ANTHRACITE CAPITAL INC, 424B1, 1998-03-24

ANTHRACITE CAPITAL INC
424B1, 1998-03-24
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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<PAGE>
Filed Pursuant to Rule 424(b)(1)

Registration No. 333-40813

PROSPECTUS

20,000,000 SHARES

ANTHRACITE CAPITAL, INC.

COMMON STOCK
------------------

Anthracite Capital, Inc. (the "Company"), a Maryland corporation, was
organized in November 1997 to invest in a diversified portfolio of multifamily,
commercial and residential mortgage loans, mortgage-backed securities and other
real estate related assets in U.S. and non-U.S. markets. The Company will seek
to achieve strong investment returns by maximizing the spread of investment
income (net of credit losses) earned on its real estate assets over the cost of
financing and hedging these assets and/or liabilities. The Company's business
decisions will depend on changing market factors, and the Company will pursue
various strategies and opportunities in different market environments. The
Company will elect to be taxed as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code"), and generally will
not be subject to federal income tax to the extent that it distributes its net
income to stockholders and maintains its qualification as a REIT. The Company's
operations will be managed by BlackRock Financial Management, Inc. (the
"Manager" or "BlackRock"), an indirect subsidiary of PNC Bank Corp. ("PNC"). The
Company has no ownership interest in the Manager.
--------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY, INCLUDING:

- The Company intends to invest in assets that are risky and suitable only
for sophisticated investors;

- The Manager has never managed a REIT, and there can be no assurance that
the past experience of the Manager will be sufficient to successfully
manage the business of the Company;

- The Company's operations are expected to be highly leveraged, and there
are no limitations on borrowings, which is likely to increase the
volatility of the Company's income and net asset value and could result in
operating or capital losses;

- The Manager is a subsidiary of PNC Bank, National Association ("PNC
Bank"), and therefore PNC Bank will be able to influence the affairs of
the Manager and the investment decisions of the Company;

- The Company was organized in November 1997, had no assets at December 31,
1997, has no operating history, and there is no prior market for the
Common Stock;

- None of the Company's assets have been identified and delays in investing
the net proceeds of the Offering will result in reduced income;

- The Company has no established financing sources, and there can be no
assurance that financing will be available on favorable terms;

- The Company will face substantial competition in acquiring suitable
investments, which could increase its costs;

(CONTINUED ON NEXT PAGE)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share......................................... $15.00 $1.05 $13.95
Total (3)......................................... $300,000,000 $21,000,000 $279,000,000
</TABLE>

(1) The Company has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000, payable by the Company.
(3) The Company has granted to the underwriters a 30-day option to purchase up
to an aggregate number of 3,000,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $345,000,000, $24,150,000, and $320,850,000 ,
respectively. See "Underwriting."
----------------------------------

The shares of Common Stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by the
underwriters and subject to approval of certain legal matters by counsel for the
underwriters and certain other conditions. The underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made in New
York, New York on or about March 27, 1998.

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

LEHMAN BROTHERS

PRUDENTIAL SECURITIES
INCORPORATED

The date of this Prospectus is March 24, 1998.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)

- The Company intends to acquire significant amounts of mortgage loans and
non-investment grade mortgage-backed securities, which may be subject to
significant credit risk of loss of principal and non-payment of interest;

- The yield on the Company's investments, including interest only securities
("IOs"), and the value of the Company's Common Stock, will be sensitive to
changes in prevailing interest rates and changes in prepayment rates,
which may result in a mismatch between the Company's borrowing rates and
asset yields and consequently reduce or eliminate the net income from the
Company's investments;

- The Company intends to use hedging strategies that involve risk and that
may not be successful in insulating the Company from exposure to changing
interest and prepayment rates;

- The Company will be taxed as a regular corporation if it fails to qualify
or maintain its qualification as a REIT;

- The Company's investment and operating policies and strategies may be
changed at any time without the consent of stockholders;

- The Management Agreement provides for base management fees payable to the
Manager without consideration of the performance of the Company's
portfolio and also provides for incentive fees based on certain
performance criteria, which could result in the Manager recommending
riskier or more speculative investments;

- Stockholders will be subject to significant potential dilution from future
equity offerings, including offerings of preferred stock; and

- The Company's activities, structure and operations may be adversely
affected by changes in the tax laws applicable to REITs.

All of the shares of common stock (the "Common Stock") offered hereby are
being sold by the Company. The Common Stock offered to the public hereby will
represent all of the equity ownership of the Company, except as follows. PNC has
agreed to purchase in a private placement that will close concurrently with the
offering made hereby (the "Offering"), at a price per share equal to the initial
public offering price, net of underwriting discounts and commissions, a number
of shares of Common Stock such that following completion of the Offering and the
Underwriters' exercise of the over-allotment option, if any, PNC will own 3% of
the shares of Common Stock outstanding. In addition, FBR Asset Investment
Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc., one of the
Representatives of the Underwriters, has agreed to acquire $10 million of Common
Stock in a private placement that will close concurrently with the Offering at
the initial public offering price, net of underwriting discounts and
commissions.

Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price for the
Common Stock is $15 per share. See "Underwriting" for information relating to
the determination of the initial public offering price. The Common Stock has
been approved for listing on the New York Stock Exchange (the "NYSE") under the
symbol "AHR."
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THE MARKET PRICE, THE
PURCHASE OF SHARES OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
------------------------

CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS," WHICH
CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "INTEND," "CONTINUE," OR
"BELIEVES" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE STATEMENTS IN "RISK FACTORS" IN THIS PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.

THIS PROSPECTUS MAY CONTAIN PROJECTIONS, FORECASTS OR ESTIMATES OF FUTURE
PERFORMANCE OR CASH FLOWS OF THE COMPANY. PROJECTIONS, FORECASTS AND ESTIMATES
ARE ALSO FORWARD-LOOKING STATEMENTS AND WILL BE BASED UPON CERTAIN ASSUMPTIONS.
ACTUAL EVENTS ARE DIFFICULT TO PREDICT AND MAY BE BEYOND THE COMPANY'S CONTROL.
ACTUAL EVENTS MAY DIFFER FROM THOSE ASSUMED. SOME IMPORTANT FACTORS THAT WOULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING
STATEMENTS INCLUDE CHANGES IN INTEREST RATES; DOMESTIC AND FOREIGN BUSINESS,
MARKET, FINANCIAL OR LEGAL CONDITIONS; DIFFERENCES IN THE ACTUAL ALLOCATION OF
THE ASSETS OF THE COMPANY FROM THOSE ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE
HEDGED AND THE EFFECTIVENESS OF THE HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE
OF RISK WILL BE INCREASED BY THE COMPANY'S LEVERAGING OF ITS ASSETS.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT ANY ESTIMATED RETURNS OR PROJECTIONS
CAN BE REALIZED OR THAT ACTUAL RETURNS OR RESULTS WILL NOT BE MATERIALLY LOWER
THAN THOSE THAT MAY BE ESTIMATED.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY............................. 1
The Company.................................... 1
General...................................... 1
Investment Strategy.......................... 1
Summary Risk Factors........................... 3
Relationship With PNC........................ 4
Credit Risk Management......................... 5
The Manager.................................... 5
General...................................... 5
Organization and Relationships................. 6
The Management Agreement....................... 6
Management Compensation...................... 7
Conflicts of Interest of the Manager......... 8
Tax Status of the Company...................... 9
Certain Benefits to Related Parties............ 9
Industry Trends................................ 10
Dividend Policy and Distributions.............. 11
The Offering................................... 11
RISK FACTORS................................... 12
Conflicts of Interest of the Manager May Result
in Decisions That Do Not Fully Reflect
Stockholders' Best Interests................. 12
No Operating History; No Established Financing;
No Prior Market For Common Stock............. 13
Dependence on The Manager; Termination of
Management Agreement......................... 13
Interest Rate Fluctuations Will Affect Value of
Mortgage Assets, Net Income and Common
Stock........................................ 14
General...................................... 14
Interest Rate Mismatch Could Occur Between
Asset Yields and Borrowing Rates Resulting
in Decreased Yield......................... 14
Inverted Yield Curve Adversely Affects
Income..................................... 14
Prepayment Rates Can Increase, Thus Adversely
Affecting Yields........................... 14
Ownership of Non-Investment Grade Mortgage
Assets Subject To Increased Risk of Loss..... 15
Risk of Loss on Mortgage Loans................. 16
Multifamily and Commercial Loans Involve a
Greater Risk of Loss than Single Family
Loans...................................... 16
Limited Recourse Loans May Limit the
Company's Recovery to the Value of the
Mortgaged Property......................... 16
Volatility of Values of Mortgaged Properties
May Affect Adversely the Company's Mortgage
Loans...................................... 16
Construction, Bridge and Mezzanine Loans
Involve Greater Risks of Loss than Loans
Secured by Income Producing Properties..... 17
Distressed Mortgage Loans May Have Greater
Default Risks than Performing Loans........ 17
Foreign Mortgage Loans and Real Properties
are Subject to Currency Conversion Risks,
Foreign Tax Laws and Uncertainty of Foreign
Laws....................................... 17
Risks Related to Investments in Real
Property................................... 17

<CAPTION>
PAGE
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<S> <C>
Reverse Repurchase Agreements and Dollar Roll
Agreements................................... 18
Leverage Increases Exposure to Loss............ 18
Hedging Transactions Can Limit Gains and
Increase Exposure to Losses.................. 19
Tax, Legal and Other Risks..................... 20
Failure to Maintain REIT Status Would Have
Adverse Tax Consequences................... 20
Risk of Changes in the Tax Law Applicable to
REITs...................................... 21
Risk of Adverse Tax Treatment of Excess
Inclusion Income........................... 21
Risk that Potential Future Offerings Could
Dilute the Interest of Holders of Common
Stock...................................... 21
Future Revisions in Policies and Strategies
Without Stockholder Consent Create
Uncertainty for Investors.................. 21
Significant Competition May Adversely Affect
the Company's Ability to Acquire Assets.... 21
Failure to Maintain Exemption from the
Investment Company Act Would Restrict the
Company's Operating Flexibility............ 22
Failure to Develop a Public Market May Result
in a Decrease in Market Price.............. 22
Temporary Investment in Short-Term
Investments Will Reduce the Earnings of the
Company.................................... 22
Restrictions on Ownership of the Common
Stock...................................... 23
Possible Environmental Liabilities........... 23
Limitation on Liability of Manager........... 24
Investments May Be Illiquid and Their Value
May Decrease............................... 24
Plans Should Consider ERISA Risks of
Investing in Common Stock.................. 24
Year 2000 Compliance......................... 24
USE OF PROCEEDS................................ 25
DIVIDEND AND DISTRIBUTION POLICY............... 25
CAPITALIZATION................................. 26
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST... 26
THE COMPANY.................................... 28
General...................................... 28
Investment Strategy.......................... 28
Operating Policies and Strategies............ 29
Operating Policies......................... 29
Capital and Leverage Policies.............. 29
Liabilities................................ 30
Relationship With PNC...................... 30
Securitization............................. 32
Credit Risk Management..................... 33
Asset/Liability Management................. 33
Hedging Activities......................... 33
Other Policies............................. 34
Future Revisions in Policies and
Strategies............................... 35
DESCRIPTION OF REAL ESTATE RELATED ASSETS...... 35
Mortgage Loans............................... 35
Distressed Mortgage Loans.................... 36
Construction Financing, Bridge Financing and
Loans Subject to Prior Liens............... 36
</TABLE>

i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Commitments to Mortgage Loan Sellers......... 36
Bridge Loans................................. 38
Mortgage-Backed Securities................... 38
Commercial Mortgage-Backed Securities........ 40
Foreign Mortgage Investments................. 41
FHA and GNMA Project Loans................... 41
Pass-Through Certificates.................... 42
Privately Issued Pass-Through Certificates... 42
FNMA Certificates............................ 42
FHLMC Certificates........................... 43
GNMA Certificates............................ 43
CMOs......................................... 43
Mortgage Derivatives......................... 44
Multifamily and Commercial Real Properties... 44
Real Properties With Known Environmental
Problems................................... 45
Net Leased Real Estate....................... 46
SECURITIES OF OR INTERESTS IN COMPANIES
PRIMARILY ENGAGED IN REAL ESTATE ACTIVITIES
AND INVESTMENTS IN OTHER SECURITIES.......... 46
EMPLOYEES...................................... 47
FACILITIES..................................... 47
LEGAL PROCEEDINGS.............................. 47
MANAGEMENT OF THE COMPANY...................... 48
Directors and Executive Officers of the
Company.................................... 48
Executive Compensation....................... 53
Stock Options................................ 53
THE MANAGER.................................... 55
The Management Agreement..................... 55
Management Compensation...................... 57
Expenses..................................... 59
Conflicts of Interest........................ 60
Limits of Responsibility..................... 60
FEDERAL INCOME TAX CONSEQUENCES................ 61
Taxation of the Company...................... 61
Requirements for Qualification............... 62
Income Tests............................... 63
Asset Tests................................ 66
Distribution Requirements.................. 67
Recordkeeping Requirements................... 69
<CAPTION>
PAGE
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<S> <C>
Failure to Qualify........................... 69
Taxation of Taxable U.S. Stockholders........ 69
Taxation of Stockholders on the Disposition
of the Common Stock........................ 71
Capital Gains and Losses..................... 71
Information Reporting Requirements and Backup
Withholding................................ 71
Taxation of Tax-Exempt Stockholders.......... 72
Taxation of Non-U.S. Stockholders............ 73
State and Local Taxes........................ 74
Taxation of ASC.............................. 74
Proposed Tax Legislation..................... 75
ERISA CONSIDERATIONS........................... 75
DESCRIPTION OF CAPITAL STOCK................... 76
Repurchase of Shares and Restrictions on
Transfer................................... 76
DIVIDEND REINVESTMENT PLAN..................... 78
MATERIAL PROVISIONS OF MARYLAND LAW AND OF THE
COMPANY'S ARTICLES OF AMENDMENT AND
RESTATEMENT AND BYLAWS....................... 78
Removal of Directors......................... 78
Staggered Board.............................. 79
Business Combinations........................ 79
Control Share Acquisitions................... 79
Amendment to the Articles of Amendment and
Restatement................................ 80
Dissolution of the Company................... 80
Advance Notice of Director Nominations and
New Business............................... 80
Possible Anti-Takeover Effect of Material
Provisions of Maryland Law and of the
Articles of Amendment and Restatement and
Bylaws..................................... 81
TRANSFER AGENT AND REGISTRAR................... 81
REPORTS TO STOCKHOLDERS........................ 81
UNDERWRITING................................... 82
LEGAL MATTERS.................................. 84
EXPERTS........................................ 84
ADDITIONAL INFORMATION......................... 84
GLOSSARY....................................... G-1
FINANCIAL STATEMENT............................ F-1
</TABLE>

ii
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS. CAPITALIZED AND OTHER TERMS USED HEREIN SHALL HAVE THE MEANINGS
ASSIGNED TO THEM IN THE GLOSSARY, WHICH STARTS AT PAGE G-1. UNLESS OTHERWISE
INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INHERENTLY INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS" AND WITHIN THE PROSPECTUS
GENERALLY.

THE COMPANY

GENERAL

Anthracite Capital, Inc. (the "Company"), a Maryland corporation, was formed
in November 1997 to invest in multifamily, commercial and residential mortgage
loans, mortgage-backed securities and other real estate related assets in both
U.S. and non-U.S. markets. The Company will use its equity capital and borrowed
funds to seek to achieve strong investment returns by maximizing the spread of
investment income (net of credit losses) earned on its real estate assets over
the cost of financing and hedging these assets. The Company will elect to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"). The Company generally will not be subject to
federal income tax to the extent that it distributes its net income to its
stockholders and maintains its qualification as a REIT. See "Federal Income Tax
Consequences--Requirements for Qualification--Distribution Requirements."

The day-to-day operations of the Company will be managed by BlackRock
Financial Management, Inc. (the "Manager" or "BlackRock"), subject to the
direction and oversight of the Company's Board of Directors, which shall
initially consist of six members, four of whom will be unaffiliated with the
Manager or its Affiliates. The Manager, a Delaware corporation, is a subsidiary
of PNC Bank, National Association ("PNC Bank").

INVESTMENT STRATEGY

The Company intends to purchase and originate multifamily, commercial and
residential term loans ("Mortgage Loans") and interests in multifamily and
commercial mortgage-backed securities ("CMBS"). The Company also may invest in
interests in residential mortgage-backed securities ("RMBS" and, together with
CMBS, "MBS"). The Company may hold its Mortgage Loans or utilize them as
collateral to create its own MBS.

Initially, one of the Company's primary investment focuses will be the
acquisition of non-investment grade CMBS. Non-investment grade CMBS offer the
potential of higher yields than relatively more senior classes of CMBS, but
carry greater credit and prepayment risk. The Company believes that a prudently
managed portfolio of non-investment grade CMBS can produce attractive returns in
a variety of interest rate environments, but no assurance can be given that such
returns will be achieved.

The Company will take an opportunistic approach to its investments and,
accordingly, the Company may invest in assets other than Mortgage Loans and MBS.
The Company may invest in or provide loans used to finance construction
("Construction Loans"), loans secured by real property and used as temporary
financing ("Bridge Loans") and loans secured by junior liens on real property
("Mezzanine Loans"). The Company may invest in multifamily and commercial
Mortgage Loans that are in default ("Nonperforming Mortgage Loans") or for which
default is likely or imminent or for which the borrower is making monthly
payments in accordance with a forbearance plan ("Subperforming Mortgage Loans"
and,

1
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together with Nonperforming Mortgage Loans, "Distressed Mortgage Loans"). The
Company may also invest, for hedging and other purposes, in derivative mortgage
securities such as interest only ("IO") strips, principal only ("PO") strips,
and other securities with significant exposure to changes in mortgage prepayment
rates.

The Company expects that a portion of its mortgage assets will consist of
foreign MBS and foreign Mortgage Loans that the Company believes can provide
attractive returns. In addition, the Company may invest in real property located
outside the United States. The Company may invest in multifamily, commercial and
other real property, including Net Leased Real Estate, properties acquired at
foreclosure or by deed-in-lieu of foreclosure ("REO Property") and other
underperforming or otherwise distressed real property (all of such
underperforming and distressed real property, together with REO Property, being
referred to collectively as "Distressed Real Property"). The Company may invest
in registered investment companies, partnerships and other investment funds and
other types of non-mortgage related assets and intends to engage in hedging
transactions to reduce interest rate, prepayment and currency exchange rate
risks, subject to the REIT Provisions of the Code and the requirements for
exemption from the Investment Company Act of 1940, as amended (the "Investment
Company Act").

The Company will finance its assets with the net proceeds of this Offering,
future offerings of equity securities and borrowings, and expects that it will
employ leverage consistent with the type of assets acquired and the desired
level of risk in various investment environments, in general. The Company's
governing documents do not explicitly limit the amount of leverage that the
Company may employ. Instead, the Board of Directors will adopt an indebtedness
policy for the Company that will give the Manager extensive discretion as to the
amount of leverage to be employed, depending on the Manager's assessment of
acceptable risk and consistent with the nature of the assets then held by the
Company, subject to periodic review by the Company's Board of Directors. Once
fully invested, the Company anticipates maintaining a debt-to-equity ratio of
between 3.5:1 and 4.5:1; although this ratio may be higher or lower from time to
time. Moreover, the Company's indebtedness policy may be changed by the Board of
Directors in the future. The Company will leverage its assets primarily with
reverse repurchase agreements, dollar rolls, securitizations of its Mortgage
Loans and secured and unsecured loans, including the issuance of commercial
paper. The Company also expects to issue preferred stock as a source of longer
term capital to finance asset growth.

The Company's policy is to acquire those mortgage assets that it believes
are likely to generate the highest returns on capital invested, after
considering the amount and nature of anticipated cash flows from the asset, the
credit risk of the borrower, the Company's ability to pledge the asset to secure
collateralized borrowings, the capital requirements resulting from the purchase
and financing of the asset, the potential for appreciations and the costs of
financing, hedging and managing the asset. Prior to acquisition, potential
returns on capital employed will be assessed over the expected life of the asset
and in a variety of interest rate, yield spread, financing cost, credit loss and
prepayment scenarios. In managing the Company's portfolio, the Manager will
establish stringent credit standards and credit monitoring procedures and will
also consider balance sheet management and risk diversification issues. The
Company will employ proprietary risk management tools developed by the Manager
to continually monitor the risks of its assets and liabilities. Similar
proprietary tools will also help the Company achieve its goal of having its
annual income, determined in accordance with generally accepted accounting
principles, equal or exceed its annual Taxable Income. The Company also intends
to minimize its Excess Inclusion Income. See "Federal Income Tax Consequences."
Pursuant to the Company's investment guidelines, the Company's investments will
be made based on the Manager's assessment of prevailing market conditions and
the relative risks and returns available at the time. An investor in the Common
Stock offered hereby is therefore subject to the risk that the Company's
investment strategy will differ from that which would be selected by such
investor at any given time.

2
<PAGE>
SUMMARY RISK FACTORS

Each prospective purchaser of the Common Stock offered hereby should review
"Risk Factors" beginning on page 12 for a discussion of material risks that
should be considered before investing in the Common Stock, including the
following:

- The Company intends to invest in assets that are risky and suitable only
for sophisticated investors.

- The Manager has never managed a REIT. There can be no assurance that the
past experience of the Manager will be sufficient to successfully manage
the business of the Company.

- The Company's Articles of Amendment and Restatement do not expressly limit
borrowings. The Company intends to leverage its investments in an amount
to be determined by the Manager and, ultimately, by the Board of
Directors. Such leverage is likely to increase the volatility of the
Company's income and net asset value and could result in operating or
capital losses. If borrowing costs increase, or if the cash flow generated
by the Company's assets decreases, the Company's use of leverage will
increase the likelihood that the Company will experience reduced or
negative cash flow and reduced liquidity.

- The Company and the Manager have common officers and directors, which may
present conflicts of interest in the Company's dealings with the Manager
and its Affiliates, including the Company's purchase of assets originated
by such Affiliates. For example, the Company may purchase certain mortgage
assets from PNC Bank, which owns 70% of the outstanding capital stock of
the Manager. Because PNC Bank will be able to influence the affairs of the
Manager there is a risk that PNC Bank will be able to influence the
investment decisions of the Company.

- The Company was organized in November 1997 and has only limited assets and
no operating history. There is no prior market for the Common Stock, and
the Company has no established financing sources.

- The Company intends to acquire significant amounts of Mortgage Loans and
non-investment grade MBS, which are subject to greater risk of credit loss
of principal and non-payment of interest than investments in senior
investment grade securities.

- No specific assets have been identified for purchase by the Company, and
delays in investing the proceeds of the Offering would result in reduced
income. The Company will face substantial competition in acquiring
suitable investments, which could increase its costs. Stockholders will
not have the opportunity to evaluate the manner in which the proceeds of
the Offering are to be invested or the economic merits of particular
assets to be acquired. The Manager will exercise significant discretion in
investing and allocating the proceeds of the Offering.

- Assets to be purchased by the Company from PNC Bank and its Affiliates may
in some cases not have a readily determinable fair market value. Depending
on the circumstances, the investment guidelines approved by the Board of
Directors may not require independent valuations.

- The yield on investments in Mortgage Loans and MBS, particularly IOs and
POs, and thus the value of the Company's Common Stock, will be sensitive
to changes in prevailing interest rates and changes in prepayment rates,
which may result in a mismatch between the Company's borrowing rates and
asset yields and consequently reduce or eliminate income derived from the
Company's investments.

- The Company may invest in real property, or mortgage loans secured by real
property, located outside the United States, which may expose the Company
to currency conversion risks, foreign tax laws and the uncertainty of
foreign laws.

3
<PAGE>
- Delinquency and loss ratios on the Company's Mortgage Loans will be
affected by the performance of third-party servicers and special
servicers.

- The Company intends to use hedging strategies that involve risk and that
may not be successful in insulating the Company from exposure to changing
interest and prepayment rates.

- The Company will be taxed as a regular corporation if it fails to maintain
its qualification as a REIT, which would reduce earnings and cash
available for distribution to stockholders.

- The Company's investment and operating policies and the strategies that
the Manager uses to implement those policies may be changed at any time
without the consent of stockholders.

- Termination of the Management Agreement by the Company may result in the
payment of a substantial termination fee, which will be equal to the value
of the Management Agreement for the next four years, and such payment
could adversely affect the Company's financial condition. Termination of
the Management Agreement by the Manager could adversely affect the Company
if the Company were unable to find a suitable replacement.

- Stockholders will be subject to significant potential dilution from future
equity offerings, including offerings of preferred stock, which may have
an adverse effect on the market price of the Common Stock.

- The Company's activities, structure and operations may be adversely
affected by changes in the tax laws applicable to REITs.

- Failure to maintain an exemption from the Investment Company Act would
adversely affect results of operations.

- The Manager manages funds that are authorized to invest in certain of the
assets in which the Company may invest. There may be investment
opportunities that are favorable to each of the Company and certain other
funds managed by the Manager. In that case, the Manager will allocate
investment opportunities among the potential investors based upon the
investors' primary investment objectives, applicable investment
restrictions, and such other factors as the Manager deems appropriate and
fair under the circumstances.

- The Manager is not prohibited from managing or advising REITs or other
entities that may compete with the Company for assets, including entities
that may have similar investment objectives to the Company's.

RELATIONSHIP WITH PNC

PNC Bank, a subsidiary of PNC Bank Corp. ("PNC"), originated approximately
$5.8 billion, on a gross basis, in commercial and multifamily loans in 1997
through its network of offices and correspondent relationships. PNC Bank will
enter into an agreement granting the Company, so long as the Management
Agreement (as hereinafter defined) with the Manager remains in effect, a right
of first offer to purchase, at fair market value, not less than $1 billion
annually of multifamily and commercial Mortgage Loans originated by PNC Bank and
which PNC Bank has determined to make available for sale, which may include
loans eligible for sale to securitization conduits and loans that are ineligible
for securitization, such as Mezzanine Loans. Although not contractually
committed to do so, the Company intends to purchase

4
<PAGE>
pools of Mortgage Loans offered to it pursuant to the foregoing right of first
offer, provided such purchase would comply with the Company's investment
guidelines and underwriting criteria as established and modified from time to
time. The Company also expects in certain circumstances to "table fund" loans
originated by PNC Bank. That is, the Company will fund the loan directly to the
borrower at closing and will pay PNC Bank an origination fee for sourcing and
originating the loan. In some cases, the Company may pay part or all of such
fees with securities of the Company. This arrangement will enable PNC Bank to
originate loans that it might not wish to retain, either because of regulatory
capital rules applicable to PNC Bank or for other similar reasons. The Company
believes that pools of PNC Bank's Mortgage Loans will be appropriate investments
for the Company given the Company's investment strategy.

On January 28, 1998, PNC Bank announced an agreement with Midland Loan
Services, L.P. ("Midland"), headquartered in Kansas City, Missouri, under which
substantially all of Midland's assets will be acquired and substantially all of
Midland's liabilities will be assumed by Midland Loan Services, Inc. ("New
Midland"), a newly formed Delaware corporation that is a wholly owned subsidiary
of PNC Bank. The closing of this transaction, which is subject to the
satisfaction of certain conditions, is expected to close in the second quarter
of 1998. Midland is a real estate financial services company which provides loan
servicing and asset management for large pools of commercial and multifamily
real estate loans and originates commercial real estate loans. As of January 31,
1998, Midland and its affiliates were responsible for servicing commercial and
multifamily loans with an aggregate principal balance of approximately $23.9
billion. In 1997, Midland originated approximately $714 million in commercial
and multifamily mortgage loans. Although no formal agreement exists, if the
acquisition by PNC Bank occurs, the Company anticipates that New Midland will
service all or a portion of the commercial loans for which the Company acquires
servicing rights pursuant to standard agreements that are expected to be
approved by the Unaffiliated Directors. New Midland is also expected to serve as
an additional source of assets to be acquired.

CREDIT RISK MANAGEMENT

The Company intends to manage the credit risk associated with its investment
portfolio by regularly monitoring the individual credit exposure associated with
each asset in its investment portfolio, diversifying its portfolio of
non-investment grade investments and maintaining a portion of its assets in high
quality investments. The Company will implement various hedging strategies,
primarily to protect itself from the effects of interest rate fluctuations on
its variable rate liabilities. However, no hedging strategy will insulate the
Company completely from such risks, and the Company's ability to enter into
hedging transactions may be limited by the REIT Provisions of the Code and the
transaction costs associated with entering into such transactions.

THE MANAGER

GENERAL

The Manager is a subsidiary of PNC Bank, which is a wholly owned subsidiary
of PNC. Established in 1988, the Manager is a registered investment adviser
under the Investment Advisers Act of 1940 and is one of the largest fixed income
investment management firms in the United States. The Manager engages in
investment and risk management as its sole business and specializes in the
management of domestic and offshore fixed income assets for pension and profit
sharing plans, financial institutions, such as banking and insurance companies,
and mutual funds for retail and institutional investors.

5
<PAGE>
ORGANIZATION AND RELATIONSHIPS

The material relationships among the Company, its Affiliates and the Manager
are depicted in the organization chart below.

[LOGO]

Anthracite Securitization Corp. ("ASC"), a Delaware corporation, is a
taxable subsidiary of the Company, formed for the purpose of future
securitizations of the Company's mortgage loans and other assets. In order to
comply with the REIT Provisions of the Code, the Company will own 100% of the
non-voting common stock and 5% of the voting common stock of ASC. The other 95%
of the voting common stock of ASC will be owned by the Manager. See "Federal
Income Tax Consequences--Taxation of ASC" and "--Proposed Tax Legislation."

The Company may from time to time form additional taxable subsidiaries for
purposes of carrying out its investment activities. See "Federal Income Tax
Consequences--Proposed Tax Legislation" for a discussion of recent proposals
that could affect the ability of the Company to obtain the benefits of certain
of such subsidiaries.

THE MANAGEMENT AGREEMENT

The Company will enter into the Management Agreement with the Manager at the
closing of the Offering. Pursuant to the Management Agreement, the Manager will
be responsible for the day-to-day operations of the Company and will perform
such services and activities relating to the assets and operations of the
Company as may be appropriate. The Manager will be primarily involved in three
activities: (i) underwriting, originating and acquiring Mortgage Loans and other
real estate related assets; (ii) asset/liability and risk management, hedging of
floating rate liabilities, and financing, management and disposition of assets,
including credit and prepayment risk management; and (iii) capital management,
structuring, analysis, capital raising and investor relations activities. In
conducting these activities, the Manager will formulate operating strategies for
the Company, arrange for the acquisition of assets by the

6
<PAGE>
Company, arrange for various types of financing and hedging strategies for the
Company, monitor the performance of the Company's assets and provide certain
administrative and managerial services in connection with the operation of the
Company. At all times, the Manager will be subject to the direction and
oversight of the Company's Board of Directors.

