
            9.0
            
            
            9.0Industrial
            
            
            19,360
            
            
            2.9
            
            
            
            19,317
            
            
            4.0
            
            
            9.1
            
            
            9.1Other
                Mixed Use
            
            
            7,767
            
            
            1.2
            
            
            
            6,649
            
            
            1.3
            
            
            8.7
            
            
            8.7Total
            
            $
            674,094
            
            
            100.0
            %
            
            $
            481,745
            
            
            100.0
            %
            
            8.1
            %
            
            8.6
            %





Included
      in the table above are non-U.S. dollar denominated commercial real estate loans
      with a carrying value of $380,810 and $243,377 at March 31, 2007 and December
      31, 2006, respectively. The Company finances its non-U.S. dollar denominated
      loans by borrowing in the applicable local currency and hedging the un-financed
      portion.





Reconciliation
      of commercial mortgage loans:




Book
                ValueBalance
                at December 31, 2006
            
            $
            481,745Adjustment
                for discount accretion and foreign currency
            
            
            7,318Proceeds
                from repayment of mortgage loans
            
            
            (9,478
            )Investments
                in commercial mortgage loans
            
            
            194,509Balance
                at March 31, 2007
            
            $
            674,094





There
      were no loans that were delinquent in payment of principal or interest at March
      31, 2007 or December 31, 2006.





15





**Note
      7 EQUITY INVESTMENTS**





The
      following table is a summary of the Company’s equity investments for the three
      months ended March 31, 2007:





BlackRock
              Diamond
            
            Carbon
                I
            
            Carbon
                II
            
            Dynamic
                India
              Fund
                IV *
            
            TotalBalance
                atDecember
                31, 2006
            
            $
            105,894
            
            $
            3,144
            
            $
            69,259
            
            $
            3,850
            
            $
            182,147Contributions
                toInvestments
            
            
            7,397
            
            
            -
            
            
            15,612
            
            
            -
            
            
            23,009Distributions
                fromInvestments
            
            
            (894
            )
            
            -
            
            
            (2,743
            )
            
            -
            
            
            (3,637
            )Equity
                earnings
            
            
            5,970
            
            
            840
            
            
            3,146
            
            
            -
            
            
            9,956Balance
                atMarch
                31, 2007
            
            $
            118,367
            
            $
            3,984
            
            $
            85,274
            
            $
            3,850
            
            $
            211,475










The
      Company has a $100,000 commitment to acquire shares of BlackRock
      Diamond Property Fund (“BlackRock Diamond”) .
      At
      March 31, 2007, the commitment was fully funded and the Company owned
      approximately 18% of BlackRock Diamond. The Company’s investment in BlackRock
      Diamond at March 31, 2007 was $118,367.





The
      Company recorded $5,970 of income related to its ownership in BlackRock Diamond
      for the three months ended March 31, 2007, as reported by BlackRock Diamond.
      Of
      the $5,970 in income, $214 represented current income and $5,756 represented
      unrealized capital appreciation. The Company’s investment represents a 18%
      interest in a portfolio of 54 assets with a total market value of approximately
      $829,141. BlackRock Diamond carries its real estate investments at estimated
      fair values based upon valuations performed internally and upon appraisal
      reports prepared annually by independent real estate appraisers. The estimated
      fair values of real estate may differ significantly from those that could be
      realized if the real estate were actually offered for sale in the market place.





At
      March
      31, 2007, the Company owned approximately 20% of Carbon
      Capital, Inc. (“Carbon I”) .
      The
      Company also owned approximately 26% of Carbon
      Capital II, Inc. (“Carbon II”, and collectively with Carbon I, the “Carbon
      Capital Funds”) at
      March
      31, 2007. Collectively, the Carbon Capital Funds are private commercial real
      estate income opportunity funds managed by the Manager (see Note 11 of the
      consolidated financial statements).





The
      Company entered into a $50,000 commitment on July 20, 2001 to acquire shares
      of
      Carbon I. On July 12, 2005, the investment period expired and as repayments
      occur, capital will be returned to investors. The Company’s investment in Carbon
      I at March 31, 2007 was $3,984.





16


The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II. The Company’s investment in Carbon II at March 31, 2007 was $85,274.
      The Company’s remaining commitment to Carbon II at March 31, 2007 was
      $14,726.





As
      previously reported, investments held by Carbon II, of which the Company owns
      26%, include a $24,546 commercial real estate mezzanine loan which defaulted
      during July 2006.  The default was subsequently cured.  The underlying
      property is a hotel located in the South Beach area of Miami, Florida.  The
      loan matured in March 2007, and the borrower failed to repay the loan triggering
      a maturity default.  The borrower is in advanced discussions with a lender
      regarding a refinance.  Based on credit analysis performed for this
      property, the
      loan
      to value of this loan is less than 60% andCarbon II believes a loan loss
      reserve is not necessary at this time.





As
      previously reported, two other loans held by Carbon II have defaulted.  The
      aggregate carrying value of the two loans on Carbon II’s consolidated financial
      statements is $24,000 ($12,000 per loan).  The underlying properties,
      located in Orlando and Boynton Beach, Florida, are multi-family assets being
      converted to condominiums.  Regarding the 336-unit property in Orlando,
      Carbon II is negotiating a workout arrangement with the borrower, whereby Carbon
      II will forebear from taking title and will make all advances necessary to
      operate the property and service the first mortgage.  The borrower will
      continue to hold title and implement its new sales strategy.  Since its
      implementation in March 2007, 15 units have been sold and closed.  An
      additional 65 units are under contract with deposits and 75 contracts are being
      prepared.  Based on credit analysis performed for this property, Carbon II
      believes a loan loss reserve is not necessary at this time.





Regarding
      the 216-unit property in Boynton Beach, the borrower was not able to achieve
      sufficient condominium sales to complete the condominium conversion.  The
      borrower defaulted on its loan.  Carbon II has taken title to the property,
      hired independent managing agent and intends to operate it as a rental property
      while preparing the property for sale.  Based on the credit analysis
      performed for this property, at December 31, 2006, Carbon II established a
      loan
      loss reserve of $5,180 for the loan, of which the Company’s share is
      $1,361.  Carbon II determined that no change to the loan loss reserve was
      necessary at March 31, 2007. All other commercial real estate loans in the
      Carbon Capital Funds are performing as expected.





On
      December 22, 2005, the Company entered into an $11,000 commitment to acquire
      shares of Dynamic India Fund IV. On February 13, 2006, the Company received
      a
      notice calling 35% of its commitment.




17


**Note
      8**   **BORROWINGS**





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





Certain
      information with respect to the Company's borrowings at March 31, 2007 is
      summarized as follows:




Reverse
              Repurchase
                Agreements
            
            Credit
              Facilities
            
            Commercial
                Mortgage
              Loan
                Pools
            
            CDOs
            
            Senior
              Unsecured
              Notes
            
            Trust
              Preferred
              Securities
            
            Total
              BorrowingsOutstanding
                borrowings
            
            $
            683,050
            
            $
            156,237
            
            $
            1,236,806
            
            $
            1,828,168
            
            $
            75,000
            
            $
            180,477
            
            $
            4,159,738Weighted
                average borrowing rate
            
            
            5.40
            %
            
            6.35
            %
            
            3.99
            %
            
            5.85
            %
            
            7.20
            %
            
            7.64
            %
            
            5.34
            %Weighted
                average remaining maturity
            
            
            76
                days
            
            
            135
                days
            
            
            5.6
                years
            
            
            7.2
                years
            
            
            9.8
                years
            
            
            28.9
                years
            
            
            6.3
                yearsEstimated
                fair value of assets pledged
            
            $
            743,688
            
            $
            252,056
            
            $
            1,257,631
            
            $
            2,151,645
            
            $
            -
            
            $
            -
            
            $
            4,405,020






At
      March
      31, 2007, the Company's borrowings had the following remaining
      maturities:




Reverse
              Repurchase
                Agreements
            
            Credit
              Facilities
            
            Commercial
                Mortgage
              Loan
                Pools
            
            CDOs*
            
            Senior
              Unsecured
              Notes
            
            Trust
              Preferred
              Securities
            
            Total
              BorrowingsWithin
                30 days
            
            $
            68,196
            
            $
            73,380
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            141,57631
                to 59 days
            
            
            -
            
            
            24,525
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            24,52560
                days to less than 1 year
            
            
            614,854
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            614,8541
                year to 3 years
            
            
            -
            
            
            58,332
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            58,3323
                years to 5 years
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Over
                5 years
            
            
            -
            
            
            -
            
            
            1,236,806
            
            
            1,828,168
            
            
            75,000
            
            
            180,477
            
            
            3,320,451$
            683,050
            
            $
            156,237
            
            $
            1,236,806
            
            $
            1,828,168
            
            $
            75,000
            
            $
            180,477
            
            $
            4,159,738









18


*Reverse
      Repurchase Agreements and Credit Facilities*





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





Under
      the
      credit facilities and the reverse repurchase agreements, the respective lender
      retains the right to mark the underlying collateral to estimated fair value.
      A
      reduction in the value of pledged assets would require the Company to provide
      additional collateral or fund margin calls. From time to time, the Company
      may
      be required to provide additional collateral or fund margin calls. See “Item 3 -
      Quantitative and Qualitative Disclosures About Market Risk” for a discussion of
      the Company’s exposure to potential margin calls. At March 31, 2007, more than
      ten percent of the Company’s net assets were held as collateral for reverse
      repurchase agreements with Citigroup Global Markets, Inc. and Lehman Brothers,
      Inc.





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




March
                31, 2007Maturity
              Date
            
            Facility
              Amount
            
            Total
              Borrowings
            
            Unused
              Borrowing
              CapacityGreenwich
                Capital, Inc.(1)
            
            
            7/7/07
            
            $
            75,000*
            
            $
            12,064
            
            $
            -Deutsche
                Bank, AG(2)
            
            
            12/20/07
            
            $
            200,000
            
            $
            87,111
            
            $
            112,889Bank
                of America, N.A.(3)
            
            
            9/17/08
            
            $
            100,000
            
            $
            -
            
            $
            100,000Morgan
                Stanley Bank(3)
                (4)
            
            
            2/16/08
            
            $
            200,000
            
            $
            57,062
            
            $
            142,938$
            575,000
            
            $
            156,237
            
            $
            418,763







(1) USD
      only


(2) Multicurrency


(3) Non-USD
      only


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





During
      the second quarter of 2007, the Company entered into a $150 million committed
      dollar and non-dollar credit faculty with Lehman Commercial Paper Inc.
      Outstanding borrowings bear interest at LIBOR based variable rates. The facility
      matures in 60-days with two 30-day extensions available.





The
      Company is subject to various covenants in its credit facilities, including
      maintaining a minimum net worth measured on a book value of $400,000 in
      accordance with generally accepted accounting principles in the United States
      of
      America (“GAAP”), a maximum recourse debt-to-equity of 3.0 to 1, a minimum cash
      requirement of $10,000 based upon certain debt-to-equity ratios. During the
      first quarter of 2007, the Company amended the debt service coverage ratio
      covenant on its committed debt facilities. The terms of the calculation were
      revised and the debt service coverage ratio was reduced from 1.75 to 1.20.
      The
      revised calculation better reflects the Company’s ability to service debt on a
      cash basis. At March 31, 2007, the Company was in compliance with all covenants.





19


*Junior
      Subordinated Notes*





During
      April 2007, the Company issued €50 million junior subordinated notes due in
      2022. The notes bear interest at a rate equal to 3-month Euribor plus 2.6%.
      The
      notes can be redeemed in whole by the Company subject to certain provisions.
      The
      Company has the option to redeem all or a portion of the Notes at any time
      on or
      after April 30, 2012 at a redemption price equal to 100% of the principal amount
      thereof plus accrued and unpaid interest through but excluding the redemption
      date.




**Note
      9**   **PREFERRED
      STOCK**





On
      February 12, 2007, the Company authorized and issued 3,450,000 shares of Series
      D Preferred Stock, including 450,000 shares of Series D Preferred Stock issued
      pursuant to an option granted to the underwriters to cover over-allotments.
      The
      Series D Preferred Stock is perpetual, carries a 8.25% coupon and has a
      preference in liquidation of $86,250. The aggregate net proceeds to the Company
      (after deducting underwriting fees and expenses) were approximately $83,306.




**Note
      10**   **COMMON
      STOCK**





The
      following table summarizes Common Stock issued by the Company for the three
      months ended March 31, 2007:





Shares
            
            Net
                ProceedsDividend
                Reinvestment Plan
            
            
            15,363
            
            $
            201Sales
                agency agreement
            
            
            111,700
            
            
            1,347Incentive
                fees*
            
            
            75,298
            
            
            963Incentive
                fee - stock based*
            
            
            289,155
            
            
            3,470Total
            
            
            491,516
            
            $
            5,981








On
      March
      6, 2007, the Company declared dividends to its common stockholders of $0.29
      per
      share, payable on April 30, 2007 to stockholders of record on March 30, 2007.
      For U.S. federal income tax purposes, the dividends are expected to be ordinary
      income to the Company’s stockholders.