The Company may terminate, or decline to renew the term of, the Management
Agreement without cause at any time after the first two years upon 60 days
written notice by a majority vote of the Unaffiliated Directors. Although no
termination fee is payable in connection with a termination for cause, in
connection with a termination without cause, the Company must pay the Manager a
termination fee, which could be substantial. The amount of the termination fee
will be determined by independent appraisal of the value of the Management
Agreement for the next four years. Such appraisal is to be conducted by a
nationally-recognized appraisal firm mutually agreed upon by the Company and the
Manager. If the Company and the Manager are unable to agree upon an appraisal
firm, then each of the Company and the Manager is to choose an independent
appraisal firm to conduct an appraisal. In such event, (i) if the appraisals
prepared by the two appraisers so selected are the same or differ by an amount
that does not exceed 20% of the higher of the two appraisals, the termination
fee is to be deemed to be the average of the appraisals as prepared by each
party's chosen appraiser, and (ii) if the two appraisals differ by more than 20%
of such higher amount, the two appraisers together are to select a third
appraisal firm to conduct an appraisal. If the two appraisers are unable to
agree as to the identity of such third appraiser, either the Manager or the
Company may request that the American Arbitration Association ("AAA") select the
third appraiser. The termination fee then is to be an amount determined by such
third appraiser, but in no event less than the lower of the two initial
appraisals or more than the higher of such two initial appraisals.

In addition, the Company has the right at any time during the term of the
Management Agreement to terminate the Management Agreement without the payment
of any termination fee upon, among other things, a material breach by the
Manager of any provision contained in the Management Agreement that remains
uncured at the end of the applicable cure period (including the failure of the
Manager to use reasonable efforts to comply with the Company's investment policy
and guidelines).

MANAGEMENT COMPENSATION

The following table presents all compensation, fees and other benefits
(including reimbursement of out-of-pocket expenses) that the Manager may earn or
receive under the terms of the Management Agreement.

<TABLE>
<CAPTION>
RECIPIENT PAYOR AMOUNT
- ---------- ----------- -----------------------------------------------------------------------------------------
<S> <C> <C>

Manager Company Base management fee equal to a percentage of the Average Invested Assets by rating
category of the Company(1)
Manager Company Incentive compensation based on the amount, if any, by which the Company's Funds From
Operations and certain net gains exceed a hurdle rate(2)
Manager Company Out-of-pocket expenses of Manager paid to third parties(3)
</TABLE>

- ------------------------

(1) The base management fee is equal to 1% per annum of Average Invested Assets
rated less than BB-or not rated, 0.75% of Average Invested Assets rated BB-
through BB+, and 0.35% of Average Invested Assets rated above BB+.

(2) For a detailed explanation of the calculation of the incentive compensation
payable to the Manager, see "The Manager--Management Compensation."

(3) The Manager may engage PNC Bank, New Midland or unaffiliated third parties
to conduct due diligence with respect to potential portfolio investments and
to provide certain other services. Accordingly, a portion of the
out-of-pocket expenses may be paid to PNC Bank or New Midland in such
capacities. The Company's guidelines will require the contract for such
engagement to be conducted at arm's length, as evidenced by documentation
provided by the Manager to the Board of

7
<PAGE>
Directors. PNC Bank and New Midland will be paid fees and out-of-pocket
expenses as would customarily be paid to unaffiliated third parties for such
services. See "The Manager--Expenses."

Thus, if the Company had total Average Invested Assets for a full year of
$1.2 billion (representing the proceeds of the Offering and a leverage ratio of
3.1), the base management fee would equal $12 million if all of such Average
Invested Assets were rated less than BB- or not rated, and would equal $4.2
million if all of such Average Invested Assets were rated above BB+. These fees
are for illustrative purposes only, however, since the mix and amount of assets
will vary.

The Manager will not receive any management fee for the period prior to the
sale of the shares of Common Stock offered hereby. The base management fee is
intended to compensate the Manager for its costs in providing management
services to the Company. The Board of Directors of the Company may adjust the
base management fee with the consent of the Manager in the future if necessary
to align the fee more closely with the costs of such services.

CONFLICTS OF INTEREST OF THE MANAGER

The Company is subject to conflicts of interest involving the Manager and
its Affiliates because, among other reasons, (i) the Manager and its Affiliates
are permitted to purchase mortgage assets for their own account and to advise
accounts of other clients, and many investments appropriate for the Company also
will be appropriate for these accounts, (ii) the incentive fee, which is based
on the Company's income, may create an incentive for the Manager to recommend
investments with greater income potential, which generally are riskier or more
speculative, than would be the case if its fee did not include a "performance"
component, and (iii) the executive officers and certain of the directors of the
Company will be directors, officers and employees of the Manager.

The Company is also subject to conflicts of interest because of the expected
purchase of substantial assets from PNC Bank and its Affiliates. Many of such
assets do not have a readily determinable fair

8
<PAGE>
market value and independent valuations may not be sought. Nevertheless, the
Company intends to adopt operating policies to minimize the effect of such
conflicts. These policies will require that any acquisition of assets from PNC
Bank or its Affiliates be fair and reasonable to the Company. The Unaffiliated
Directors will adopt a policy that will require the Manager to document the fair
market value of all affiliated purchases, and to provide copies of that
documentation to the Board on a quarterly basis. In addition, the Board of
Directors intends to approve certain operating and investing guidelines, which
may be amended from time to time.

TAX STATUS OF THE COMPANY

The Company intends to qualify and will elect to be taxed as a REIT under
the REIT Provisions of the Code commencing with its taxable year ending December
31, 1998. Provided the Company qualifies as a REIT, the Company generally will
not be subject to federal corporate income tax on taxable income that is
distributed to its stockholders. REITs are subject to a number of organizational
and operational requirements, including a requirement that they currently
distribute at least 95% of their annual Taxable Income. Although the Company
does not intend to request a ruling from the Internal Revenue Service (the
"IRS") as to its REIT status, the Company will receive an opinion of Skadden,
Arps, Slate, Meagher & Flom LLP with respect to the qualification of the Company
as a REIT, which opinion is based on certain assumptions and representations
about the Company's ongoing businesses and investment activities and other
matters. No assurance can be given that the Company will be able to comply with
such assumptions and representations in the future. Furthermore, such opinion is
not binding on the IRS or any court. Failure to qualify as a REIT would render
the Company subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates and distributions
to its stockholders would not be deductible. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain federal, state, local
and foreign taxes on its income and property. In connection with the Company's
election to be taxed as a REIT, the Company's Articles of Amendment and
Restatement impose restrictions on the transfer and ownership of its stock. See
"Risk Factors--Failure to Maintain REIT Status Would Have Adverse Tax
Consequences," "Federal Income Tax Consequences-- Taxation of the Company" and
"Description of Capital Stock--Repurchase of Shares and Restrictions on
Transfer."

CERTAIN BENEFITS TO RELATED PARTIES

Pursuant to the 1998 Stock Option Plan, the Company will authorize the
issuance of options to purchase 2,470,453 shares of Common Stock and will grant
to the Manager, as of the initial public offering, options to purchase an
aggregate of 1,680,722 shares of Common Stock (which the Manager may allocate to
its directors, officers and employees) at an exercise price equal to the initial
public offering price. See "The Manager--Management Compensation" and
"Management of the Company--Stock Options." In addition to granting options
under the 1998 Stock Option Plan, the Company intends to grant to certain
officers, directors and employees of the Company and of the Manager, options to
purchase approximately 246,544 of the shares of Common Stock at the initial
public offering price, net of underwriting discounts and commissions. Such
options will be exercisable in September 1998 and will expire in March 1999.

PNC has agreed that it will purchase in a private placement from the
Company, at a price equal to the initial public offering price net of
underwriting discounts and commissions, a number of shares of Common Stock of
the Company such that the shares owned by it will constitute 3% of the shares of
the Company's Common Stock then outstanding. In addition, FBR Asset Investment
Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc., one of the
Representatives of the Underwriters, has agreed to acquire $10 million of Common
Stock in a private placement that will close concurrently with the Offering, at
the initial public offering price, net of underwriting discounts and
commissions.

The Company has granted certain "demand" and "piggyback" registration rights
to FBR Asset Investment Corporation and PNC with respect to the Common Stock
acquired by them. Subject to certain conditions, the demand registration rights
permit holders of such shares to require the Company to

9
<PAGE>
register their shares. Subject to certain conditions, the piggyback registration
rights permit the holders of such shares to include their Common Stock in the
registration by the Company of its equity securities other than in connection
with the registration by the company under the Securities Act of any of its
securities, (i) in connection with any corporate reorganization, or (ii) in
connection with an employee benefit plan.

The Company will enter into the Management Agreement with the Manager
pursuant to which the Manager will be entitled to receive an annual base
management fee, a quarterly incentive fee and a termination fee in the event of
termination without cause or nonrenewal. Certain officers and directors of the
Manager are also officers and directors of the Company, as shown in the
following table:

<TABLE>
<CAPTION>
NAME POSITION WITH MANAGER POSITION WITH COMPANY
<S> <C> <C> <C>
Laurence D. Fink Chairman of Board, Chief Chairman of Board
Executive Officer
Hugh R. Frater Managing Director President, Chief Executive
Officer
Richard M. Shea Director Chief Operating Officer and
Chief Financial Officer
Edwin O. Bergman Vice President Vice President
Chris A. Milner Vice President Vice President
Andrew Siwulec Vice President Vice President
Mark S. Warner Director Vice President
Susan L. Wagner Managing Director Secretary
</TABLE>

See "The Manager--The Management Agreement."

INDUSTRY TRENDS

Management believes fundamental changes are occurring in the U.S. mortgage
market, resulting in the shift of investment capital and mortgage assets out of
traditional lending and savings institutions and into the development and growth
of new forms of mortgage banking and mortgage investment firms, including those
that qualify as REITs under the Code. Management believes that traditional
mortgage investment companies, such as banks, thrifts and insurance companies,
provide less attractive investment structures for investing in mortgage assets
because of the costs associated with regulation, infrastructure, and corporate
level taxation. Additionally, with the development of highly competitive
national mortgage markets (which the Company believes is partly due to the
expansion of government sponsored enterprises such as GNMA, FNMA and FHLMC),
local and regional mortgage originators have lost market share to more efficient
mortgage originators who compete nationally. The growth of the secondary
mortgage market, including new securitization techniques, has also resulted in
financing structures that can be utilized efficiently to fund leveraged mortgage
portfolios and better manage interest rate risk.

As a REIT, the Company can generally pass through earnings to stockholders
without incurring an entity-level federal income tax, thereby allowing the
Company to pay higher dividends than institutions with similar investments that
are subject to federal income tax on their earnings. In addition, recent changes
to federal tax laws provide REITs with greater flexibility to manage and hedge
their floating rate liabilities. See "Federal Income Tax Consequences--Taxation
of the Company."

The U.S. residential and commercial mortgage markets have experienced
considerable growth over the past 15 years, with total U.S. residential mortgage
debt outstanding growing from approximately $965 billion in 1980 to
approximately $3.9 trillion in 1996, according to the Mortgage Market
Statistical Annual for 1997, and total U.S. commercial mortgage debt outstanding
growing from approximately $955 billion in 1993 to approximately $1.1 trillion
in 1996, according to The Federal Reserve. In addition, according to the same
sources, the total amount of U.S. residential mortgage debt securitized into MBS
has grown from approximately $110 billion in 1980 to approximately $1.9 trillion
in 1996, and the total amount of U.S.

10
<PAGE>
commercial MBS outstanding has grown from approximately $34.2 billion in 1993 to
approximately $97.2 billion in 1996.

Foreign mortgage loan and securitization markets have also grown rapidly in
recent years. For example, in Europe, commercial and residential Mortgage Loans
outstanding have grown by approximately $200 billion since 1994, to
approximately $1.6 trillion in 1996. This global growth of the supply and demand
for mortgage capital is expected to continue and the REIT investment structure
is expected to be the most efficient vehicle for financing such growth.

DIVIDEND POLICY AND DISTRIBUTIONS

To avoid corporate income and excise tax and to maintain its qualification
as a REIT, the Company intends to make annual distributions to its stockholders
of at least 95% of the Company's Taxable Income (which does not necessarily
equal net income as calculated in accordance with GAAP), determined without
regard to the deduction for dividends paid and by excluding any net capital
gains. All distributions in excess of those required for the Company to maintain
REIT status will be made by the Company at the discretion of the Board of
Directors and will depend on the taxable earnings of the Company, its financial
condition and such other factors as the Board of Directors deems relevant.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered......................... 20,000,000 shares(1)

Common Stock to be Outstanding after the 21,365,198 shares(1)(2)(3)
Offering...................................

Use of Proceeds.............................. To purchase the Company's initial portfolio
of mortgage and other assets. The Company
intends to temporarily invest the balance of
the proceeds of the Offering in readily
marketable interest bearing assets consistent
with its intention to qualify as a REIT until
appropriate real estate related assets are
identified and acquired. See "Use of
Proceeds."
</TABLE>

- ------------------------

(1) Assumes that the Underwriters' option to purchase up to an additional
3,000,000 shares to cover over-allotments will not be exercised. See
"Underwriting."

(2) Excludes 2,470,453 shares of Common Stock reserved for issuance under the
Company's 1998 Stock Option Plan. Options to acquire 1,680,722 shares of
Common Stock will be granted on the date of the offering to the public to
the Manager and Unaffiliated Directors of the Company. See "Management of
the Company--Stock Options." Also excludes 246,544 options to be granted, at
the initial public offering price, net of underwriting discounts and
commissions, to certain officers, directors and employees of the Company and
the Manager. See "--Certain Benefits to Related Parties." Includes 716,846
shares to be purchased by FBR Asset Investment Corporation (regardless of
whether the overallotment option is exercised) and 648,352 shares to be
purchased by PNC (assuming that the overallotment option is not exercised)
in private placements that will close concurrently with the Offering.

(3) The Company intends to redeem the 13,233 of shares held by the initial
stockholder on the date of the Offering for $198,500.

11
<PAGE>
RISK FACTORS

Before investing in the shares of Common Stock offered hereby, prospective
investors should give special consideration to the information set forth below,
in addition to the information set forth elsewhere in this Prospectus. The
following risk factors are interrelated and, consequently, investors should
treat such risk factors as a whole. This Prospectus contains forward-looking
statements that may be identified by the use of forward-looking terminology such
as "may," "will," "should," "expect," "anticipate," "estimate," "intend,"
"continue," or "believes" or the negatives thereof or other variations thereon
or comparable terminology. The matters set forth under "Risk Factors" constitute
cautionary statements identifying important factors with respect to any forward
looking statements, including certain risks and uncertainties, that could cause
actual results to differ materially from those in such forward-looking
statements.

An investment in the Company involves various risks, including the risk that
an investor can lose its investment. While the Company will strive to attain its
objectives through, among other things, the Manager's research and portfolio
management skills, there is no guarantee of successful performance and no
guarantee that such objectives can be reached or that a positive return can be
achieved. In addition to the information set forth elsewhere in this Prospectus,
the following risk factors should be considered.

CONFLICTS OF INTEREST OF THE MANAGER MAY RESULT IN DECISIONS THAT DO NOT
FULLY REFLECT STOCKHOLDERS' BEST INTERESTS.

The Company is subject to conflicts of interest involving the Manager. The
executive officers and certain of the directors of the Company will be
directors, officers and employees of the Manager. A majority of the Board of
Directors, however, will consist of Unaffiliated Directors.

The Company expects to acquire mortgage assets from the Manager's Affiliates
and will have a right of first offer to purchase up to $1 billion annually in
multifamily and commercial Mortgage Loans originated by PNC Bank and which PNC
Bank has determined to make available for sale. The Mortgage Loans will be made
available for purchase at fair market value. Certain of such purchases could
involve the issuance of equity securities of the Company. In addition, the
Company expects to acquire other mortgage assets, including subordinated
interests, from the Manager's Affiliates, and the Company may, but has no
current plans to, invest as a co-participant with Affiliates of the Manager in
loans originated or acquired by such Affiliates. Although such investments will
be subject to review by Unaffiliated Directors, it is anticipated that the
Unaffiliated Directors will rely primarily on information provided by the
Manager in reviewing such transactions. Because the Manager is a majority-owned
subsidiary of PNC Bank, there is a risk that PNC Bank will be able to exert
influence over these investment decisions. Although the Company anticipates
purchasing various mortgage assets from the Affiliates of the Manager from time
to time, other than the right of first offer to PNC loans, the Manager and its
Affiliates will have no obligation to make any particular investment
opportunities available to the Company.

The Manager has informed the Company that it expects to continue to purchase
and manage mortgage assets and other real estate related assets in the future
for third-party accounts. The Manager and its Affiliates currently provide
investment services to more than 200 accounts, with assets of more than $100
billion, for which assets suitable for the Company could also be appropriate.
The Manager also provides services to REITs not affiliated with the Company. As
a result, there may be a conflict of interest between the operations of the
Manager and its Affiliates in the acquisition and disposition of mortgage
assets. In addition, the Manager and its Affiliates may from time to time
purchase mortgage assets for their own account and may purchase or sell assets
from or to the Company. Such conflicts may result in decisions and allocations
of mortgage assets by the Manager that are not in the best interests of the
Company, although the Manager seeks to allocate investment opportunities in a
fair manner among accounts for which particular opportunities are suitable and
to achieve the most favorable price in all transactions.

12
<PAGE>
Although the Company has adopted investment guidelines, those guidelines
give the Manager significant discretion in investing the proceeds of the
Offering. Moreover, in the future, the Board of Directors may change the
investment guidelines without the consent of the shareholders.

In addition to its base management compensation, the Manager will have the
opportunity to earn incentive compensation under the Management Agreement for
each fiscal quarter in an amount equal to 25% of the Funds From Operations of
the Company (before payment of such incentive compensation) plus gains (or minus
losses) from certain transactions in excess of the amount that would produce an
annualized return on invested common stock capital equal to the Ten-Year U.S.
Treasury Rate plus 3.5%, expressed as a quarterly rate. In evaluating mortgage
assets for investment and in other management strategies, the opportunity to
earn a performance fee based on net income may lead the Manager to place undue
emphasis on the maximization of income at the expense of other criteria, such as
preservation of capital, in order to achieve a higher incentive compensation,
which could result in increased risk to the value of the Company's portfolio.

The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or Affiliates to engage in any
business or render services of any kind to any other person, including other
REITs. The ability of the Manager and its employees to engage in other business
activities could reduce the time and effort spent on the management of the
Company.

NO OPERATING HISTORY; NO ESTABLISHED FINANCING; NO PRIOR MARKET FOR COMMON
STOCK.

The Company was organized in November 1997, has only limited assets at the
date hereof, has no operating history and will commence operations only if the
shares of Common Stock offered hereby are sold. No prior market exists for the
Common Stock of the Company. The results of the Company's operations will depend
on many factors, including the availability of opportunities for the acquisition
of assets, the level and volatility of interest rates, readily accessible short
and long-term funding alternative conditions in the financial markets and
economic conditions. The Company will face substantial competition in acquiring
suitable investments, which could increase its costs. Moreover, delays in
investing the proceeds of the offering will result in reduced income to the
Company. Stockholders will not have the opportunity to evaluate the manner in
which the proceeds are to be invested or the economic merits of particular
assets to be acquired. The Company has not established any lines of credit or
collateralized financing and, if such financing is available, there is no
assurance that it will be available on favorable terms. Furthermore, no
assurance can be given that the Company will be able to successfully operate its
business as described in this Prospectus.

DEPENDENCE ON THE MANAGER; TERMINATION OF MANAGEMENT AGREEMENT.

The Company will be heavily dependent for the selection, structuring and
monitoring of its mortgage assets and associated borrowings on the diligence and
skill of the officers and employees of the Manager, primarily those named under
"Management of the Company" elsewhere herein. The Company does not anticipate
having employment agreements with its senior officers, or requiring the Manager
to employ specific personnel or dedicate employees solely to the Company. The
Manager in turn is dependent on the efforts of senior management personnel.
While the Company believes that the Manager could find replacements for its key
executives, the loss of their services could have an adverse effect on the
operations of the Manager and the Company.

The Manager has no experience in managing a REIT. There can be no assurance
that the past experience of the Manager will be sufficient to successfully
manage the business of the Company. Further, the past performance of the Manager
is not indicative of future results of the Company.

The Company may terminate, or decline to renew the term of, the Management
Agreement without cause after the first two years upon 60 days' written notice.
The Company will be obligated to pay the Manager a substantial termination fee
in the event the Company terminates the Management Agreement,

13
<PAGE>
except in the case of a termination for cause. Payment of this termination fee,
which will be equal to the value of the Management Agreement for four years,
could have an adverse effect on the Company's financial condition, cash flows
and results of operations and would reduce the amount of funds available for
distribution to stockholders.

INTEREST RATE FLUCTUATIONS WILL AFFECT VALUE OF MORTGAGE ASSETS, NET INCOME
AND COMMON STOCK.

GENERAL. Interest rates are 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.
Interest rate fluctuations can adversely affect the income and value of the
Company's Common Stock in many ways and present a variety of risks, including
the risk of a mismatch between asset yields and borrowing rates, variances in
the yield curve and changing prepayment rates.

INTEREST RATE MISMATCH COULD OCCUR BETWEEN ASSET YIELDS AND BORROWING RATES
RESULTING IN DECREASED YIELD. The Company's operating results will depend in
large part on differences between the income from its assets (net of credit
losses) and its borrowing costs. The Company intends to fund a substantial
portion of its assets with borrowings which have interest rates that reset
relatively rapidly, such as monthly or quarterly. The Company anticipates that,
in most cases, the income from its assets will respond more slowly to interest
rate fluctuations than the cost of its borrowings, creating a potential mismatch
between asset yields and borrowing rates. Consequently, changes in interest
rates, particularly short-term interest rates, may significantly influence the
Company's net income. Increases in these rates will tend to decrease the
Company's net income and market value of the Company's net assets. Interest rate
fluctuations that result in the Company's interest expense exceeding interest
income would result in the Company incurring operating losses.

INVERTED YIELD CURVE ADVERSELY AFFECTS INCOME. The relationship between
short-term and long-term interest rates is often referred to as the "yield
curve." Ordinarily, short-term interest rates are lower than long-term interest
rates. If short-term interest rates rise disproportionately relative to
long-term interest rates (a flattening of the yield curve), the borrowing costs
of the Company may increase more rapidly than the interest income earned on its
assets. Because the Company's borrowings will primarily bear interest at
short-term rates and its assets will primarily bear interest at medium-term to
long-term rates, a flattening of the yield curve will tend to decrease the
Company's net income and market value of its net assets. Additionally, to the
extent cash flows from long-term assets that return scheduled and unscheduled
principal are reinvested, the spread between the yields of the new assets and
available borrowing rates may decline and also may tend to decrease the net
income and market value of the Company's net assets. It is also possible that
short-term interest rates may adjust relative to long-term interest rates such
that the level of short-term rates exceeds the level of long-term rates (a yield
curve inversion). In this case, borrowing costs may exceed the interest income
and operating losses could be incurred.

PREPAYMENT RATES CAN INCREASE, THUS ADVERSELY AFFECTING YIELDS. The value
of the Company's assets may be affected substantially by prepayment rates on
mortgage assets. Prepayment rates on mortgage assets are influenced by changes
in current interest rates and a variety of economic, geographic and other
factors beyond the control of the Company, and consequently, such prepayment
rates cannot be predicted with certainty. In periods of declining mortgage
interest rates, prepayments on mortgage assets generally increase. If general
interest rates decline as well, the proceeds of such prepayments received during
such periods are likely to be reinvested by the Company in assets yielding less
than the yields on the mortgage assets that were prepaid. In addition, the
market value of the mortgage assets may, because of the risk of prepayment,
benefit less from declining interest rates than from other fixed-income
securities. Conversely, in periods of rising interest rates, prepayments on
mortgage assets generally decrease, in which case the Company would not have the
prepayment proceeds available to invest in assets with higher yields. Under
certain interest rate and prepayment scenarios the Company may fail to recoup
fully its cost of acquisition of certain investments.

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The Company may acquire IOs, which are classes of MBS that are entitled to
payments of interest, but not to (or only to nominal) payments of principal. The
yield to maturity of IOs is very sensitive to the rate of prepayments on the
underlying mortgage loans. If the rate of prepayments is faster than
anticipated, the yield on IOs will be negatively affected, and, in extreme
cases, the IO investment could become worthless. Some IOs bear interest at a
floating rate that varies inversely with (and often at a multiple of) changes in
a specified interest rate index ("Inverse IOs"). Therefore, the yield to
maturity of an Inverse IO is extremely sensitive to changes in the related
index. The Company also expects to invest in subordinated IOs ("Sub IOs").
Interest amounts otherwise allocable to Sub IOs generally are used to make
payments on more senior classes or to fund a reserve account for the protection
of senior classes until overcollateralization occurs or the balance in the
reserve account reaches a specified level. The yield to maturity of Sub IOs is
very sensitive not only to default losses but also to the rate and timing of
prepayment on the underlying loans. Under certain interest rate and prepayment
scenarios, the Company may fail to recoup fully the cost of acquiring IOs,
Inverse IOs and Sub IOs.

The Company also may acquire POs, which are classes of MBS that are entitled
to payments of principal, but not to payments of interest. The yield to maturity
of POs and on classes of MBS, that are purchased at a discount to their
principal balance is very sensitive to changes in the weighted average life of
such securities, which in turn is dictated by the rate of prepayments on the
underlying Mortgage Collateral, as defined below. In periods of declining
interest rates, rates of prepayment on mortgage loans generally increase, and if
the rate of prepayments is faster than anticipated, the yield on POs and
securities purchased at a discount will be positively affected. Conversely, the
yield on POs and securities purchased at a discount will be affected adversely
by slower than anticipated prepayment rates, which generally are associated with
a rising interest rate environment. See "--Tax, Legal and Other Risks--Failure
to Maintain REIT Status Would Have Adverse Tax Consequences."

OWNERSHIP OF NON-INVESTMENT GRADE MORTGAGE ASSETS SUBJECT TO INCREASED RISK
OF LOSS.

The Company intends to acquire a significant amount of non-investment grade
mortgage assets, including unrated "first loss" credit support subordinated
interests. A first loss security is the most subordinate class in a structure
and accordingly is the first to bear the loss upon a default on restructuring or
liquidation of the underlying collateral and the last to receive payment of
interest and principal. Such classes are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest than
more senior, rated classes. The market values of subordinated interests tend to
be more sensitive to changes in economic conditions than more senior, rated
classes. As a result of these and other factors, subordinated interests
generally are not actively traded and may not provide holders thereof with
liquidity of investment.

The yield to maturity on subordinated interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying mortgage loans and the timing of any such defaults
or losses. Because these types of subordinated interests generally have no
credit support, to the extent there are realized losses on the mortgage loans,
the Company may not recover the full amount or, in extreme cases, any of its
initial investment in such subordinated interests.

When the Company acquires a subordinated MBS, it typically will be unable to
obtain the right to service the underlying performing mortgage loans (the
"Mortgage Collateral"). To minimize its losses, the Company will seek to obtain
the rights to service the underlying Mortgage Collateral in default (the
servicing of defaulted mortgage loans is referred to as "Special Servicing"),
although in many cases it will not be able to obtain Special Servicing rights on
acceptable terms. If the Company does acquire Special Servicing rights, then it
will contract with a third-party special servicer, such as PNC Bank or New
Midland, to perform the Special Servicing functions, and thus the performance of
the Company's investments will be dependent upon such third party's performance.
If PNC Bank or New Midland is hired, then the Manager will endeavor to ensure
that the contract provides a market price, and evidence of the Manager's
analysis

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in this regard will be provided to the Board of Directors at the next quarterly
Board meeting. To the extent the Company does not obtain Special Servicing
rights with respect to the Mortgage Collateral underlying its MBS, the servicer
of the Mortgage Collateral generally would be responsible to holders of the
senior classes of MBS, whose interests may not be the same as those of the
holders of the subordinated classes. Accordingly, the Mortgage Collateral may
not be serviced in a manner that is most advantageous to the Company as the
holder of a subordinated class.

RISK OF LOSS ON MORTGAGE LOANS.

The Company intends to acquire, accumulate and securitize Mortgage Loans as
part of its investment strategy. While holding Mortgage Loans, the Company will
be subject to risks of borrower defaults, bankruptcies, fraud and losses and
special hazard losses that are not covered by standard hazard insurance. Also,
the costs of financing and hedging the Mortgage Loans could exceed the interest
income on the Mortgage Loans. In the event of any default under Mortgage Loans
held by the Company, the Company will bear the risk of loss of principal to the
extent of any deficiency between the value of the mortgage collateral and the
principal amount of the mortgage loan. It may not be possible or economical for
the Company to securitize all of the Mortgage Loans that it acquires, in which
case the Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults, bankruptcies, fraud losses and special hazard losses.
Furthermore, the Company would expect to retain a subordinated interest in
securitizations of such mortgage loans, in which case it would retain
substantially all of these risks in a more concentrated form up to the amount of
its subordinated interest.

MULTIFAMILY AND COMMERCIAL LOANS INVOLVE A GREATER RISK OF LOSS THAN SINGLE
FAMILY LOANS. Multifamily and commercial real estate lending is considered to
involve a higher degree of risk than single family residential lending because
of a variety of factors, including generally larger loan balances, dependency
for repayment on successful operation of the mortgaged property and tenant
businesses operating therein, and loan terms that include amortization schedules
longer than the stated maturity which provide for balloon payments at stated
maturity rather than periodic principal payments. In addition, the value of
multifamily and commercial real estate can be affected significantly by the
supply and demand in the market for that type of property.

LIMITED RECOURSE LOANS MAY LIMIT THE COMPANY'S RECOVERY TO THE VALUE OF THE
MORTGAGED PROPERTY. The Company anticipates that a substantial portion of the
Mortgage Loans that it will acquire may contain limitations on the mortgagee's
recourse against the borrower. In other cases, the mortgagee's recourse against
the borrower may be limited by applicable provisions of the laws of the
jurisdictions in which the mortgaged properties are located or by the
mortgagee's selection of remedies and the impact of those laws on that
selection. In those cases, in the event of a borrower default, recourse may be
limited to only the specific mortgaged property and other assets, if any,
pledged to secure the relevant Mortgage Loan. As to those Mortgage Loans that
provide for recourse against the borrower and its assets generally, there can be
no assurance that such recourse will provide a recovery in respect of a
defaulted Mortgage Loan greater than the liquidation value of the mortgaged
property securing that Mortgage Loan.

VOLATILITY OF VALUES OF MORTGAGED PROPERTIES MAY AFFECT ADVERSELY THE
COMPANY'S MORTGAGE LOANS. Commercial and multifamily property values and net
operating income derived therefrom are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to, national,
regional and local economic conditions (which may be adversely affected by plant
closings, industry slowdowns and other factors); local real estate conditions
(such as an oversupply of housing, retail, industrial, office or other
commercial space); changes or continued weakness in specific industry segments;
perceptions by prospective tenants, retailers and shoppers of the safety,
convenience, services and attractiveness of the property; the willingness and
ability of the property's owner to provide capable management and adequate
maintenance; construction quality, age and design; demographic factors;
retroactive changes to building or similar codes; and increases in operating
expenses (such as energy costs).

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CONSTRUCTION, BRIDGE AND MEZZANINE LOANS INVOLVE GREATER RISKS OF LOSS THAN
LOANS SECURED BY INCOME PRODUCING PROPERTIES. The Company may acquire
Construction Loans, Bridge Loans and Mezzanine Loans. These types of Mortgage
Loans are considered to involve a higher degree of risk than long-term senior
mortgage lending secured by income-producing real property. This is because of a
variety of factors, including, in the case of Construction Loans, dependency on
successful completion and operation of the project for repayment, difficulties
in estimating construction or rehabilitation costs and loan terms that often
require little or no amortization, providing instead for additional advances to
be made and for a balloon payment at a stated maturity date. In the case of
Mezzanine Loans, the factors would include, among other things, that a
foreclosure by the holder of the senior loan could result in a Mezzanine Loan
becoming unsecured. Accordingly, the Company may not recover some or all of its
investment in such Mezzanine Loan. In addition, Construction Loans, Bridge Loans
and Mezzanine Loans may have higher loan to value ratios than conventional
Mortgage Loans because of shared appreciation provisions.

DISTRESSED MORTGAGE LOANS MAY HAVE GREATER DEFAULT RISKS THAN PERFORMING
LOANS. The Company may acquire Nonperfoming and Subperforming Mortgage Loans,
as well as Mortgage Loans that have had a history of delinquencies. These
Mortgage Loans presently may be in default or may have a greater than normal
risk of future defaults and delinquencies, as compared to newly originated, high
quality loans. Returns on an investment of this type depend on the borrower's
ability to make required payments or, in the event of default, the ability of
the loan's servicer to foreclose and liquidate the mortgaged property underlying
the Mortgage Loan. There can be no assurance that the servicer can liquidate a
defaulted Mortgage Loan successfully or in a timely fashion.

FOREIGN MORTGAGE LOANS AND REAL PROPERTIES ARE SUBJECT TO CURRENCY
CONVERSION RISKS, FOREIGN TAX LAWS AND UNCERTAINTY OF FOREIGN LAWS. The Company
may invest in real property, or Mortgage Loans secured by real property, located
outside the United States. Investing in real property located in foreign
countries creates risks associated with the uncertainty of foreign laws and
markets. Moreover, investments in foreign assets may be subject to currency
conversion risks. In addition, income from investment in foreign real property
and, in some instances, foreign Mortgage Loans may be subject to tax by foreign
jurisdictions, which would reduce the economic benefit of such investments. The
Manager has limited experience in investing in foreign real property.

RISKS RELATED TO INVESTMENTS IN REAL PROPERTY. Distressed Real Properties
may have significant amounts of unleased space and thus may not generate
revenues sufficient to pay operating expenses and meet debt service obligations.
The value of the Company's investments in real property and the Company's income
and ability to make distributions to its stockholders will be dependent upon the
ability of the Manager to hire and supervise capable property managers to
operate the real property in a manner that maintains or increases revenues in
excess of operating expenses and debt service. Revenues from real property may
be affected adversely by changes in national or local economic conditions,
competition from other properties offering the same or similar attributes,
changes in interest rates and in the availability, cost and terms of mortgage
funds, the impact of present or future environmental legislation and compliance
with environmental laws, the ongoing need for capital improvements (particularly
in older structures), changes in real estate tax rates and other operating
expenses, adverse changes in governmental rules and fiscal policies, civil
unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured or underinsured losses), acts of war,
adverse changes in zoning laws, and other factors that will be beyond the
control of the Company.

Although the Company's insurance will not cover all losses, the Company
intends to maintain comprehensive casualty insurance on its real property,
including liability and fire and extended coverage, in amounts sufficient to
permit replacement in the event of a total loss, subject to applicable
deductibles. The Company will endeavor to obtain coverage of the type and in the
amount customarily obtained by owners of properties similar to its real
property. There are certain types of losses, however, generally of a

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catastrophic nature, such as earthquakes, floods and hurricanes, that may be
uninsurable or not economically insurable. Inflation, changes in building codes
and ordinances, environmental considerations, provisions in loan documents
encumbering properties that have been pledged as collateral security for loans,
and other factors also might make it economically impractical to use insurance
proceeds to replace a property if it is damaged or destroyed. Under such
circumstances, the insurance proceeds received by the Company, if any, might not
be adequate to restore the Company's investment with respect to the affected
property.

All real property owned by the Company will be subject to real property
taxes and, in some instances, personal property taxes. Such real and personal
property taxes may increase or decrease as property tax rates change and as the
properties are assessed or reassessed by taxing authorities. An increase in
property taxes on the Company's real property could adversely affect the
Company's income and ability to make distributions to its stockholders and could
decrease the value of that real property.

REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS.

Reverse repurchase agreements involve sales by the Company of portfolio
assets, concurrently with an agreement by the Company to repurchase such assets
at a later date at a fixed price. During the reverse repurchase agreement
period, the Company continues to receive principal and interest payments on such
portfolio assets and also has the opportunity to earn a return on the collateral
furnished by the counterparty to secure its obligation to redeliver the
securities.

Dollar rolls are transactions in which the Company sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type of coupon) securities on a specified future
date. During the roll period, the Company forgoes principal and interest paid on
the securities. The Company is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.

Reverse repurchase agreements and dollar roll agreements involve the risk
that the market value of the securities retained by the Company may decline
below the price of the securities the Company has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll agreement files for bankruptcy or
becomes insolvent, the Company's use of the proceeds of the agreement may be
restricted pending a determination by the other party or its trustee or receiver
whether to enforce the Company's obligation to repurchase the securities.

LEVERAGE INCREASES EXPOSURE TO LOSS.

The Company expects to employ leverage consistent with the type of assets
acquired and the desired level of interest rate risk in various investment
environments. The Company's Articles of Amendment and Restatement and Bylaws do
not limit the amount of indebtedness the Company may incur. Instead, the Board
of Directors will adopt an indebtedness policy that will give the Manager
discretion as to the amount of leverage to be employed depending on the
Manager's assessment of acceptable risk consistent with the nature of the assets
then held by the Company. The Company will leverage its assets primarily with
reverse repurchase agreements, dollar rolls, securitizations of its Mortgage
Loans and secured and unsecured loans, including the issuance of commercial
paper. The terms of such borrowings may provide for the Company to pay a fixed
or adjustable rate of interest, and may provide for any term to maturity that
the Company deems appropriate.

Leverage can reduce the net income available for distributions to
stockholders. If the interest income on the assets purchased with borrowed funds
fails to cover the cost of the borrowings, the Company will experience net
interest losses and may experience net losses and erosion or elimination of its
equity.

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The ability of the Company to achieve its investment objectives depends to a
significant extent on its ability to borrow money in sufficient amounts and on
sufficiently favorable terms to earn incremental returns. The Company may not be
able to achieve the degree of leverage it believes to be optimal due to
decreases in the proportion of the value of its assets that it can borrow
against, decreases in the market value of the Company's assets, increases in
interest rates, changes in the availability of financing in the market,
conditions then applicable in the lending market and other factors. This may
cause the Company to experience losses or less profits than would otherwise be
the case.

A substantial portion of the Company's borrowings are expected to be in the
form of collateralized borrowings. If the value of the assets pledged to secure
such borrowings were to decline, the Company would be required to post
additional collateral, reduce the amount borrowed or suffer forced sales of the
collateral. If sales were made at prices lower than the carrying value of the
collateral, the Company would experience additional losses. If the Company is
forced to liquidate Qualified REIT Real Estate Assets to repay borrowings, there
can be no assurance that it will be able to maintain compliance with the REIT
Provisions of the Code regarding asset and source of income requirements.

HEDGING TRANSACTIONS CAN LIMIT GAINS AND INCREASE EXPOSURE TO LOSSES.

The Company intends to enter into hedging transactions primarily to protect
itself from the effect of interest rate fluctuations on its floating rate debt
and also to protect its portfolio of mortgage assets from interest rate and
prepayment rate fluctuations. There can be no assurance that the Company's
hedging activities will have the desired beneficial impact on the Company's
results of operations or financial condition. Moreover, no hedging activity can
completely insulate the Company from the risks associated with changes in
interest rates and prepayment rates.

Hedging involves risk and typically involves costs, including transaction
costs. Such costs increase dramatically as the period covered by the hedging
increases and during periods of rising and volatile interest rates. The Company
may increase its hedging activity and, thus, increase its hedging costs, during
such periods when interest rates are volatile or rising. The incurrence of such
costs will limit the amount of cash available for distributions to stockholders.
The Company intends generally to hedge as much of the interest rate risk as the
Manager determines is in the best interests of the stockholders of the Company
given the cost of such hedging transactions and the need to maintain the
Company's status as a REIT.

The Company has not established specific policies as to the extent of the
hedging transactions in which it will engage; however, the Unaffiliated
Directors will be responsible for reviewing at their regular meetings the extent
and effect of hedging activities. The amount of income the Company may earn from
its hedging instruments is subject to certain limitations under the REIT
Provisions of the Code. See "Federal Income Tax Consequences--Requirements for
Qualification--Income Test." These limitations may result in the Manager
electing to have the Company bear a level of interest rate risk that could
otherwise be hedged when the Manager believes, based on all relevant facts, that
bearing such risk is advisable to maintain the Company's status as a REIT.

Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there are no requirements with respect
to record keeping, financial responsibility or segregation of customer funds and
positions. The business failure of a counterparty with which the Company has
entered into a hedging transaction will most likely result in a default. Default
by a party with which the Company has entered into a hedging transaction may
result in the loss of unrealized profits and force the Company to cover its
resale commitments, if any, at the then current market price. Although generally
the Company will seek to reserve for itself the right to terminate its hedging
positions, it may not always be possible to dispose of or close out a hedging
position without the consent of the counterparty, and the Company may not be
able to enter into an offsetting contract in order to cover its risk. There can
be no assurance that a liquid

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secondary market will exist for hedging instruments purchased or sold, and the
Company may be required to maintain a position until exercise or expiration,
which could result in losses.

There can be no assurance that the Company will be able to obtain financing
at borrowing rates below the asset yields of its mortgage assets. The Company
will face competition for financing sources that may limit the availability of,
and adversely affect the cost of funds to, the Company.

TAX, LEGAL AND OTHER RISKS.

FAILURE TO MAINTAIN REIT STATUS WOULD HAVE ADVERSE TAX CONSEQUENCES. In
order to maintain its qualification as a REIT for federal income tax purposes,
the Company must continually satisfy certain tests with respect to the sources
of its income, the nature of its assets, the amount of its distributions to
stockholders and the ownership of its stock. If the Company fails to qualify as
a REIT in any tax year, it would be taxed as a regular domestic corporation. In
that event, the Company would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, and distributions to the Company's stockholders would not be deductible
by the Company in computing its taxable income. Any such corporate tax liability
could be substantial and would reduce the amount of cash available for
distribution to the Company's stockholders, which in turn could have an adverse
effect on the value of, and trading prices for, the Company's Common Stock. In
addition, the unremedied failure of the Company to be treated as a REIT for any
one year would disqualify the Company from being treated as a REIT for the four
subsequent years.

The REIT Provisions of the Code may limit the ability of the Company to
hedge its assets and the related Company borrowings. Under the REIT Provisions,
the Company must limit its income in each year from "Qualified Hedges" (together
with any other income generated from other than qualifying Real Estate Assets)
to less than 25% of the Company's gross income. As a result, the Company may
have to limit its use of certain hedging techniques that might otherwise be
advantageous. Any limitation on the Company's use of hedging techniques may
result in greater interest rate risk. If the Company were to receive income from
Qualified Hedges in excess of the 25% limitation, it could incur payment of a
penalty tax equal to the amount of income in excess of those limitations, or in
the case of a willful violation, loss of REIT status for federal tax purposes.

The Company must also ensure that at the end of each calendar quarter at
least 75% of the value of its assets consists of cash, cash equivalents,
government securities and qualifying Real Estate Assets, and of the investments
in securities not included in the foregoing, the Company does not hold more than
10% of the outstanding voting securities of any one issuer and no more than 5%
by value of the Company's assets consists of the securities of any one issuer.
Failure to comply with any of the foregoing tests would require the Company to
dispose of a portion of its assets within 30 days after the end of the calendar
quarter or face loss of REIT status and adverse tax consequences.

The Company must generally distribute at least 95% of its Taxable Income
each year. The Company's operations may from time to time generate Taxable
Income in excess of cash flows. For example, subordinated MBS often are
originally issued at a discount to their redemption price, which discount is
generally equal to the difference between an obligation's issue price and its
redemption price ("OID"). Mezzanine Loans also may be deemed to have OID for
federal income tax purposes. OID generally will be accrued using a constant
yield methodology that does not allow credit losses to be reflected until they
are actually incurred. The Company will be required to recognize as income each
year the portion of the OID that accrues during that year, which will increase
the amount that the Company must distribute for that year in order to avoid a
corporate-level income tax, notwithstanding the fact that there may be no
corresponding contemporaneous receipt of cash by the Company. In addition, the
Company may recognize taxable market discount income upon the receipt of
proceeds from the disposition of, or principal payments on, Mortgage Loans and
MBS that are "market discount bonds" (i.e., obligations with an adjusted issue
price that is greater than the Company's tax basis in such obligations),
although such

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proceeds often will be used to make non-deductible principal payments on related
borrowings. Finally, the Company may recognize taxable income without receiving
a corresponding cash distribution if it forecloses on or makes a "significant
modification" (as specifically defined in the Treasury Regulations) to a
Mortgage Loan, to the extent that the fair market value of the underlying
property or the principal amount of the modified loan, as applicable, exceeds
the Company's basis in the original loan. Consequently, the Company's investment
activities could have the effect of requiring the Company to incur borrowings or
to liquidate a portion of its portfolio at rates or times that the Company
regards as unfavorable in order to distribute all of its taxable income and
thereby avoid corporate-level income tax and maintain its qualification as a
REIT.

RISK OF CHANGES IN THE TAX LAW APPLICABLE TO REITS. The rules dealing with
federal income taxation are constantly under review by the IRS, the Treasury
Department and Congress. New federal tax legislation or other provisions may be
enacted into law or new interpretations, rulings or Treasury Regulations could
be adopted, all of which could adversely affect the taxation of the Company or
its stockholders, possibly with retroactive effect. No prediction can be made as
to the likelihood of passage of any new tax legislation or other provisions
either directly or indirectly affecting the Company or its stockholders.

RISK OF ADVERSE TAX TREATMENT OF EXCESS INCLUSION INCOME. In general,
dividend income that a Tax-Exempt Entity receives from the Company should not
constitute unrelated business taxable income as defined in Section 512 of the
Code ("UBTI"). If, however, Excess Inclusion income were realized by the Company
and allocated to stockholders, such income cannot be offset by net operating
losses and, if the stockholder is a Tax-Exempt Entity, is fully taxable as UBTI
and, as to foreign stockholders, would be subject to federal income tax
withholding without reduction pursuant to any otherwise applicable income tax
treaty. Excess Inclusion income would be generated if the Company were to
acquire residual interests in one or more REMICs. Although there is no Excess
Inclusion income currently generated by a non-REMIC securitization, this result
may change if Treasury Regulations are issued regarding the application of the
taxable mortgage pool rules of the Code to REITs. The Company intends to arrange
its securitizations in a manner to avoid generating significant amounts of
Excess Inclusion income.

RISK THAT POTENTIAL FUTURE OFFERINGS COULD DILUTE THE INTEREST OF HOLDERS OF
COMMON STOCK. The Company expects in the future to increase its capital
resources by making additional offerings of equity and debt securities,
including classes of preferred stock, Common Stock, commercial paper,
medium-term notes, CMOs and senior or subordinated notes. All debt securities
and other borrowings, as well as all classes of preferred stock, will be senior
to the Common Stock in a liquidation of the Company. The effect of additional
equity offerings may be the dilution of the equity of stockholders of the
Company or the reduction of the price of shares of the Common Stock, or both.
The Company is unable to estimate the amount, timing or nature of additional
offerings as they will depend upon market conditions and other factors.

FUTURE REVISIONS IN POLICIES AND STRATEGIES WITHOUT STOCKHOLDER CONSENT
CREATE UNCERTAINTY FOR INVESTORS. The Company's Board of Directors has
established the investment policies, the operating policies, and the strategies
set forth in this Prospectus as the investment policies, operating policies and
strategies of the Company. However, these policies and strategies may be
modified or waived by the Board of Directors of the Company without stockholder
consent, subject, in certain cases, to approval by a majority of the
Unaffiliated Directors.

SIGNIFICANT COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO
ACQUIRE ASSETS. The Company's net income depends, in large part, on the
Company's ability to acquire mortgage assets at favorable spreads over the
Company's borrowing costs. In acquiring mortgage assets, the Company competes
with other mortgage REITs, specialty finance companies, savings and loan
associations, banks, mortgage bankers, insurance companies, mutual funds,
institutional investors, investment banking firms, other

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lenders, governmental bodies and other entities. In addition, there are numerous
mortgage REITs with asset acquisition objectives similar to the Company, and
others may be organized in the future. The effect of the existence of additional
REITs may be to increase competition for the available supply of mortgage assets
suitable for purchase by the Company. Many of the Company's anticipated
competitors are significantly larger than the Company, have access to greater
capital and other resources and may have other advantages over the Company. In
addition to existing companies, other companies may be organized for purposes
similar to that of the Company, including companies organized as REITs focused
on purchasing mortgage assets. A proliferation of such companies may increase
the competition for equity capital and thereby adversely affect the market price
of the Common Stock. In addition, adverse publicity affecting this sector of the
capital markets or significant operating failures of competitors may adversely
affect the market price of the Common Stock.

FAILURE TO MAINTAIN EXEMPTION FROM THE INVESTMENT COMPANY ACT WOULD RESTRICT
THE COMPANY'S OPERATING FLEXIBILITY. The Company at all times intends to
conduct its business so as not to become regulated as an investment company
under the Investment Company Act. Accordingly, the Company does not expect to be
subject to the restrictive provisions of the Investment Company Act. The
Investment Company Act excludes from regulation entities that are primarily
engaged in the business of purchasing or otherwise acquiring "mortgages and
other liens on and interests in real estate." Under the current interpretations
of the staff of the Commission, in order to qualify for this exemption, the
Company must, among other things, maintain at least 55% of its assets directly
in mortgage loans, qualifying pass-through certificates and certain other
qualifying interests in real estate and an additional 25% of its assets in real
estate related assets. In addition, unless certain MBS represent all the
certificates issued with respect to an underlying pool of mortgage loans, such
securities may be treated as securities separate from the underlying mortgage
loans and thus, may not qualify as qualifying interests in real estate for
purposes of the 55% requirement. The Company's ownership of many mortgage
assets, therefore, will be limited by the provisions of the Investment Company
Act. If the Company fails to qualify for exemption from registration as an
investment company, its ability to use leverage would be substantially reduced,
and it would be unable to conduct its business as described herein. Any failure
to qualify for such exemption would have a material adverse effect on the
Company.

FAILURE TO DEVELOP A PUBLIC MARKET MAY RESULT IN A DECREASE IN MARKET
PRICE. Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that a regular trading market for the
shares of Common Stock offered hereby will develop or, if developed, that any
such market will be sustained. In the absence of a public trading market, an
investor may be unable to liquidate its investment in the Company. The initial
public offering price has been determined by the Company and representatives of
the Underwriters. There can be no assurance that the price at which the shares
of Common Stock will sell in the public market after the closing of the Offering
will not be lower than the price at which they are sold by the Underwriters. See
"Underwriting." While there can be no assurance that a market for the Common
Stock will develop, the Common Stock has been approved for listing on the NYSE
under the symbol "AHR."

In the event that a public market for the Common Stock exists, it is likely
that the market price of the shares of the Common Stock will be strongly
influenced by any variation between the gross yield on the Company's assets (net
of credit losses) and prevailing market interest rates, with any narrowing of
the spread between yield and cost adversely affecting the price of the Common
Stock. In addition, since any positive spread between the yield on its assets
and the cost of its borrowings will not necessarily be larger in high interest
rate environments than in low interest rate environments, the Net Income of the
Company and, therefore, the dividend yield on its Common Stock, may be less
attractive compared with alternative investments, which could negatively affect
the price of the Common Stock.

TEMPORARY INVESTMENT IN SHORT-TERM INVESTMENTS WILL REDUCE THE EARNINGS OF
THE COMPANY. The Company's results of operations may be adversely affected
during the period in which the Company is

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initially implementing its investment, leveraging and hedging strategies since
during this time the Company will be primarily invested in short-term
investments.

RESTRICTIONS ON OWNERSHIP OF THE COMMON STOCK. In order for the Company to
meet the requirements for qualification as a REIT at all times, the Articles of
Amendment and Restatement prohibit any person from acquiring or holding,
directly or indirectly, shares of capital stock in excess of 9.8% (in value or
in number of shares, whichever is more restrictive) of the aggregate of the
outstanding shares of any class of capital stock of the Company ("Excess
Shares"). The Articles of Amendment and Restatement further prohibit (i) any
person from beneficially or constructively owning shares of capital stock that
would result in the Company being "closely held" under Section 856(h) of the
Code or would otherwise cause the Company to fail to qualify as a REIT, and (ii)
any person from transferring shares of capital stock if such transfer would
result in shares of capital stock being beneficially owned by fewer than 100
persons. If any transfer of shares of capital stock occurs which, if effective,
would result in a violation of one or more ownership limitations, then that
number of shares of capital stock, the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded to
the nearest whole shares) shall be automatically transferred to a Trustee of a
Trust for the exclusive benefit of one or more Charitable Beneficiaries, and the
Intended Transferee may not acquire any rights in such shares; provided,
however, that if any transfer occurs which, if effective, would result in shares
of capital stock being owned by fewer than 100 persons, then the transfer shall
be null and void and the Intended Transferee shall acquire no rights to the
stock. Subject to certain limitations, the Company's Board of Directors may
waive the limitations for certain investors. See "Description of Capital
Stock--Repurchase of Shares and Restrictions on Transfer."

The authorized capital stock of the Company includes preferred stock
issuable in one or more series. The issuance of preferred stock could have the
effect of making an attempt to gain control of the Company more difficult by
means of a merger, tender offer, proxy contest or otherwise. The preferred
stock, if issued, would have a preference on dividend payments that could affect
the ability of the Company to make dividend distributions to the common
stockholders.

The provisions of the Company's Articles of Amendment and Restatement or
relevant Maryland law may inhibit market activity and the resulting opportunity
for the holders of the Common Stock to receive a premium for their Common Stock
that might otherwise exist in the absence of such provisions. Such provisions
also may make the Company an unsuitable investment vehicle for any person
seeking to obtain ownership of more than 9.8% of the outstanding shares of the
Company's Common Stock.

Material provisions of the Maryland General Corporation Law ("MGCL")
relating to "business combinations" and a "control share acquisition" and of the
Articles of Amendment and Restatement and Bylaws of the Company may also have
the effect of delaying, deterring or preventing a takeover attempt or other
change in control of the Company that would be beneficial to stockholders and
might otherwise result in a premium over then prevailing market prices. Although
the Bylaws of the Company contain a provision exempting the acquisition of
Common Stock by any person from the control share acquisition statute, there can
be no assurance that such provision will not be amended or eliminated at any
time in the future.

POSSIBLE ENVIRONMENTAL LIABILITIES. The Company may become subject to
environmental risks when it acquires interests in properties with material
environmental problems. Such environmental risks include the risk that operating
costs and values of these assets may be adversely affected by the obligation to
pay for the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of complying with future legislation. Such laws
often impose liability regardless of whether the owner or operator knows of, or
was responsible for, the presence of such hazardous or toxic substances. The
costs of investigation, remediation or removal of hazardous substances could
exceed the value of the property. The Company's income and ability to make
distributions to its stockholders could be affected adversely by the existence
of an environmental liability with respect to its properties.

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<PAGE>
The Company may invest in real property with known material environmental
problems or Mortgage Loans secured by such real property. If it does so, the
Company may take certain steps to limit its liability for such environmental
problems, such as creating a special purpose entity to own such real property.
Despite these steps, there are risks associated with such an investment. The
Manager has only limited experience in investing in real property with
environmental problems.

LIMITATION ON LIABILITY OF MANAGER. Pursuant to the Management Agreement,
the Manager will not assume any responsibility other than to render the services
called for thereunder and will not be responsible for any action of the Board of
Directors in following or declining to follow its advice or recommendations. The
Manager and its directors and officers will not be liable to the Company, any
subsidiary of the Company, the Unaffiliated Directors, the Company's
stockholders or any subsidiary's stockholders for acts performed in accordance
with and pursuant to the Management Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement. The Company has agreed
to indemnify the Manager and its directors and officers with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising from
acts of the Manager not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement.

INVESTMENTS MAY BE ILLIQUID AND THEIR VALUE MAY DECREASE. Many of the
Company's assets are and will be relatively illiquid. In addition, certain of
the MBS that the Company will acquire will include interests that have not been
registered under the relevant securities laws, resulting in a prohibition
against transfer, sale, pledge or other disposition of those MBS except in a
transaction that is exempt from the registration requirements of, or otherwise
in accordance with, those laws. The ability of the Company to vary its portfolio
in response to changes in economic and other conditions may be relatively
limited. No assurances can be given that the fair market value of any of the
Company's assets will not decrease in the future.

PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK. Fiduciaries
of employee benefit plans subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the ERISA fiduciary
investment standards before authorizing an investment by a plan in the Common
Stock. In addition, fiduciaries of employee benefit plans or other retirement
arrangements (such as an individual retirement account ("IRA") or certain H.R.
10 Plans or Keogh plans) which are subject to Title I of ERISA, and/or Section
4975 of the Code, as well as any entity, including an insurance company general
account, whose underlying assets include plan assets by reason of a plan or
account investing in such entity, should consult with their legal counsel to
determine whether an investment in the Common Stock will cause the assets of the
Company to be considered plan assets pursuant to the plan asset regulations set
forth at 29 C.F.R. Section 2510.3-101, thereby subjecting the Plan to the
prohibited transaction rules and the Company's assets to the fiduciary
investment standards of ERISA, or cause the excise tax provisions of Section
4975 of the Code, to apply to the Company's assets, unless some exception or
exemption granted by the Department of Labor applies to the acquisition, holding
or transfer of the Common Stock. See "ERISA Considerations."

YEAR 2000 COMPLIANCE. As the year 2000 approaches, an issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Failure to adequately address this issue could have
potentially serious repercussions. The Manager is in the process of working with
the Company's service providers to prepare for the year 2000. Based on
information currently available, the Company does not expect that it will incur
significant operating expenses or be required to incur material costs to be year
2000 compliant.

24
<PAGE>
USE OF PROCEEDS

The Company has not identified any initial assets and intends temporarily to
invest the net proceeds of the Offering, approximately $278,000,000 million
($319,850,000 million if the Underwriters' over-allotment option is exercised),
in readily marketable interest bearing assets until appropriate real estate
assets are identified and acquired. The Company may require up to six months to
have the net proceeds of the Offering fully invested in long-term mortgage
assets and up to an additional nine months to fully implement the leveraging
strategy to increase the mortgage asset investments to its desired level.
Pending full investment in the desired mix of assets, funds will be committed to
short-term investments that are expected to provide a lower net return than the
Company hopes to achieve from its intended primary investments.

DIVIDEND AND DISTRIBUTION POLICY

The Company intends to distribute substantially all of its net Taxable
Income (which does not ordinarily equal net income as calculated in accordance
with GAAP) to stockholders in each year. The Company intends to declare four
regular quarterly dividends to be paid out of funds readily available for the
payment of dividends. The Company's dividend policy is subject to revision at
the discretion of its Board of Directors. All distributions will be made by the
Company at the discretion of its Board of Directors and will depend on the
earnings and financial condition of the Company, maintenance of REIT status,
applicable provisions of the MGCL and such other factors as the Company's Board
of Directors deems relevant.

In order to avoid corporate income and excise tax and to maintain its
qualification as a REIT under the Code, the Company must make distributions to
its stockholders each year in an amount at least equal to (i) 95% of its Taxable
Income (before deduction of dividends paid and not including any net capital
gain), plus (ii) 95% of the excess of the net income from Foreclosure Property
over the tax imposed on such income by the Code, minus (iii) any excess noncash
income. The "Taxable Income" of the Company for any year means the taxable
income of the Company for such year (excluding any net income derived either
from property held primarily for sale to customers or from Foreclosure Property)
subject to certain adjustments provided in the REIT Provisions of the Code.

It is anticipated that distributions generally will be taxable as ordinary
income to stockholders of the Company, although a portion of such distributions
may be designated by the Company as capital gain or may constitute a return of
capital. The Company will furnish annually to each of its stockholders a
statement setting forth distributions paid during the preceding year and their
characterization as ordinary income, return of capital or capital gains. For a
discussion of the federal income tax treatment of distributions by the Company,
see "Federal Income Tax Consequences--Taxation of Taxable U.S. Stockholders."

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<PAGE>
CAPITALIZATION

The capitalization of the Company, as of March 5, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby and to PNC and FBR
Asset Investment Corporation, is as follows:

<TABLE>
<CAPTION>
ACTUAL AS
(IN ADJUSTED(1)(2)
THOUSANDS) (IN THOUSANDS)
------------- ----------------
<S> <C> <C>
Preferred Stock, par value $.001
Authorized -- 100,000,000 shares
None outstanding.............................................................. $ 0 $ 0
Common Stock, par value $.001................................................... $ $
Authorized -- 400,000,000 shares
Outstanding -- 13,333 shares (as adjusted 21,365,198 shares(3))............... 0 21
Additional Paid-in Capital.................................................. $ 200 298,024
------------- --------
Total..................................................................... $ 200 $ 298,045
------------- --------
------------- --------
</TABLE>

- ------------------------

(1) After deducting offering expenses estimated to be $1,000,000, payable by the
Company, and assuming no exercise of the Underwriters' overallotment option
to purchase up to an additional 3,000,000 shares of Common Stock. Includes
shares of Common Stock to be purchased by PNC and FBR Asset Investment
Corporation.

(2) Includes 648,352 shares of Common Stock to be purchased by PNC and 716,846
shares of Common Stock to be purchased by FBR Asset Investment Corporation.
Does not include 2,470,453 shares of Common Stock reserved for issuance upon
exercise of options granted under the Company's 1998 Stock Option Plan. See
"Management of the Company--Stock Options." Does not include 246,544 options
to be granted at the initial public offering price, net of underwriting
discounts and commissions, to certain officers, directors and employees of
the Company and the Manager. See "Prospectus Summary--Certain Benefits to
Related Parties."

(3) The Company intends to redeem 13,233 of the 13,333 shares held by the
initial stockholder on the date of the Offering for $198,500.

CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST

In evaluating mortgage assets for investment and in other operating
strategies, an undue emphasis on the maximization of income at the expense of
other criteria, such as preservation of capital, in order to achieve a higher
incentive fee could result in increased risk to the value of the Company's
portfolio. However, the Board of Directors will evaluate the performance of the
Manager before entering into or renewing any management arrangement and the
Unaffiliated Directors will review in connection with each renewal of the
Management Agreement that the Manager's compensation is reasonable in relation
to the nature and quality of services performed. Any material changes in the
Company's investment and operating policies are required to be approved by the
Board of Directors. See "Risk Factors--Conflicts of Interest of the Manager May
Result in Decisions That Do Not Fully Reflect Stockholders' Best Interests"; and
"--Future Revisions of Policies and Strategies Without Stockholder Consent
Create Uncertainty for Investors."

The Company, on the one hand, and the Manager and its Affiliates, on the
other, may in the future, enter into a number of relationships other than those
governed by the Management Agreement and other than the right of first offer,
some of which may give rise to conflicts of interest between the Manager and its
Affiliates and the Company. The market in which the Company will seek to
purchase mortgage assets is characterized by rapid evolution of products and
services and, thus, there may in the future be relationships between the Company
and the Manager and Affiliates of the Manager in addition to those described
herein. The Company's Board of Directors, including a majority of the
Unaffiliated Directors intends to approve investment guidelines, including
guidelines for affiliate transactions, that would permit most affiliate
transactions to be closed without prior Board approval. The Manager will be
required to provide a

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<PAGE>
detailed report of such transactions, including evidence that the term of such
transactions are fair, to the Board on a quarterly basis.