**Note
      11**   **TRANSACTIONS
      WITH AFFILIATES**





The
      Company has a Management Agreement, an administrative services agreement and
      an
      accounting services agreement with the Manager, the employer of certain
      directors and all of the officers of the Company, under which the Manager and
      the Company’s officers manage the Company’s day-to-day investment operations,
      subject to the direction and oversight of the Company’s Board of Directors.
      Pursuant to the Management Agreement and these other agreements, the Manager
      and
      the Company’s officers formulate investment strategies, arrange for the
      acquisition of assets, arrange for financing, monitor the performance of the
      Company’s assets and provide certain other advisory, administrative and
      managerial services in connection with the operations of the Company. For
      performing certain of these services, the Company pays the Manager under the
      Management Agreement a base management fee equal to 2.0% of the quarterly
      average total stockholders’ equity for the applicable quarter.





20


To
      provide an incentive, the Manager is entitled to receive an incentive fee under
      the Management Agreement equal to 25% of the amount by which the rolling
      four-quarter GAAP net income before the incentive fee exceeds the greater of
      8.5% or 400 basis points over the ten-year Treasury note multiplied by the
      adjusted per share issue price of the Company’s Common Stock ($11.37 per common
      share at March 31, 2007). Additionally, up to 30% of the incentive fees earned
      in 2006 or after may be paid in shares of the Company’s Common Stock subject to
      certain provisions under a compensatory deferred stock plan approved by the
      stockholders of the Company in 2006. The Board of Directors also authorized
      a
      stock based incentive plan where one-half of one percent of common shares
      outstanding as of December 31 st is paid
      to the Manager.




The
      Company’s unaffiliated directors approved an extension of the Management
      Agreement to March 31, 2008 at the Board’s March 2007 meeting.





The
      following is a summary of management and incentive fees incurred for the three
      months ended March 31, 2007, and 2006:





For
                the Three Months Ended March 31,2007
            
            2006Management
                fee
            
            $
            3,520
            
            $
            3,050Incentive
                fee
            
            
            2,724
            
            
            1,169Incentive
                fee- stock based
            
            
            709
            
            
            -Total
                management and incentive fees
            
            $
            6,953
            
            $
            4,219





At
      March
      31, 2007 and 2006, respectively, management and incentive fees of $11,248
      and $4,014 ,
      remain
      payable to the Manager and are included on the accompanying consolidated
      statement of financial condition as a component of other liabilities. In
      accordance with the provisions of the Management Agreement, the Company recorded
      reimbursements to the Manager of $117 and $100 for certain expenses incurred
      on
      behalf of the Company during the three months ended March 31, 2007, and 2006,
      respectively.





The
      Company also has administration and accounting services agreements with the
      Manager. Under the terms of the administration services agreement, the Manager
      provides financial reporting, audit coordination and accounting oversight
      services to the Company. Under the terms of the accounting services agreement,
      the Manager provides investment accounting services to the Company. For the
      three months ended March 31, 2007, and 2006, the Company recorded administration
      and accounting service fees of $181, and $58, respectively, which are included
      in general and administrative expense on the accompanying statement of
      operations.





21


The
      special servicer on 28 of the Company's 33 Controlling Class trusts is Midland
      Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of The
      PNC
      Financial Services Group, Inc. (“PNC Bank”), and therefore a related party of
      the Manager. The Company's fees for Midland’s services are at market rates.




On
      December 13, 2005, the Company entered into a $75,000 commitment to acquire
      shares of BlackRock Diamond. BlackRock Diamond is a private REIT managed by
      BlackRock Realty Advisors, Inc., a subsidiary of the Manager. On February
      21, 2006, the Company increased its capital commitment by an additional $25,000,
      resulting in a total capital commitment of $100,000 . At
      March
      31, 2007, the commitment was fully funded and the Company owned approximately
      18% of BlackRock Diamond. The Company does not incur any additional management
      or incentive fees to the Manager related to its investment in BlackRock Diamond.
      The Company’s investment in BlackRock Diamond at March 31, 2007 was $118,367.





During
      2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
      I, a private commercial real estate income opportunity fund managed by the
      Manager. The Carbon I investment period ended on July 12, 2004 and the Company’s
      investment in Carbon I at March 31, 2007 was $3,984. The Company does not incur
      any additional management or incentive fees to the Manager related to its
      investment in Carbon I. On March 31, 2007, the Company owned approximately
      20%
      of the outstanding shares of Carbon I.





The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II, a private commercial real estate income opportunity fund managed
      by
      the Manager. At March 31, 2007, the Company’s investment in Carbon II was
      $85,274 and the Company’s remaining commitment to Carbon II is $14,726. The
      Company does not incur any additional management or incentive fees to the
      Manager related to its investment in Carbon II. On March 31, 2007, the Company
      owned approximately 26% of the outstanding shares of Carbon II.





The
      Company’s unaffiliated directors approved the investments in BlackRock Diamond
      and the Carbon Capital Funds prior to the investments being made.





During
      2000, the Company completed the acquisition of CORE Cap, Inc. At the time of
      the
      CORE Cap, Inc. acquisition, the Manager agreed to pay GMAC (CORE Cap, Inc.’s
      external advisor) $12,500 over a ten-year period (“Installment Payment”) to
      purchase the right to manage the Core Cap, Inc. assets under the existing
      management contract (“GMAC Contract”). The GMAC Contract had to be terminated in
      order to allow the Company to complete the merger, as the Company’s management
      agreement with the Manager did not provide for multiple managers. As a result
      the Manager offered to buy-out the GMAC Contract as the Manager estimated it
      would receive incremental fees above and beyond the Installment Payment, and
      thus was willing to pay for, and separately negotiate, the termination of the
      GMAC Contract. Accordingly, the value of the Installment Payment was not
      considered in the Company’s allocation of its purchase price to the net assets
      acquired in the acquisition of CORE Cap, Inc. The Company agreed that should
      the
      Management Agreement with its Manager be terminated, not renewed or not extended
      for any reason other than for cause, the Company would pay to the Manager an
      amount equal to the Installment Payment less the sum of all payments made by
      the
      Manager to GMAC. At March 31, 2007, the Installment Payment would be $4,000
      payable over four years. The Company does not accrue for this contingent
      liability.





22


**Note
      12 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES**







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




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




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, other liabilities or restricted cash. Should the counterparty
      fail
      to return deposits paid, the Company would be at risk for the estimated fair
      value of that asset. At March 31, 2007, the Company did not have any of these
      deposits.




At March
      31 ,
      2007,
      the Company had interest rate swaps with notional amounts aggregating $1,568,941
      designated as cash flow hedges of borrowings under reverse repurchase agreements
      and the floating rate debt of its CDOs. Cash flow hedges with an estimated
      fair
      value of $20,723 are included in derivative assets on the consolidated statement
      of financial condition and cash flow hedges with an estimated fair value of
      $12,271 are included in derivative liabilities on the consolidated statement
      of
      financial condition. For the three months ended March
      31 ,
      2007,
      the net change in the estimated fair value of the interest rate swaps was a
      decrease of $4,811, of which $109 was deemed ineffective and is included as
      a
      decrease of interest expense and $4,920 was recorded as a reduction of OCI.
      At March
      31 ,
      2007,
      the $1,568,941 notional of swaps designated as cash flow hedges had a weighted
      average remaining term of 7.3 years.





During
      the three months ended March
      31 ,
      2007,
      the Company terminated one of its interest rate swaps with a notional amount
      of
      $41,000 that was designated as a cash flow hedge of borrowings under reverse
      repurchase agreements. The Company will reclassify the $16 gain in value
      incurred from OCI to interest expense over 8.8 years, which was the remaining
      term of the swap at the time it was closed out. At March
      31 ,
      2007,
      the Company has, in aggregate, $7,780 of net losses related to terminated swaps
      in OCI. For the quarter ended March
      31 ,
      2007,
      $408 was reclassified as an increase to interest expense and $1,619 will be
      reclassified as an increase to interest expense for the next twelve
      months.





At
      March
      31, 2007, the Company had interest rate swaps with notional amounts aggregating
      $1,446,606 designated as trading derivatives. Trading derivatives with an
      estimated fair value of $520 are included in derivative assets on the
      consolidated statement of financial condition and trading derivatives with
      an
      estimated fair value of $293 are included in derivative liabilities on the
      consolidated statement of financial condition. For the three months ended March
      31, 2007, the change in estimated fair value for these trading derivatives
      was
      an increase of $275 and is included as a reduction of loss on securities
      held-for-trading on the consolidated statement of operations. At March 31,
      2007,
      the $1,446,606 notional of swaps designated as trading derivatives had a
      weighted average remaining term of 2.6 years.




23




At
      March
      31, 2007, the Company had a forward LIBOR cap with a notional amount of $85,000
      and an estimated fair value at March 31, 2007 of $131 which is included in
      derivative assets, and the change in estimated fair value related to this
      derivative is included as a component of gain (loss) on securities
      held-for-trading on the consolidated statements of operations.




***Foreign
      Currency***




The
      U.S.
      dollar is considered the functional currency for certain of the Company’s
      international subsidiaries. Foreign currency transaction gains or losses are
      recognized in the period incurred and are included in foreign currency gain
      (loss) in the consolidated statement of operations. Gains and losses on foreign
      currency forward commitments are included in foreign currency gain (loss) in
      the
      consolidated statement of operations. The Company recorded foreign currency
      gains of $1,484 and $44 for the three months ended March 31, 2007 and 2006,
      respectively.




Foreign
      currency agreements at March 31, 2007 consisted of the following:




At
                March 31, 2007Estimated
              Fair
                Value
            
            Unamortized
              Cost
            
            Average
              Remaining
                TermCurrency
                swaps
            
            
            (410
            )
            
            -
            
            
            9.0
                yearsCDO
                currency swaps
            
            
            537
            
            
            -
            
            
            11.8
                yearsForwards
            
            
            (2,685
            )
            
            -
            
            
            18
                days






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





24


**Note
      13 NET INTEREST INCOME**





The
      following is a presentation of the Company net interest income for the three
      months ended March 31, 2007 and 2006:




2007
            
            2006Interest
                Income:Interest
                from securities available-for-sale
            
            $
            46,674
            
            $
            38,897Interest
                from commercial mortgage loans
            
            
            11,166
            
            
            8,015Interest
                from commercial mortgage loan pools
            
            
            13,132
            
            
            13,227Interest
                from securities held-for-trading
            
            
            1,506
            
            
            1,925Interest
                from cash and cash equivalents
            
            
            924
            
            
            337Total
                interest income
            
            
            73,402
            
            
            62,401Interest
                Expense:Interest
            
            
            54,365
            
            
            44,632Interest
                - securities held-for-trading
            
            
            1,474
            
            
            1,893Total
                interest expense
            
            
            55,839
            
            
            46,525Net
                interest income
            
            $
            17,563
            
            $
            15,876





25




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





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





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





Anthracite
      Capital, Inc., a Maryland corporation, and subsidiaries (collectively, the
      "Company") is a specialty finance company that invests in commercial real estate
      assets on a global basis. The Company seeks to generate income from the spread
      between the interest income, gains and net operating income on its commercial
      real estate assets and the interest expense from borrowings to finance its
      investments. The Company's primary activities are investing in high yielding
      commercial real estate debt and equity. The Company combines traditional real
      estate underwriting and capital markets expertise to maximize the opportunities
      arising from the continuing integration of these two disciplines. The Company
      focuses on acquiring pools of performing loans in the form of commercial
      mortgage-backed securities ("CMBS"), issuing secured debt backed by CMBS and
      providing strategic capital for the commercial real estate industry in the
      form
      of mezzanine loan financing. The Company also began investing in diversified
      portfolios of commercial real estate in the United States during December 2005.
      The Company commenced operations on March 24, 1998.





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





The
      Company is managed by BlackRock Financial Management, Inc. (the "Manager"),
      a
      subsidiary of BlackRock, Inc., a publicly traded (NYSE:BLK) asset management
      company with approximately $1.154 trillion of assets under management, including
      more than $25 billion in real estate equity and debt, at March 31, 2007. The
      Manager provides an operating platform that incorporates significant asset
      origination, risk management, operational and property management
      capabilities.





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


1)  Commercial
      Real Estate Securities


2)  Commercial
      Real Estate Loans


3)
      Commercial Real Estate Equity





The
      commercial real estate securities portfolio provides diversification and high
      yields that are adjusted for anticipated losses over a period of time
      (typically, a ten-year weighted average life) and can be financed through the
      issuance of secured debt that matches the life of the investment. Commercial
      real estate loans provide attractive risk adjusted returns over shorter periods
      of time through strategic investments in specific property types or regions.
      The
      Company’s equity strategy is to invest in a diverse portfolio of commercial real
      estate with the objective of repositioning the property to maximize its value.
      The return objective is to provide strong returns over a medium term period
      of
      four to seven years through a combination of real estate operating income and
      capital gains. It is expected that, over the short term, current returns will
      fluctuate as gains and losses are reported based on a valuation process each
      quarter. The Company believes that the combination of these activities will
      result in moderate income and dividend growth for its stockholders.