The Manager has informed the Company that it expects to continue to purchase
and manage mortgage assets and other real estate related assets in the future
for third-party accounts. In addition, the Manager and its Affiliates may from
time to time purchase mortgage assets for their own account. Except for the
right of first offer on PNC loans, the Manager and its Affiliates will have no
obligation to make any particular investment opportunities available to the
Company. As a result, there may be a conflict of interest between the operations
of the Manager and its Affiliates and the Company in the acquisition and
disposition of mortgage assets. The Company expects to acquire mortgage assets
from the Manager's Affiliates. In addition, the Company may, but has no current
plans to, invest as a co-participant with Affiliates of the Manager in loans
originated or acquired by such Affiliates. Although such investments will be
subject to review by a committee of Unaffiliated Directors, it is anticipated
that they will rely primarily on information provided by the Manager. Such
conflicts may result in decisions and/or allocations of mortgage assets by the
Manager that are not in the best interests of the Company, although the Manager
seeks to allocate investment opportunities in a fair manner among accounts for
which particular opportunities are suitable and to achieve the most favorable
price in all transactions.

Pursuant to the terms of the Management Agreement, the Manager will allocate
investment and disposition opportunities in accordance with policies and
procedures the Manager considers fair and equitable, including, without
limitation, such considerations as investment objectives, restrictions and time
horizon, availability of cash and the amount of existing holdings.

From time to time, mortgage lenders offer for sale large pools of mortgage
loans and REO properties pursuant to a competitive bidding process. In such a
case, the Manager may choose an unaffiliated entity with which to submit a joint
bid for the pool, as long as the Company takes title only to the mortgage loans
and not the real estate.

Many investments appropriate for the Company also will be appropriate for
accounts of other clients the Manager advises. Situations may arise in which the
investment activities of the Manager or the other accounts may disadvantage the
Company, such as the inability of the market to fully absorb orders for the
purchase or sale of particular securities placed by the Manager for the Company
and its other accounts at prices and in quantities which would be obtained if
the orders were being placed only for the Company. The Manager may aggregate
orders of the Company with orders for its other accounts. Such aggregation of
orders may not always be to the benefit of the Company with regard to the price
or quantity executed.

27
<PAGE>
THE COMPANY

GENERAL

The Company was recently organized to invest in a diversified portfolio
consisting of multifamily, commercial and residential Mortgage Loans, mortgage
backed securities and other real estate related assets.

The Company expects to use its equity and borrowed funds to seek to generate
net income for distribution to stockholders based primarily on the spread
between the yield on its assets (net of credit losses) and the cost of its
borrowings and hedging activities. The Company will endeavor to qualify and will
elect to be taxed as a REIT under the Code. If the Company so qualifies, the
Company generally will not be subject to federal income tax to the extent that
it distributes its income to its stockholders. See "Federal Income Tax
Consequences." The day-to-day operations of the Company will be managed by the
Manager subject to the direction and oversight of the Company's Board of
Directors, a majority of whom will be unaffiliated with PNC and the Manager.

INVESTMENT STRATEGY

The Company's investment strategy will be to maximize its net income by
investing in a diversified portfolio of Mortgage Loans, MBS and other real
estate related assets. In creating and managing its investment portfolio, the
Company will utilize the Manager's expertise and significant business
relationships between the Manager and its Affiliates, as well as unrelated
participants in the real estate industry. The Manager, in its discretion,
subject to the supervision of the Board of Directors and to the REIT Provisions
of the Code, will evaluate and monitor the Company's assets and how long such
assets should be held in the Company's portfolio. Thus, the Manager will
actively manage the Company's assets, and such assets may not be held to
maturity. Although the Company intends to manage its assets actively, it does
not intend to acquire, hold or sell assets in such a manner that such assets
would be characterized as dealer property for federal income tax purposes.

The Company intends to acquire the following types of investments: (i)
Mortgage Loans; (ii) MBS, including CMBS and RMBS, fixed and adjustable rate
Privately-Issued Certificates and Agency Certificates, CMOs and REMIC interests,
and Mortgage Derivatives, including IOs; (iii) multifamily and commercial real
properties; (iv) Non-U.S. Mortgage Loans, Non-U.S. MBS and real properties; and
(v) other assets. Consistent with the Company's policy of maintaining its status
as a REIT for federal income tax purposes, substantially all of the Company's
assets will consist of Qualified REIT Real Estate Assets under the REIT
Provisions of the Code. See "Description of Mortgage Assets" for a description
of these instruments.

The Company will finance its assets with the net proceeds of the Offering,
future equity offerings and borrowings and expects that it will maintain a
debt-to-equity ratio of between 3.5:1 and 4.5:1, although the actual ratio may
be higher or lower than this range from time to time. The Company will leverage
primarily with reverse repurchase agreements, dollar roll agreements,
securitizations of its Mortgage Loans, secured and unsecured borrowings,
commercial paper and issuance of Preferred Stock.

The Company's policy is to acquire those mortgage assets which it believes
are likely to generate the highest returns on capital invested, after
considering the amount and nature of anticipated cash flows from the asset, the
Company's ability to pledge the asset to secure collateralized borrowings, the
capital requirements resulting from the purchase and financing of the asset, the
potential for appreciation and the costs of financing, hedging and managing the
asset. Prior to acquisition, potential returns on capital employed will be
assessed over the expected life of the asset and in a variety of interest rate,
yield spread, financing cost, credit loss and prepayment scenarios. In managing
the Company's portfolio, the Manager also will consider balance sheet management
and risk diversification issues.

28
<PAGE>
Although the Company intends to invest primarily in Mortgage Loans and CMBS,
the Company's business decisions will depend on changing market factors. Thus,
the Company cannot anticipate with any certainty the percentage of its assets
that will be invested in each category of real estate related assets. The
Company has a great deal of discretion as to the manner in which it may invest,
leverage and hedge its assets. The Company may change its policies without
stockholder approval, but subject to approval by a majority of the Unaffiliated
Directors of the Company.

OPERATING POLICIES AND STRATEGIES

OPERATING POLICIES. The Board of Directors (including a majority of the
Unaffiliated Directors) must approve operating policies for the Company. The
Board of Directors may, in its discretion, revise such policies from time to
time in response to changes in market conditions or opportunities without
stockholder approval.

The Company will also adopt compliance guidelines, including restrictions on
acquiring, holding and selling assets, to ensure that the Company establishes
and maintains its qualification as a REIT and is excluded from regulation as an
investment company. Before acquiring any asset, the Manager will determine
whether such asset would constitute a Qualified REIT Real Estate Asset under the
REIT Provisions of the Code. Substantially all of the assets that the Company
intends to acquire are expected to be Qualified REIT Real Estate Assets. The
Company will regularly monitor purchases of mortgage assets and the income
generated from such assets, including income from its hedging activities, in an
effort to ensure that at all times the Company maintains its qualification as a
REIT and its exclusion under the Investment Company Act.

The Unaffiliated Directors will review all transactions of the Company on a
quarterly basis to ensure compliance with the operating policies and to ratify
all transactions with PNC and its Affiliates, except that the purchase of
securities from PNC and its Affiliates will require prior approval. The
Unaffiliated Directors are likely to rely substantially on information and
analysis provided by the Manager to evaluate the Company's operating policies,
compliance therewith and other matters relating to the Company's investments.

In order to maintain the Company's REIT status, the Company generally
intends to distribute to stockholders aggregate dividends equaling at least 95%
of its Taxable Income each year. See "Federal Income Tax Consequences."

CAPITAL AND LEVERAGE POLICIES. The Company's operations are expected to be
highly leveraged. Initially, the Company intends to finance its acquisition of
mortgage assets through the proceeds of the Offering and, thereafter, primarily
by borrowing against or "leveraging" its existing portfolio and using the
proceeds to acquire additional mortgage assets. See "Risk Factors--Leverage
Increases Exposure to Loss." The Company expects to incur debt such that, once
fully invested, it will maintain a debt-to-equity ratio of between 3.5:1 to
4.5:1, although the actual ratio may be higher or lower from time to time
depending on market conditions and other factors deemed relevant by the Manager.
The actual debt-to-equity ratio will depend on the Manager's assessment of
acceptable risk consistent with the nature of the assets then held by the
Company. For example, immediately following the Offering, a significant portion
of the proceeds is expected to be invested in short-term high quality assets and
the Company's debt-to-equity ratio is likely to be high. The Company's Articles
of Amendment and Restatement and Bylaws do not limit the amount of indebtedness
the Company can incur. Instead, the Board of Directors will establish an
indebtedness policy that gives the Manager a great deal of flexibility.
Moreover, the Board of Directors has discretion to deviate from or change the
Company's indebtedness policy at any time. However, the Company intends to
maintain an adequate capital base to protect against various business conditions
in which the Company's financing and hedging costs might exceed interest income
(net of credit losses) from its mortgage assets. These conditions could occur,
for example, due to credit losses or when, due to interest rate fluctuations,
interest income on the Company's mortgage assets lags behind interest rate
increases in

29
<PAGE>
the Company's borrowings, which are expected to be predominantly variable rate.
See "Risk Factors-- Interest Rate Fluctuations Will Affect Value of Mortgage
Assets, Net Income and Common Stock."

LIABILITIES. Mortgage assets, other than securitized Mortgage Loans, will be
financed primarily at short-term borrowing rates through reverse repurchase
agreements, dollar roll agreements, loan agreements, lines of credit, commercial
paper borrowings and other credit facilities with institutional lenders. The
Company may also borrow long-term and issue preferred stock.

Reverse repurchase agreements are structured as sale and repurchase
obligations and have the economic effect of allowing a borrower to pledge
purchased mortgage assets as collateral securing short-term loans to finance the
purchase of such mortgage assets. Typically, the lender in a reverse repurchase
arrangement makes a loan in an amount equal to a percentage of the market value
of the pledged collateral. At maturity, the borrower is required to repay the
loan and the pledged collateral is released. Pledged mortgage assets continue to
pay principal and interest to the borrower.

A dollar roll agreement provides for the sale and delayed delivery of
mortgage assets and a simultaneous forward repurchase commitment by the borrower
to repurchase the same or a substantially similar security on a future date.
During the roll period, the borrower forgoes principal and interest payments on
the mortgage assets, but is compensated by the interest earned on the cash
proceeds of the initial sale of the mortgage assets and the spread on the
forward repurchase price. Because the dollar roll provides a borrower with funds
for the roll period, its value may be expressed as an "implied financing rate."
Dollar rolls are a favorable means of financing when the forward repurchase
price is low compared to the initial sale price, making the implied financing
rate lower than alternative short-term borrowing rates. The Company's ability to
enter into dollar roll agreements may be limited in order to maintain the
Company's status as a REIT or to avoid the imposition of tax on the Company.

The Company expects that reverse repurchase agreements and, to the extent
consistent with the REIT Provisions of the Code, dollar roll agreements will be,
together with Mortgage Loan securitizations, the principal means of leveraging
its mortgage assets. However, the Company may also utilize warehouse lines of
credit or issue secured or unsecured notes of any maturity if it appears
advantageous to do so. The Company expects to issue shares of preferred stock,
including in connection with the acquisition of assets. The Company intends to
enter into reverse repurchase agreements with financially sound institutions,
including broker/dealers, commercial banks and other lenders, which meet credit
standards approved by the Board of Directors. Upon repayment of a reverse
repurchase agreement, or a repurchase pursuant to a dollar roll agreement, the
Company intends to pledge the same collateral promptly to secure a new reverse
repurchase agreement or will sell similar collateral pursuant to a new dollar
roll agreement. Since the Company is newly-formed and has not commenced
operations, it has not yet established any lines of credit or collateralized
financing facilities. The Company has conducted preliminary discussions with
potential lenders and believes, on the basis of these discussions, that it will
be able to obtain financing in amounts and at interest rates consistent with the
Company's financing objectives.

The reverse repurchase and dollar roll agreements also would require the
Company to deposit additional collateral (a "margin call") or reduce its
borrowings thereunder, if the market value of the pledged collateral declines.
This may require the Company to sell mortgage assets to provide such additional
collateral or to reduce its borrowings. The Company intends to maintain an
equity cushion sufficient to provide liquidity in the event of interest rate
movements and other market conditions affecting the market value of the pledged
mortgage assets. However, there can be no assurance that the Company will be
able to safeguard against being required to sell mortgage assets in the event of
a change in market conditions.

RELATIONSHIP WITH PNC. PNC Bank will enter into an agreement granting to the
Company, for as long as the Management Agreement with the Manager remains in
effect, a right of first offer to purchase not less than $1 billion annually of
multifamily and commercial Mortgage Loans originated by PNC Bank and which PNC
Bank has determined to make available for sale. Such Mortgage Loans may be

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of the type suitable to be sold to conduits ("Conduit Loans") or ineligible for
sale to conduits ("Non-Conduit Loans"). In general, Non-Conduit Loans
potentially have greater yields than Conduit Loans, but they also carry greater
risks. Although not contractually committed to do so, the Company presently
intends to purchase the Mortgage Loans offered to it pursuant to the foregoing
right of first offer, subject to compliance with the Company's policy guidelines
and underwriting criteria as established and modified from time to time. The
parties anticipate that the Non-Conduit Loans will be funded by the Company
directly to the borrower at closing of the loan transaction, and that the
Company will pay PNC Bank an origination fee. Some or all of such origination
fees could, in some circumstances, consist of securities of the Company. Most
mortgage loans the Company expects to purchase from PNC Bank will fit the
following descriptions. The Company does not intend, however, to restrict its
purchases to loans that meet these criteria.

Multifamily and commercial Mortgage Loans originated for securitization by
PNC Bank typically are evidenced by a promissory note and secured by a mortgage,
deed of trust or other similar security instrument that creates a security
interest in real property. The Mortgage Loans originated by PNC Bank include
acquisition, renovation, construction and term loans as well as secured and
unsecured lines of credit.

PNC Bank generally requires that mortgaged properties be subject to a "Phase
I" environmental assessment or an update of a previously conducted assessment
conducted in accordance with industry-wide standards. In addition, PNC Bank
examines whether the use and operation of the mortgaged properties were in
compliance in all material respects with all applicable zoning, land-use,
environmental, building, fire and health ordinances, rules, regulations and
orders applicable to such properties. In almost all cases, the Mortgage Loans
require that each mortgaged property be insured by a hazard insurance policy in
a specified amount.

The Company expects that the Mortgage Loans purchased from PNC Bank as whole
loans or participations generally will have (i) terms to stated maturity ranging
from 12 to 120 months, (ii) amortization terms ranging from interest only to 360
months and (iii) loan-to-value ratios at origination ranging from 35% to 90%.

The Company expects to maintain a relationship with PNC Bank in which the
Company will be a ready, willing and able purchaser of not only Mortgage Loans,
but also other assets that may be offered from time to time by PNC Bank (such
home equity and single family mortgage financings). Although no binding
commitment will exist on the part of PNC Bank or the Company regarding the sale
and purchase of such other assets, the Company expects to be able to purchase
such other assets from PNC Bank on terms and at prices that will be fair to both
parties and that meet the Company's investment policy for transactions with
affiliates. If an asset that otherwise meets all of the Company's criteria for
asset acquisition is being offered to the Company by PNC Bank or one of its
Affiliates at a price that is greater, or on terms that are less favorable, than
would be available from third parties for similar assets in bona fide arm's
length transactions, the Manager would be expected to recommend that the Company
decline to acquire that asset at the quoted price and terms, notwithstanding the
relationship among the Company, PNC Bank and its Affiliates.

The Manager will determine fair transfer prices for the Company's
acquisitions of assets from PNC Bank and its Affiliates based on guidelines
approved by the Unaffiliated Directors. The Unaffiliated Directors will review
those transactions on a quarterly basis to insure compliance with the
guidelines.

In deciding whether to approve an acquisition of any assets, including
acquisitions of Mortgage Loans, MBS and other assets from PNC Bank or its
Affiliates, including New Midland, the Manager may consider such information as
it deems appropriate to determine whether the acquisition is consistent with the
guidelines, such as whether the price is fair and the investment otherwise is
suitable and in the best interests of the Company. In addition, the Manager may
consider, among other factors, whether the acquisition of that asset will
enhance the Company's ability to achieve or exceed the Company's risk

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adjusted target rate of return, if any, whether the asset otherwise is
well-suited for the Company and whether the Company financially is able to take
advantage of the investment opportunity presented thereby. There is no
geographic limitation or requirement of geographic diversification (either as to
size, jurisdictional boundary, zip code or other geographic measure) as to the
properties that secure repayment of the Mortgage Loans or underlying the MBS
contemplated to be acquired or created by the Company; the only limitations as
to the type of assets that the Company may acquire and the characteristics
thereof being limitations either (i) imposed by law, (ii) set forth in the
Guidelines or (iii) with which the Company must comply as a condition of
maintaining both its status as a REIT and its exemption from regulation under
the Investment Company Act.

When possible, the price that the Company will pay for Mortgage Loans, MBS
and other assets acquired from PNC Bank or its Affiliates will be determined by
reference to the prices most recently paid to PNC Bank or its Affiliates for
similar assets, adjusted for differences in the terms of such transactions and
for changes in market conditions between the dates of the relevant transactions.
If no previous sales of similar assets have occurred, the Company will attempt
to determine a market price for the asset by an alternative method, such as
obtaining an appraisal, if it can do so at a reasonable cost. Investors should
understand, however, that such determinations are estimates and are not bona
fide third-party offers to buy or sell.

Although no formal agreement exists, it is anticipated that if the
acquisition by PNC occurs, New Midland will act as servicer for those mortgage
loans for which the Company acquires servicing rights for a market servicing
fee. In addition, the Company would expect that New Midland would be a
significant source of assets for the Company.

It is the intention of the Company that the agreements and transactions,
including the sale of pools of Mortgage Loans, MBS and real property, between
the Company on the one hand, and PNC Bank and its Affiliates, on the other hand
will be fair to both parties. However, there can be no assurance that each of
such agreements and transactions will be on terms at least as favorable to the
Company as it could have obtained from unaffiliated third parties.

SECURITIZATION. The Company intends to acquire and accumulate Mortgage Loans
for securitization and may use ASC for such purposes. Moreover, the Company may
issue non-REMIC CMOs collateralized by previously issued CMOs or MBS in
transactions known as "resecuritizations." The Company will structure a
resecuritization in the same manner as a securitization. The collateral (whether
whole mortgage loans or MBS) will be transferred into a qualified REIT
subsidiary, and that entity will issue non-REMIC CMOs. The transaction will be
structured as debt, with the issuer retaining an equity interest in the
collateral. In a debt transaction, the principal balance of the collateral
(whether whole loans or MBS) will exceed the principal balance of the CMOs.
Thus, once the CMOs are paid in full, the issuer will own the collateral free of
the lien of the CMO debt. During the period in which the Company is acquiring
mortgage loans for securitization, the Company is likely to borrow funds secured
by such loans pursuant to warehouse lines of credit. The Company intends to
securitize Mortgage Loans primarily by issuing structured debt in non-REMIC
transactions. Under this approach, for accounting purposes, the securitized
Mortgage Loans will remain on the Company's balance sheet as assets and the debt
obligations (the CMOs) will appear as liabilities. The proceeds of
securitizations by the Company will be used to reduce preexisting borrowings
relating to such assets and to purchase additional assets. Issuing structured
debt in this manner locks in potentially less expensive, long-term, non-recourse
financing that better matches the terms of the Mortgage Loans and fixed-income
instruments serving as collateral for such debt.

The Company also may employ, from time to time to the extent consistent with
the REIT Provisions of the Code, other forms of securitization under which a
"sale" of an interest in the Mortgage Loans occurs, and a resulting gain or loss
is recorded on the Company's balance sheet for accounting purposes at the time
of sale. In a "sale" securitization, only the net retained interest in the
securitized Mortgage Loans

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will remain on the Company's balance sheet. The Company may elect to conduct
certain of its securitization activities, including such sales, through one or
more taxable subsidiaries or through "Qualified REIT Subsidiaries", as defined
under the REIT Provisions of the Code, formed for such purpose. To the extent
consistent with the REIT Provisions of the Code, such entity would elect to be
taxed as a Real Estate Mortgage Investment Conduit ("REMIC") or a Financial
Asset Securitization Investment Trust ("FASIT").

The Company expects that it will retain interests in the underlying Mortgage
Loans which will be subordinated with respect to payments of principal and
interest on the underlying Mortgage Loans to the classes of securities issued to
investors in such securitizations. Accordingly, any losses incurred on the
underlying Mortgage Loans will be applied first to reduce the remaining amount
of the Company's retained interest, until reduced to zero. Thereafter, the
Company would have no further exposure to losses.

Typically, in connection with the creation of a new Mortgage Loan
securitization, the issuer generally will be required to enter into a master
servicing agreement with respect to such series of mortgage securities with an
entity acceptable to the Rating Agencies, that regularly engages in the business
of servicing Mortgage Loans (a "Master Servicer"). In order to assist the
Company in maintaining its exclusion from investment company regulation, the
Company expects that it will acquire or retain the right to initiate, direct or
forbear foreclosure proceedings in connection with defaults on any of the
underlying Mortgage Loans and may retain special servicers, including New
Midland, to maintain borrower performance and to exercise available remedies,
including foreclosure, at the direction of the Company. Exercise of such rights
may require the Company to be responsible for advancing payments to investors in
such securitizations as if such default has not occurred.

The Company intends to structure its securitizations so as to avoid the
attribution of any Excess Inclusion Income to the Company's stockholders. See
"Federal Income Tax Consequences--Taxation of Taxable U.S. Stockholders."

CREDIT RISK MANAGEMENT. With respect to its assets, the Company will be
exposed to various levels of credit and special hazard risk, depending on the
nature of the underlying assets and the nature and level of credit enhancements
supporting such assets. The Company will originate or purchase mortgage loans
which meet minimum debt service coverage standards established by the Company.
The Manager will review and monitor credit risk and other risks of loss
associated with each investment. In addition, the Manager will seek to diversify
the Company's portfolio of assets to avoid undue geographic, issuer, industry
and certain other types of concentrations. The Company's Board of Directors will
monitor the overall portfolio risk and review levels of provision for loss.

ASSET/LIABILITY MANAGEMENT. To the extent consistent with its election to
qualify as a REIT, the Company will follow an interest rate risk management
policy intended to mitigate the negative effects of major interest rate changes.
The Company intends to minimize its interest rate risk from borrowings both
through hedging activities and by attempting to structure the key terms of its
borrowings to generally correspond (in the aggregate for the entire portfolio,
and not on an asset-by-asset basis) to the interest rate and maturity parameters
of its assets.

HEDGING ACTIVITIES. The Company intends to enter into hedging transactions
to protect its investment portfolio from interest rate fluctuations and other
changes in market conditions. These transactions may include interest rate
swaps, the purchase or sale of interest rate collars, caps or floors, options,
Mortgage Derivatives and other hedging instruments. These instruments may be
used to hedge as much of the interest rate risk as the Manager determines is in
the best interest of the Company's stockholders, given the cost of such hedges
and the need to maintain the Company's status as a REIT. The Manager may elect
to have the Company bear a level of interest rate risk that could otherwise be
hedged when the Manager believes, based on all relevant facts, that bearing such
risk is advisable. The Manager has extensive experience in hedging real estate
assets with these types of instruments.

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Hedging instruments often are not traded on regulated exchanges, guaranteed
by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, there may be no requirements with
respect to record keeping, financial responsibility or segregation of customer
funds and positions. The Company will enter into these transactions only with
counterparties with long term debt rated "A" or better by at least one of the
Rating Agencies. The business failure of a counterparty with which the Company
has entered into a hedging transaction will most likely result in a default,
which may result in the loss of unrealized profits and force the company to
cover its resale commitments, if any, at the then current market price. Although
generally the Company will seek to reserve for itself the right to terminate its
hedging positions, it may not always be possible to dispose of or close out a
hedging position without the consent of the counterparty, and the Company may
not be able to enter into an offsetting contract in order to cover its risk.
There can be no assurance that a liquid secondary market will exist for hedging
instruments purchased or sold, and the Company may be required to maintain a
position until exercise or expiration, which could result in losses.

The Company intends to protect its investment portfolio against the effects
of significant interest rate fluctuations and to preserve the net income and
capital value of the Company. Specifically, the Company's asset acquisition and
borrowing strategies are intended to offset the potential adverse effects
resulting from the differences between fixed rates or other limitations on
coupon rate adjustment, such as interest rate caps, associated with its mortgage
assets and the shorter term predominantly variable nature of the Company's
related borrowings.

The Company's hedging activities are intended to address both income and
capital preservation. Income preservation refers to maintaining a stable spread
between yields from mortgage assets and the Company's borrowing costs across a
reasonable range of adverse interest rate environments. Capital preservation
refers to maintaining a relatively steady level in the market value of the
Company's capital across a reasonable range of adverse interest rate scenarios.
To monitor and manage capital preservation risk, the Company will model and
measure the sensitivity of the market value of its capital (i.e., the
combination of its assets, liabilities and hedging positions) to various changes
in interest rates in various economic scenarios. The Company will not enter into
these types of transactions for speculative purposes.

The Company will focus its hedging activities on providing a level of income
and capital protection against reasonable interest rate risks. However, no
strategy can insulate the Company completely from changes in interest rates.

OTHER POLICIES. The Company intends to invest and operate in a manner
consistent with the requirements of the Code to establish and maintain its
qualification as a REIT for federal income tax purposes (see "Federal Income Tax
Consequences -- Taxation of the Company"), unless, due to changes in the tax
laws, changes in economic conditions or other fundamental changes in the
Company's business environment, the Board of Directors, with the consent of the
holders of a majority of the shares of Common Stock outstanding and entitled to
vote on the question, determines that it is no longer in the best interest of
the Company to qualify as a REIT.

The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act.

The Company has the authority to offer shares of its capital stock and to
repurchase or otherwise reacquire such shares or any other of its securities.
Under certain circumstances the Company may purchase shares of its Common Stock
in the open market or otherwise. The Board of Directors has no present intention
to cause the Company to repurchase any of its shares and any such action would
be taken

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only in conformity with applicable federal and state laws and the requirements
for qualification as a REIT for federal income tax purposes.

Except in connection with its formation, the Company has not, to date,
issued shares of Common Stock or other securities. The Company has not made
loans to officers and directors and does not intend to do so. The Company does
not intend to engage in trading, underwriting or agency distribution or sale of
securities of other issuers.

The Company has no present intention to invest in the securities of other
issuers for the purpose of exercising control. The decision to do so is vested
solely in the Board of Directors and may be changed without a vote of the
shareholders.

FUTURE REVISIONS IN POLICIES AND STRATEGIES. The Company's Board of
Directors (including the Unaffiliated Directors) will approve the investment
policies, the operating policies and the strategies set forth in this
Prospectus. The Board of Directors has the power to modify or waive such
policies and strategies without the consent of the stockholders to the extent
that the Board of Directors determines that such modification or waiver is in
the best interest of the Company or its stockholders. Among other factors,
developments in the market that affect the policies and strategies mentioned
herein or which change the Company's assessment of the market may cause the
Company's Board of Directors to revise its policies and strategies. However, if
such modification or waiver relates to the relationship of, or any transaction
between, the Company and the Manager or any Affiliate of the Manager, the
approval of a majority of the Unaffiliated Directors is also required.

DESCRIPTION OF REAL ESTATE RELATED ASSETS

The Company intends to invest principally in the following types of mortgage
assets subject to the operating restrictions described in "Operating Policies
and Strategies" above and the additional policies described below.

MORTGAGE LOANS. The Company intends to acquire and accumulate fixed and
adjustable-rate Mortgage Loans senior or subordinate liens on multifamily
residential, commercial, single-family (one-to-four unit) residential or other
real property as a significant part of its investment strategy.

The Mortgage Loans may be originated by or purchased from various suppliers
of mortgage assets throughout the United States and abroad, such as savings and
loan associations, banks, mortgage bankers, home builders, insurance companies
and other mortgage lenders. The Company may acquire Mortgage Loans directly from
originators and from entities holding Mortgage Loans originated by others. The
Company may also originate its own Mortgage Loans, particularly bridge financing
of Mortgage Loan and real property portfolios. The Board of Directors of the
Company has not established any limits upon the geographic concentration of
Mortgage Loans to be acquired by the Company or the credit quality of suppliers
of Mortgage Assets.

In considering whether to acquire a pool of Mortgage Loans, the Company's
policy is to request that the Manager perform certain due diligence tasks on
behalf of the Company that reasonably may be expected to provide relevant and
material information as to the value of the Mortgage Loans within that pool and
whether the Company should acquire that pool.

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The Company's policy is to acquire Mortgage Loans only at prices that are
fair to the Company and that meet the Company's investment criteria. In
determining the price of a Mortgage Loan, the Company may request that the
Manager review and analyze a number of factors. These factors include market
conditions (market interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors). They also
include a yield to maturity of the Mortgage Loan, the liquidity of the Mortgage
Loan, the limitations on the obligations of the seller with respect to the
Mortgage Loan, the rate and timing of payments to be made with respect to the
Mortgage Loan, the mortgaged property underlying the Mortgage Loan, the risk of
adverse fluctuations in the market values of that mortgaged property as a result
of economic events or governmental regulations, the historical performance and
other attributes of the property manager responsible for managing the mortgaged
property, relevant laws limiting actions that may be taken with respect to loans
secured by real property and limitations on recourse against the obligors
following realization on the collateral through various means, risks of timing
with respect to Mortgage Loan prepayments, risks associated with geographic
concentration of underlying assets constituting the mortgaged property for the
relevant Mortgage Loan, environmental risks, pending and threatened litigation,
junior liens and other issues relating to title, a prior history of defaults by
affiliated parties on similar and dissimilar obligations, and other factors.

DISTRESSED MORTGAGE LOANS. The Company may acquire Nonperforming or
Subperforming Mortgage Loans secured by multifamily and commercial properties.
In general, the Company expects to foreclose on such Mortgage Loans in an
attempt to acquire title to the underlying Distressed Real Properties. If the
Company acquires pools of Distressed Mortgage Loans (or pools of Mortgage Loans
that are primarily Distressed Mortgage Loans), the Company's policy is that the
due diligence to be performed before acquiring such Distressed Mortgage Loans or
pools is to be substantially similar to the due diligence process described
above in connection with the acquisition of performing Term Loans and the due
diligence process described below to be performed in connection with the
acquisition of Distressed Real Properties.

CONSTRUCTION FINANCING, BRIDGE FINANCING AND LOANS SUBJECT TO PRIOR LIENS.
The Company may invest in or provide Construction Loans. The Company will be
permitted to make a Construction Loan if the Construction Loan is secured by a
first lien mortgage, deed of trust or deed to secure debt, as collateral
security for the borrower's obligations with respect to the Construction Loan.
In addition, the Company may invest in or provide Mezzanine Loans to owners of
real properties that are encumbered by first lien mortgages, deeds of trust or
deeds to secure debt, in which case the Company's Mezzanine Loans generally will
be secured by junior liens on the subject properties. The policy of the Company
is that, at the time of origination of a Mezzanine Loan, the value of the
subject property should exceed the sum of the outstanding balances of the debt
secured by the first lien and the maximum amount contemplated to be advanced by
the Company under the Mezzanine Loan. With respect to both Construction Loans
and Mezzanine Loans, the Company may receive not only a stated fixed or variable
interest rate on the loan, but also a percentage of gross revenues and/or a
percentage of the increase in the fair market value of the property securing
repayment of that Construction Loan or Mezzanine Loan, payable upon maturity or
refinancing of the applicable Construction Loan or Mezzanine Loan or upon the
sale of the property. The Company may also provide bridge financing, generally
in the form of secured loans, for the acquisition of Mortgage Loan portfolios,
real properties or other real estate related assets.

COMMITMENTS TO MORTGAGE LOAN SELLERS. The Company may issue commitments
("Commitments") to originators and other sellers of Mortgage Loans and MBS,
including PNC Bank and New Midland, who follow policies and procedures that
comply with all applicable federal and state laws and regulations and satisfy
the Company's underwriting criteria. Commitments will obligate the Company to
purchase mortgage assets from the holders of the Commitments for a specific
period of time, in a specific aggregate principal amount and at a specified
price and margin over an index. Although the Company may commit to acquire
Mortgage Loans prior to funding, all loans are required to be fully

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funded prior to their acquisition by the Company. Following the issuance of
Commitments, the Company will be exposed to risks of interest rate fluctuations.

Mortgage Loans acquired by the Company will generally be held until a
sufficient quantity has been accumulated for securitization. During the
accumulation period, the Company will be subject to risks of borrower defaults
and bankruptcies, fraud losses and special hazard losses (such as those
occurring from earthquakes, floods or windstorms) that are not covered by
standard hazard insurance. In the event of a default on any Mortgage Loan held
by the Company, the Company will bear the risk of loss of principal to the
extent of any deficiency between the value of the collateral underlying the
Mortgage Loan and the principal amount of the Mortgage Loan. No assurance can be
given that any such mortgage, fraud or hazard insurance will adequately cover a
loss suffered by the Company. Also during the accumulation period, the costs of
financing the Mortgage Loans through reverse repurchase agreements and other
borrowings and lines of credit with warehouse lenders could exceed the interest
income on the Mortgage Loans. It may not be possible or economical for the
Company to complete the securitization for all Mortgage Loans that the Company
acquires, in which case the Company will continue to bear the risks of borrower
defaults and special hazard losses.

The Company may obtain commitments for mortgage pool insurance on the
Mortgage Loans it acquires from a mortgage insurance company with a
claims-paying ability in one of the two highest rating categories by either of
the Rating Agencies. Mortgage pool insurance insures the payment of certain
portions of the principal and interest on Mortgage Loans. In lieu of mortgage
pool insurance, the Company may arrange for other forms of credit enhancement
such as letters of credit, subordination of cash flows, corporate guaranties,
establishment of reserve accounts or overcollateralization. Credit losses
covered by the pool insurance policies or other forms of credit enhancement are
restricted to the limits of their contractual obligations and may be lower than
the principal amount of the Mortgage Loan. The pool insurance or credit
enhancement will be issued when the Mortgage Loan is subsequently securitized,
and the Company will be at risk for credit losses on that loan prior to its
securitization.

In addition to credit enhancement, the Company may also obtain a commitment
for special hazard insurance on the Mortgage Loans, if available at reasonable
cost, to mitigate casualty losses that are not usually covered by standard
hazard insurance, such as vandalism, war, earthquake, floods and windstorm. This
special hazard insurance is generally not in force during the accumulation
period, but is activated instead at the time the Mortgage Loans are pledged as
collateral for the mortgage securities. Accordingly, the risks associated with
such special hazard losses exist only between the times the Company purchases a
Mortgage Loan and the inclusion of such Mortgage Loan within a newly created
issue of mortgage securities.

It is expected that when the Company acquires Mortgage Loans, the seller
will represent and warrant to the Company that there has been no fraud or
misrepresentation during the origination of the Mortgage Loans. It will agree to
repurchase any loan with respect to which there is fraud or misrepresentation.
The Company will provide similar representations and warranties when the Company
sells or pledges the Mortgage Loans as collateral for mortgage securities. If a
Mortgage Loan becomes delinquent and the pool insurer is able to prove that
there was a fraud or misrepresentation in connection with the origination of the
Mortgage Loan, the pool insurer will not be liable for the portion of the loss
attributable to such fraud or misrepresentation. Although the Company will have
recourse to the seller based on the seller's representations and warranties to
the Company, the Company will be at risk for loss to the extent the seller does
not perform its repurchase obligations.

The Company intends to acquire new mortgage assets, and will also seek to
expand its capital base in order to further increase the Company's ability to
acquire new mortgage assets, when the potential returns from new mortgage assets
appear attractive relative to the return expectations of stockholders (as
expressed principally by the effective dividend yield of the Common Stock). The
Company may in the

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future acquire mortgage assets by offering its debt or equity securities in
order to acquire such mortgage assets.

The Company intends to retain a subordinate interest in the pools of
Mortgage Loans it securitizes and to acquire subordinate interests in pools of
Mortgage Loans securitized by others. The credit quality of Mortgage Loans and
the mortgage securities utilizing Mortgage Loans as the underlying collateral,
depends on a number of factors, including their loan-to-value ratio, their terms
and the geographic diversification of the location of the properties securing
the Mortgage Loans and, in the case of multi-family and commercial properties,
the creditworthiness of tenants and debt service coverage ratios.

BRIDGE LOANS. Bridge loans are short-term loans (generally 2-4 years)
secured by liens on real property or by a pledge of partnership interests in a
portfolio of properties. Bridge loans are not intended to be permanent debt
capital but rather, interim financing prior to the sale of the property or its
refinancing with bank debt or mortgage loans. The loans generally pay a floating
rate of interest based on LIBOR or a similar floating rate index.

Bridge loans carry a high sensitivity to default or extension of principal
repayment terms due to the need for refinancing and minimal principal
amortization. As they are associated with transfers of equity ownership,
property repositioning and tenant lease-up, bridge loans bear the risk that
operating strategies may not be successful, economic conditions may deteriorate
and competitors may undertake competing strategies.

MORTGAGE-BACKED SECURITIES. The Company intends to acquire MBS, primarily
non-investment grade classes, from various sources. MBS typically are divided
into two or more interests, sometimes called "tranches" or "classes." The Senior
classes are often securities which, if rated, would have ratings ranging from
low investment grade "BBB" to higher investment grades "A," "AA" or "AAA." The
junior, subordinated classes typically would include one or more non-investment
grade classes which, if rated, would have ratings below investment grade "BBB."
Such subordinated classes also typically include an unrated higher-yielding,
credit support class (which generally is required to absorb the first losses on
the underlying Mortgage Loans).

MBS generally are issued either as CMOs or Pass-Through Certificates. "CMOs"
are debt obligations of special purpose corporations, owner trusts or other
special purpose entities secured by commercial Mortgage Loans or MBS.
Pass-Through Certificates evidence interests in trusts, the primary assets of
which are Mortgage Loans. CMO Bonds and Pass-Through Certificates may be issued
or sponsored by agencies or instrumentalities of the United States Government or
private originators of, or investors in, Mortgage Loans, including savings and
loan associations, mortgage bankers, commercial banks, investment banks and
other entities. MBS may not be guaranteed by an entity having the credit status
of a governmental agency or instrumentality and in this instance are generally
structured with one or more of the types of credit enhancement described below.
In addition, MBS may be illiquid.

In most non-government mortgage loan securitizations, MBS are issued in
multiple classes in order to obtain investment-grade credit ratings for the
senior classes and thus increase their marketability. Each class of MBS may be
issued with a specific fixed or variable coupon rate and has a stated maturity
or final scheduled distribution date. Principal prepayments on the Mortgage
Loans comprising the mortgage collateral may cause the MBS to be retired
substantially earlier than their stated maturities or final scheduled
distribution dates, although, with respect to commercial Mortgage Loans, there
generally are penalties for or limitations on the ability of the borrower to
prepay the loan. Interest is paid or accrued on MBS on a periodic basis,
typically monthly.

The credit quality of MBS depends on the credit quality of the underlying
mortgage collateral. Among the factors determining the credit quality of the
mortgage collateral will be a government or agency guarantee ratio of the
Mortgage Loan balances to the value of the properties securing the Mortgage
Loans, the purpose of the Mortgage Loans (e.g., refinancing or new purchase),
the amount of the

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Mortgage Loans, their terms, the geographic diversification of the location of
the properties securing the Mortgage Loans, and, in the case of commercial
Mortgage Loans, the credit-worthiness of tenants.

The principal of and interest on the underlying Mortgage Loans may be
allocated among the several classes of a MBS in many ways, and the credit
quality of a particular class results primarily from the order and timing of the
receipt of cash flow generated from the underlying Mortgage Loans. Subordinated
interests in MBS carry significant credit risks. Typically, in a
"senior-subordinated" structure, the subordinated interest provide credit
protection to the senior classes by absorbing losses from loan defaults or
foreclosures before such losses are allocated to senior classes. As long as the
more senior classes of securities are outstanding, all prepayments on the
Mortgage Loans generally are paid to those senior classes, at least until the
end of a lock-out period, which typically is five years or more. In some
instances, particularly with respect to subordinated interests in commercial
mortgage securitizations, the holders of subordinated interests are not entitled
to receive scheduled payments of principal until the more senior classes are
paid in full or until the end of a lock-out period. Because of this structuring
of the cash flows from the underlying Mortgage Loans, subordinated interests in
a typical securitization are subject to a substantially greater risk of
non-payment than are the more senior classes. Accordingly, the subordinated
interests are assigned lower credit ratings, or no ratings at all.

As a result of the typical "senior-subordinated" structure, the subordinated
classes of MBS will be extremely sensitive to losses on the underlying Mortgage
Loans. For example, if the Company owns a $20 million first loss subordinated
class of MBS consisting of $100 million of underlying Mortgage Loans, a 7% loss
on the underlying Mortgage Loans generally will result in a 70% loss of the
stated principal amount of the subordinated interest. Accordingly, the holder of
the subordinated interest is particularly interested in minimizing the loss
frequency (the percentage of the loan balances that default over the life of the
mortgage collateral) and the loss severity (the amount of loss on defaulted
Mortgage Loans, i.e., the principal amount of the Mortgage Loan unrecovered
after applying any recovery to the expenses of foreclosure and accrued interest)
on the underlying Mortgage Loans.

Losses on the mortgage collateral underlying the Company's MBS will depend
upon a number of factors, many of which will be beyond the control of the
Company or the applicable servicer. Among other things, the default frequency on
the mortgage collateral will reflect broad conditions in the economy generally
and real property, particularly economic conditions in the local area in which
the underlying mortgaged property is located, the loan-to-value ratio of the
Mortgage Loan, the purpose of the loan, and the debt service coverage ratio
(with respect to commercial and multifamily Mortgage Loans). The loss severity
on the mortgage collateral will depend upon many of the same factors described
above, and will also be influenced by certain legal aspects of Mortgage Loans
that underlie the MBS acquired by the Company, including the servicer's ability
to foreclose on the defaulted Mortgage Loan and sell the underlying mortgaged
property. Various legal issues affect the ability to foreclose on a Mortgage
Loan or sell the mortgaged property. These legal issues may extend the time of
foreclosure proceedings or may require the expenditure of additional sums to
sell the underlying Mortgaged Property, in either case increasing the amount of
loss with respect to the Mortgage Loans.

In considering whether to acquire a MBS, the Company's policy is to
determine, in consultation with the Manager, the scope of review to be performed
before the Company acquires that MBS, which will be designed to provide to the
Company such information regarding that MBS as the Company and Manager determine
to be relevant and material to the Company's decision regarding the acquisition
of that MBS. The Company's policy generally is to request that the Manager
perform due diligence substantially similar to that described above in
connection with the acquisition of performing Mortgage Loans. The due diligence
may include an analysis of (i) the underlying collateral pool, (ii) the
prepayment and default history of the originator's prior loans, (iii) cash flow
analyses under various prepayment and interest rate scenarios (including
sensitivity analyses) and (iv) an analysis of various default scenarios. The
Company also may request that the Manager determine and advise the Company as to
the price at which the Manager would recommend acquisition of the MBS by the
Company, and the Manager's reasons for such

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advice. However, which of these characteristics (if any) are important and how
important each characteristic may be to the evaluation of a particular MBS
depends on the individual circumstances. Because there are so many
characteristics to consider, each MBS must be analyzed individually, taking into
consideration both objective data as well as subjective analysis.

Many of the MBS to be acquired by the Company will not have been registered
under the Securities Act, but instead initially will have been sold in private
placements. These MBS will be subject to restrictions on resale and,
accordingly, will have substantially more limited marketability and liquidity.

CMO Residuals are derivative mortgage securities issued by agencies of the
U.S. Government or by private originators of, or investors in, Mortgage Loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Many special
purpose trusts or corporations that issue multi-class MBS elect to be treated,
for federal income tax purposes, as REMICs. The Company may acquire not only MBS
that are treated as regular interests in REMICs, but also those that are
designated as REMIC Residual Interests or as Non-REMIC Residual Interests. The
cash flow generated by the Mortgage Loans underlying a series of CMOs is first
applied to the required payments of principal and interest on the CMOs and
second to pay the related administrative expenses of the issuer. The Residual
Interests generally receive excess cash flows, if any, after making the
foregoing payments. The amount of Residual Interest cash flow will depend on,
among other things, the characteristics of the Mortgage Loans, the coupon rate
of the CMOs, prevailing interest rates, and particularly the prepayment
experience of the Mortgage Loans. Regular Interests in a REMIC are treated as
debt for tax purposes. Unlike regular interests, REMIC Residual Interests
typically generate Excess Inclusion or other forms of taxable income (including
the accretion of market discount) that bear no relationship to the actual
economic income that is generated by a REMIC. REMIC Residual Interests that are
required to report taxable income or loss but receive no cash flow from the
Mortgage Loans are called "Non-Economic Residuals."

Any purchases and sales of REMIC Residual Interests will be conducted by a
fully taxable corporate subsidiary to prevent the liability for Excess Inclusion
Income from being passed to the Company's stockholders. See "Federal Income Tax
Consequences--Taxation of Taxable U.S. Stockholders."

Any REMIC securitizations carried out by the Company will generally create a
REMIC Residual Interest. If the residual interest is a Non-Economic Residual,
the Company may incur a negative purchase price to dispose of it, or the Company
may retain it in a fully taxable corporate subsidiary. See "Operating Policies
and Strategies--Securitizations."

Subordinated MBS generally are issued at a significant discount to their
outstanding principal balance, which gives rise to OID for federal income tax
purposes. The Company will be required to accrue the OID as taxable income over
the life of the related subordinated MBS on a level-yield method whether or not
the Company receives the related cash flow. The OID income attributable to a
subordinated MBS generally will increase the amount the Company must distribute
to its stockholders in order to avoid corporate income tax on its retained
income in the early years of the Company's ownership of the MBS even though the
Company may not receive the related cash flow from the MBS until a later taxable
year. As a result, the Company could be required to borrow funds, to issue
capital stock or to liquidate assets in order to distribute all of its taxable
income and thereby avoid corporate income tax in any taxable year.

COMMERCIAL MORTGAGE-BACKED SECURITIES. It is expected that many of the MBS
acquired by the Company will be interests in CMBS. The mortgage collateral
supporting CMBS may be pools of whole loans or other MBS, or both. Of the
interests in CMBS that the Company acquires, most will be subordinated or IO
classes of MBS Interests, but the Company also may acquire more senior classes
or combined classes of first-loss and more senior CMBS.

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Unlike RMBS, which typically are collateralized by thousands of single
family Mortgage Loans, CMBS are collateralized generally by a more limited
number of commercial or multifamily Mortgage Loans with larger principal
balances than those of single family Mortgage Loans. As a result, a loss on a
single Mortgage Loan underlying a CMBS will have a greater negative effect on
the yield of such CMBS, especially the subordinated MBS in such CMBS.

With respect to CMBS, the Company will use sampling and other appropriate
analytical techniques to determine on a loan-by-loan basis which loans will
undergo a full-scope review and which loans will undergo a more streamlined
review process. Although the choice is a subjective one, considerations that
influence the choice for scope of review often include loan size, debt service
coverage ratio, loan-to-value ratio, loan maturity, lease rollover, property
type and geographic location. A full-scope review may include, among other
factors, a property site inspection, tenant-by-tenant rent roll analysis, review
of historical income and expenses for each property securing the loan, a review
of major leases for each property (if available); recent appraisals (if
available), engineering and environmental reports (if available), and the price
paid for similar CMBS by unrelated third parties in arm's length purchases and
sales (if available) or a review of broker price opinions (if the price paid by
a bona fide third party for similar CMBS is not available and such price
opinions are available). For those loans that are selected for the more
streamlined review process, the Manager's evaluation may include a review of the
property operating statements, summary loan level data, third party reports, and
a review of prices paid for similar CMBS by bona fide third parties or broker
price opinions, each as available. If the Manager's review of such information
does not reveal any unusual or unexpected characteristics or factors, no further
due diligence is performed.

FOREIGN MORTGAGE INVESTMENTS. The Company may acquire or originate Mortgage
Loans secured by real property located outside the United States or acquire such
real property. The Company has no limitations on the geographic scope of its
investments in foreign real properties and such investments may be made in a
single foreign country or among several foreign countries as the Board of
Directors may deem appropriate. Investing in real estate related assets located
in foreign countries creates risks associated with the uncertainty of foreign
laws and markets and risks related to currency conversion. The Company may be
subject to foreign income tax with respect to its investments in foreign real
estate related assets. However, any foreign tax credit that otherwise would be
available to the Company for U.S. federal income tax purposes will not flow
through to the Company's stockholders.

When acquiring real properties located outside the United States or Mortgage
Loans secured by foreign real properties, the Company will perform, or request
that the Manager perform, a due diligence review and analysis of such foreign
Mortgage Loans or real properties substantially similar to that described above
in connection with the acquisition of performing Mortgage Loans and real
properties. In addition, the Company will hire, or request that the Manager
hire, a local law firm to advise the Company concerning the applicable laws,
including real property laws, of the local jurisdiction and to provide a legal
opinion about the Company's rights with respect to the Mortgage Loans or real
properties. If the country in which the relevant real property is located is
subject to political instability, the Company may request that the Manager
investigate the availability of, cost of, and benefits that reasonably can be
expected to be provided to the Company by, obtaining insurance against such
political risks. The Company's policy is to purchase such insurance only if the
Manager advises the Company that based on the Manager's analysis of the relevant
factors, the Manager has determined that the Company should purchase such
insurance. The Company may request that the Manager consider ways to minimize
currency conversion risks that may be associated with the investment in foreign
Mortgage Loans or foreign real properties, such as the purchase of currency
swaps, and make a recommendation to the Company with respect thereto.

FHA AND GNMA PROJECT LOANS. The Company intends to invest in loan
participations and pools of loans insured under a variety of programs
administered by the Department of Housing and Urban Development ("HUD"). These
loans will be insured under the National Housing Act and will provide financing
for the purchase, construction or substantial rehabilitation of multifamily
housing, nursing homes and intermediate care facilities, elderly and handicapped
housing, and hospitals.

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Similar to CMBS, investments in FHA and GNMA Project Loans will be
collateralized by a more limited number of loans, with larger average principal
balances, than RMBS, and will therefore be subject to greater performance
variability. Loan participations are most often backed by a single FHA-insured
loan. Pools of insured loans, while more diverse, still provide much less
diversification than pools of single family loans.

FHA insured loans will be reviewed on a case by case basis to identify and
analyze risk factors which may materially impact investment performance.
Property specific data such as debt service coverage ratio, loan-to-value ratio,
HUD inspection reports, HUD financial statements and rental subsidies will be
analyzed in determining the appropriateness of a loan for investment purposes.
The Manager will also rely on the FHA insurance contracts and their anticipated
impact on investment performance in evaluating and managing the investment
risks. FHA insurance covers 99% of the principal balance of the underlying
project loans. Additional GNMA credit enhancement may cover 100% of the
principal balance.

PASS-THROUGH CERTIFICATES. The Company's investments in mortgage assets are
expected to be concentrated in Pass-Through Certificates. The Pass-Through
Certificates to be acquired by the Company will consist primarily of
pass-through certificates issued by FNMA, FHLMC and GNMA, as well as privately
issued adjustable-rate and fixed-rate mortgage pass-through certificates. The
Pass-Through Certificates to be acquired by the Company will represent interests
in mortgages that will be secured by liens on single-family (one-to-four units)
residential properties, multifamily residential properties and commercial
properties.

Pass-Through Certificates backed by adjustable-rate Mortgage Loans are
subject to lifetime interest rate caps and to periodic interest rate caps that
limit the amount an interest rate can change during any given period. The
Company's borrowings are generally not subject to similar restrictions. In a
period of increasing interest rates, the Company could experience a decrease in
Net Income or incur losses because the interest rates on its borrowings could
exceed the interest rates on ARM Pass-Through Certificates owned by the Company.
The impact on Net Income of such interest rate changes will depend on the
adjustment features of the Mortgage Assets owned by the Company, the maturity
schedules of the Company's borrowings and related hedging.

PRIVATELY ISSUED PASS-THROUGH CERTIFICATES. Privately issued Pass-Through
Certificates are structured similarly to the FNMA, FHLMC and GNMA pass-through
certificates discussed below and are issued by originators of and investors in
Mortgage Loans, including savings and loan associations, savings banks,
commercial banks, mortgage banks, investment banks and special purpose
subsidiaries of such institutions. Privately issued Pass-Through Certificates
are usually backed by a pool of conventional Mortgage Loans and are generally
structured with credit enhancement such as pool insurance or subordination.
However, privately issued Pass-Through Certificates are typically not guaranteed
by an entity having the credit status of FNMA, FHLMC or GNMA guaranteed
obligations.

FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation. FNMA provides funds to the mortgage market primarily by purchasing
Mortgage Loans on homes from local lenders, thereby replenishing their funds for
additional lending.

FNMA Certificates may be backed by pools of Mortgage Loans secured by
single-family or multi-family residential properties. The original terms to
maturities of the Mortgage Loans generally do not exceed 40 years. FNMA
Certificates may pay interest at a fixed rate or adjustable rate. Each series of
FNMA ARM certificates bears an initial interest rate and margin tied to an index
based on all loans in the related pool, less a fixed percentage representing
servicing compensation and FNMA's guarantee fee. The specified index used in
each such series has included the Treasury Index, the 11(th) District Index,
LIBOR and other indices. Interest rates paid on fully-indexed FNMA ARM
certificates equal the applicable index rate plus a specified number of basis
points ranging typically from 125 to 250 basis points. In addition, the majority
of series of FNMA ARM certificates issued to date have evidenced pools of
Mortgage Loans with monthly, semi-annual or annual interest rate adjustments.
Adjustments in the interest rates paid are

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generally limited to an annual increase or decrease of either 100 or 200 basis
points and to a lifetime cap of 500 or 600 basis points over the initial
interest rate. Certain FNMA programs include Mortgage Loans which allow the
borrower to convert the adjustable mortgage interest rate of its ARM to a fixed
rate. ARMs which are converted into fixed rate Mortgage Loans are repurchased by
FNMA, or by the seller of such loans to FNMA, at the unpaid principal balance
thereof plus accrued interest to the due date of the last adjustable rate
interest payment.

FNMA guarantees to the registered holder of a FNMA Certificate that it will
distribute amounts representing scheduled principal and interest (at the rate
provided by the FNMA Certificate) on the Mortgage Loans in the pool underlying
the FNMA Certificate, whether or not received, and the full principal amount of
any such Mortgage Loan foreclosed or otherwise finally liquidated, whether or
not the principal amount is actually received. The obligations of FNMA under its
guarantees are solely those of FNMA and are not backed by the full faith and
credit of the United States. If FNMA were unable to satisfy such obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such Mortgage Loans.

FHLMC CERTIFICATES. FHLMC is a privately owned corporate instrumentality of
the United States created pursuant to an Act of Congress. The principal activity
of FHLMC currently consists of the purchase of Conforming Mortgage Loans or
participation interests therein and the resale of the loans and participations
so purchased in the form of guaranteed MBS.

Each FHLMC Certificate issued to date has been issued in the form of a
Pass-Through Certificate representing an undivided interest in a pool of
Mortgage Loans purchased by FHLMC. The Mortgage Loans included in each pool are
fully amortizing, conventional Mortgage Loans with original terms to maturity of
up to 40 years secured by first liens on one-to-four unit family residential
properties or multi-family properties.

FHLMC guarantees to each holder of its certificates the timely payment of
interest at the applicable pass-through rate and ultimate collection of all
principal on the holder's pro rata share of the unpaid principal balance of the
related Mortgage Loans, but does not guarantee the timely payment of scheduled
principal of the underlying Mortgage Loans. The obligations of FHLMC under its
guarantees are solely those of FHLMC and are not backed by the full faith and
credit of the United States. If FHLMC were unable to satisfy such obligations,
distributions to holders of FHLMC Certificates would consist solely of payments
and other recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of FHLMC Certificates would be affected by delinquent
payments and defaults on such Mortgage Loans.

GNMA CERTIFICATES. GNMA is a wholly owned corporate instrumentality of the
United States within HUD. GNMA guarantees the timely payment of the Principal of
and interest on certificates that represent an interest in a pool of Mortgage
Loans insured by the FHA and other loans eligible for inclusion in mortgage
pools underlying GNMA Certificates. GNMA Certificates constitute general
obligations of the United States backed by its full faith and credit.

CMOs. The Company may invest, from time to time, in adjustable rate and
fixed rate CMOs issued by private issuers or FHLMC, FNMA or GNMA. CMOs are a
series of bonds or certificates ordinarily issued in multiple classes, each of
which consists of several classes with different maturities and often complex
priorities of payment, secured by a single pool of Mortgage Loans, Pass-Through
Certificates, other CMOs or other mortgage assets. Principal prepayments on
collateral underlying a CMO may cause it to be retired substantially earlier
than the stated maturities or final distribution dates. Interest is paid or
accrues on all interest bearing classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on underlying Mortgages Loans may
be allocated among the several classes of a series of a CMO in many ways,
including pursuant to complex internal leverage formulas that may make the CMO
class especially sensitive to interest rate or prepayment risk.

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CMOs may be subject to certain rights of issuers thereof to redeem such CMOs
prior to their stated maturity dates, which may have the effect of diminishing
the Company's anticipated return on its investment. Privately-issued
single-family, multi-family and commercial CMOs are supported by private credit
enhancements similar to those used for Privately-Issued Certificates and are
often issued as senior-subordinated mortgage securities. In general, the Company
intends to only acquire CMOs or multi-class Pass-Through certificates that
represent beneficial ownership in grantor trusts holding Mortgage Loans, or
regular interests and residual interests in REMICs, or that otherwise constitute
Qualified REIT Real Estate Assets.

MORTGAGE DERIVATIVES. The Company may acquire Mortgage Derivatives,
including IOs, Inverse IOs, Sub IOs and floating rate derivatives, as market
conditions warrant. Mortgage Derivatives provide for the holder to receive
interest only, principal only, or interest and principal in amounts that are
disproportionate to those payable on the underlying Mortgage Loans. Payments on
Mortgage Derivatives are highly sensitive to the rate of prepayments on the
underlying Mortgage Loans. In the event that prepayments on such Mortgage Loans
occur more frequently than anticipated, the rates of return on Mortgage
Derivatives representing the right to receive interest only or a
disproportionately large amount of interest, i.e., IOs, would be likely to
decline. Conversely, the rates of return on Mortgage Derivatives representing
the right to receive principal only or a disproportional amount of principal,
i.e., POs, would be likely to increase in the event of rapid prepayments.

Some IOs in which the Company may invest, such as Inverse IOs, bear interest
at a floating rate that varies inversely with (and often at a multiple of)
changes in a specific index. The yield to maturity of an Inverse IO is extremely
sensitive to changes in the related index. The Company also may invest in
inverse floating rate Mortgage Derivatives which are similar in structure and
risk to Inverse IOs, except they generally are issued with a greater stated
principal amount than Inverse IOs.

Other IOs in which the Company may invest, such as Sub IOs, have the
characteristics of a Subordinated Interest. A Sub IO is entitled to no payments
of principal; moreover, interest on a Sub IO often is withheld in a reserve fund
or spread account to fund required payments of principal and interest on more
senior trenches of mortgage securities. Once the balance in the spread account
reaches a certain level, excess funds are paid to the holders of the Sub IO.
These Sub IOs provide credit support to the senior classes and thus bear
substantial credit risks. In addition, because a Sub IO receives only interest
payments, its yield is extremely sensitive to the rate of prepayments (including
prepayments as a result of defaults) on the underlying Mortgage Loans.

IOs can be effective hedging devices because they generally increase in
value as fixed-rate mortgage securities decrease in value. The Company also may
invest in other types of derivatives currently available in the market and other
Mortgage Derivatives that may be developed in the future if the Manager
determines that such investments would be advantageous to the Company.

MULTIFAMILY AND COMMERCIAL REAL PROPERTIES. The Company believes that under
appropriate circumstances the acquisition of multifamily and commercial real
properties, including REO Properties and other Distressed Real Properties, may
offer significant opportunities to the Company. The Company's policy will be to
conduct an investigation and evaluation of the real properties in a portfolio of
real properties before purchasing such a portfolio. Prior to purchasing real
estate related assets, the Manager generally will identify and contact real
estate brokers and/or appraisers in the relevant market areas to obtain rent and
sale comparables for the assets in a portfolio contemplated to be acquired. This
information will be used to supplement due diligence that will be performed by
the Manager's employees.

The Company's policy is to conduct an investigation and evaluation of the
properties in a portfolio of real properties before acquiring such a portfolio.
Prior to acquiring such a portfolio, the Company's policy generally is to
request that the Manager identify and contact real estate brokers and appraisers
in the market area of the real properties within the portfolio to obtain
information regarding rental rates and sales prices of comparable real property.
The Company's policy is to determine, in consultation with the

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Manager, whether to obtain a Phase I environmental assessment (or, if available
to the Company or the Manager, to request that the Manager review a previously
obtained Phase I environmental assessment) for each real property, certain real
properties, or none of the real properties within the portfolio prior to its
acquisition by the Company. The policy of the Company is to use the information
contained in such comparables and environmental assessments to supplement the
due diligence that is to be performed by the Manager with respect to that
portfolio.

The Company's policy generally is to request that the Manager include within
its due diligence review and analysis of those real properties contemplated to
be acquired by the Company a review of market studies for each geographic market
designated by the Company in which the real properties within a portfolio are
concentrated. The Company may request that such studies include area economic
data, employment trends, absorption rates and market rental rates. The Company's
policy is that such due diligence analyses generally also include (i) site
inspections of the most significant properties in a portfolio of real properties
(and, if the Company determines that such a review will be cost-effective, a
random sampling of the less significant properties), and (ii) a review of all
property files and documentation that are made available to the Company or the
Manager. The Company generally will require that such reviews include, to the
extent possible, examinations of available legal documents, litigation files,
correspondence, title reports, operating statements, appraisals and engineering
and environmental reports.

The Company's policy is that the process of determining the fair market
value of a real property is to utilize those procedures that the Company and the
Manager deem relevant for the specific real property being evaluated, which
procedures need not be the same for each real property being evaluated. Sources
of information that may be examined in determining the fair market value of a
real property may include one or more of the following: (a) current and
historical operating statements; (b) existing or new appraisals; (c) sales
comparables; (d) industry statistics and reports regarding operating expenses,
such as those compiled by the Institute of Real Estate Management and the
Building Owners and Managers Association; (e) existing leases and market rates
for comparable leases; (f) deferred maintenance observed during site inspections
or described in structural and engineering reports; and (g) correspondence and
other documents and memoranda found in the files of the seller of that Real
Property or other relevant parties.