26


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





The
      following table illustrates the mix of the Company’s asset types at March 31,
      2007 and December 31, 2006:





Carrying
                Value atMarch
                31, 2007
            
            December
                31, 2006Amount
            
            %
            
            Amount
            
            %Commercial
                real estate securities
            
            $
            2,618,814
            
            
            53.4
            %
            $
            2,494,100
            
            
            53.0
            %Commercial
                mortgage loan pools(1)
            
            
            1,257,631
            
            
            25.7
            
            
            1,271,014
            
            
            27.0Commercial
                real estate loans(2)
            
            
            763,352
            
            
            15.6
            
            
            554,148
            
            
            11.8Commercial
                real estate equity
            
            
            122,217
            
            
            2.5
            
            
            109,744
            
            
            2.3Total
                commercial real estate assets
            
            
            4,762,014
            
            
            97.2
            
            
            4,429,006
            
            
            94.1Residential
                mortgage-backed securities
            
            
            139,472
            
            
            2.8
            
            
            276,343
            
            
            5.9Total
            
            $
            4,901,486
            
            
            100.0
            %
            $
            4,705,349
            
            
            100.0
            %






(1)
            Represents
                a Controlling Class CMBS that is consolidated for accounting purposes.
                See
                Note 5 of the consolidated financial
                statements.


(2)
            Includes
                equity investments and real estate joint
                ventures.





During
      the three months ended March
      31,
      2007 ,
      the
      Company purchased a total of $315,980 of commercial real estate assets. Included
      in this amount is $136,878 of non-U.S. dollar denominated assets as the Company
      continues to expand its global investment activities. Commercial real estate
      assets purchased were comprised of: $127,288 of CMBS, $181,298 of commercial
      real estate loans and $7,397 of real estate equity. During the three months
      ended March 31, 2007, the Company sold CMBS with an adjusted purchase price
      of
      $43,022, resulting in a gain of $6,630. In addition, the Company sold eight
      RMBS
      with an adjusted purchase price of $128,135. These sales resulted in a gain
      of
      $546 from six securities and a loss of $15 from the remaining two
      securities.





27


**Summary
      of Commercial Real Estate Assets**





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




Commercial
              Real
                Estate
              Securities
            
            Commercial
              Real
                Estate
              Loans
(1)
            
            Commercial
              RealEstate
              Equity
            
            Commercial
              Mortgage
                Loan
              Pools
            
            Total
              Commercial
              Real
                Estate
              Assets
            
            Total
              Commercial
              Real
                Estate
              Assets
                (USD)USD
            
            $
            2,359,351
            
            $
            382,542
            
            $
            118,367
            
            $
            1,257,631
            
            $
            4,117,890
            
            $
            4,117,890GBP
            
            
            £42,086
            
            
            £25,342
            
            
            -
            
            
            -
            
            
            £67,428
            
            
            132,733EURO
            
            
            €102,761
            
            
            €232,760
            
            
            -
            
            
            -
            
            
            €335,521
            
            
            448,725Swiss
                Francs
            
            
            -
            
            
            CHF23,804
            
            
            -
            
            
            -
            
            
            CHF23,804
            
            
            19,630Canadian
                Dollars
            
            $
            45,180
            
            
            -
            
            
            -
            
            
            -
            
            $
            45,180
            
            
            39,185Indian
                Rupees
            
            
            -
            
            
            -
            
            
            Rs165,935
            
            
            -
            
            
            Rs165,935
            
            
            3,850Total
                USD Equivalent
            
            $
            2,618,814
            
            $
            763,352
            
            $
            122,217
            
            $
            1,257,631
            
            $
            4,762,014
            
            $
            4,762,014


Includes the
      Company’s investments in the Carbon Capital Funds of $89,258 at March 31,
      2007.





A
      summary
      of the Company’s commercial real estate assets with estimated fair values in
      local currencies at December 31, 2006 is as follows:




Commercial
              Real
                Estate
              Securities
            
            Commercial
              Real
                Estate
              Loans(1)
            
            Commercial
              Real
                Estate
              Equity
            
            Commercial
              Mortgage
                Loan
              Pools
            
            Total
              Commercial
              Real
                Estate
              Assets
            
            Total
              Commercial
              Real
                Estate
              Assets
                (USD)USD
            
            $
            2,312,503
            
            $
            310,771
            
            $
            105,894
            
            $
            1,271,014
            
            $
            4,000,182
            
            $
            4,000,182GBP
            
            
            £27,532
            
            
            £28,977
            
            
            -
            
            
            -
            
            
            £56,509
            
            
            110,681Euro
            
            
            €80,923
            
            
            €141,422
            
            
            -
            
            
            -
            
            
            €222,345
            
            
            293,408Canadian
                Dollars
            
            $
            24,339
            
            
            -
            
            
            -
            
            
            -
            
            $
            24,339
            
            
            20,885Indian
                Rupees
            
            
            -
            
            
            -
            
            
            Rs169,823
            
            
            -
            
            
            Rs169,823
            
            
            3,850Total
                USD Equivalent
            
            $
            2,494,100
            
            $
            554,148
            
            $
            109,744
            
            $
            1,271,014
            
            $
            4,429,006
            
            $
            4,429,006


Includes the
      Company’s investments in the Carbon Capital Funds of $72,402 at December 31,
      2006.





The
      Company has foreign currency rate exposure related to its non-U.S. dollar
      denominated assets. The Company’s primary currency exposures are Euro and
      British pound. Changes in currency rates can adversely impact the estimated
      fair
      value and earnings of the Company’s non-U.S. holdings. The Company mitigates
      this impact by utilizing local currency-denominated financing on its foreign
      investments and foreign currency forward commitments and swaps to hedge the
      net
      exposure. Foreign currency gain was $1,484 and $44 for the three months ended March
      31,
      2007 and
      2006, respectively.





28


**Commercial
      Real Estate Assets Portfolio Activity**





The
      following table details the par, estimated fair value, adjusted purchase price,
      and loss adjusted yield of the Company’s commercial real estate securities
      included in as well as outside of the Company’s CDOs at March 31, 2007. The
      dollar price (“Dollar Price”) represents the estimated fair value or adjusted
      purchase price of a security, respectively, relative to its par value.





Commercial
                real estate securities outside CDOs
            
            Par
            
            Carrying
              Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Expected
              YieldInvestment
                grade CMBS
            
            $
            39,947
            
            $
            39,772
            
            
            99.56
            
            $
            39,812
            
            
            99.66
            
            
            5.30
            %Investment
                grade REIT debt
            
            
            23,121
            
            
            21,930
            
            
            94.85
            
            
            22,978
            
            
            99.38
            
            
            5.49
            %CMBS
                rated BB+ to B
            
            
            234,666
            
            
            187,874
            
            
            80.06
            
            
            191,540
            
            
            81.62
            
            
            8.46
            %CMBS
                rated B- or lower
            
            
            267,899
            
            
            110,967
            
            
            41.42
            
            
            104,242
            
            
            38.91
            
            
            7.61
            %CDO
                Investments
            
            
            348,912
            
            
            71,755
            
            
            20.57
            
            
            69,763
            
            
            19.99
            
            
            19.05
            %CMBS
                Interest Only securities (“IOs”)
            
            
            2,884,027
            
            
            64,540
            
            
            2.24
            
            
            65,365
            
            
            2.27
            
            
            7.64
            %Multifamily
                agency securities
            
            
            442,589
            
            
            445,981
            
            
            100.77
            
            
            447,547
            
            
            101.12
            
            
            5.07
            %Commercial
                mortgage loan pools
            
            
            1,191,835
            
            
            1,257,631
            
            
            105.52
            
            
            1,257,631
            
            
            105.52
            
            
            4.14
            %Total
                commercial real estate assets outside CDOs
            
            
            5,432,996
            
            
            2,200,450
            
            
            40.50
            
            
            2,198,878
            
            
            40.47
            
            
            5.48
            %Commercial
                real estate loans and equity outside CDOsCommercial
                real estate loans
            
            
            204,364
            
            
            293,193
            
            
            
            
            
            290,684Commercial
                real estate
            
            
            103,850
            
            
            122,217
            
            
            
            
            
            103,850Total
                commercial real estate loans and equity outside CDOs
            
            
            308,214
            
            
            415,410
            
            
            
            
            
            394,534Commercial
                real estate assets included in CDOsInvestment
                grade CMBS
            
            
            807,629
            
            
            800,929
            
            
            99.17
            
            
            761,559
            
            
            94.30
            
            
            7.04
            %Investment
                grade REIT debt
            
            
            223,324
            
            
            229,231
            
            
            102.64
            
            
            224,891
            
            
            100.70
            
            
            5.92
            %CMBS
                rated BB+ to B
            
            
            638,930
            
            
            543,777
            
            
            85.11
            
            
            498,739
            
            
            78.06
            
            
            9.53
            %CMBS
                rated B- or lower
            
            
            193,215
            
            
            77,771
            
            
            40.25
            
            
            70,779
            
            
            36.63
            
            
            14.96
            %Credit
                tenant lease
            
            
            23,655
            
            
            24,288
            
            
            102.68
            
            
            24,292
            
            
            102.69
            
            
            5.67
            %Commercial
                real estate loans
            
            
            478,783
            
            
            470,158
            
            
            98.20
            
            
            450,357
            
            
            94.06
            
            
            8.31
            %Total
                commercial real estate assets included in CDOs
            
            
            2,365,536
            
            
            2,146,154
            
            
            90.73
            
            
            2,030,617
            
            
            85.84
            
            
            8.07
            %Total
                commercial real estate assets
            
            $
            8,106,746
            
            $
            4,762,014
            
            
            
            
            $
            4,624,029





29


The
      following table details the par, carrying value, adjusted purchase price and
      expected yield of the Company’s commercial real estate assets included in as
      well as outside its CDOs at December 31, 2006:




Commercial
                real estate securities outside CDOs
            
            Par
            
            Carrying
              Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Expected
              YieldInvestment
                grade CMBS
            
            $
            20,989
            
            $
            21,426
            
            
            102.09
            
            $
            21,753
            
            
            103.64
            
            
            5.51
            %Investment
                grade REIT debt
            
            
            23,121
            
            
            21,566
            
            
            93.28
            
            
            22,973
            
            
            99.36
            
            
            5.49
            %CMBS
                rated BB+ to B
            
            
            106,979
            
            
            86,677
            
            
            81.02
            
            
            87,486
            
            
            81.78
            
            
            8.01
            %CMBS
                rated B- or lower
            
            
            147,465
            
            
            50,165
            
            
            34.02
            
            
            46,043
            
            
            31.22
            
            
            9.06
            %CDO
                Investments
            
            
            406,605
            
            
            117,246
            
            
            28.84
            
            
            114,482
            
            
            28.16
            
            
            14.19
            %CMBS
                Interest Only securities (“IOs”)
            
            
            2,980,467
            
            
            69,352
            
            
            2.33
            
            
            69,183
            
            
            2.32
            
            
            7.36
            %Multifamily
                agency securities
            
            
            447,191
            
            
            449,827
            
            
            100.59
            
            
            452,781
            
            
            101.25
            
            
            5.07
            %Commercial
                mortgage loan pools
            
            
            1,207,212
            
            
            1,271,014
            
            
            105.29
            
            
            1,271,014
            
            
            105.29
            
            
            4.14
            %Total
                commercial real estate assets outside CDOs
            
            
            5,340,029
            
            
            2,087,273
            
            
            39.06
            
            
            2,085,715
            
            
            39.06
            
            
            5.30
            %Commercial
                real estate loans and equity outside CDOsCommercial
                real estate loans
            
            
            69,183
            
            
            140,985
            
            
            
            
            
            141,951Commercial
                real estate
            
            
            96,453
            
            
            109,744
            
            
            
            
            
            96,453Total
                commercial real estate loans and equity outside CDOs
            
            
            165,636
            
            
            250,729
            
            
            
            
            
            238,404Commercial
                real estate assets included in CDOsInvestment
                grade CMBS
            
            
            797,678
            
            
            794,622
            
            
            99.62
            
            
            750,662
            
            
            94.11
            
            
            7.00
            %Investment
                grade REIT debt
            
            
            223,324
            
            
            227,678
            
            
            101.95
            
            
            224,964
            
            
            100.73
            
            
            5.92
            %CMBS
                rated BB+ to B
            
            
            650,202
            
            
            554,185
            
            
            85.23
            
            
            508,908
            
            
            78.27
            
            
            9.31
            %CMBS
                rated B- or lower
            
            
            193,236
            
            
            77,038
            
            
            39.87
            
            
            70,727
            
            
            36.60
            
            
            14.87
            %Credit
                tenant lease
            
            
            23,793
            
            
            24,318
            
            
            102.20
            
            
            24,439
            
            
            102.71
            
            
            5.67
            %Commercial
                real estate loans
            
            
            424,973
            
            
            413,163
            
            
            97.22
            
            
            400,559
            
            
            94.25
            
            
            8.36
            %Total
                commercial real estate assets included in CDOs
            
            
            2,313,206
            
            
            2,091,004
            
            
            90.39
            
            
            1,980,259
            
            
            85.61
            
            
            8.01
            %Total
                commercial real estate assets
            
            $
            7,818,871
            
            $
            4,429,006
            
            
            
            
            $
            4,304,378





The
      Company’s CDO offerings allow the Company to match fund its commercial real
      estate portfolio by issuing long-term debt to finance long-term assets. The
      CDO
      debt is non-recourse to the Company; therefore, the Company’s losses are limited
      to its equity investment in the CDO. The CDO debt is also hedged to protect
      the
      Company from an increase in short-term interest rates. At March 31, 2007, over
      67% of the estimated fair value of the Company’s subordinated CMBS was match
      funded in the Company's CDOs in this manner. The Company retained 100% of the
      equity of CDOs I, II, III, HY3 and Euro (each as defined below) and recorded
      the
      transactions on its consolidated financial statements as secured
      financing.