The Manager is expected to develop projections of net operating income and
cash flows taking into account lease rollovers, tenant improvement costs and
leasing commissions. The Manager will compare its estimates of revenue and
expenses to historical operating statements and estimates provided in appraisals
and general industry and regional statistics. Market capitalization rates and
discount rates are then applied to the cash flow projections to estimate values.
These values are then compared to available appraisals and market sale
comparables to determine recommended bid prices for each asset. The amount
offered by the Company generally will take into account projected holding
periods, capital costs and projected profit expectations, and will be the price
that the Manager estimates is sufficient to generate an acceptable risk-adjusted
return on the Company's investment.

After the Company acquires Distressed Real Property, the Company's goal will
be to improve management of that real property so as to increase its cash flow.
If cash flows can be increased and the net operating income stabilized, the
Company may seek an opportunity to sell the real property. The length of time
the Company will hold Distressed Real Properties may vary considerably from
asset to asset, and will be based on the Manager's analysis and conclusions as
to the best time to sell some or all of them.

REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS. The Company may acquire
real properties with known material environmental problems and Mortgage Loans
secured by such real properties subsequent to an environmental assessment that
would reasonably indicate that the present value of the cost of clean-up or
remediation would not exceed the realizable value from the disposition of the
mortgage property. In considering whether to acquire real properties with known
material environmental problems and Mortgage loans secured by such real
properties, the Company will perform, or request that the Manager perform, a due
diligence review and analysis substantially similar to that

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described above in connection with the acquisition of Distressed Mortgage Loans
and real property. In addition, the Company will hire, or request that the
Manager hire, an environmental engineering consultant to estimate the extent and
cost of possible environmental remediation or monitoring if title was acquired
to a property with a material environmental problem and the time required to
effect such remediation or complete such monitoring. The Manager has no
experience in investing in Mortgage Loans secured by environmental distressed
real property, or in such environmentally distressed real property.

The Company's policy is generally to avoid acquiring in its own name real
property with known material environmental problems (other than such real
property acquired by the Company through foreclosure, or deed-in-lieu of
foreclosure, when an "innocent lender" defense appears to be available to the
Company). The Company's policy instead is to establish a special purpose entity
to hold such real property. If the Company determines that to do so would be
appropriate, such special purpose entity could hold other real properties with
known material environmental problems that the Company thereafter may wish to
acquire. There can be no assurance that acquiring or holding properties in the
name of a special purpose entity would insulate the Company from any
environmental liabilities associated with such properties. The Company may
acquire environmental risk hazard insurance from time to time when commercially
available.

NET LEASED REAL ESTATE. The Company intends to invest in net leased real
estate on a leveraged basis. Net leased real estate is generally defined as real
estate that is net leased on a long-term basis (ten years or more) to tenants
who are customarily responsible for paying all costs of owning, operating, and
maintaining the leased property during the term of the lease, in addition to the
payment of a monthly net rent to the landlord for the use and occupancy of the
premises ("Net Leased Real Estate"). The Company expects to acquire Net Leased
Real Estate on a leveraged basis with triple-net rents that will provide
sufficient cash flow to provide an attractive cash return on its investment
therein after debt service. Although the time during which the Company will hold
Net Leased Real Estate will vary, the Company anticipates holding most Net
Leased Real Estate for more than ten years. The Company will focus on Net Leased
Real Estate that is either leased to creditworthy tenants or is real estate that
can be leased to other tenants in the event of a default of the initial tenant.

The Company expects to have the tax depreciation associated with such
investments to offset the non-cash accrual of interest on certain MBS Interests
and Mortgage Loans, including the OID generally associated with either MBS
Interests that are issued at a discount from par or participating Mortgage Loans
and the "phantom" taxable income associated with other mortgage derivatives.

SECURITIES OF OR INTERESTS IN COMPANIES PRIMARILY ENGAGED
IN REAL ESTATE ACTIVITIES AND
INVESTMENTS IN OTHER SECURITIES

The Company may invest in fixed-income securities that are not mortgage
assets, including securities issued by corporations or issued or guaranteed by
U.S. or sovereign foreign entities, loan participations, emerging market debt,
high yield debt and collateralized bond obligations, denominated in U.S.
dollars.

The Company may also purchase the stock of other mortgage REITS or similar
companies when Management believes that such purchase will yield attractive
returns on capital employed. When the stock market valuations of such companies
are low in relation to the market value of their assets, such stock purchases
can be a way for the Company to acquire an interest in a pool of mortgage assets
at an attractive price. The Company may also invest in securities issued by
investment companies or other investment funds.

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EMPLOYEES

The Company initially expects not to have any employees other than officers,
each of whom will be full-time employees of the Manager, whose duties will
include performing administrative activities for the Company.

FACILITIES

The Company's executive offices are located at 345 Park Avenue, New York,
New York 10154.

LEGAL PROCEEDINGS

There are no pending legal proceedings to which the Company is a party or to
which any property of the Company is subject.

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MANAGEMENT OF THE COMPANY

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The following tables set forth certain information about the directors and
executive officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --------- -----------------------------------------------------
<S> <C> <C>

INSIDE DIRECTORS

Laurence D. Fink 45 Chairman of the Board of Directors

Hugh R. Frater 42 President and Chief Executive Officer and Director

UNAFFILIATED DIRECTORS

Donald G. Drapkin 50 Director

Carl Guether 51 Director

Jeffrey C. Keil 54 Director

Kendrick R. Wilson, III 51 Director

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

Richard M. Shea 38 Chief Operating Officer and Chief Financial Officer

Edwin O. Bergman 32 Vice President

Chris A. Milner 31 Vice President

Andrew Siwulec 49 Vice President

Mark Warner 36 Vice President

Susan Wagner 36 Secretary
</TABLE>

Because the Manager will assume principal responsibility for managing the
affairs of the Company, the Company does not expect to employ full-time
personnel and the officers listed above are expected to perform only ministeral
functions as officers of the Company, such as executing contracts and filing
reports with regulatory agencies. Notwithstanding the foregoing, the persons
listed above, who are officers of the Manager and will be compensated by the
Manager, are expected in their capacities as officers of the Manager, fulfilling
duties of the Manager under the Management Agreement, to devote a substantial
amount of their time to the affairs of the Company. As officers of the Manager,
such persons will not have fiduciary obligations to the Company and its
stockholders.

DIRECTORS AND EXECUTIVE OFFICERS

LAURENCE D. FINK, Chairman, is also Chairman and Chief Executive Officer of
the Manager, Chairman of the Manager's Management Committee and Co-Chair of the
Manager's Investment Strategy Group. Mr. Fink serves on the Asset Liability
Committee of PNC Bank. He is also Chairman of the Board and a Director of
BlackRock's family of closed-end mutual funds, and a Director of BlackRock's
offshore funds.

Prior to founding BlackRock in 1988, Mr. Fink was a member of the Management
Committee and a Managing Director of First Boston. Mr. Fink joined First Boston
in 1976. During his tenure at First Boston, Mr. Fink was co-head of the Taxable
Fixed Income Division, which was responsible for trading and distribution of all
government, mortgage and corporate securities. In 1989, Mr. Fink was featured in
THE WALL STREET JOURNAL CENTENNIAL EDITION as one of 28 "business leaders of
tomorrow," and in 1987, Mr. Fink was featured in INVESTMENT DEALERS' DIGEST as
head of the mortgage-related securities group of "The

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Ultimate Brokerage Firm." Mr. Fink also started the Financial Futures and
Options Department and headed the Mortgage and Real Estate Products Group.

Currently, Mr. Fink is a member of the Boards of Trustees of New York
University Medical Center, Dwight-Englewood School in Englewood, New Jersey, the
National Outdoor Leadership School (NOLS) and Phoenix House, and a member of the
Boards of Directors of VIMRx Pharmaceuticals Inc. and Innovir Laboratories, Inc.
Previously, Mr. Fink was a member of Fannie Mae's Advisory Council. Mr. Fink
earned a B.A. degree in political science from the University of California at
Los Angeles in 1974 and an M.B.A. degree with a concentration in real estate
from U.C.L.A. in 1976.

HUGH R. FRATER, President and Chief Executive Officer, is a Managing
Director of the Manager, where he is co-head of the BlackRock Account Management
Group and a member of the firm's Management Committee. Mr. Frater's primary
responsibilities include providing strategic and risk management advice to
BlackRock's financial services clients and developing and marketing portfolio
management services for tax-exempt and taxable clients. His areas of expertise
include general corporate finance and bank and insurance company regulatory,
accounting and investment issues.

Prior to joining BlackRock in 1988, Mr. Frater was a Vice President in
Investment Banking at Lehman Brothers in the financial institutions department.
Mr. Frater joined Lehman Brothers in 1985 as a generalist in the Mortgage and
Savings Institutions Group. From 1980 to 1983, Mr. Frater was Director of
Programming for The Learning Channel, an educational cable television network.

Mr. Frater earned a B.A. degree in English from Dartmouth College in 1978
and an M.B.A. degree in finance from Columbia University in 1985.

DONALD G. DRAPKIN, Director, has been Vice Chairman and Director of
McAndrews & Forbes Holdings Inc. and various of its affiliates since March 1987.
Prior to joining MacAndrews and Forbes, Mr. Drapkin was a partner in the law
firm of Skadden, Arps, Slate, Meagher & Flom for more than five years. Mr.
Drapkin also is a Director of the following corporations which file reports
pursuant to the Exchange Act: Algos Pharmaceutical Corporation, The Cosmetic
Center, Inc., The Coleman Company, Inc., Coleman Holdings Inc., Coleman
Worldwide Inc., Playboy Enterprises, Inc., Cardio Technologies, Inc., Genta,
Inc., Welder Nutrition International Inc., and VIMRx Pharmaceuticals Inc. (On
December 27, 1996, Marvel Holdings, Marvel Parent, Marvel Entertainment Group,
Inc., of which Mr. Drapkin is a Director, and several of their respective
subsidiaries, and Marvel III Holdings Inc., of which Mr. Drapkin is a Director,
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code.).

CARL GUETHER. Since November 1997, Mr. Guether has been Executive Vice
President and Chief Financial Officer of WMC Mortgage Corp., a mortgage banking
company. Mr. Guether had been Vice Chairman and Chief Financial Officer, and
previously Executive Vice President, of Great Western Financial Corporation and
Great Western Bank since 1987. Mr. Guether had joined Great Western following
its acquisition of Aristar, Inc., a consumer finance and insurance company in
1983, where he served as Executive Vice President and Chief Financial Officer
and previous financial management positions since 1974. From 1972 to 1974 Mr.
Guether held financial management positions with Associates Financial Services
Company, an international consumer finance company. From 1968 to 1972 he was an
accountant with Deloitte, Haskins and Sells. Mr. Guether is a Director of John
Alden Financial Corp. He received an M.B.A. from Lehigh University in 1968 and a
B.A. from Ursinus College in 1967.

JEFFREY C. KEIL, Director, has been Chairman of the Executive Committee of
International Real Returns, LLC, investment advisor to an investment company
organized by Lazard Freres & Co., since January 1998. From 1996 to January 1998,
Mr. Keil was a General Partner of Keil Investment Partners, a private fund which
invested in the financial sector in Israel. From 1984 to 1996, Mr. Keil was
President, Director and Chairman of the Finance Committee of Republic New York
Corporation and Vice Chairman and a Member of the Executive Committee of
Republic National Bank of New York. Mr. Keil earned a B.S. degree in economics
at the University of Pennsylvania in 1965, pursued graduate studies in
mathematical

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statistics, operations research and international economics from the London
School of Economics, and earned an M.B.A. degree with a concentration in Finance
from Harvard Graduate School of Business Administration in 1968.

KENDRICK R. WILSON, III, Director, has been Vice Chairman of Lazard Freres &
Co. LLC, a member of the firm's Management Committee and head of the firm's
merger and acquisition activities within the banking and financial services
industries from 1989 to March 1998. Prior to joining Lazard in 1989, Mr. Wilson
was President and Chief Operating Officer of Ranieri Wilson & Co. Prior to
joining Ranieri Wilson & Co., Mr. Wilson was a Senior Executive Vice President
and member of the Board of Directors of E.F. Hutton & Co. and prior thereto he
was a Managing Director in the financial institutions group of Salomon Brothers
Inc. Mr. Wilson is a director of Bank United, American Buildings Company, Inc.,
Meigher Communications, Inc., BlackRock Asset Investors and American Marine
Holdings, Inc.

Mr. Wilson received a B.A. from Dartmouth College and an M.B.A. from Harvard
Business School. He served as an officer in the U.S. Army Special Forces in
Vietnam.

RICHARD M. SHEA, ESQ., Chief Operating Officer and Chief Financial Officer,
is a Director of the Manager and a member of the Risk Management and Analytics
Group. Mr. Shea is responsible for the overall management of BlackRock's eight
taxable term trusts with total assets of approximately $5.3 billion as of
December 31, 1997. The term trusts are fixed-income closed-end mutual funds that
terminate on a specific date with a specific targeted net asset value at
termination. Mr. Shea is also responsible for tax and regulatory issues for all
of BlackRock's funds and partnerships. Mr. Shea has established tax analytics,
including a proactive CMO tax model, and procedures to optimize fund performance
within the framework of relevant tax laws. He currently uses these systems to
trade REMIC residuals and to support trading of other MBS derivatives. He also
works with clients that have special tax situations and assists in designing
investment strategies that take these special needs into account.

Prior to joining BlackRock in 1993, Mr. Shea was an Associate Vice President
and tax counsel at Prudential Securities, Inc. Mr. Shea joined Prudential in
1988 and was responsible for corporate tax planning, tax-oriented investment
strategies and tax issues of CMOs and original issue discount obligations. Mr.
Shea previously worked as a Senior Tax Specialist at Laventhol and Horwath for
over four years where he structured real estate limited partnership investments
for the private placement market.

Mr. Shea earned a B.S. degree, in accounting from the State University of
New York at Plattsburgh in 1981 and a J.D. degree from New York Law School in
1984.

EDWIN O. BERGMAN, Vice President -- Risk Management, is also a Vice
President in BlackRock's Risk Management and Analytics group. Since joining
BlackRock in October 1996 Mr. Bergman has performed a variety of functions
throughout the Risk Management area. Mr. Bergman serves as a team leader within
the firm's Risk Management advisory practice. Mr. Bergman has also developed
capabilities which allow enhanced prepayment and loss analysis of commercial
mortgage backed securities, provide analysis and pricing of money market
securities and enhance the stratification and pricing of the firm's mortgage
holdings.

Prior to working at BlackRock, Mr. Bergman worked as an associate in Booz,
Allen & Hamilton's Financial Services and Technology Practice where he developed
credit pricing, pipeline hedging and information management strategies for
several large mortgage finance institutions in the United States and Australia.
Prior to working at Booz, Allen & Hamilton, Mr. Bergman was a Vice President in
Goldman, Sachs & Co.'s Mortgage Research area from December 1992 to February
1995 where he developed models supporting the structuring and analysis of
commercial and residential mortgage-backed securities and a variety of other
asset-backed securities. Prior to working at Goldman Sachs & Co., Mr. Bergman
was a Senior Associate at Morgan Stanley from July 1987 to December 1992 where
he led teams exploring applications of emerging technology and developing
applications supporting Fixed Income Compliance, Commodities Trading and
Brokerage Accounting.

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Mr. Bergman received a B.A. in Economics and the Natural Sciences from The
Johns Hopkins University in May of 1987 with departmental honors in Economics.

CHRIS A. MILNER, Vice President--Acquisitions, is also a Vice President and
Manager of PNC Real Estate Capital Markets, where he is responsible for managing
PNC's Commercial Mortgage-Backed Securities Program and is a member of the Real
Estate Executive Committee. Areas under Mr. Milner's direction include CMBS loan
origination, underwriting and closing as well as securitization.

Prior to co-founding PNC's CMBS Program in 1995, Mr. Milner was a Vice
President in PNC's real estate asset management subsidiary. In this capacity,
Mr. Milner was responsible for the restructure or sale of distressed commercial
real estate loans and the coordination of PNC's special servicer ratings and
sub-performing/non-performing loan sales.

Mr. Milner joined PNC in 1990 upon completion of his graduate work (M.B.A.
in Finance), MAGNA CUM LAUDE with a concentration in Real Estate Finance at
Indiana University. While attending graduate school, Mr. Milner worked at Melvin
Simon & Associates--the predecessor to the Simon/DeBartolo REIT--performing
cashflow/refinance analyses on regional mall properties. Mr. Milner earned a
liberal arts B.A. degree from DePauw University in 1988.

ANDREW SIWULEC, Vice President -- Loan Underwriting, is Senior Vice
President and Co-Manager of Institutional Real Estate for PNC Bank.
Institutional Real Estate encompasses public real estate companies, real estate
investment funds, and large private owners/developers throughout the U.S. His
responsibilities include business strategy and the management of PNC's New York,
New Jersey, Philadelphia, and Washington, D.C. offices. He is a member of the
Real Estate Executive Committee which serves as the management committee for all
commercial real estate activities at PNC.

Prior to joining PNC in 1996, Mr. Siwulec served as Senior Vice President
for commercial real estate workouts at Midlantic Bank where he started in
November 1991. During that period, he managed six teams of professionals that
worked out problem credits and sold performing and non-performing real estate
assets through eight portfolio sales. Mr. Siwulec previously worked for a
Washington, D.C. commercial mortgage banking firm where he worked on developing
a conduit for commercial mortgages and managed non-performing assets for the
firm and under contract with GNMA. Mr. Siwulec began his real estate finance
career at Continental Illinois National Bank where he most recently managed
commercial construction lending nationwide.

Mr. Siwulec earned his A.B. in 1970 from The Johns Hopkins University in
Liberal Arts and his M.B.A. from The University of Pennsylvania, Wharton School
of Business in 1976 in finance.

MARK S. WARNER, CFA, Vice President, is a Director and portfolio manager of
the Manager, where his primary responsibility is managing client portfolios,
specializing in the commercial mortgage (CMBS) and non-agency residential
mortgage sectors.

Prior to joining BlackRock in 1993, Mr. Warner was a Director in the Capital
Markets Unit of the Prudential Mortgage Capital Company. Mr. Warner joined
Prudential in 1987, and was initially responsible for asset/liability strategies
for the participating annuity segment. Mr. Warner joined Prudential's Commercial
Real Estate Division in 1989, where he was responsible for the sale of
commercial whole loans, purchases of private placement mortgage-backed
securities and securitization opportunities within Prudential's non-residential
portfolio. Mr. Warner previously worked in the fixed income department at
PaineWebber.

Mr. Warner authored the chapter entitled "Commercial Mortgage-Backed
Securities Portfolio Management" in WHOLE-LOAN CMOS, published by Frank J.
Fabozzi Associates in 1995 and, co-authored with Wesley Edens, a Managing
Director of BlackRock, the article entitled "The ABC's of CMBS" for the PENSION
REAL ESTATE ASSOCIATION'S FOURTH QUARTER 1996 magazine. Mr. Warner earned a B.A.
degree in political science from Columbia University in 1983 and an M.B.A.
degree in finance and marketing from

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Columbia Business School in 1987. Mr. Warner received his Chartered Financial
Analyst (CFA) designation in 1993.

SUSAN L. WAGNER, Secretary, is a Managing Director of the Manager, where she
heads the International Business and Strategic Product Development Departments
and is a member of the Management Committee. Ms. Wagner is primarily responsible
for creating asset management products for international investors and
developing and maintaining relationships with international clients. Ms. Wagner
has also been responsible for several special advisory assignments. Ms. Wagner
serves as a Director of BlackRock's offshore funds.

Prior to founding BlackRock in 1988, Ms. Wagner was a vice president in the
Mortgage and Savings Institutions Group at Lehman Brothers. Ms. Wagner joined
Lehman in 1984 in the Capital Markets Division and in 1986 was given
responsibility for oversight of all subsidiaries through which Lehman issued
structured mortgage securities. During her tenure at Lehman, Ms. Wagner worked
on a wide variety of projects including structured financings, portfolio
restructuring, conventional debt and equity offerings, and merger and
acquisition transactions.

Ms. Wagner earned a B.A. degree, MAGNA CUM LAUDE, in economics and English
from Wellesley College in 1982 and an M.B.A. degree in finance from the
University of Chicago in 1984.

Directors will be elected for a term of three years, and hold office until
their successors are elected and qualified. All officers serve at the discretion
of the Company's Board of Directors. Although the Company may have salaried
employees, it currently has no such employees. The Company will pay an annual
director's fee to each unaffiliated director of $20,000, a fee of $1,000 for
each meeting of the Board of Directors attended by each unaffiliated director
and reimbursement of costs and expenses of all directors for attending such
meetings. Affiliated directors will not be separately compensated by the Company
other than through the Company's stock option plan.

The Bylaws of the Company provide that the Board of Directors shall have not
less than three or more than nine members, as determined from time to time by
the existing Board of Directors. The Board of Directors will initially have six
members consisting of two directors affiliated with the Manager and four
Unaffiliated Directors. The Bylaws further provide that except in the case of a
vacancy, the majority of the members of the Board of Directors and of any
committee of the Board of Directors must at all times after the issuance of the
shares of Common Stock in this Offering be Unaffiliated Directors. A vacancy on
the Board of Directors resulting from the removal of a Director by the
stockholders will be filled by a vote of the stockholders. Except in the case of
a removal of a Director by the stockholders, vacancies occurring on the Board of
Directors among the Unaffiliated Directors will be filled by the vote of a
majority of the directors, including the Unaffiliated Directors. The term
"Unaffiliated Directors" refers to those directors that are not affiliated,
directly, or indirectly, with the Manager or PNC, whether by ownership of,
ownership interest in, employment by, any material business or professional
relationship with, or serving as an officer or director of the Manager or PNC or
an Affiliated business entity of the Manager or PNC.

The Articles of Amendment and Restatement of the Company also provide for
three classes of directors with staggered terms, such that one class shall be
elected each year. Two of the classes of directors will contain one affiliated
director and one Unaffiliated Director and one class will contain two
Unaffiliated Directors. After the initial staggered period (the first three
years), all directors will serve for a term of three years.

The Articles of Amendment and Restatement of the Company provide for the
indemnification of the directors and officers of the Company to the fullest
extent permitted by Maryland law. Other employees and agents of the Company may
be indemnified to such extent as shall be authorized by the Board of Directors
or the Bylaws. Maryland law generally permits indemnification of directors,
officers, employees and agents against certain judgments, penalties, fines,
settlements and reasonable expenses that any such person actually incurred in
connection with any proceeding to which such person may be made a party by
reason of serving in such positions unless it is established that: (i) an act or
omission of the director,

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officer, employee or agent was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) such person actually received an improper personal
benefit in money, property or services; or (iii) in the case of criminal
proceedings, such person had reasonable cause to believe that the act or
omission was unlawful. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.

The Articles of Amendment and Restatement of the Company provide that the
personal liability of any director or officer of the Company to the Company or
its stockholders for money damages is limited to the fullest extent allowed by
the statutory or decisional law of the State of Maryland as amended or
interpreted. Maryland law authorizes the limitation of liability of directors
and officers to corporations and their stockholders for money damages except (i)
to the extent that it is proved that the person actually received an improper
personal benefit, or (ii) to the extent that a judgment or other final
adjudication adverse to the person is entered in a proceeding based on a finding
that the person's action, or failure to act, was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated.

EXECUTIVE COMPENSATION

The Company has not paid, but may in the future pay, annual compensation to
the Company's executive officers for their services as executive officers. The
Company may from time to time, in the discretion of the Compensation Committee
(as defined below) of the Board of Directors, grant options to purchase shares
of the Company's Common Stock to the Manager, executive officers and directors
pursuant to the Company's 1998 Stock Option Plan. See "Stock Options" below.

STOCK OPTIONS

The Company has adopted a stock option plan (the "1998 Stock Option Plan")
that provides for the grant of both qualified incentive stock options ("ISOs")
that meet the requirements of Section 422 of the Code, and non-qualified stock
options. ISOs may be granted to the officers and key employees of the Company,
if any. Nonqualified stock options may be granted to the Manager, directors,
officers, any key employees of the Company and to the directors, officers and
key employees of the Manager. The exercise price for any qualified option
granted under the 1998 Stock Option Plan may not be less than 100% of the fair
market value of the shares of Common Stock at the time the option is granted.
The purpose of the 1998 Stock Option Plan is to provide a means of
performance-based compensation to the Manager in order to attract and retain
qualified personnel and to provide an incentive to others whose job performance
affects the Company. The 1998 Stock Option Plan became effective on March 23,
1998.

Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the 1998 Stock Option Plan authorizes the grant of options to
purchase an aggregate of 2,470,453 shares of the Company's Common Stock. If an
option granted under the 1998 Stock Option Plan expires or terminates, the
shares subject to any unexercised portion of that option will again become
available for the issuance of further options under the 1998 Stock Option Plan.
Unless previously terminated by the Board of Directors, the 1998 Stock Option
Plan will terminate ten years from its effective date, and no options may be
granted under the 1998 Stock Option Plan thereafter.

The 1998 Stock Option Plan will be administered by a committee of the Board
of Directors comprised entirely of Unaffiliated Directors (the "Compensation
Committee") options granted under the 1998 Stock Option Plan will become
exercisable in accordance with the terms of the grant made by the Compensation
Committee. The Compensation Committee has discretionary authority to determine
at the time an option is granted whether it is intended to be an ISO or a
non-qualified option, and when and in what increments shares of Common Stock
covered by the option may be purchased. If stock options are to be granted to
the Unaffiliated Directors, then the full Board of Directors will approve such
grants.

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Under current law, ISOs may not be granted to any director of the Company
who is not also a full-time employee or to directors, officers and other
employees of entities unrelated to the Company. In addition, no options may be
granted under the 1998 Stock Option Plan to any person who, assuming exercise of
all options held by such person, would own or be deemed to own more than 9.8% of
the outstanding shares of Common Stock of the Company.

Each option must terminate no more than ten years from the date it is
granted. Options may be granted on terms providing that they will be exercisable
in whole or in part at any time or times during their respective terms, or only
in specified percentages at stated time periods or intervals during the term of
the option.

The exercise price of any option granted under the 1998 Stock Option Plan is
payable in full (i) by cash, (ii) by surrender of shares of the Company's Common
Stock having a market value equal to the aggregate exercise price of all shares
to be purchased, (iii) by cancellation of indebtedness owed by the Company to
the option holder, (iv) by any combination of the foregoing, or (v) by a full
recourse promissory note executed by the option holder. The terms of the
promissory note may be changed from time to time by the Company's Board of
Directors to comply with applicable regulations or other relevant pronouncements
of the Service or the Commission.

The Company's Board of Directors may, without affecting any outstanding
options, from time to time revise or amend the 1998 Stock Option Plan, and may
suspend or discontinue it at any time. However, no such revision or amendment
may increase the number of shares of Common Stock subject to the 1998 Stock
Option Plan (with the exception of adjustments resulting from changes in
capitalization), change the class of participants eligible to receive options
granted under the 1998 Stock Option Plan or modify the period within which or
the terms stated in the 1998 Stock Option Plan upon which the options may be
exercised without stockholder approval.

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THE MANAGER

The Manager is a subsidiary of PNC Bank, National Association ("PNC Bank"),
which is itself a wholly owned subsidiary of PNC Bank Corp. Established in 1988,
the Manager is a registered investment adviser under the Investment Advisers Act
of 1940 and is one of the largest fixed-income investment management firms in
the United States. The Manager engages in investment and risk management as its
sole businesses and specializes in the management of domestic and offshore
fixed-income assets for pension and profit sharing plans, financial institutions
such as banking and insurance companies and mutual funds for retail and
institutional investors.

The address of the Manager is 345 Park Avenue, New York, New York 10154.

THE MANAGEMENT AGREEMENT

The Company will enter into the Management Agreement with the Manager for an
initial term expiring on the second anniversary of the closing of the Offering.
Thereafter, successive extensions, each for a period not to exceed two years,
may be made by agreement between the Company and the Manager, with the approval
of a majority of the Unaffiliated Directors. The Manager will be primarily
involved in three activities: (i) underwriting, originating and acquiring
Mortgage Loans and other real estate related assets; (ii) asset/liability
management, financing, hedging, management and disposition of mortgage assets,
including credit and prepayment risk management; and (iii) capital management,
oversight of the Company's structuring, analysis, capital raising and investor
relations activities. In conducting these activities, the Manager will formulate
operating strategies for the Company, arrange for the acquisition of assets by
the Company, arrange for various types of financing for the Company, monitor the
performance of the Company's mortgage assets and provide certain administrative
and managerial services in connection with the operation of the Company. The
Manager will be required to manage the business affairs of the Company in
conformity with the policies that are approved and monitored by the Company's
Board of Directors. The Manager will be required to prepare regular reports for
the Company's Board of Directors that will review the Company's acquisitions of
assets, portfolio composition and characteristics, credit quality, performance
and compliance with the policies approved by the Company's Board of Directors.

At all times, the Manager will be subject to the direction and oversight of
the Company's Board of Directors and will have only such functions and authority
as the Company may delegate to it. The Manager will be responsible for the
day-to-day operations of the Company and will perform such services and
activities relating to the Mortgage Assets and operations of the Company as may
be appropriate, including:

- providing a complete program of investing and reinvesting the capital and
assets of the Company in pursuit of its investment objectives and in
accordance with policies adopted by the Company's Board of Directors from
time to time;

- serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the Company's
Board of Directors;

- assisting the Company in developing criteria for mortgage asset purchase
commitments that are specifically tailored to the Company's investment
objectives and making available to the Company its knowledge and
experience with respect to mortgage assets and other real estate related
assets;

- counseling the Company in connection with policy decisions made by the
Board of Directors;

- evaluating and recommending hedging strategies to the Company's Board of
Directors in accordance with hedging guidelines and policies adopted by
the Board of Directors, engaging in hedging activities on behalf of the
Company, consistent with the Company's status as a REIT;

- maintenance of the Company's exemption from regulation as an investment
company;

- representing the Company in connection with the purchase and commitment to
purchase or sell mortgage assets, including the accumulation of Mortgage
Loans for securitization and the incurrence of debt;

- arranging for the issuance of MBS from pools of Mortgage Loans owned by
the Company;

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- furnishing reports and statistical and economic research to the Company
regarding the Company's activities and the services performed for the
Company by the Manager;

- monitoring and providing to the Company's Board of Directors on an ongoing
basis price information and other data, obtained from certain nationally
recognized dealers that maintain markets in mortgage assets identified by
the Board of Directors from time to time, and providing data and advice to
the Board of Directors in connection with the identification of such
dealers;

- administering the day-to-day operations of the Company and performing and
supervising the performance of such other administrative functions
necessary in the management of the Company as may be agreed upon by the
Manager and the Company's Board of Directors;

- contracting, as necessary, with third parties for master and special
servicing of assets acquired by the Company;

- communicating on behalf of the Company with the holders of the equity and
debt securities of the Company as required to satisfy the reporting and
other requirements of any governmental bodies or agencies and to maintain
effective relations with such holders;

- causing the Company to qualify to do business in all applicable
jurisdictions;

- causing the Company to retain qualified accountants and legal counsel to
assist in developing appropriate accounting procedures, compliance
procedures and testing systems and to conduct quarterly compliance
reviews;

- assisting the Company in complying with all regulatory requirements
applicable to the Company in respect of its business activities, including
preparing or causing to be prepared all financial statements required
under applicable regulations and contractual undertakings and all reports
and documents, if any, required under the Exchange Act;

- assisting the Company in making required tax filings and reports and
maintaining its status as a REIT, including soliciting stockholders for
required information to the extent provided in the REIT Provisions of the
Code;

- performing such other services as may be required from time to time for
management and other activities relating to the assets of the Company as
the Board of Directors shall reasonably request or the Manager shall deem
appropriate under the particular circumstances; and

- using all reasonable efforts to cause the Company to comply with all
applicable laws.