30


The
      table
      below summarizes the Company’s CDO collateral and debt at March 31,
      2007.




Collateral
                at March 31, 2007
            
            Debt
                at March 31, 2007Adjusted
              Purchase
                Price
            
            Loss
                Adjusted
              Yield
            
            Adjusted
                Issue
              Price
            
            Weighted
              Average
                Cost
              of
                Funds *
            
            Net
              SpreadCDO
                I
            
            $
            456,839
            
            
            7.99
            %
            $
            405,490
            
            
            7.23
            %
            
            0.77
            %CDO
                II
            
            
            287,941
            
            
            7.60
            %
            
            291,261
            
            
            5.76
            %
            
            1.85
            %CDO
                III
            
            
            345,156
            
            
            7.18
            %
            
            366,019
            
            
            5.22
            %
            
            1.96
            %CDO
                HY3
            
            
            416,706
            
            
            9.74
            %
            
            402,089
            
            
            6.31
            %
            
            3.43
            %Euro
                CDO
            
            
            330,448
            
            
            7.79
            %
            
            347,715
            
            
            4.50
            %
            
            3.29
            %Total
                **
            
            $
            1,837,090
            
            
            8.14
            %
            $
            1,812,574
            
            
            5.68
            %
            
            2.28
            %





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


**
      The
      Company chose not to sell $13,069 of par of CDO III debt rated BB and $12,500
      of
      par of Euro CDO debt rated BB




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





The
      Company views its below investment grade CMBS investment activity as two
      portfolios: Controlling Class CMBS and other below investment grade CMBS. The
      Company considers the CMBS securities where it maintains the right to influence
      the foreclosure/workout process on the underlying loans its controlling class
      CMBS (“Controlling Class”). The distinction between the two is in the rights the
      Company obtains with its investment in Controlling Class CMBS. Controlling
      Class
      rights allow the Company to influence the workout and/or disposition of defaults
      that occur in the underlying loans. These securities absorb the first losses
      realized in the underlying loan pools. The coupon payment on the non-rated
      security also can be reduced for special servicer fees charged to the trust.
      The
      next highest rated security in the structure then generally will be downgraded
      to non-rated and become the first to absorb losses and expenses from that point
      on. At March 31, 2007, the Company owned 33 trusts
      where it is in the first loss position and is designated as the controlling
      class representative by owning the lowest rated or non-rated CMBS class. The
      total par of the loans underlying these securities was $49,811,289. At March
      31,
      2007, subordinated Controlling Class CMBS with a par of $1,115,314 were included
      on the Company’s consolidated statement of financial condition and subordinated
      Controlling Class CMBS with a par of $694,727 were held as collateral for CDO
      HY1 and CDO HY2.




The
      Company’s other below investment grade CMBS have more limited rights associated
      with its ownership to influence the workout and/or disposition of underlying
      loan defaults. The total par of the Company’s other below investment grade CMBS
      at March 31, 2007 was $170,020; the average credit protection, or subordination
      level, of this portfolio is 1.08%.




31


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




Par
            
            Estimated
              Fair
                Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Weighted
              Average
                Subordination
              LevelBB+
            
            
            194,947
            
            
            175,003
            
            
            89.77
            
            
            162,197
            
            
            83.18
            
            
            3.49
            %BB
            
            
            146,805
            
            
            122,031
            
            
            83.12
            
            
            121,075
            
            
            82.46
            
            
            2.56
            %BB-
            
            
            148,236
            
            
            114,141
            
            
            77.00
            
            
            107,356
            
            
            72.41
            
            
            2.93
            %B+
            
            
            78,006
            
            
            54,858
            
            
            70.33
            
            
            52,259
            
            
            66.67
            
            
            2.21
            %B
            
            
            107,961
            
            
            72,523
            
            
            67.18
            
            
            65,873
            
            
            60.60
            
            
            1.80
            %B-
            
            
            86,759
            
            
            49,202
            
            
            56.71
            
            
            44,870
            
            
            51.70
            
            
            1.24
            %CCC
            
            
            22,314
            
            
            8,412
            
            
            37.70
            
            
            8,260
            
            
            37.02
            
            
            0.88
            %NR
            
            
            330,286
            
            
            108,188
            
            
            32.76
            
            
            98,862
            
            
            29.93
            
            
            n/aTotal
            
            
            1,115,314
            
            
            704,359
            
            
            63.15
            
            
            660,752
            
            
            59.17




The
      Company’s investment in its subordinated Controlling Class CMBS securities by
      credit rating category at December 31, 2006 was as follows:




Par
            
            Estimated
              Fair
                Value
            
            Dollar
              Price
            
            Adjusted
              Purchase
              Price
            
            Dollar
              Price
            
            Weighted
              Average
                Subordination
              LevelBB+
            
            $
            158,220
            
            $
            142,415
            
            
            90.01
            
            $
            130,966
            
            
            82.77
            
            
            3.51
            %BB
            
            
            135,874
            
            
            116,085
            
            
            85.44
            
            
            111,000
            
            
            81.69
            
            
            2.81
            %BB-
            
            
            120,226
            
            
            94,256
            
            
            78.40
            
            
            86,317
            
            
            71.80
            
            
            3.13
            %B+
            
            
            71,277
            
            
            51,030
            
            
            71.59
            
            
            47,861
            
            
            67.15
            
            
            2.05
            %B
            
            
            88,217
            
            
            60,237
            
            
            68.28
            
            
            52,988
            
            
            60.07
            
            
            1.88
            %B-
            
            
            66,160
            
            
            37,680
            
            
            56.95
            
            
            35,001
            
            
            52.90
            
            
            1.28
            %CCC
            
            
            9,671
            
            
            3,823
            
            
            39.53
            
            
            3,596
            
            
            37.19
            
            
            0.88
            %NR
            
            
            260,332
            
            
            81,480
            
            
            31.30
            
            
            73,842
            
            
            28.36
            
            
            n/aTotal
            
            $
            909,977
            
            $
            587,006
            
            
            64.51
            
            $
            541,571
            
            
            59.54




Future
      delinquencies and losses may cause the par reductions and cause the Company
      to
      conclude that a change in loss adjusted yield is required along with a
      write-down of the adjusted purchase price through the income statement as
      required by EITF 99-20. During the three months ended March 31, 2007, the loan
      pools were paid down by $377,855. Pay down proceeds are distributed to the
      highest rated CMBS class first and reduce the percent of total underlying
      collateral represented by each rating category.





As
      the
      portfolio matures and expected losses occur, subordination levels of the lower
      rated classes of a CMBS investment will be reduced. This may cause the lower
      rated classes to be downgraded, which would negatively affect their estimated
      fair value and therefore the Company’s net asset value. Reduced estimated fair
      value would negatively affect the Company’s ability to finance any such
      securities that are not financed through a CDO or similar matched funding
      vehicle. In some cases, securities held by the Company may be upgraded to
      reflect seasoning of the underlying collateral and thus would increase the
      estimated fair value of the securities. During the three months ended March
      31,
      2007, three securities in 33 of the Company’s Controlling Class CMBS were
      upgraded by at least one rating agency and none were downgraded. Additionally,
      at least one rating agency upgraded 26 of the Company’s non-Controlling Class
      commercial real estate securities.





32


As
      part
      of its underwriting process, the Company assumes a certain amount of loans
      will
      incur losses over time. In performing continuing credit reviews on the 33
      Controlling Class trusts, the Company estimates that specific losses totaling
      $580,164 related to principal of the underlying loans will not be recoverable,
      of which $255,486 is expected to occur over the next five years. The total
      loss
      estimate of $580,164 represents 1.2% of the total underlying loan pools. Due
      to
      falling delinquency rates in the CMBS market, the Company no longer assumes
      an
      additional layer of unassigned losses. Previously, the Company assumed ten
      to
      forty basis points of additional defaults would occur with a 35% loss severity
      and a one-year recovery period. The effect of this change is to reduce total
      losses assumed by 15 to 62 basis points, depending on the transaction.





The
      Company considers delinquency information from the Lehman Brothers Conduit
      Guide
      to be the most relevant benchmark to measure credit performance and market
      conditions applicable to its Controlling Class CMBS holdings. The year of
      issuance, or vintage year, is important, as older loan pools will tend to have
      more delinquencies than newly underwritten loans. The Company owns Controlling
      Class CMBS issued in 1998, 1999, and 2001 through 2007. Comparable delinquency
      statistics referenced by vintage year as a percentage of par outstanding at
      March 31, 2007 are shown in the table below:





Vintage
                Year
            
            Underlying
              Collateral
            
            Delinquencies
              Outstanding
            
            Lehman
                Brothers
              Conduit
                Guide1998
            
            $
            5,035,941
            
            
            0.59
            %
            
            0.85
            %1999
            
            
            563,316
            
            
            1.13
            %
            
            0.93
            %2001
            
            
            826,673
            
            
            0.00
            %
            
            0.76
            %2002
            
            
            1,061,800
            
            
            1.43
            %
            
            0.94
            %2003
            
            
            2,078,722
            
            
            0.89
            %
            
            0.33
            %2004
            
            
            6,529,492
            
            
            0.22
            %
            
            0.21
            %2005
            
            
            12,084,033
            
            
            0.05
            %
            
            0.17
            %2006
            
            
            13,704,496
            
            
            0.21
            %
            
            0.06
            %2007
            
            
            7,926,816
            
            
            0.00
            %
            
            0.00
            %Total
            
            $
            49,811,289
            
            
            0.24
            %*
            
            0.23
            %*








Delinquencies
      on the Company’s CMBS collateral as a percent of principal are in line with
      expectations and are consistent with comparable data provided in the Lehman
      Brothers Conduit Guide. These seasoning criteria generally will adjust for
      the
      lower delinquencies that occur in newly originated collateral. See Item 7A
      -
      "Quantitative and Qualitative Disclosures About Market Risks" for a detailed
      discussion of how delinquencies and loan losses affect the Company.





33


The
      following table sets forth certain information relating to the aggregate
      principal balance and payment status of delinquent commercial mortgage loans
      underlying the Controlling Class CMBS held by the Company at March 31,
      2007:





March
                31, 2007Principal
            
            Number
              of
                Loans
            
            %
                of
              CollateralPast
                due 30 days to 60 days
            
            $
            14,699
            
            
            3
            
            
            0.03
            %Past
                due 60 days to 90 days
            
            
            37,845
            
            
            6
            
            
            0.08
            %Past
                due 90 days or more
            
            
            33,957
            
            
            10
            
            
            0.07
            %Real
                Estate owned
            
            
            29,226
            
            
            12
            
            
            0.06
            %Foreclosure
            
            
            4,236
            
            
            1
            
            
            0.01
            %Total
                Delinquent
            
            $
            119,963
            
            
            32
            
            
            0.24
            %Total
                Collateral Balance
            
            $
            49,811,289







Of
      the 32
      delinquent loans at March 31, 2007, 12 loans were real estate owned and being
      marketed for sale, one loan was in foreclosure and the remaining 19 loans were
      in some form of workout negotiations. The Controlling Class CMBS owned by the
      Company have a delinquency rate of 0.24%, which is consistent with industry
      averages. During 2007, the underlying collateral experienced early payoffs
      of
      $377,885 representing 0.76% of the year-end pool balance. These loans were
      paid
      off at par with no loss. Aggregate losses related to the underlying collateral
      of $11,849 were realized during three months ended March 31, 2007. This brings
      cumulative realized losses to $121,298, which is 2.04% of total estimated
      losses. These losses include special servicer and other workout expenses. This
      experience to date is in line with the Company's loss expectations. Realized
      losses and special servicer expenses are expected to increase on the underlying
      loans as the portfolio matures. Special servicer expenses are also expected
      to
      increase as portfolios mature.







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





34


The
      Company manages its credit risk through disciplined underwriting,
      diversification, active monitoring of loan performance and exercise of its
      right
      to influence the workout process for delinquent loans as early as possible.
      The
      Company maintains diversification of credit exposures through its underwriting
      process and can shift its focus in future investments by adjusting the mix
      of
      loans in subsequent acquisitions. The comparative profiles of the loans
      underlying the Company’s CMBS by property type at March 31, 2007 and December 31
      2006 were as follows:





March
                31, 2007 Exposure
            
            December
                31, 2006 ExposureProperty
                Type
            
            Collateral
              Balance
            
            %
                of
              Total
            
            Collateral
              Balance
            
            %
                of
              TotalOffice
            
            $
            16,223,902
            
            
            32.6
            %
            $
            13,415,671
            
            
            31.6
            %Retail
            
            
            14,596,980
            
            
            29.3
            
            
            13,217,676
            
            
            31.2Multifamily
            
            
            11,190,345
            
            
            22.4
            
            
            8,978,823
            
            
            21.2Industrial
            
            
            3,778,795
            
            
            7.6
            
            
            3,332,194
            
            
            7.9Lodging
            
            
            3,155,024
            
            
            6.3
            
            
            2,726,441
            
            
            6.4Healthcare
            
            
            438,207
            
            
            0.9
            
            
            305,612
            
            
            0.7Other
            
            
            428,036
            
            
            0.9
            
            
            422,284
            
            
            1.0Total
            
            $
            49,811,289
            
            
            100
            %
            $
            42,398,701
            
            
            100
            %





At
      March
      31, 2007, the estimated fair value of the Company’s holdings of subordinated
      Controlling Class CMBS is $44,405 higher than the adjusted cost for these
      securities which consists of a gross unrealized gain of $53,174 and a gross
      unrealized loss of $8,769. The adjusted purchase price of the Company’s
      subordinated Controlling Class CMBS portfolio at March 31, 2007 represents
      approximately 59.2% of its par amount. The estimated fair value of the Company’s
      subordinated Controlling Class CMBS portfolio at March 31, 2007 represents
      approximately 63.2% of its par amount. As the portfolio matures, the Company
      expects to recoup the $8,769 of unrealized loss, provided that the credit losses
      experienced are not greater than the credit losses assumed in the projected
      cash
      flow analysis. At March 31, 2007, the Company believed there has been no
      material deterioration in the credit quality of its portfolio below current
      expectations.





The
      Company’s interest income calculated in accordance with EITF 99-20 for its CMBS
      is computed based upon a yield, which assumes credit losses will occur. The
      yield to compute the Company’s taxable income does not assume there would be
      credit losses, as a loss can only be deducted for tax purposes when it has
      occurred. This is the primary difference between the Company’s income in
      accordance with accounting principles generally accepted in the United States
      of
      America (“GAAP”) and taxable income. As a result, for the years 1998 through
      2007, the Company’s GAAP income was approximately $44,431 lower than its taxable
      income.





**Commercial
      Real Estate Loan Activity**





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




35


The
      following table summarizes the Company’s commercial real estate loan portfolio
      by property type at March 31, 2007 and December 31, 2006:




Loan
                Outstanding
            
            Weighted
                AverageMarch
                31, 2007
            
            December
                31, 2006
            
            YieldProperty
                Type
            
            Amount
            
            %
            
            Amount
            
            %
            
            2007
            
            2006Office
            
            $
            133,449
            
            
            19.8
            %
            $
            130,016
            
            
            27.0
            %
            
            8.3
            %
            
            8.2
            %Residential
            
            
            121,572
            
            
            18.0
            
            
            57,917
            
            
            12.0
            
            
            9.4
            
            
            10.7Retail
            
            
            319,632
            
            
            47.4
            
            
            194,938
            
            
            40.5
            
            
            7.2
            
            
            7.7Hotel
            
            
            38,402
            
            
            5.7
            
            
            38,899
            
            
            8.1
            
            
            10.1
            
            
            10.0Storage
            
            
            33,912
            
            
            5.0
            
            
            34,009
            
            
            7.1
            
            
            9.0
            
            
            9.0Industrial
            
            
            19,360
            
            
            2.9
            
            
            19,317
            
            
            4.0
            
            
            9.1
            
            
            9.1Other
                Mixed Use
            
            
            7,767
            
            
            1.2
            
            
            6,649
            
            
            1.3
            
            
            8.7
            
            
            8.7Total
            
            $
            674,094
            
            
            100.0
            %
            $
            481,745
            
            
            100.0
            %
            
            8.1
            %
            
            8.6
            %





Included
      in the table above are non-U.S. dollar denominated commercial real estate loans
      with a carrying value of $380,810 and $243,377 at March 31, 2007 and December
      31, 2006, respectively. The Company finances its non-U.S. dollar denominated
      loans by borrowing in the applicable local currency and hedging the un-financed
      portion.





During
      the first quarter of 2007, the Company purchased two U.S dollar denominated
      commercial real estate loans with a total cost of $52,663 and a principal
      balance of $52,725, three Euro denominated commercial real estate loans with
      a
      total cost of €75,502 ($98,296) and a principal balance totaling €76,727, one
      Swiss Franc denominated loan with a cost of CHF23,804 ($14,724) and a principal
      balance of CHF23,923,and an additional investment in Carbon II of $15,615.
      During the quarter ended March 31, 2007, the Company received repayments of
      commercial real estate loans in the aggregate amount of $9,478.





The
      Company's investments in Carbon Capital Funds also invest in commercial real
      estate loans. For the quarter ended March 31, 2007, the Company recorded $3,986
      of income for the Carbon Capital Funds. Carbon II increased its investment
      in
      U.S. commercial real estate loans by originating three loans for a total
      investment of $95,168 during the first quarter of 2007. Paydowns in Carbon
      Capital Funds during the quarter totaled $130,545 and Carbon II sold one loan
      with a carrying value of $24,500. As loans are repaid or sold, Carbon II has
      redeployed capital into acquisitions of additional loans for the portfolio.
      The
      Carbon I investment period has expired and no new portfolio additions are
      expected.





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





March
                31,
              2007
            
            December
                31,
              2006Carbon
                I
            
            $
            3,984
            
            $
            3,144Carbon
                II
            
            
            85,274
            
            
            69,259$
            89,258
            
            $
            72,403





At
      March
      31, 2007, all commercial real estate loans owned directly by the Company were
      performing in line with expectations.  As previously reported, investments
      held by Carbon II include a $24,546 commercial real estate mezzanine loan which
      defaulted during July 2006.  The default was subsequently cured.  The
      underlying property is a hotel located in the South Beach area of Miami,
      Florida.  The loan matured in March 2007, and the borrower failed to repay
      the loan triggering a maturity default.  The borrower is in advanced
      discussions with a lender regarding a refinance.  Based on credit analysis
      performed for this property, Carbon II believes a loan loss reserve is not
      necessary at this time.





36


As
      previously reported, two other loans held by Carbon II defaulted.  The
      aggregate carrying value of the two loans on Carbon II’s consolidated financial
      statements is $24,000 ($12,000 per loan).  The underlying properties are
      Florida multi-family assets being converted to condominiums.  Regarding the
      336-unit property in Orlando, Carbon II is negotiating a workout arrangement
      with the borrower, whereby Carbon II will forebear from taking title and will
      make all advances necessary to operate the property and service the first
      mortgage.  The borrower will continue to hold title and implement its new
      sales strategy.  Since its implementation in March, 15 units have been sold
      and closed.  An additional 65 units are under contract with deposits and 75
      contracts are being prepared.  Based on credit analysis performed for this
      property, Carbon II believes a loan loss reserve is not necessary at this time.





Regarding
      the 216-unit property in Boynton Beach, the borrower was not able to achieve
      sufficient condominium sales to complete the condominium conversion.  The
      borrower defaulted on its loan.  Carbon II has taken title to the property,
      hired independent managing agent and intends to operate it as a rental property
      while preparing the property for sale.  Based on the credit analysis
      performed for this property, at December 31, 2006, Carbon II established a
      loan
      loss reserve of $5,180 for the loan, of which the Company’s share is
      $1,361.  Carbon II determined that no change to the loan loss reserve was
      necessary at March 31, 2007. All financial information with respect to the
      Carbon Capital Funds was reported by the Carbon Capital Funds.





**Commercial
      Real Estate**





At
      March
      31, 2007, the Company had invested an aggregate of $100,000 in BlackRock Diamond
      Property Fund, Inc. (“BlackRock Diamond”). BlackRock Diamond is a private real
      estate investment trust (“REIT”) managed by BlackRock Realty Advisors, Inc., a
      subsidiary of the Company’s Manager. BlackRock Diamond's investment objective is
      to seek a high risk adjusted return through "value-added" capital appreciation
      and current income on properties throughout the United States. This means that
      BlackRock Diamond focuses on operating properties that will be repositioned,
      renovated, or expanded to achieve maximum returns. Part of the investment
      strategy includes a budgeted amount of capital expenditures that are used to
      improve the value of the investment and realize the full value potential of
      a
      given property. BlackRock Diamond relies on its manager's extensive
      relationships in the real estate markets to source opportunities. BlackRock
      Diamond focuses on large urban locations where it believes the real estate
      equity markets will outperform.





BlackRock
      Diamond is an open-end fund. As such, it may allow shares to be redeemed at
      a
      price equal to its quarter-end net asset value upon 60 days’ notice. The assets
      are subject to quarterly appraisals with one independent appraisal done
      annually. The Company does not pay a separate management or incentive fee to
      the
      Manager for management services associated with its investment in BlackRock
      Diamond.





The
      Company had a 18% ownership in BlackRock Diamond at March 31, 2007 and recorded
      $5,970 of income during the three months ended March 31, 2007 with respect
      to
      this investment under the equity method. At March 31, 2007, the Company had
      no
      remaining capital commitments to BlackRock Diamond.





37


For
      the
      quarter ended March 31, 2007, the Company recorded $5,970 of income, consisting
      of $214 of current income and $5,756 of unrealized gains on the underlying
      portfolio assets. At March 31, 2007, BlackRock Diamond’s portfolio consisted of
      54 assets with a total estimated market value of approximately $829,141. All
      financial information relating to this investment was reported by BlackRock
      Diamond.





The
      Company has an indirect investment in a commercial real estate development
      fund
      located in India. At March 31, 2007, the Company’s capital committed was
      $11,000, of which $3,850 had been drawn. The entity conducts its operations
      in
      the local currency, Indian Rupees.




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





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








For
                the Three Months
              Ended
                March 31,
            
            Variance2007
            
            2006
            
            Amount
            
            %Commercial
                real estate securities
            
            $
            45,881
            
            $
            37,791
            
            $
            8,090
            
            
            21.4
            %Commercial
                mortgage loan pools
            
            
            13,132
            
            
            13,227
            
            
            (95
            )
            
            (0.7
            )Commercial
                real estate loans
            
            
            11,166
            
            
            8,015
            
            
            3,151
            
            
            39.3RMBS
            
            
            2,299
            
            
            3,030
            
            
            (731
            )
            
            24.1Cash
                and cash equivalents
            
            
            924
            
            
            337
            
            
            587
            
            
            174.2Total
            
            $
            73,402
            
            $
            62,400
            
            $
            11,002
            
            
            17.6
            %





38


The
      following table reconciles interest income and total income for the three months
      ended March 31, 2007, and 2006.




For
                the Three Months
              EndedMarch
                31,
            
            Variance2007
            
            2006
            
            Amount
            
            %Interest
                income
            
            $
            73,402
            
            $
            62,400
            
            $
            11,002
            
            
            17.6
            %Earnings
                from BlackRock Diamond
            
            
            5,970
            
            
            5,542
            
            
            428
            
            
            7.7Earnings
                from Carbon I
            
            
            840
            
            
            706
            
            
            134
            
            
            19.0Earnings
                from Carbon II
            
            
            3,146
            
            
            3,095
            
            
            51
            
            
            1.6Total
                Income
            
            $
            83,358
            
            $
            71,743
            
            $
            11,615
            
            
            16.2
            %





For
      the
      three months ended March 31, 2007 versus 2006, interest income increased
      $11,002, or 17.6%. The Company continued to increase its investments in
      commercial real estate securities and loans, resulting in an increase of
      $11,241, or 24.5%, during the three months ended March 31, 2007. Interest income
      from RMBS decreased by $731, or 24.1%, due to the sale of the Company’s RMBS
      positions. Income from BlackRock Diamond was $5,970 and $5,542 for the quarter
      ended March, 2007 and 2006, respectively. The Company began investing in
      BlackRock Diamond in the fourth quarter of 2005. BlackRock Diamond maintains
      its
      financial records on a fair value basis. The Company has retained such
      accounting in its consolidated financial statements pursuant to EITF Issue
      85-12, *Retention
      of Specialized Accounting for Investments in Consolidation.*





39


***Interest
      Expense*** **:** The
      following table sets forth information regarding the total amount of interest
      expense from certain of the Company’s borrowings and cash flow
      hedges.