Upon a majority vote of the Unaffiliated Directors, the Company may
terminate, or decline to renew the term of, the Management Agreement without
cause at any time after the first two years upon 60 days written notice. Upon
such termination, in connection with any termination without cause, the Company
shall pay the Manager a termination fee. The amount of the termination fee shall
be determined by independent appraisal of the value of the Management Agreement
for the next four years. Such appraisal is to be conducted by a
nationally-recognized appraisal firm mutually agreed upon by the Company and the
Manager. If the Company and the Manager are unable to agree upon an appraisal
firm, then each of the Company and the Manager is to choose an independent
appraisal firm to conduct an appraisal. In such event, (i) if the appraisals
prepared by the two appraisers so selected are the same or differ by an amount
that does not exceed 20% of the higher of the two appraisals, the termination
fee is to be deemed to be the average of the appraisals as prepared by each
party's chosen appraiser, and (ii) if the two appraisals differ by more than 20%
of such higher amount, the two appraisers together are to select a third
appraisal firm to conduct an appraisal. If the two appraisers are unable to
agree as to the identity of such third appraiser, either of the Manager and the
Company may request that the American Arbitration Association ("AAA") select the
third appraiser. The termination fee then is to be an amount determined by such
third appraiser, but in no event less than the lower of the two initial
appraisals or more than the higher of such two initial appraisals.

In addition, the Company has the right at any time during the term of the
Management Agreement to terminate the Management Agreement without the payment
of any termination fee upon, among other

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things, a material breach by the Manager of any provision contained in the
Management Agreement that remains uncured at the end of the applicable cure
period (including the failure of the Manager to use reasonable efforts to comply
with the Company's investment policy and guidelines).

The Management Agreement may not be assigned (within the meaning of the
Investment Advisers Act of 1940 and the rules thereunder) by either party
without the consent of the other party.

MANAGEMENT COMPENSATION

<TABLE>
<CAPTION>
RECIPIENT PAYOR AMOUNT
- ---------- ----------- -----------------------------------------------------------------------------------------
<S> <C> <C>

Manager Company Base management fee equal to a percentage of the Average Invested Assets by rating
category of the Company(1)

Manager Company Incentive compensation based on the amount, if any, by which the Company's Funds From
Operations and certain net gains exceed a hurdle rate(2)

Manager Company Out-of-pocket expenses of Manager paid to third parties(3)
</TABLE>

- ------------------------

(1) The base management fee is equal to 1% per annum of Average Invested Assets
rated lower than BB-or not rated, 0.75% of Average Invested Assets rated BB-
through BB+, and 0.35% of Average Invested Assets rated above BB+.

(2) A detailed explanation of the calculation of the incentive compensation is
provided below.

(3) The Manager may engage PNC Bank, New Midland or unaffiliated third parties
to conduct due diligence with respect to potential portfolio investments and
to provide certain other services. Accordingly, a portion of the
out-of-pocket expenses may be paid to PNC Bank or New Midland in such
capacities. The contracting for such engagement will be conducted at arm's
length. PNC Bank and New Midland will be paid fees and out-of-pocket
expenses as would customarily be paid to unaffiliated third parties for such
services. See "The Manager--Expenses."

The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets (other than cash or cash equivalents) of the
Company, including the assets of all of its direct and indirect subsidiaries,
before reserves for depreciation or bad debts or other similar noncash reserves,
computed by taking the daily average of such values during such period and shall
be determined as follows: (i) Average Invested Assets with a rating of less than
BB- or not rated means, for any quarter, the Average Invested Assets in such
quarter that have received a credit rating of less than BB- from Standard &
Poor's Corporation ("S&P") or less than Ba3 from Moody's Investors Service, Inc.
("Moody's") or have received an equivalent rating from an NRSRO or that have not
been rated by either Moody's, S&P or an NRSRO and are not guaranteed by the U.S.
government or any agency or instrumentality thereof, (ii) Average Invested
Assets with a rating of BB- to BB+ shall mean the Average Invested Assets that
have received a credit rating of BB- to BB+ from S&P or Ba3 to Ba1 from Moody's
or have received an equivalent rating from an NRSRO and that are not covered by
clause (i) above, and (iii) Average Invested Assets with a credit rating above
BB+ shall mean the Average Invested Assets that have received a credit rating
above BB+ from S&P or above Ba1 from Moody's or have received an equivalent
rating from an NRSRO and that are not covered by clause (i) or (ii) above or
that are not rated but are guaranteed by the U.S. government or any agency or
instrumentality thereof. The Manager will not receive any management fee for the
period prior to the sale of the shares of Common Stock offered hereby. The base
management fee is intended to compensate the Manager for its costs in providing
management services to the Company. The Board of Directors may adjust the base
management fee with the consent of the Manager in the future if necessary to
align the fee more closely with the costs of such services.

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Thus, if the Company had total Average Invested Assets for a full year of
$1.2 billion (representing the proceeds of the Offering and a debt to equity
ratio of 3:1), the base management fee would equal $12 million if all of such
Average Invested Assets were rated less than BB- or not rated, and would equal
$4.2 million if all of such Average Invested Assets were rated above BB+. These
fees are for illustrative purposes only, however, since the mix and amount of
assets will vary.

The Manager will be entitled to receive incentive compensation for each
fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount
by which (1)(a) Funds From Operations of the Company (before the incentive fee)
per share of Common Stock (based on the weighted average number of shares
outstanding) plus (b) gains (or minus losses) from debt restructuring and sales
of property per share of Common Stock (based on the weighted average number of
shares outstanding), exceed (2) an amount equal to (a) the weighted average of
the price per share of the initial offering and the prices per share of any
secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury
Rate plus three and one-half percent per annum (expressed as a quarterly
percentage) multiplied by (B) the weighted average number of shares of Common
Stock outstanding during such quarter. Notwithstanding the foregoing, no payment
of any portion of the incentive compensation that is attributable to net capital
gains of the Company prior to the end of the first full fiscal quarter of the
Company's operations following any minimum calculation period longer than a
quarter required by Rule 205-3 of the Investment Advisers Act of 1940 at the
time of such calculation, will accrue or be payable until completion of such
fiscal quarter, at which time the cumulative net capital gains of the Company
through the end of such quarter will be computed and incentive compensation will
be paid on such net gains at the rate provided above and after which time the
net capital gains includible above for each quarter will be the excess of such
net capital gains for such minimum calculation period through the end of such
quarter (the "Total Period") over the net capital gains (if any) for the portion
of the Total Period other than such quarter. For any period less than a quarter
during which the Management Agreement is in effect, the incentive fee will be
prorated according to the proportion which such period bears to a full quarter
of 90, 91 or 92 days, as the case may be. "Funds From Operations" as defined by
NAREIT means net income (computed in accordance with GAAP) excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization on real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. Funds From Operations does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions. As used in calculating the Manager's compensation, the term "Ten
Year U.S. Treasury Rate" means the arithmetic average of the weekly average
yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to constant maturities of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the Company
determines in good faith that the Ten Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate will be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less than
eight nor more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. government securities selected by the
Company.

The ability of the Company to generate Funds From Operations in excess of
the Ten Year U.S. Treasury Rate, and of the Manager to earn the incentive
compensation described in the preceding paragraph, is dependent upon the level
of credit losses, the level and volatility of interest rates, the Company's
ability to react to changes in interest rates and to utilize successfully the
operating strategies described herein, and other factors, many of which are not
within the Company's control.

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The Manager is expected to use the proceeds from its base management fee and
incentive compensation in part to pay compensation to its officers and employees
who, notwithstanding that certain of them also are officers of the Company, will
receive no cash compensation directly from the Company.

The Company expects to rely primarily on the facilities, personnel and
resources of the Manager to conduct its operations. The Manager will be
reimbursed for (or charge the Company directly for) the Manager's costs and
expenses in employing third-parties to perform professional services (including
legal and accounting) for the Company and to perform due diligence tasks on
assets purchased or considered for purchase by the Company. Further, the Manager
will be reimbursed for any expenses incurred in contracting with third-parties
for the master or special servicing of assets acquired by the Company. The
Manager may engage PNC Bank or New Midland to conduct due diligence with respect
to potential portfolio investments and to provide other services. Accordingly, a
portion of the out-of-pocket expenses may be paid to PNC Bank or New Midland in
such capacities. The contracting for such engagement will be conducted at arm's
length and PNC Bank and New Midland will be paid fees and out-of-pocket expenses
as would customarily be paid to unaffiliated third-parties for such services.
Such arrangements may also be made using an income sharing arrangement such as a
joint venture. Expense reimbursement will be made quarterly.

The management fees are payable in arrears. The Manager's base and incentive
fees and reimbursable costs and expenses will be calculated by the Manager
within 45 days after the end of each quarter, and such calculation will be
promptly delivered to the Company. The Company is obligated to pay such fees,
costs and expenses within 60 days after the end of each fiscal quarter. If
requested by the Manager, the Company will make advance payments of the base
management fee as often as semi-monthly at the rate of 75% of such fee estimated
by the Manager.

The Company has adopted the 1998 Stock Option Plan. The Manager and the
directors, officers and any employees of the Company and the Manager may be
granted options under the Company's 1998 Stock Option Plan. See "Management of
the Company--Stock Options."

EXPENSES

The Company will be required to pay all offering expenses (including
accounting, legal, printing, clerical, personnel, filing and other expenses)
incurred by the Company, the Manager or its Affiliates on behalf of the Company
in connection with the Offering, estimated at $1,000,000. This payment will not
be subject to the limitation on expenses to be borne by the Company as described
in the paragraph below.

Subject to the limitations set forth below, the Company will also pay all
operating expenses except those specifically required to be borne by the Manager
under the Management Agreement. The operating expenses required to be borne by
the Manager include costs and expenses of its officers and employees and any
overhead incurred in connection with its duties under the Management Agreement,
the cost of office space and equipment required for the Company's day-to-day
operations and the costs of any salaries or directors fees of any officers or
directors of the Company who are affiliated persons of the Manager except that
the Board of Directors of the Company may approve reimbursement to the Manager
of the Company's pro rata portion of the salaries, bonuses, health insurance,
retirement benefits and similar employment costs for the time spent on Company
operations and administration other than for the provision of investment
advisory services. The expenses that will be paid by the Company will include
(but not necessarily be limited to issuance and transaction costs incident to
the acquisition, disposition and financing of investments, legal, accounting and
auditing fees and expenses, the compensation and expenses of the Company's
Unaffiliated Directors, the costs of printing and mailing proxies and reports to
stockholders, costs incurred by employees of the Manager for travel on behalf of
the Company, costs associated with any computer software or hardware that is
used solely for the Company, costs to obtain liability insurance to indemnify
the Company's directors and officers, the Manager and its employees and
directors and the Underwriters, and the compensation and expenses of the
Company's custodian and transfer agent, if any. The Company will also be
required to pay all expenses incurred in connection with due diligence, the
accumulation of Mortgage Loans, the master and special servicing of Mortgage
Loans,

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the issuance and administration of MBS from pools of Mortgage Loans or
otherwise, the raising of capital, incurrence of debt, the acquisition of
assets, interest expenses, taxes and license fees, non-cash costs, litigation,
the base and incentive management fee and extraordinary or non-recurring
expenses. Such services may be provided to the Company by Affiliates of the
Manager if the Manager believes such services are of comparable or superior
quality to those provided by third-parties and can be provided at comparable
cost. The Board of Directors will periodically review the Company's expenses
levels, the division of expenses between the Company and the Manager and
reimbursements of expenses advanced by the Manager.

The Manager and its employees and the Unaffiliated Directors may also
receive stock options pursuant to the Company's 1998 Stock Option Plan. See
"Management of the Company--Stock Options."

CONFLICTS OF INTEREST

The Company is subject to conflicts of interest involving the Manager and
its Affiliates because, among other reasons, (i) the Manager and its Affiliates
are permitted to purchase mortgage assets for their own account and to advise
accounts of other clients, and many investments appropriate for the Company also
will be appropriate for these accounts and (ii) the incentive fee, which is
based on income of the Company, may create an incentive for the Manager to
recommend investments with greater income potential, which generally are riskier
or more speculative, than would be the case if its fee did not include a
"performance" component.

The Company is also subject to conflicts of interest because of the expected
purchase of substantial assets from PNC and its Affiliates. Many of such assets
do not have a readily determinable fair market value and independent valuations
may not be sought. Nevertheless, the Company intends to adopt operating policies
to minimize the effect of such conflicts. These policies will require that any
acquisition of assets from PNC or its Affiliates be made for fair market value.
The Unaffiliated Directors will adopt a policy requiring documentation of the
fair market value of all affiliated purchases. The policy will require the
reporting of all such documentation quarterly. In addition, the Board of
Directors intends to approve certain operating and investing guidelines which
may be amended from time to time in response to market conditions, but only with
the approval of a majority of the Unaffiliated Directors. The Unaffiliated
Directors are likely to rely substantially on information and analysis provided
by the Manager.

LIMITS OF RESPONSIBILITY

Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to undertake the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager, its
directors and its officers will not be liable to the Company, any issuer of MBS,
any subsidiary of the Company, the Unaffiliated Directors, the Company's
stockholders or any subsidiary's stockholders for acts performed in accordance
with and pursuant to the Management Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement. There can be no
assurance that the Company would be able to recover any damages for claims it
may have against the Manager. Although certain officers and directors of the
Manager are also officers and directors of the Company, and therefore have
fiduciary duties to the Company and its stockholders in that capacity, the
Manager and the officers and directors of the Manager, in their capacities as
such, have no fiduciary duties to the Company or its stockholders.

The Company has agreed to indemnify the Manager and its directors, officers,
employees and controlling persons with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from any acts or omissions of
the Manager or its employees made in good faith in the performance of the
Manager's duties under the Management Agreement. The Management Agreement does
not limit or restrict the right of the Manager or any of its officers,
directors, employees or Affiliates from engaging in any business or rendering
services of any kind to any other person, including the purchase of, or
rendering advice to others purchasing, mortgage assets that meet the Company's
policies and criteria. See "Risk Factors--Conflicts of Interest."

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FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the material federal income tax consequences
that may be relevant to the Company and to a prospective holder of the Common
Stock. Skadden, Arps, Slate, Meagher & Flom LLP ("Counsel") has acted as counsel
to the Company and has reviewed this summary and has rendered an opinion that
the descriptions of the law and the legal conclusions contained herein are
correct in all material respects, and the discussions hereunder fairly summarize
the material federal income tax consequences to the Company and a holder of the
Common Stock. The discussion contained herein does not address all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations (except as discussed
below), financial institutions or broker-dealers and, except as discussed below,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.

The statements in this discussion and the opinion of Counsel are based on
current provisions of the Code, existing, temporary, and currently proposed
Treasury Regulations promulgated under the Code, the legislative history of the
Code, existing administrative rulings and practices of the Internal Revenue
Service (the "IRS"), and judicial decisions.

EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

TAXATION OF THE COMPANY

The Company plans to make an election to be taxed as a REIT under the Code,
commencing with its taxable year ending on December 31, 1998.

The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections and Treasury Regulations that govern the
federal income tax treatment of a REIT and its stockholders. The discussion is
qualified in its entirety by the applicable Code provisions, Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retroactively.

Counsel has advised the Company in connection with the Offering and the
Company's election to be taxed as a REIT. Counsel has provided the Company with
an opinion that, provided the Company makes a timely election to be taxed as a
REIT, the Company will be organized in conformity with the requirements for
qualification as a REIT, and its proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT under Section 856
through 860 of the Code (the "REIT Provisions of the Code"). Investors should be
aware, however, that opinions of counsel are not binding upon the IRS or any
court. It must be emphasized that Counsel's opinion is based on and is
conditioned upon certain assumptions and representations made by the Company as
to factual matters, including assumptions and representations regarding the
nature of the Company's properties and the future conduct of its business in
accordance with the descriptions of the requirements to qualify as a REIT, which
are as described in this Prospectus. The Company's qualification and taxation as
a REIT depends upon its ability to meet, through actual annual operating
results, asset ownership, distribution levels, and diversity of Stock ownership,
and the various qualification tests imposed under the Code discussed below.
Counsel will not review the Company's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual results
of the Company's operations for any particular taxable year will satisfy such
requirements. For a discussion of the tax consequences of failure to qualify as
a REIT, see "--Failure to Qualify."

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If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its Net Income that is distributed
currently to its stockholders. This treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder levels)
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference, if any. Third, if the Company has (i)
net income from the sale or other disposition of "foreclosure property" that is
held primarily for sale to customers in the ordinary course of business or (ii)
other nonqualifying income from foreclosure property, it will be subject to tax
at the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held primarily
for sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test, multiplied by a fraction intended to reflect the
Company's profitability. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year (other
than long-term capital gains that the Company elects to retain and pay the tax
thereon), and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. To the extent that the
Company elects to retain and pay income tax on its net capital gain, such
retained amounts will be treated as having been distributed for purposes of the
4% excise tax. Seventh, if the Company acquires any asset from a C corporation
(i.e., a corporation generally subject to full corporate-level tax) in a merger
or other transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on which it acquired
such asset, then to the extent of such asset's net unrealized "built-in-gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
the Company will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the tax on net
unrealized "built-in-gain" assume that the Company will elect pursuant to IRS
Notice 88-19 to be subject to the rules described in the preceding sentence if
it were to make any such acquisition. See "--Proposed Tax Legislation." Finally,
the Company will be subject to tax at the highest marginal corporate rate on the
portion of any Excess Inclusion derived by the Company from REMIC Residual
Interests equal to the percentage of the Stock of the Company held by the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, any other tax-exempt organization (other than a farmer's cooperative
described in Section 521 of the Code) that is exempt from taxation under the
unrelated business taxable income provisions of the Code, or any rural
electrical or telephone cooperative (each, a "Disqualified Organization"). Any
such tax on the portion of any Excess Inclusion allocable to Stock of the
Company held by a Disqualified Organization will reduce the cash available for
distribution from the Company to all stockholders.

REQUIREMENTS FOR QUALIFICATION

The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
the REIT Provisions of the Code; (iv) that is neither a financial institution
nor an insurance company subject

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to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) not more than 50% in value of the outstanding
shares of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of
each taxable year (the "5/50 Rule"); (vii) that makes an election to be a REIT
(or has made such election for a previous taxable year) and satisfies all
relevant filing and other administrative requirements established by the Service
that must be met in order to elect and maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. Conditions (i) to (iv), inclusive, must be
met during the entire taxable year and condition (v) must be met during at least
335 days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. For purposes of determining Stock ownership under the
5/50 Rule, a supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used exclusively
for charitable purposes generally is considered an individual. A trust that is a
qualified trust under Code Section 401(a), however, generally is not considered
an individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.

Prior to the consummation of the Offering, the Company did not satisfy
conditions (v) and (vi) in the preceding paragraph. The Company anticipates
issuing sufficient Common Stock with sufficient diversity of ownership pursuant
to the Offering to allow it to satisfy requirements (v) and (vi). In addition,
the Charter provides for restrictions regarding the transfer of the Common Stock
that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in clauses (v) and (vi) above. See "Description
of Capital Stock--Repurchase of Shares and Restrictions on Transfer."

The Code provides that a corporation that is a "Qualified REIT Subsidiary"
shall not be treated as a separate corporation, and all assets, liabilities, and
items of income, deduction, and credit of a "Qualified REIT Subsidiary" shall be
treated as assets, liabilities, and items of income, deduction, and credit of
the REIT. A "Qualified REIT Subsidiary" is a corporation, all of the capital
Stock of which is owned by the REIT. Thus, in applying the requirements
described herein, any "Qualified REIT Subsidiaries" of the Company will be
ignored, and all assets, liabilities, and items of income, deduction, and credit
of such subsidiaries will be treated as assets, liabilities, and items of
income, deduction, and credit of the Company.

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of Section 856 of the Code, including satisfying the
gross income and asset tests described below.

INCOME TESTS. In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross income
must be satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and interest on obligations secured by mortgages on
real property or on interests in real property) or temporary investment income.
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property, mortgages on real property, or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
Stock or securities, or from any combination of the foregoing.

The term "interest," as defined for purposes of the 75% and 95% gross income
tests, generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount

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depends in whole or in part on net income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. In addition, an amount received or accrued generally will
not be excluded from the term "interest" solely by reason of being based on the
income or profits of a debtor if the debtor derives substantially all of its
gross income from the related property through the leasing of substantially all
of its interests in the property, to the extent the amounts received by the
debtor would be characterized as rents from real property if received by a REIT.

Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the assets
of a REMIC consists of real estate assets (determined as if the Company held
such assets), the Company will be treated as receiving directly its
proportionate share of the income of the REMIC. In addition, if the Company
receives interest income with respect to a mortgage loan that is secured by both
real property and other property and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value of the real
property on the date the Company purchased the mortgage loan, the interest
income will be apportioned between the real property and the other property,
which apportionment may cause the Company to recognize income that is not
qualifying income for purposes of the 75% gross income test.

In general, the interest, original issue discount, and market discount
income that the Company derives from its investments in MBS Interests, and
Mortgage Loans will be qualifying interest income for purposes of both the 75%
and the 95% gross income tests, except to the extent that less than 95% of the
assets of a REMIC in which the Company holds an interest consists of real estate
assets (determined as if the Company held such assets), and the Company's
proportionate share of the income of the REMIC includes income that is not
qualifying income for purposes of the 75% and 95% gross income tests. In some
cases, however, the loan amount of a Mortgage Loan may exceed the value of the
real property securing the loan, which will result in a portion of the interest
income from the loan being classified as qualifying income for purposes of the
95% gross income test, but not for purposes of the 75% gross income test. It is
also possible that, in some instances, the interest income from a Distressed
Mortgage Loan may be based in part on the borrower's profits or net income,
which generally will disqualify the income from the loan for purposes of both
the 75% and the 95% gross income tests.

The Company may acquire Construction Loans or Mezzanine Loans that have
shared appreciation provisions. To the extent interest from a loan that is based
on the cash proceeds from the sale of property constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75% and 95%
gross income tests.

The Company also may employ, to the extent consistent with the REIT
Provisions of the Code, other forms of securitization under which a "sale" of an
interest in the Mortgage Loans occurs, and a resulting gain or loss is recorded
on the Company's balance sheet for accounting purposes at the time of sale. In a
"sale" securitization, only the net retained interest in the securitized
Mortgage Loans would remain on the Company's balance sheet. The Company may
elect to conduct certain of its securitization activities, including such sales,
through one or more taxable subsidiaries or through "Qualified REIT
Subsidiaries", as defined under the REIT Provisions of the Code, formed for such
purpose. To the extent consistent with the REIT Provisions of the Code, such
entity would elect to be taxed as a Real Estate Mortgage Investment Conduit
("REMIC") or a Financial Asset Securitization Investment Trust ("FASIT").

The rent received by the Company from the tenants of its real property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the income
or

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profits of any person. However, an amount received or accrued generally will not
be excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Second, the
Code provides that the Rent received from a tenant will not qualify as "rents
from real property" in satisfying the gross income tests if the Company, or a
direct or indirect owner of 10% or more of the Company, owns 10% or more of the
ownership interests in such tenant, taking into account both direct and
constructive ownership (a "Related Party Tenant"). Third, if Rent attributable
to personal property, leased in connection with a lease of Real Property, is
greater than 15% of the total Rent received under the lease, then the portion of
Rent attributable to such personal property will not qualify as "rents from real
property." Finally, for the Rent to qualify as "rents from real property," the
Company generally must not operate or manage the Real Property or furnish or
render services to the tenants of such Real Property, other than through an
"independent contractor" who is adequately compensated and from whom the Company
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent the services provided by the Company are "usually or
customarily rendered" in connection with the rental or space for occupancy only
and are not otherwise considered "rendered to the occupant." In addition, the
Company may render a "DE MINIMIS" amount of impermissible services without
violating the independent contractor requirement.

The Company has represented that it will not charge Rent for any portion of
any real property that is based, in whole or in part, on the income or profits
of any person (except by reason of being based on a fixed percentage or
percentages of receipts or sales, as described above) to the extent that the
receipt of such Rent would jeopardize the Company's status as a REIT. In
addition, the Company has represented that, to the extent that it receives Rent
from a Related Party Tenant, such Rent will not cause the Company to fail to
satisfy either the 75% or 95% gross income test. The Company also has
represented that it will not allow the Rent attributable to personal property
leased in connection with any lease of real property to exceed 15% of the total
Rent received under the lease, if the receipt of such Rent would cause the
Company to fail to satisfy either the 75% or 95% gross income test. Furthermore,
as a result of restrictions on the ownership of Stock in the Company, no person
may own, directly or indirectly, more than 9.8% of the outstanding stock of the
Company so that no tenant of the Company should be a Related Party Tenant.
Finally, the Company has represented that it will not operate or manage its real
property or furnish or render noncustomary services to the tenants of its real
property other than through an "independent contractor," to the extent that such
operation or the provision of such services would jeopardize the Company's
status as a REIT.

REITS generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purpose of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid in such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company does
not anticipate that it will receive any income from foreclosure property that is
not qualifying income for purposes of the 75% gross income test, but, if the
Company does receive any such income, the Company will make an election to treat
the related property as foreclosure property. If property is not eligible for
the election to be treated as foreclosure property because the related loan was
acquired by the REIT at a time when default was imminent or anticipated, income
received with respect to such Ineligible Property may not be qualifying income
for purposes of the 75% or 95% gross income test.

The Company will generally be subject to a 100% tax on net income derived
from a prohibited transaction. The term "prohibited transaction" generally
includes a sale or other disposition of property

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(other than foreclosure property) that is held primarily for sale to customers
in the ordinary course of a trade or business. In general, the assets owned by
the Company should not be considered held for sale to customers and any such
sale should not be in the ordinary course of the Company's business. Whether
property is held "primarily for sale to customers in the ordinary course of a
trade or business" depends, however, on the facts and circumstances in effect
from time to time, including those related to a particular property. Complete
assurance cannot be given that the Company will comply with the safe-harbor
provisions of the Code or avoid owning property that may be characterized as
property held "primarily for sale to customers in the ordinary course of a trade
or business." In addition, it should be noted that a REMIC or FASIT
securitization by the Company of its whole loans could be considered a
"prohibited transaction."

It is possible that the Company will enter into hedging transactions with
respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms, including an interest rate swap or
cap agreement, option, futures contract, forward rate agreement, or similar
financial instrument (collectively, a "Qualified Hedge"). To the extent that the
Company enters into a Qualified Hedge to reduce the interest rate risk on
indebtedness incurred or to be incurred to acquire or carry Real Estate Assets,
any periodic income or gain from the disposition of such Qualified Hedge should
be qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test.

The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. The Company will
monitor the amount of nonqualifying income produced by its assets and has
represented that it will manage its portfolio in order to comply at all times
with the gross income tests.

If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and the Company
anticipates that any incorrect information on the schedule will not be due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances the Company would be entitled to the benefit of such relief
provisions. As discussed above in "Federal Income Tax Consequences--Taxation of
the Company," even if such relief provisions apply, a 100% tax would be imposed
on the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitability.

ASSET TESTS. The Company, at the close of each quarter of each taxable year,
also must satisfy, either directly or through partnerships in which it has an
interest, two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "Real Estate
Assets," or, in cases where the Company raises new capital through Stock or
long-term (at least five-year) debt offerings, temporary investments in Stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "Real Estate Assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of a
mortgage does not exceed the fair market value of the associated real property,
regular or residual interests in a REMIC (except that, if less than 95% of the
assets of a REMIC consists of "real estate assets" (determined as if the Company
held such assets), the Company will be treated as holding directly its
proportionate share of the assets of such REMIC), and shares of other REITS. For
purposes of the 75% asset test, the term "interest in real property" includes an
interest in mortgage loans or land and improvements thereon, such as buildings
or other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of real property, and
an option to acquire real property (or a leasehold of real property). An
"interest in real property" also generally includes an interest in mortgage
loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property,

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to the extent that the principal balance of the mortgage does not exceed the
fair market value of the real property that is allocable to the equity interest.
Second, of the investments not included in the 75% asset class, the value of any
one issuer's securities owned by the Company may not exceed 5% of the value of
the Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities (except for its interests in any
partnership and any Qualified REIT Subsidiary). See "Proposed Tax Legislation."

The Company expects that any MBS, Distressed Real Property and temporary
investments that it acquires generally will be qualifying assets for purposes of
the 75% asset test, except to the extent that less than 95% of the assets of a
REMIC in which the Company owns an interest consists of "Real Estate Assets" and
the Company's proportionate share of those assets includes assets that are
nonqualifying assets for purposes of the 75% asset test. Mortgage Loans
(including Distressed Mortgage Loans, Construction Loans, Bridge Loans and
Mezzanine Loans) also will be qualifying assets for purposes of the 75% asset
test to the extent that the principal balance of each mortgage loan does not
exceed the value of the associated real property. The Company will own 100% of
the non-voting common stock and 5% of the voting common stock of ASC. The
remaining voting common stock of ASC will be owned by the Manager. As long as
the Manager owns, directly or indirectly, less than 10% of the stock of the
Company, the Company will not be deemed to own more than 10% of the voting stock
of ASC. In addition, the Company believes that the value of its ASC stock will
not exceed 5% of the total value of the Company's assets. The Company will
monitor the status of the assets that it acquires for purposes of the various
asset tests and has represented that it will manage its portfolio in order to
comply at all times with such tests.

The Company anticipates that it may securitize all or a portion of the
Mortgage Loans which it acquires, in which event the Company will likely retain
certain of the subordinated and IO classes of MBS Interests which may be created
as a result of such securitization. The securitization of the Mortgage Loans may
be accomplished through one or more REMICs established by the Company or, if a
non-REMIC securitization is desired, through one or more Qualified REIT
Subsidiaries established by the Company. The securitization of the Mortgage
Loans through either one or more REMICs or one or more Qualified REIT
Subsidiaries should not affect the qualification of the Company as a REIT or
result in the imposition of corporate income tax under the taxable mortgage pool
rules. Income realized by the Company from a REMIC securitization could,
however, be subject to a 100% tax as a "prohibited transaction."

If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more nonqualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.

DISTRIBUTION REQUIREMENTS. The Company, in order to avoid corporate income
taxation of its earnings, is required to distribute with respect to each taxable
year dividends (other than capital gain dividends and retained capital gains) to
its stockholders in an aggregate amount at least equal to (i) the sum of (A) 95%
of its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% of the net income (after tax),
if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its federal income tax return for such year and if paid on or
before the first regular dividend payment date after such declaration. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year (or, in the case of distributions with declaration and
record dates falling in the last three months of the calendar year, by the end
of the January immediately following such

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year) at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed. However, the Company may elect to retain,
rather than distribute, all or a portion of its net long-term capital gains and
pay the tax on such undistributed gains, in which case the Company's
stockholders would include their proportionate share of such undistributed
long-term capital gains in income and receive a credit for their share of the
tax paid by the Company. For purposes of the 4% excise tax described above, any
such retained amounts would be treated as having been distributed. The Company
intends to make timely distributions sufficient to satisfy the annual
distribution requirements.