For
                the Three Months Ended 31,
            
            Variance2007
            
            2006
            
            Amount
            
            %Collateralized
                debt obligations
            
            $
            26,671
            
            $
            16,134
            
            $
            10,537
            
            
            65.3
            %Commercial
                mortgage loan pools
            
            
            12,400
            
            
            12,620
            
            
            (220
            )
            
            1.7Commercial
                real estate securities*
            
            
            8,362
            
            
            8,123
            
            
            239
            
            
            2.9Commercial
                real estate loans
            
            
            1,002
            
            
            2,964
            
            
            (1,962
            )
            
            66.2RMBS
            
            
            3,324
            
            
            3,596
            
            
            (272
            )
            
            7.6Senior
                unsecured notes
            
            
            1,347
            
            
            -
            
            
            1,347
            
            
            n/aJunior
                subordinated notes - net
            
            
            3,280
            
            
            2,220
            
            
            1,060
            
            
            47.7Cash
                flow hedges
            
            
            (438
            )
            
            1,483
            
            
            (1,921
            )
            
            (129.5
            )Hedge
                ineffectiveness**
            
            
            (109
            )
            
            (615
            )
            
            506
            
            
            82.3Total
                Interest Expense
            
            $
            55,839
            
            $
            46,525
            
            $
            9,314
            
            
            20.0
            %







**See
      Note 11 of the consolidated financial statements, Derivative Instruments and
      Hedging Activities, for a further description of the Company’s hedge
      ineffectiveness.





For
      the
      three months ended March 31, 2007, interest expense increased $9,314, or 20.0%,
      from the same three month period in 2006. The issuance of two additional CDOs
      increased interest expense $10,537, or 65.3%, from the same three month period
      of 2006. Hedging expenses not related to the CDOs decreased $1,921, or 129.5%,
      from 2006 levels. This decrease is primarily the result of the fourth quarter
      2006 de-designation of certain cash flow hedges and the resulting
      reclassification of amounts in OCI that were previously being amortized. The
      issuance of $75,000 of senior unsecured notes in October 2006 increased interest
      expense $1,347 as compared to 2006. Interest expense from junior subordinated
      notes increased $1,060, or 47.7%, because the $180,447 of junior subordinated
      notes were outstanding for a full quarter in 2007.





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





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





40


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





For
                the Three Months Ended March 31,2007
            
            2006Interest
                income
            
            $
            73,402
            
            $
            62,400Interest
                expense related to the consolidation of commercial mortgage loan
                pools
            
            
            (12,400
            )
            
            (12,620
            )Adjusted
                interest income
            
            $
            61,002
            
            $
            49,780





For
                the Three Months Ended March 31,2007
            
            2006Interest
                expense
            
            $
            55,839
            
            $
            46,525Interest
                expense related to the consolidation of commercial mortgage loan
                pools
            
            
            (12,400
            )
            
            (12,620
            )Hedge
                ineffectiveness
            
            
            109
            
            
            615Adjusted
                interest expense
            
            $
            43,548
            
            $
            34,520





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





The
      ratios below are also presented including the income from equity investments.
      The Company believes the ratios including income from equity investments are
      indicative of the performance of the Company’s entire portfolio.





41


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





For
                the Three Months Ended March 31,2007
            
            2006Adjusted
                interest income
            
            $
            61,002
            
            $
            49,780Adjusted
                interest expense
            
            $
            43,548
            
            $
            34,520Adjusted
                net interest income ratiosNet
                interest margin
            
            
            2.1
            %
            
            2.2
            %Average
                yield
            
            
            7.4
            %
            
            7.2
            %Cost
                of funds
            
            
            5.9
            %
            
            6.1
            %Net
                interest spread
            
            
            1.5
            %
            
            1.1
            %Ratios
                including income from equity investmentsNet
                interest margin
            
            
            3.1
            %
            
            3.4
            %Average
                yield
            
            
            8.1
            %
            
            8.2
            %Cost
                of funds
            
            
            5.9
            %
            
            6.1
            %Net
                interest spread
            
            
            2.3
            %
            
            2.1
            %





Net
      interest margin has remained relatively constant as the yield curve remained
      flat and the Company continues to maintain a consistent spread between the
      yield
      of its assets and cost of its liabilities





***Other
      Expenses:*** Expenses
      other than interest expense consist primarily of management fees, incentive
      fees
      and general and administrative expenses. The table below summarizes those
      expenses for the three months ended March 31, 2007 and 2006,
      respectively.





For
                the Three Months
              Ended
                March 31,
            
            Variance2007
            
            2006
            
            Amount
            
            %Management
                fee
            
            $
            3,520
            
            $
            3,050
            
            $
            470
            
            
            15.4
            %Incentive
                fee
            
            
            2,724
            
            
            1,169
            
            
            1,555
            
            
            133.0Incentive
                fee- stock based
            
            
            709
            
            
            -
            
            
            709
            
            
            n/aGeneral
                and administrative expense
            
            
            1,305
            
            
            1,104
            
            
            201
            
            
            18.2Total
                other expenses
            
            $
            8,258
            
            $
            5,323
            
            $
            2,935
            
            
            55.1
            %




Management
      fees are based on 2% of average quarterly stockholders’ equity. The increase of
      $470, or 15.4%, is due to the increase in the Company’s stockholders’ equity.
      The Manager earned an incentive fee of $2,724 for the quarter ended March
      31,
      2007, 30% of which was paid in Common Stock, as the Company achieved the
      necessary performance goals specified in the Management Agreement. The increase
      in incentive fee - stock based of $709 is due to the commencement of the fee
      in
      the second quarter of 2006 . The fee is based on the number of common shares
      outstanding as of year end. The Company accrues the incentive fee - stock based
      expense each quarter based on the shares outstanding at the end of the
      quarter.





42


General
      and administrative expense is comprised of accounting agent fees, custodial
      agent fees, directors' fees, fees for professional services ,
      insurance premiums, broken deal expenses, and due diligence costs. The increase
      in general and administrative expense for the quarter ended March 31, 2007
      is
      primarily attributable to the Company’s new investment accounting system and
      costs associated with the Company’s global expansion.





***Other
      Gains (Losses):*** **** During
      the three months ended March 31, 2007, the
      Company sold a retained CDO bond with an adjusted purchase price of $43,022,
      resulting in a gain of $6,630. In addition, the Company sold eight RMBS with
      an
      adjusted purchase price of $128,135. These sales resulted in a gain of $546
      from
      six securities and a loss of $15 from the remaining two securities.





***Dividends
      Declared:***  On
      March
      6, 2007, the Company declared distributions to its stockholders of $0.29 per
      share, payable on April 30, 2007 to stockholders of record on March 30,
      2007.





43


***Changes
      in Financial Condition***





*Securities
      available-for-sale:* The
      Company's securities available-for-sale, which are carried at estimated fair
      value, included the following at March 31, 2007 and December 31,
      2005:





Security
                Description
            
            March
                31,
              2007
              Estimated
              Fair
              Value
            
            Percentage
            
            December
                31,
              2006
              Estimated
              Fair
              Value
            
            PercentageCommercial
                mortgage-backed securities:CMBS
                IOs
            
            $
            64,541
            
            
            2.4
            %
            $
            69,352
            
            
            2.7
            %Investment
                grade CMBS
            
            
            821,126
            
            
            30.0
            
            
            795,543
            
            
            30.4Non-investment
                grade rated subordinated securities
            
            
            792,924
            
            
            29.0
            
            
            686,019
            
            
            26.2Non-rated
                subordinated securities
            
            
            125,547
            
            
            4.6
            
            
            80,167
            
            
            3.1Credit
                tenant lease
            
            
            24,288
            
            
            0.9
            
            
            24,318
            
            
            0.9Investment
                grade REIT debt
            
            
            251,161
            
            
            9.2
            
            
            249,244
            
            
            9.5Multifamily
                agency securities
            
            
            445,980
            
            
            16.3
            
            
            449,827
            
            
            17.2CDO
                investments
            
            
            71,755
            
            
            2.6
            
            
            117,246
            
            
            4.5Total
                CMBS
            
            
            2,597,322
            
            
            95.0
            
            
            2,471,716
            
            
            94.5Residential
                mortgage-backed securities:Agency
                adjustable rate securities
            
            
            1,677
            
            
            0.1
            
            
            1,774
            
            
            0.1Residential
                CMOs
            
            
            125,948
            
            
            4.5
            
            
            130,850
            
            
            5.0Hybrid
                adjustable rate mortgages (“ARMs”)
            
            
            10,846
            
            
            0.4
            
            
            11,516
            
            
            0.4Total
                RMBS
            
            
            138,471
            
            
            5.0
            
            
            144,140
            
            
            5.5Total
                securities available-for-sale
            
            $
            2,735,793
            
            
            100.0
            %
            $
            2,615,856
            
            
            100.0
            %





*Borrowings:* ****** As
      of
      March 31, 2007 and December 31, 2006, the Company's debt consisted of reverse
      repurchase agreements, credit facilities, CDOs, senior unsecured notes, trust
      preferred securities, and commercial mortgage loans pools 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. At March 31, 2007 and December 31, 2006,
      the
      Company obtained financing in amounts and at interest rates consistent with
      the
      Company's short-term financing objectives.





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





44


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





For
                the Three Months Ended
              March
                31, 2007March
                31, 2007
              Balance
            
            Maximum
              Balance
            
            Range
                of
              MaturitiesCDO
                debt*
            
            $
            1,828,168
            
            $
            1,828,168
            
            
            5.4
                to 10.2 yearsCommercial
                mortgage loan pools
            
            
            1,236,806
            
            
            1,278,058
            
            
            1.8
                to 11.7 yearsReverse
                repurchase agreements
            
            
            683,050
            
            
            808,847
            
            
            2
                to 275 daysCredit
                facilities
            
            
            156,237
            
            
            179,799
            
            
            12
                to 321 daysSenior
                unsecured notes**
            
            
            75,000
            
            
            75,000
            
            
            9.8
                yearsJunior
                subordinated notes***
            
            
            180,477
            
            
            180,477
            
            
            28.9
                years





*
      Disclosed as adjusted issue price. Total par of the Company’s CDO debt at March
      31, 2007 was $1,837,902.


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


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





The
      table
      above does not include interest payments on the Company’s borrowings. Such
      disclosure of interest payments has been omitted because certain borrowings
      require variable rate interest payments. The Company’s total interest payments
      for the three months ended March 31, 2007 were $52,910.





At
      March
      31, 2007, the Company's borrowings had the following weighted average yields
      and
      range of interest rates and yields:





Reverse
              Repurchase
                Agreements
            
            Lines
                of
              Credit
            
            Commercial
                Mortgage
              Loan
                Pools
            
            Collateralized
              Debt
              Obligations
            
            Junior
              Subordinated
              Notes
            
            Senior
              Unsecured
              Notes
            
            Total
              Collateralized
                BorrowingsWeighted
                average yield
            
            
            5.40
            %
            
            6.35
            %
            
            3.99
            %
            
            5.85
            %
            
            7.64
            %
            
            7.20
            %
            
            5.34
            %Interest
                RateFixed
            
            
            -
            %
            
            -
            %
            
            3.99
            %
            
            6.79
            %
            
            7.64
            %
            
            7.20
            %
            
            5.80
            %Floating
            
            
            5.40
            %
            
            6.35
            %
            
            -
            %
            
            5.57
            %
            
            -
            %
            
            -
            %
            
            5.57
            %Effective
                YieldFixed
            
            
            -
            %
            
            -
            %
            
            3.99
            %
            
            7.27
            %
            
            7.64
            %
            
            7.20
            %
            
            6.06
            %Floating
            
            
            5.40
            %
            
            6.35
            %
            
            -
            %
            
            5.57
            %
            
            -
            %
            
            -
            %
            
            5.57
            %





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





45


Interest
      rate hedging instruments at March 31, 2007 and December 31, 2006 consisted
      of
      the following:





At
                March 31, 2007Notional
              Value
            
            Estimated
              Fair
                Value
            
            Unamortized
              Cost
            
            Average
                Remaining
              Term
                (years)Cash
                flow hedges
            
            $
            679,700
            
            
            2,926
            
            
            -
            
            
            7.9CDO
                cash flow hedges
            
            
            889,241
            
            
            5,526
            
            
            -
            
            
            7.0Trading
                swaps
            
            
            1,188,727
            
            
            (39
            )
            
            -
            
            
            1.9CDO
                trading swaps
            
            
            257,879
            
            
            266
            
            
            -
            
            
            5.6CDO
                LIBOR cap
            
            
            85,000
            
            
            131
            
            
            1,407
            
            
            6.2







At
                December 31, 2006Notional
              Value
            
            Estimated
              Fair
                Value
            
            Unamortized
              Cost
            
            Average
                Remaining
              Term
                (years)Cash
                flow hedges
            
            $
            644,200
            
            $
            5,048
            
            
            -
            
            
            7.9CDO
                cash flow hedges
            
            
            895,499
            
            
            8,230
            
            
            -
            
            
            7.2Trading
                swaps
            
            
            1,220,000
            
            
            2,033
            
            
            -
            
            
            2.1CDO
                timing swaps
            
            
            223,445
            
            
            212
            
            
            -
            
            
            6.1CDO
                LIBOR cap
            
            
            85,000
            
            
            (38
            )
            
            1,407
            
            
            6.4





Foreign
      currency agreements at March 31, 2007 and December 31, 2006 consisted of the
      following:




At
                March 31, 2007Estimated
              Fair
                Value
            
            Unamortized
              Cost
            
            Average
              RemainingTermCurrency
                swaps
            
            
            (410
            )
            
            -
            
            
            9.0
                yearsCDO
                currency swaps
            
            
            537
            
            
            -
            
            
            11.8
                yearsForwards
            
            
            (2,685
            )
            
            -
            
            
            18
                days







At
                December 31, 2006Estimated
              Fair
                Value
            
            Unamortized
              Cost
            
            Average
              Remaining
                TermCurrency
                swaps
            
            $
            1,179
            
            
            -
            
            
            12.5CDO
                currency swaps
            
            
            (1,418
            )
            
            -
            
            
            12.5Forwards
            
            
            (2,659
            )
            
            -
            
            
            10
                days








**Capital
      Resources and Liquidity**





The
      Company requires capital to fund its investment activities and operating
      expenses. The Company believes it currently has sufficient access to capital
      resources to fund its existing business plan. The Company's capital sources
      include cash flow from operations, borrowings under reverse repurchase
      agreements, credit facilities, CDOs, and the issuance of preferred and common
      equity securities.





46


The
      distribution requirements under the REIT provisions of the Code limit the
      Company's ability to retain earnings and thereby replenish or increase capital
      committed to its operations. However, the Company believes that its access
      to
      significant capital resources and financing will enable the Company to meet
      current and anticipated capital requirements.





The
      Company believes that its existing sources of funds will be adequate for
      purposes of meeting its short- and long-term liquidity needs. The Company's
      ability to meet its long-term (i.e., beyond one year) liquidity requirements
      is
      subject to obtaining additional debt and equity financing. Any decision by
      the
      Company's lenders and investors to provide the Company with financing will
      depend upon a number of factors, such as the Company's compliance with the
      terms
      of its existing credit arrangements, the Company's financial performance,
      industry or market trends, the general availability of and rates applicable
      to
      financing transactions, such lenders' and investors' resources and policies
      concerning the terms under which they make capital commitments and the relative
      attractiveness of alternative investment or lending opportunities.





Certain
      information with respect to the Company's borrowings at March 31, 2007 is
      summarized as follows:




Reverse
              Repurchase
                Agreements
            
            Credit
              Facilities
            
            Commercial
              Mortgage
              Loan
                Pools
            
            CDOs
            
            Senior
              Unsecured
              Notes
            
            Trust
              Preferred
              Securities
            
            Total
              BorrowingsOutstanding
                borrowings
            
            $
            683,050
            
            $
            156,237
            
            $
            1,236,806
            
            $
            1,828,168
            
            $
            75,000
            
            $
            180,477
            
            $
            4,159,738Weighted
                average borrowing rate
            
            
            5.40
            %
            
            6.35
            %
            
            3.99
            %
            
            5.85
            %
            
            7.20
            %
            
            7.64
            %
            
            5.34
            %Weighted
                average remaining maturity
            
            
            76
                days
            
            
            135
                days
            
            
            5.6
                years
            
            
            7.2
                years
            
            
            9.8
                years
            
            
            28.9
                years
            
            
            6.3
                yearsEstimated
                fair value of assets pledged
            
            $
            743,688
            
            $
            252,056
            
            $
            1,257,631
            
            $
            2,151,645
            
            $
            -
            
            $
            -
            
            $
            4,405,020




At
      March
      31, 2007, the Company's borrowings had the following remaining
      maturities:




Reverse
              Repurchase
                Agreements
            
            Credit
              Facilities
            
            Commercial
                Mortgage
              Loan
                Pools
            
            CDOs*
            
            Senior
              Unsecured
              Notes
            
            Trust
              Preferred
              Securities
            
            Total
              BorrowingsWithin
                30 days
            
            $
            68,196
            
            $
            73,380
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            141,57631
                to 59 days
            
            
            -
            
            
            24,525
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            24,52560
                days to less than 1 year
            
            
            614,854
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            614,8541
                year to 3 years
            
            
            -
            
            
            58,332
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            58,3323
                years to 5 years
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Over
                5 years
            
            
            -
            
            
            -
            
            
            1,236,806
            
            
            1,828,168
            
            
            75,000
            
            
            180,477
            
            
            3,320,451$
            683,050
            
            $
            156,237
            
            $
            1,236,806
            
            $
            1,828,168
            
            $
            75,000
            
            $
            180,477
            
            $
            4,159,738









47





*Reverse
      Repurchase Agreements and Credit Facilities*





Reverse
      repurchase agreements are secured loans generally with a term of 90 days. The
      interest rate is based on 90-day LIBOR plus a spread that is determined based
      on
      the asset pledged as security. The terms include a daily mark to market
      provision that requires the posting of additional collateral if the value of
      the
      pledged asset declines. After the 90-day period expires, there is no obligation
      for the lender to extend credit for an additional period. This type of financing
      generally is available only for more liquid securities. The interest rate
      charged on reverse repurchase agreements is usually the lowest relative to
      the
      alternatives due to the lower risk inherent in these transactions.





Committed
      financing facilities represent multi-year agreements to provide secured
      financing for a specific asset class. These facilities include a mark to market
      provision requiring the Company to repay borrowings if the value of the pledged
      asset declines in excess of a threshold amount. A significant difference between
      committed financing facilities and reverse repurchase agreements is the term
      of
      the financing. A committed facility provider generally is required to provide
      financing for the full term of the agreement, usually two to three years, rather
      than ninety days as generally used in the reverse repurchase market. This longer
      term makes the financing of less liquid assets viable.





During
      the second quarter of 2007, the Company entered into a $150 million committed
      dollar and non-dollar credit faculty with Lehman Commercial Paper Inc.
      Outstanding borrowings bear interest at LIBOR based variable rates. The facility
      matures in 60-days with two 30-day extensions available.





*CDOs*





Issuance
      of secured term debt is generally done through a CDO offering in a private
      placement. This entails creating a special purpose entity that holds assets
      used
      to secure the payments required of the debt issued. Asset cash flows generally
      are matched with the debt service requirements over their respective lives
      and
      an interest rate swap is used to match the fixed or floating rate nature of
      the
      coupon payments where necessary. This type of transaction is usually referred
      to
      as "match funding" or "term financing" the assets. There is no mark to market
      requirement in this structure and the debt cannot be called or terminated by
      the
      bondholders. Furthermore, the debt issued is non-recourse to the issuer; and
      therefore permanent reductions in asset value do not affect the liquidity of
      the
      Company. However, since the Company expects to earn a positive spread between
      the income generated by the assets and the expense of the debt issued, a
      permanent impairment of any of the assets would negatively affect the spread
      over time.





*Junior
      Subordinate Notes*





During
      April 2007, the Company announced the private placement of €50 million junior
      subordinated notes due in 2022. The notes bear interest at a rate equal to
      3-month Euribor plus 2.6%. The notes can be redeemed in whole by the Company
      subject to certain provisions. The Company has the option to redeem all or
      a
      portion of the Notes at any time on or after April 30, 2012 at a redemption
      price equal to 100% of the principal amount thereof plus accrued and unpaid
      interest through but excluding the redemption date.





48




*Preferred
      Equity Issuances*





The
      Company may issue preferred stock from time to time as a source of long-term
      or
      permanent capital. Preferred stock generally has a fixed coupon and may have
      a
      fixed term in the form of a maturity date or other redemption or conversion
      features. The preferred stockholder typically has the right to a preferential
      distribution for dividends and any liquidity proceeds.





On
      February 12, 2007, the Company issued $86,250 of Series D Cumulative Redeemable
      Preferred Stock (“Series D Preferred Stock”), including $11,250 of Series D
      Preferred Stock sold to underwriters pursuant to an over-allotment option.
      The
      Series D Preferred Stock will pay an annual dividend of 8.25%.





*Common
      Equity Issuances*





Another
      source of permanent capital is the issuance of common stock through a follow-on
      offering. This allows investors to purchase a large block of common stock in
      one
      transaction. A common stock issuance can be accretive to the Company's book
      value per share if the issue price per share exceeds the Company’s book value
      per share. It also can be accretive to earnings per share if the Company deploys
      the new capital into assets that generate a risk adjusted return that exceeds
      the return of the Company's existing assets. Furthermore, earnings accretion
      also can be achieved at reinvestment rates that are lower than the return on
      existing assets if common stock is issued at a premium to book
      value.





The
      Company continuously evaluates the market for follow-on common stock offerings
      as well as the available opportunities to deploy new capital on an accretive
      basis. For the three months ended March 31, 2007, the Company issued 15,363
      shares of Common Stock under its Dividend Reinvestment Plan. Net proceeds to
      the
      Company under the Dividend Reinvestment Plan were approximately
      $201.





For
      the
      three months ended March 31, 2007, the Company issued 111,700 shares of Common
      Stock in connection with a sales agency agreement with Brinson Patrick
      Securities Corporation. Net proceeds to the Company were approximately $1,347.





*Off-Balance
      Sheet Arrangements*




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





49


The
      Company has analyzed the governing pooling and servicing agreements for each
      of
      its Controlling Class CMBS and believes that the terms are consistent with
      the
      QSPE criteria and are industry standard. However, there is uncertainty with
      respect to QSPE treatment due to ongoing review by accounting standard setters,
      potential actions by various parties involved with the QSPE, as discussed above,
      as well as varying and evolving interpretations of the QSPE criteria under
      SFAS
      No. 140. Additionally, the standard setters continue to review the FIN 46(R)-5
      provisions related to the computations used to determine the primary beneficiary
      of a VIE. Future guidance from the standard setters may require the Company
      to
      consolidate CMBS trusts in which the Company has invested.





At
      March
      31, 2007, the Company owned securities of 33 Controlling Class CMBS trusts
      with
      a par of $1,115,314. The total par amount of CMBS issued by the 33 trusts was
      $49,811,289. One of the Company’s 33 Controlling Class trusts does not qualify
      as a QSPE and has been consolidated by the Company.





The
      Company’s maximum exposure to loss as a result of its investment in these VIEs
      totaled $870,833 and $762,567 at March 31, 2007 and December 31, 2006,
      respectively.





In
      addition, the Company has completed two securitizations that qualify as QSPE’s
      under SFAS No. 140. Through CDO HY1 and CDO HY2 the Company issued non-recourse
      liabilities secured by commercial related assets including portions of 17
      Controlling Class CMBS. Should future guidance from the standard setters
      determine that Controlling Class CMBS are not QSPE’s, the Company would be
      required to consolidate the assets, liabilities, income and expense of CDO
      HY1
      and CDO HY2.





The
      Company’s total maximum exposure to loss as a result of its investment in CDO
      HY1 and CDO HY2 at March 31 2007 and December 31, 2006, respectively, was
      $66,654 and $111,076.





The
      Company also owns non-investment debt and preferred securities in LEAFs CMBS
      I
      Ltd (“Leaf”), a QSPE under SFAS No. 140. Leaf issued non-recourse liabilities
      secured by investment grade commercial real estate securities. At March 31,
      2007
      and December 31, 2006, the Company’s total maximum exposure to loss as a result
      of its investment in Leaf was $6,518 and $6,796.




*Cash
      Flows*





Cash
      provided by operating activities is net income adjusted for certain non-cash
      items and changes in assets and liabilities including the Company’s trading
      securities. Operating activities provided cash flows of $166,051 and $42,899
      for
      the three months ending March 31, 2007, and 2006, respectively. Operating cash
      flow is affected by the purchase and sale of fixed income securities classified
      as trading securities. Proceeds received from repayment of trading securities
      also increases operating cash flows. The Company received $132,076 and $11,904
      from trading securities for the three months ended March 31, 2007 and 2006,
      respectively.





The
      Company’s investing cash flow consists primarily of the purchase, sale, and
      repayments on securities activities available for sale, commercial loan pools,
      commercial mortgage loans and equity investments. The Company’s investing
      activities used cash flows of $(208,374) and $(350,104), during the three months
      ended March 2007 and 2006, respectively.





50


Net
      cash
      flow provided by financing activities was $29,751 and $294,239 for the three
      months ended March 31, 2007 and 2006, respectively. During the three months
      ended March 31, 2007, net cash provided by financing activities primarily
      represented the issuance of preferred stock. During the three months ended
      March
      31, 2006, net cash provided by financing activities primarily represented the
      issuance of junior subordinated notes and significant borrowings under reverse
      repurchase agreements and credit facilities. Partially offsetting these cash
      inflows during the three months ended March 31, 2007 and 2006 was, repayments
      under reverse repurchase agreements and credit facilities and dividends
      payments.





**Transactions
      with Affiliates**




The
      Company has a Management Agreement with the Manager, the employer of certain
      directors and all of the 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. Pursuant to the Management
      Agreement, the Manager formulates investment strategies, arranges for the
      acquisition of assets, arranges for financing, monitors the performance of
      the
      Company’s assets and provides certain other advisory and managerial services in
      connection with the operations of the Company. For performing these services,
      the Company pays the Manager a base management fee equal to 2.0% of the
      quarterly average total stockholders’ equity for the applicable
      quarter.





To
      provide an incentive, the Manager is entitled to receive a quarterly incentive
      fee equal to 25% of the amount by which the rolling four-quarter GAAP net income
      before the incentive fee exceeds the greater of 8.5% or 400 basis points over
      the ten-year Treasury note multiplied by the adjusted per share issue price
      of
      the common stock ($11.37 per common share at March 31, 2007). Additionally,
      pursuant to a resolution of the Company’s Board of Directors adopted at the
      February 2006 meeting, 30% of the incentive fees earned in 2005 or after may
      be
      paid in shares of the Company’s Common Stock subject to certain provisions. The
      Board of Directors also authorized a stock based incentive plan where one-half
      of one percent of common shares outstanding at December 31 st is paid
      to the Manager.





The
      Company’s unaffiliated directors approved an extension of the Management
      Agreement to March 31, 2008 at the Board’s March 2007 meeting.





The
      following is a summary of management and incentive fees incurred for the three
      months ended March 31, 2007 and 2006:





For
                the Three Months
              Ended
                March 31,2007
            
            2006Management
                fee
            
            $
            3,520
            
            $
            3,050Incentive
                fee
            
            
            2,724
            
            
            1,169Incentive
                fee - stock based
            
            
            709
            
            
            -Total
                management and incentive fees
            
            $
            6,953
            
            $
            4,219





At March
      31 ,
      2007
      and 2006, respectively, management and incentive fees of $11,248 and $4,014
      remain payable to the Manager and are included on the accompanying consolidated
      statement of financial condition as a component of other liabilities.





51


In
      accordance with the provisions of the Management Agreement, the Company recorded
      reimbursements to the Manager of $117 for certain expenses incurred on behalf
      of
      the Company for the three months ended March 31, 2007, and $100 for the three
      months ended March 31 2006, which are included in general and administrative
      expense on the accompanying consolidated statements of operations.





The
      Company has administration and accounting services agreements with the Manager.
      Under the terms of the administration services agreement, the Manager provides
      financial reporting, audit coordination and accounting oversight services to
      the
      Company. Under the terms of the accounting services agreement, the Manager
      provides investment accounting services to the Company. For the three months
      ended March 31, 2007 and 2006, the Company recorded administration and
      investment accounting fees of $181 and $58, respectively, which are included
      in
      general and administrative expense on the accompanying consolidated statements
      of operations.





The
      special servicer on 28 of the Company's 33 Controlling Class trusts is Midland
      Loan Services, Inc. ("Midland"), a wholly owned indirect subsidiary of PNC
      Bank.
      Midland therefore may be presumed to be an affiliate of the Manager. The
      Company's fees for Midland’s services are at market rates.





On
      December 13, 2005, the Company entered into a $75,000 commitment to
      acquire shares of BlackRock
      Diamond Property Fund (“BlackRock Diamond”) .
      On February
      21, 2006, the Company increased its capital commitment by an additional $25,000,
      resulting in a total capital commitment of $100,000. BlackRock Diamond is a
      private REIT managed by BlackRock Realty Advisors, Inc., a subsidiary of the
      Manager. At
      March
      31, 2007, 100% of the com mitment
      has been called and the Company owned approximately 18% of BlackRock Diamond.
      The Company does not incur any additional management or incentive fees to the
      Manager as a result of its investment in BlackRock Diamond. The Company’s
      investment in BlackRock Diamond at March
      31 ,
      2007
      was $118,367. The Company’s unaffiliated directors approved this transaction in
      September 2005.





During
      2001, the Company entered into a $50,000 commitment to acquire shares of Carbon
      I, a private commercial real estate income opportunity fund managed by the
      Manager. The Carbon I investment period ended on July 12, 2004 and the Company’s
      investment in Carbon I at March 31, 2007 was $3,984. The Company does not incur
      any additional management or incentive fees to the Manager as a result of its
      investment in Carbon I. On March
      31 ,
      2007,
      the Company owned approximately 20% of the outstanding shares of Carbon I. The
      Company’s unaffiliated directors approved this transaction in July
      2001.





The
      Company entered into an aggregate commitment of $100,000 to acquire shares
      of
      Carbon II, a private commercial real estate income opportunity fund managed
      by
      the Manager. At March 31,
      2007, the Company’s investment in Carbon II was $85,274 and the Company’s
      remaining commitment to Carbon II is $14,726. The Company does not incur any
      additional management or incentive fees to the Manager as a result of its
      investment in Carbon II. The Company’s unaffiliated directors approved this
      transaction in September 2004.







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





During
      the first quarter of 2006, the Company and certain subsidiaries elected to
      have
      the subsidiaries treated as taxable REIT subsidiaries.  This election
      permits the subsidiaries to enter into activities related to foreign investments
      that may not have constituted qualifying assets generating qualifying income
      for
      the REIT tests.




52


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





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





The
      majority of the Company’s assets are fixed rate securities valued based on a
      market credit spread to U.S. Treasuries. As U.S. Treasury securities are priced
      to a higher yield and/or the spread to U.S. Treasuries used to price the
      Company’s assets is increased, the estimated fair value of the Company’s
      portfolio may decline. Conversely, as U.S. Treasury securities are priced to
      a
      lower yield and/or the spread to U.S. Treasuries used to price the Company’s
      assets is decreased, the estimated fair value of the Company’s portfolio may
      increase. Changes in the estimated fair value of the Company's portfolio may
      affect the Company's net income or cash flow directly through their impact
      on
      unrealized gains or losses on securities held-for-trading or indirectly through
      their impact on the Company's ability to borrow. Changes in the level of the
      U.S. Treasury yield curve can also affect, among other things, the prepayment
      assumptions used to value certain of the Company’s securities and the Company’s
      ability to realize gains from the sale of such assets. In addition, changes
      in
      the general level of the LIBOR money market rates can affect the Company’s net
      interest income. At March 31, 2007, all of the Company’s short-term
      collateralized liabilities outside of the CDOs are floating rate based on a
      market spread to LIBOR. As the level of LIBOR increases or decreases, the
      Company’s interest expense will move in the same direction.





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





53


The
      Company monitors and manages interest rate risk based on a method that takes
      into consideration the interest rate sensitivity of the Company’s assets and
      liabilities, including preferred stock. The Company’s objective is to acquire
      assets and match fund the purchase so that interest rate risk associated with
      financing these assets is reduced or eliminated. The primary risks associated
      with acquiring and financing these assets under 90-day repurchase agreements
      and
      committed borrowing facilities are mark-to-market risk and short-term rate
      risk.
      Certain secured financing arrangements provide for an advance rate based upon
      a
      percentage of the estimated fair value of the asset being financed. Market
      movements that cause asset values to decline would require a margin call or
      a
      cash payment to maintain the relationship between asset value and amount
      borrowed. A cash flow based CDO is an example of a secured financing vehicle
      that does not require a mark-to-market to establish or maintain a level of
      financing. When financed assets are subject to a mark-to-market margin call,
      the
      Company carefully monitors the interest rate sensitivity of those assets. The
      duration of the assets financed which are subject to a mark-to-market margin
      call was 2.0 years based on net asset value at March 31, 2007. This means that
      a
      100 basis point increase in interest rates would cause a margin call of
      approximately $15,000.





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





Regarding
      the table below, all changes in net interest income are measured as percentage
      changes from the respective values calculated in the scenario labeled as “Base
      Case.” The base interest rate scenario assumes interest rates at March
      31,
      2007 .
      Actual
      results could differ significantly from these estimates.





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





The
      Company’s GAAP book value incorporates the estimated fair value of the Company’s
      interest bearing assets but it does not incorporate the estimated fair value
      of
      the Company’s interest bearing fixed rate liabilities and preferred stock. The
      fixed rate liabilities and preferred stock generally will reduce the actual
      interest rate risk of the Company from an economic perspective even though
      changes in the estimated fair value of these liabilities are not reflected
      in
      the Company’s reported book value. The Company focuses on economic risk in
      managing its sensitivity to interest rates and maintains an economic duration
      within a band of 2.0 to 5.0 years. At March 31, 2007, economic duration for
      the
      Company’s entire portfolio was 2.3 years. This implies that for each 100 basis
      points of change in interest rates the Company’s economic value will change by
      approximately 2.3%. At March 31, 2007 the Company estimates its economic value,
      or net asset value of its common stock to be $723,340.





54


A
      reconciliation of the economic duration of the Company to the duration of the
      reported book value of the Company’s common stock is as follows:





Duration
                - GAAP book value at March 31, 2007
            7.8Less:Duration
                contribution of CDO I liabilities
            (1.1)Duration
                contribution of CDO II liabilities
            (1.0)Duration
                contribution of CDO III liabilities
            (0.9)Duration
                contribution of CDO HY3 liabilities
            (0.7)Duration
                contribution of Euro CDO liabilities
            (0.1)Duration
                contribution of Series C Preferred Stock
            (0.0)Duration
                contribution of Series D Preferred Stock
            (0.4)Duration
                contribution of junior subordinated notes
            (0.7)Duration
                contribution of senior unsecured notes
            (0.6)Economic
                duration at March 31, 2007
            2.3





The
      GAAP
      book value of the Company’s common stock is $10.38 per share. As indicated in
      the table above a 100 basis point change in interest rates will change reported
      book value by approximately 7.8%, or $58,000. However, the duration of the
      Company’s portfolio not financed with match funded debt is 2.0. This means that
      a 100 basis point increase in interest rates or credit spreads would cause
      a
      margin call of approximately $15,000.





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





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





55


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





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





Factors
      that indicate a higher loss severity or acceleration of the timing of an
      expected loss will cause a reduction in the expected yield and therefore reduce
      the earnings of the Company. 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 operations.





For
      purposes of illustration, a doubling of the losses in the Company’s Controlling
      Class CMBS, without a significant acceleration of those losses, would reduce
      GAAP income by approximately $0.99 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 $0.08 to $0.28 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. At March 31, 2007, securities with a total estimated
      fair value of $2,158,105 are collateralizing the CDO borrowings of $1,822,871;
      therefore, the Company’s preferred equity interest in the five CDOs is $335,234
      ($5.75 per share).





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




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




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





56


**ITEM
      4.**  CONTROLS
      AND PROCEDURES





The
      Company, under the direction and with the participation of its management,
      including the Chief Executive Officer and the Chief Financial Officer, evaluated
      the effectiveness of the Company's disclosure controls and procedures (as
      defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
      (the "Exchange Act")) as of the end of the period covered by this report. Based
      on that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that the Company's disclosure controls and procedures were effective
      at March 31, 2007.





No
      change
      in internal control over financial reporting (as defined in Rule 13a-15(f)
      under
      the Exchange Act) occurred during the quarter ended March 31, 2007 that has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.





57


Part
      II –
      OTHER INFORMATION





Item
      1. **** LEGAL
      PROCEEDINGS





At
      March
      31, 2007, there were no pending legal proceedings in which the Company was
      a
      defendant or of which any of its property was subject.




Item
      1A.
      Risk Factors




Certain
      factors may have a material adverse effect on the Company’s business, financial
      condition and results of operations. For discussion of the Company’s potential
      risks, refer to Part I, "Item 1A., Risk Factors", included in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2006 as filed with
      the U.S. Securities and Exchange Commission on March 16, 2007.




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





During
      the three months ended March 31, 2007, the Company issued 364,453 shares
      of unregistered Common Stock with an aggregate value of $4,433. Pursuant to
      the Management Agreement which authorizes that a portion of incentive fees
      earned by the Manager may be paid in shares of the Company’s Common
      Stock, the Company issued 75,298 shares to the Manager as payment of a
      portion of the Manager's incentive fees. Pursuant to the portion of the
      Management Agreement which authorizes that a stock based incentive plan where
      one-half of one percent of common shares outstanding as of December
      31 st be paid
      to the Manager, 289,155 shares were issued in March 2007. The issuances of
      common stock were made in reliance upon the exemption from registration under
      Section 4(2) of the Securities Act.





Item
      3.
      Defaults Upon Senior Securities





None.





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





None.





Item
      5.
      Other Information





None.





Item
      6.
      Exhibits




Exhibit
                No.
            Description4.1
            Indenture, dated as of October 4, 2006,
              between Anthracite Capital, Inc. and Wells Fargo Bank, N.A., as
              trustee4.2
            Indenture, dated as of October 17,
              2006, between Anthracite Capital, Inc. and Wells Fargo Bank, N.A.,
              as
              trustee31.1
            Certification of Chief Executive
              Officer31.2
            Certification of Chief Financial
              Officer32.1
            Section 1350 Certification of Chief
              Executive Officer and Chief Financial
              Officer




58


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.Date: May
              10, 2007
            By:
            /s/ Christopher
              A. MilnerName:
              Christopher A. MilnerTitle:
                Chief Executive Officer
              (duly
                authorized representative)


Date: May
              10,
              2007
            By:
            /s/ James
              J.
              LillisName:
              James J. LillisTitle:
              Chief Financial Officer


59