It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, the Company will
recognize taxable income in excess of its cash receipts when, as frequently
happens, OID accrues with respect to certain of its subordinated MBS Interests,
including POs and certain IOs. Mezzanine Loans may also be deemed to have OID
for Federal income tax purposes. OID generally will be accrued using a
methodology that does not allow credit losses to be reflected until they are
actually incurred. The Company may also be required to accrue interest income
from Distressed Mortgage Loans even though the borrowers fail to pay the full
amounts due. In addition, the Company may recognize taxable market discount
income upon the receipt of proceeds from the disposition of, or principal
payments on, MBS and Distressed Mortgage Loans that are "market discount bonds"
(i.e., obligations with an adjusted issue price that is greater than the
Company's tax basis in such obligations), but not have any cash because such
proceeds may be used to make non-deductible principal payments on related
borrowings. Market discount income is treated as ordinary income and not as
capital gain and, thus, is subject to the 95% distribution requirement.
Furthermore, the Company would have income without the receipt of cash to the
extent of the market discount attributable to debt securities held by a REMIC in
which the Company holds a residual interest. The Company also may recognize
Excess Inclusion or other taxable income in excess of cash flow from REMIC
Residual Interests or its retained interests from non-REMIC securitization
transactions. It is also possible that, from time to time, the Company may
recognize net capital gain attributable to the sale of depreciated property that
exceeds its cash receipts from the sale. In addition, pursuant to certain
Treasury Regulations, the Company may be required to recognize the amount of any
payment to be made pursuant to a shared appreciation provision over the term of
the related loan using the constant yield method. Finally, the Company may
recognize taxable income without receiving a corresponding cash distribution if
it forecloses on or makes a "significant modification" (as specifically defined
in the Treasury Regulations) to a loan, to the extent that the fair market value
of the underlying property or the principal amount of the modified loan, as
applicable, exceeds the Company's basis in the original loan. Therefore, the
Company may have less cash than is necessary to meet its annual 95% distribution
requirement, or because Excess Inclusion and OID are not taken into account in
calculating the Company's REIT taxable income for purposes of the distribution
requirement, to avoid corporate income tax or the excise tax imposed on certain
undistributed income. In such a situation, the Company may find it necessary to
arrange for short-term (or possibly long-term) borrowings or to raise funds
through the issuance of Preferred Stock or additional Common Stock, or through
the sale of assets.

Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to it stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the IRS interest based upon the amount of any
deduction taken for deficiency dividends.

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RECORDKEEPING REQUIREMENTS. Under the Treasury Regulations, the Company must
maintain certain records and request on an annual basis certain information from
its stockholders designed to disclose the actual ownership of its outstanding
Stock. The Company intends to comply with such requirements.

FAILURE TO QUALIFY

If the Company fails to qualify for taxation as a REIT in any taxable year,
and certain relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's stockholders in any year
in which the Company fails to qualify as a REIT will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
the Company's current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which the Company ceased to
qualify as a REIT. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.

TAXATION OF TAXABLE U.S. STOCKHOLDERS

As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends or retained capital gains)
will be taken into account by such U.S. stockholders as ordinary income and will
not be eligible for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. stockholder" means a holder of
Common Stock that for U.S. federal income tax purposes is (i) a citizen or
resident of the U.S., (ii) a corporation, partnership, or other entity created
or organized in or under the laws of the U.S. or of any political subdivision
thereof, (iii) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United States,
or (iv) any trust with respect to which (a) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. fiduciaries have the authority to control all substantial decisions of the
trust. Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held his Common Stock. However, corporate stockholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's Common Stock, but rather will reduce the
adjusted basis of such Stock. To the extent that such distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
stockholder's Common Stock, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the Common Stock had been
held for one year or less), assuming the Common Stock is a capital asset in the
hands of the stockholder. In addition, any distribution declared by the Company
in October, November, or December of any year and payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January of
the following calendar year.

Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain

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from the disposition of the Common Stock will not be treated as passive activity
income and, therefore, stockholders generally will not be able to apply any
"passive activity losses" (such as losses from certain types of limited
partnerships in which a stockholder is a limited partner) against such income.
Taxable distributions from the Company generally will be treated as investment
income for purposes of the investment interest limitations. Capital gains from
the disposition of Common Stock (or distributions treated as such), however,
will be treated as investment income only if the stockholder so elects, in which
case such capital gains will be taxed at ordinary income rates. The Company will
notify stockholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income or capital gain dividends.

The Company may elect to retain and pay income tax on its net long-term
capital gains. If the Company makes this election, the Company's stockholders
would include in their income as long-term capital gain their proportionate
share of the long-term capital gain as designated by the Company. Each
stockholder will be deemed to have paid the stockholder's share of the tax,
which could be credited or refunded to the stockholder. The basis of the
stockholder's shares is increased by the amount of the undistributed long-term
capital gains (less the amount of capital gains tax paid).

The Company's investment in MBS may cause it under certain circumstances to
recognize phantom income and to experience an offsetting excess of economic
income over its taxable income in later years. As a result, stockholders may
from time to time be required to pay federal income tax on distributions that
economically represent a return of capital, rather than a dividend. Such
distributions would be offset in later years by distributions representing
economic income that would be treated as returns of capital for federal income
tax purposes. Accordingly, if the Company receives phantom income, its
stockholders may be required to pay federal income tax with respect to such
income on an accelerated basis, i.e., before such income is realized by the
stockholders in an economic sense. If one takes into account the time value of
money, such an acceleration of federal income tax liabilities would cause
stockholders to receive an after-tax rate of return on an investment in the
Company that would be less than the after-tax rate of return on an investment
with an identical before-tax rate of return that did not generate phantom
income. In general, as the ratio of the Company's phantom income to its total
income increases, the after-tax rate of return received by a taxable stockholder
of the Company will decrease. The Company will consider the potential effects of
phantom income on its taxable stockholders in managing its investments.

If the Company owns REMIC Residual Interests, it is possible that
stockholders would not be permitted to offset certain portions of the dividend
income they derive from the Company with their current deductions or net
operating loss carryovers or carrybacks. The portion of a stockholder's
dividends that would be subject to this limitation would equal his allocable
share of any Excess Inclusion income derived by the Company with respect to the
REMIC Residual Interests. The Company's Excess Inclusion income for any calendar
quarter will equal the excess of its income from REMIC Residual Interests over
its "daily accruals" with respect to such REMIC Residual Interests for the
calendar quarter. Daily accruals for a calendar quarter are computed by
allocating to each day on which a REMIC Residual Interest is owned a ratable
portion of the product of (i) the "adjusted issue price" of the REMIC Residual
Interest at the beginning of the quarter and (ii) 120% of the long-term federal
interest rate (adjusted for quarterly compounding) on the date of issuance of
the REMIC Residual Interest. The adjusted issue price of a REMIC Residual
Interest at the beginning of a calendar quarter equals the original issue price
of the REMIC Residual Interest, increased by the amount of daily accruals for
prior quarters and decreased by all prior distributions to the Company with
respect to the REMIC Residual Interest. To the extent provided in future
Treasury Regulations, the Excess Inclusion income with respect to any REMIC
Residual Interests owned by the Company that do not have significant value will
equal the entire amount of the income derived from such REMIC Residual
Interests. Furthermore, to the extent that the Company (or a Qualified REIT
Subsidiary) acquires or originates Mortgage Loans and uses those loans to
collateralize one or more multiple-class offerings of MBS for which no REMIC
election is made ("Non-REMIC

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Transactions"), it is possible that, to the extent provided in future Treasury
Regulations, stockholders will not be permitted to offset certain portions of
the dividend income that they derive from the Company that are attributable to
Non-REMIC Transactions with current deductions or net operating loss carryovers
or carrybacks. Although no applicable Treasury Regulations have yet been issued,
no assurance can be provided that such regulations will not be issued in the
future or that, if issued, such regulations will not prevent the Company's
stockholders from offsetting some portion of their dividend income with
deductions or losses from other sources.

TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK

In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a stockholder who has held such
shares for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss to the extent of distributions from the
Company required to be treated by such stockholder as long-term capital gain.
All or portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of Common Stock are purchased within 30
days before or after the disposition.

CAPITAL GAINS AND LOSSES

The highest marginal individual income tax rate (which applies to ordinary
income and gain from the sale or exchange of capital assets held for one year or
less) is 39.6%. The maximum regular income tax rate on capital gains derived by
non-corporate taxpayers is 28% for sales and exchanges of capital assets held
for more than one year but not more than eighteen months, and 20% for sales and
exchanges of capital assets held for more than eighteen months. However, any
long-term capital gains from the sale or exchange of depreciable real property
that would be subject to ordinary income taxation (i.e., "depreciation
recapture") if treated as personal property will be subject to a maximum tax
rate of 25% instead of the 20% maximum rate. For taxable years beginning after
December 31, 2000, the maximum regular capital gains rate for assets which are
held more than 5 years is 18%. This rate will generally only apply to assets for
which the holding period begins after December 31, 2000. With respect to
distributions designated by the Company as capital gain dividends and any
retained capital gains that the Company is deemed to distribute, the Company may
designate (subject to certain limits) whether such a distribution is taxable to
its individual stockholders at a federal income tax rate of 20%, 25% or 28%.
Thus, the tax rate differential between capital gains and ordinary income for
non-corporate taxpayers may be significant. In addition, the characterization of
income as capital gain or ordinary income may affect the deductibility of
capital losses. Capital losses not offset by capital gains my be deducted
against a non-corporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward indefinitely by
non-corporate taxpayers. All net capital gain of a corporate taxpayer is subject
to tax at ordinary corporate income tax rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

The Company will report to its U.S. stockholders and to the IRS the amount
of distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
such holder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup

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withholding rules. A stockholder who does not provide the Company with his
correct taxpayer identification number also may be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distribution to any stockholders who fail to
certify their non-foreign status to the Company. The IRS has issued final
Treasury Regulations regarding the back up withholding rules as applied to
non-U.S. stockholders. Those regulations alter the current system of back up
withholding compliance and will be effective for payments made after December
31, 1998.

TAXATION OF TAX-EXEMPT STOCKHOLDERS

Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the IRS has ruled that dividend distributions from a
REIT to an exempt employee pension trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or business
of the exempt employee pension trust. Based on that ruling, amounts distributed
by the Company to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization finances its acquisition of the Common Stock
with debt, a portion of its income from the Company will constitute UBTI
pursuant to the "debt-financed property" rules. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans that are exempt from taxation
under paragraphs (7), (9), (17) and (20), respectively, of Code Section 501(c)
are subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. In addition, in certain
circumstances, a pension trust that owns more than 10% of the Company's Stock is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage"). The UBTI Percentage is the gross income derived by the
Company from an unrelated trade or business (determined as if the Company were a
pension trust) divided by the gross income of the Company for the year in which
the dividends are paid. The UBTI rule applies to a pension trust holding more
than 10% of the Company's Stock only if (i) the UBTI Percentage is at least 5%,
(ii) the Company qualifies as a REIT be reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interest in the pension
trust, and (iii) either (A) one pension trust owns more than 25% of the value of
the Company's Stock or (B) a group of pension trusts, each individually holding
more than 10% of the value of the Company's Stock, collectively owns more than
50% of the value of the Company's Stock. The restrictions on ownership and
transfer of the Company's Stock should prevent an Exempt Organization from
owning more than 10% of the value of the Company's Stock.

Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, the Company will be
subject to tax at the highest marginal corporate rate on the portion of any
Excess Inclusion Income derived by the Company from REMIC Residual Interests
that is allocable to Stock of the Company held by Disqualified Organizations.
Any such tax would be deductible by the Company against its income that is not
Excess Inclusion income.

If the Company derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on the Company described in the preceding
paragraph may be imposed on stockholders who are (i) pass-through entities
(i.e., partnerships, estates, trusts, regulated investment companies, REITS,
common trust funds, and certain types of cooperatives (including farmers'
cooperatives described in Section 521 of the Code)) in which a Disqualified
Organization is a record holder of shares or interests and (ii) nominees who
hold Common Stock on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds shares of Common Stock in a "street name" account for
a Disqualified Organization may be subject to federal income tax on the Excess
Inclusion income derived from those shares.

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The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of multiple-class mortgage-backed securities in non-REMIC
transactions. If such Treasury Regulations are issued in the future allocating
the Company's Excess Inclusion Income from non-REMIC transactions pro rata among
its stockholders, some percentage of the dividends paid by the Company would be
treated as UBTI in the hands of stockholders that are Exempt Organizations. See
"--Taxation of Taxable U.S. Stockholders."

TAXATION OF NON-U.S. STOCKHOLDERS

The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.

Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gain dividends or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and profits of the Company. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common Stock
is treated as effectively connected with the Non-U.S. Stockholder's conduct of a
U.S. trade or business, the Non-U.S. Stockholder generally will be subject to
federal income tax at graduated rates, in the same manner as U.S. stockholders
are taxed with respect to such distributions (and also may be subject to the 30%
branch profits tax in the case of a Non-U.S. Stockholder that is a corporation).
The Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Stockholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Stockholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income.

Any portion of the dividends paid to Non-U.S. Stockholders that is treated
as Excess Inclusion income will not be eligible for exemption from the 30%
withholding tax or a reduced treaty rate. In addition, if Treasury regulations
are issued in the future allocating the Company's Excess Inclusion income from
non-REMIC transactions among its stockholders, some percentage of the Company's
dividends would not be eligible for exemption from the 30% withholding tax or a
reduced treaty withholding tax rate in the hands of Non-U.S. Stockholders. See
"--Taxation of Taxable U.S. Stockholders."

Distributions in excess of current and accumulated earnings and profits of
the Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Stock, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company. The Company is
required to withhold 10% of any distribution in excess of the Company's current
and

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accumulated earnings and profits. Consequently, although the Company intends to
withhold at a rate of 30% on the entire amount of any distribution, to the
extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% will be subject to withholding at a rate
of 10%.

For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of a U.S. real
property interest (which includes certain interests in Real Property but does
not include Mortgage Loans or MBS) will be taxed to a Non-U.S. Stockholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of U.S.
real property interests are taxed to a Non-U.S. Stockholder as if such gain were
effectively connected with a U.S. business. Non-U.S. Stockholders thus would be
taxed at the normal capital gain rates applicable to U.S. stockholders (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a Non-U.S.
corporate stockholder not entitled to treaty relief or exemption. The Company is
required to withhold 35% of any distribution that is designated by the Company
as a U.S. real property capital gains dividend. The amount withheld is
creditable against the Non-U.S. Stockholder's FIRPTA tax liability.

Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the Stock was held directly
or indirectly by non-U.S. persons. Because the Common Stock will be publicly
traded, no assurance can be given that the Company will be or remain a
"domestically controlled REIT." In addition, a Non-US Stockholder that owns,
actually or constructively, 5% or less of the Company's Stock throughout a
specified "look-back" period will not recognize taxable gain on the sale of his
Stock under FIRPTA if the shares are traded on an established securities market.
Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if (i) investment in the Common Stock is effectively connected with
the Non-U.S. Stockholder's U.S. trade or business, in which case the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain, or (ii) the Non-U.S. Stockholder is a nonresident alien
individual who was present in the U.S. for 183 days or more during the taxable
year and certain other conditions apply, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains. If
the gain on the sale of the Common Stock were to be subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to the same treatment as U.S.
stockholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).

STATE AND LOCAL TAXES

The Company or the Company's stockholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The state and local
tax treatment of the Company and its stockholders in such jurisdictions may
differ from the federal income tax treatment described above. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws upon an investment in the Common Stock.

TAXATION OF ASC

The Company owns 100% of the non-voting common stock and 5% of the voting
common stock of ASC. The remaining voting stock of ASC is owned by the Manager.
As noted above, for the Company to qualify as a REIT, the value of the equity
and debt securities of ASC held, directly or indirectly, by the Company may not
exceed 5% of the total value of the Company's assets. In addition, the Company
may

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not own, directly or indirectly, more than 10% of the voting stock of ASC. As
long as the Manager owns, directly and indirectly, less than 10% of the stock of
the Company, the Company should not be deemed to own more than 10% of the voting
stock of ASC. In addition, the Company believes that the value of its ASC stock
does not exceed 5% of the total value of its assets. If the Service were to
challenge successfully these determinations, however, the Company likely would
fail to qualify as a REIT.

ASC is organized as a corporation and will pay federal, state and local
income taxes on its taxable income at normal corporate rates. Any such taxes
will reduce amounts available for distribution by ASC, which in turn reduce
amounts available for distribution to the Company's stockholders.

PROPOSED TAX LEGISLATION

On February 2, 1998 President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
could affect the Company if enacted in final form. First, the Proposal would
prohibit a REIT from owning, directly or indirectly, more than 10% of the voting
power or value of all classes of a C corporation's stock (other than the stock
of a qualified REIT subsidiary). Currently, a REIT may own no more than 10% of
the voting stock of a C corporation (other than a qualified REIT subsidiary),
but its ownership of the nonvoting stock of a C corporation is not limited
(other than by the rule that the value of a REIT's combined equity and debt
interest in a C corporation may not exceed 5% of the value of a REIT's total
assets). That provision is proposed to be effective with respect to stock in a C
corporation acquired by a REIT on or after the date of "first committee action"
(i.e., first action by the House Ways and Means Committee with respect to the
provision) ("First Committee Action"). A REIT that owns stock in a C corporation
in excess of the new ownership limit prior to First Committee Action would be
"grandfathered," but only to the extent that the corporation does not engage in
a new trade or business or acquire substantial new assets on or after the date
of First Committee Action. If enacted as presently written, that provision would
limit the Company's use of ASC and other taxable subsidiaries to conduct
businesses the income from which would be nonqualifying income if received
directly by the Company.

Second, the Proposal would require recognition of any net unrealized
built-in gain associated with the assets of a "large" C corporation (i.e., a C
corporation whose stock has a fair market value of more than $5 million) upon
its conversion to REIT status or merger into a REIT. That provision is proposed
to be effective for conversions to REIT status effective for taxable years
beginning January 1, 1999 and mergers of C corporations into REITs that occur
after December 31, 1998. This provision would require immediate recognition of
gain if, at any time after December 31, 1998, a "large" C corporation merges
into the Company.

ERISA CONSIDERATIONS

In considering an investment in the Common Stock, a fiduciary of a
profit-sharing, pension Stock bonus plan, or individual retirement account
("IRA"), including a plan for self-employed individuals and their employees or
any other employee benefit plan subject to prohibited transaction provisions of
the Code or the fiduciary responsibility provisions of ERISA (an "ERISA Plan")
should consider (a) whether the ownership of Common Stock is in accordance with
the documents and instruments governing such ERISA Plan, (b) whether the
ownership of Common Stock is consistent with the fiduciary's responsibilities
and satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions in
improper delegation of control over, or responsibility for, "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary and (d) the need to value the assets of the
ERISA Plan annually.

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In regard to the "plan assets" issue noted in clause (c) above, Counsel is
of the opinion that, effective as of the date of the closing of the Offering and
the listing of the shares of Common Stock on the New York Stock Exchange, and
based on certain representations of the Company, the Common Stock should qualify
as a "publicly offered security," and, therefore, the acquisition of such Common
Stock by ERISA Plans should not cause the Company's assets to be treated as
assets of such investing ERISA Plans for purposes of the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Code. Fiduciaries of ERISA Plans and IRAs should consult with and rely upon
their own advisors in evaluating the consequences under the fiduciary provisions
of ERISA and the Code of an investment in Common Stock in light of their own
circumstances.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of all classes of the Company consists of 400
million shares of Common Stock, $.001 par value, and 100 million shares of
Preferred Stock, $.001 par value, issuable in one or more series. Each share of
Common Stock is entitled to participate equally in dividends when and as
declared by the Board of Directors and in the distribution of assets of the
Company upon liquidation. Each share of Common Stock is entitled to one vote and
will be fully paid and non-assessable by the Company upon issuance. Shares of
the Common Stock of the Company have no preference, conversion, exchange,
preemptive or cumulative voting rights. The authorized capital stock of the
Company may be increased and altered from time to time as permitted by Maryland
law.

Preferred Stock may be issued from time to time in one or more classes or
series, with such preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption as shall be determined by the Company's Board of Directors.
Preferred Stock would be available for possible future financings of, or
acquisitions by, the Company and for general corporate purposes without any
legal requirement that stockholder authorization for issuance be obtained. The
issuance of Preferred Stock could have the effect of making an attempt to gain
control of the Company more difficult by means of a merger, tender offer, proxy
contest or otherwise. The Preferred Stock, if issued, would have a preference on
dividend payments that could affect the ability of the Company to make dividend
distributions to the common stockholders.

Meetings of the stockholders of the Company are to be held annually and
special meetings may be called by the Board of Directors, the Chairman of the
Board, the President, a majority of the Unaffiliated Directors or by the
Secretary of the Company on the written request of stockholders constituting a
majority of the votes entitled to be cast at such meeting. The Articles of
Amendment and Restatement reserve to the Company the right to amend any
provision thereof in the manner prescribed by law.

REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER

Two of the requirements for qualification as a REIT are that (1) during the
last half of each taxable year (other than the first taxable year for which a
REIT election is made) for which a REIT election is made, not more than 50% in
value of the outstanding shares may be owned directly or indirectly by five or
fewer individuals (the "5/50 Rule") and (2) there must be at least 100
stockholders on 335 days of each taxable year (other than the first taxable year
for which a REIT election is made) of 12 months.

In order that the Company may meet these requirements at all times, the
Articles of Amendment and Restatement prohibit any person from acquiring or
holding, directly or indirectly, in excess of 9.8% (in value or in number of
shares, whichever is more restrictive) of the number of outstanding shares of
Common Stock or any class of Preferred Stock of the Company. For this purpose,
the term "ownership" is defined in accordance with the REIT Provisions of the
Code and the constructive ownership provisions of Section 544 of the Code, as
modified by Section 856(h)(1)(B) of the Code. Subject to certain limitations,
the Company's Board of Directors may increase or decrease the ownership
limitations or waive the limitations for individual investors to the extent such
action does not affect the Company's qualification as a REIT.

For purposes of the 5/50 Rule, the constructive ownership provisions
applicable under Section 544 of the Code (i) attribute ownership of securities
owned by a corporation, partnership, estate or trust

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proportionately to its stockholders, partners or beneficiaries, (ii) attribute
ownership of securities owned by certain family members to other members of the
same family, and (iii) treat securities with respect to which a person has an
option to purchase as actually owned by that person. These rules will be applied
in determining whether a person holds shares of Common Stock in violation of the
ownership limitations set forth in the Articles of Amendment and Restatement.
Accordingly, under certain circumstances, shares of Common Stock owned by a
person who individually owns less than 9.8% of the shares outstanding may
nevertheless be in violation of the ownership limitations set forth in the
Articles of Amendment and Restatement. Ownership of shares of Common Stock
through such attribution is generally referred to as constructive ownership. The
100 stockholder test is determined by actual, and not constructive, ownership.
The Company will have greater than 100 stockholders of record.

The Articles of Amendment and Restatement further provide that if any
transfer of shares of Common Stock which, if effective, would (i) result in any
person beneficially or constructively owning shares of Common Stock in excess or
in violation of the 9.8% ownership limitations described above, (ii) result in
the Company's stock being beneficially owned by fewer than 100 persons
(determined without reference to any rules of attribution), or (iii) result in
the Company being "closely held" under Section 856(h) of the Code, then that
number of shares of Common or Preferred Stock the beneficial or constructive
ownership of which otherwise would cause such person to violate such limitations
(rounded to the nearest whole shares) shall be automatically transferred to a
trustee (the "Trustee") as trustee of a trust (the "Trust") for the exclusive
benefit of one or more charitable beneficiaries (the "Charitable Beneficiary"),
and the Intended Transferee shall not acquire any rights in such shares. Shares
of Common or Preferred Stock held by the Trustee shall be issued and outstanding
shares of Common or Preferred Stock. The Intended Transferee shall not benefit
economically from ownership of any shares held in the Trust, shall have no
rights to dividends, and shall not possess any rights to vote or other rights
attributable to the shares held in the Trust. The Trustee shall have all voting
rights and rights to dividends or other distributions with respect to shares
held in the Trust, which rights shall be exercised for the exclusive benefit of
the Charitable Beneficiary. Any dividend or other distribution paid to the
Intended Transferee prior to the discovery by the Company that shares of Common
or Preferred Stock have been transferred to the Trustee shall be paid with
respect to such shares to the Trustee by the Intended Transferee upon demand and
any dividend or other distribution authorized but unpaid shall be paid when due
to the Trustee. The Board of Directors of the Company may, in its discretion,
waive these requirements on owning shares in excess of the ownership limitations
with respect to a stockholder's ownership of Common Stock, to the extent such
waiver does not affect the Company's qualification as a REIT.

Within 20 days of receiving notice from the Company that shares of Common or
Preferred Stock have been transferred to the Trust, the Trustee shall sell the
shares held in the Trust to a person, designated by the Trustee, whose ownership
of the shares will not violate the ownership limitations set forth in the
Articles of Amendment and Restatement. Upon such sale, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Intended Transferee and to the
Charitable Beneficiary as follows. The Intended Transferee shall receive the
lesser of (1) the price paid by the Intended Transferee for the shares or, if
the Intended Transferee did not give value for the shares in connection with the
event causing the shares to be held in the Trust (e.g., in the case of a gift,
devise or other such transaction), the Market Price (as defined below) of the
shares on the day of the event causing the shares to be held in the Trust, and
(2) the price per share received by the Trustee from the sale or other
disposition of the shares held in the Trust. Any net sales proceeds in excess of
the amount payable to the Intended Transferee shall be immediately paid to the
Charitable Beneficiary. In addition, shares of Common or Preferred Stock
transferred to the Trustee shall be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that resulted in such transfer to the Trust
(or, in the case of a devise or gift, the Market Price at the time of such
devise or gift), and (ii) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the Trustee has sold shares held in the Trust. Upon such a sale to
the Company, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
Intended Transferee.

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The term "Market Price" on any date shall mean, with respect to any class or
series of outstanding shares of the Company's Stock, the Closing Price (as
defined below) for such shares on such date. The "Closing Price" on any date
shall mean the last sale price for such shares, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such shares, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if such shares are not
listed or admitted to trading on the New York Stock Exchange, as reported on the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which such shares are
listed or admitted to trading or, if such shares are not listed or admitted to
trading on any national securities exchange, the last quoted price, or, if not
so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc., Automated Quotation Systems, or, if such system is no longer in
use, the principal other automated quotation system that may then be in use or,
if such shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in such shares selected by the Company's Board of Directors or, in the
event that no trading price is available for such shares, the fair market value
of the shares, as determined in good faith by the Company's Board of Directors.

Every owner of more than 5%, (or such lower percentage as required by the
Code or the Regulations promulgated thereunder) of the outstanding shares or any
class or series of the Company's Stock, within 30 days after the end of each
taxable year, is required to give written notice to the Company stating the name
and address of such owner, the number of shares of each class and series of
Stock of the Company beneficially owned and a description of the manner in which
such shares are held. Each such owner shall provide to the Company such
additional information as the Company may request in order to determine the
effect, if any, of such beneficial ownership on the Company's status as a REIT
and to ensure compliance with the ownership limitations.

DIVIDEND REINVESTMENT PLAN

The Company may implement a dividend reinvestment plan whereby stockholders
may automatically reinvest their dividends in the Company's Common Stock.
Details about any such plan would be sent to the Company's stockholders
following adoption thereof by the Board of Directors.

MATERIAL PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S ARTICLES OF AMENDMENT AND RESTATEMENT AND BYLAWS

The following is a summary of the material provisions of the Maryland
General Corporation Law, as amended from time to time, and of the Articles of
Amendment and Restatement and the Bylaws of the Company. Such summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Articles of Amendment and Restatement and the Bylaws of the
Company, copies of which are filed as exhibits to the Registration Statement of
which this Prospectus is a part. See "Additional Information." For a description
of additional restrictions on transfer of the Common Stock, see "Description of
Capital Stock--Repurchase of Shares and Restrictions on Transfer."

REMOVAL OF DIRECTORS

The Articles of Amendment and Restatement provide that a director may be
removed from office at any time for cause by the affirmative vote of the holders
of at least two-thirds of the votes of the shares entitled to be cast in the
election of directors.

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STAGGERED BOARD

The Articles of Amendment and Restatement and the Bylaws divide the Board of
Directors into three classes of directors, each class constituting approximately
one-third of the total number of directors, with the classes serving staggered
three-year terms. The classification of the Board of Directors will make it more
difficult for stockholders to change the composition of the Board of Directors
because only a minority of the directors can be elected at once. The
classification provisions could also discourage a third party from accumulating
the Company's stock or attempting to obtain control of the Company, even though
this attempt might be beneficial to the Company and some, or a majority, of its
stockholders. Accordingly, under certain circumstances stockholders could be
deprived of opportunities to sell their shares of Common Stock at a higher price
than might otherwise be available.

BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate of the corporation who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then outstanding voting stock of
the corporation (an "Interested Stockholder") or an affiliate of such an
Interested Stockholder are prohibited for five years after the most recent date
on which the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be recommended by the board of
directors of such corporation and approved by the affirmative vote of at least
(a) 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation and (b) two-thirds of the votes entitled to be
cast by holders of voting Stock of the corporation other than shares held by the
Interested Stockholder with whom (or with whose affiliate) the business
combination is to be effected, unless, among other conditions, the corporation's
common stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. The MGCL does not
apply, however, to business combinations that are approved or exempted by the
board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder.

CONTROL SHARE ACQUISITIONS

The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquirer or in respect of which the acquirer is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquirer to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority or (iii) a majority
or more of all voting power. Control Shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "Control Share Acquisition" means the acquisition of
Control Shares, subject to certain exceptions.

A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.

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If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the Control Shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the Control Shares, as of the date of the last control share
acquisition by the acquirer or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for Control Shares are approved at a stockholders meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquirer in the control share acquisition.

The control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or (ii) to acquisitions approved or exempted by the Articles of
Amendment and Restatement or Bylaws of the corporation.

The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of Common Stock. There can be no assurance that such provision
will not be amended or eliminated at any time in the future.

AMENDMENT TO THE ARTICLES OF AMENDMENT AND RESTATEMENT

The Company reserves the right from time to time to make any amendment to
its Articles of Amendment and Restatement, now or hereafter authorized by law,
including any amendment which alters the contract rights as expressly set forth
in the Articles of Amendment and Restatement, of any shares of outstanding
stock. The Articles of Amendment and Restatement may be amended only by the
affirmative vote of holders of shares entitled to cast not less than a majority
of all the votes entitled to be cast on the matter; provided, however, that
provisions relating to the indemnification of the Company's present and former
directors and officers, the Company's election to be taxed as a REIT, the
removal of directors and dissolution of the Company may be amended only by the
affirmative vote of two thirds of the Board of Directors and the holders of
shares entitled to cast not less than two-thirds of all the votes entitled to be
cast in the election of directors.

DISSOLUTION OF THE COMPANY

The dissolution of the Company must be approved by the affirmative vote of
not less than two-thirds of all of the votes ordinarily entitled to be cast in
the election of directors, voting together as a single class, and the
affirmative vote of holders of not less than two-thirds of any series or class
of stock expressly granted a series or class vote on the dissolution of the
Company in the resolutions providing for such series or class. Prior to such
vote, the dissolution must be approved by a majority of the Board of Directors.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (1)
pursuant to the Company's notice of the meeting, (2) by the Board of Directors
or, (3) by a stockholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the Bylaws, and (b) with respect
to special meetings of stockholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of stockholders
and nominations of persons for election to the Board of Directors or (c)
provided that the Board of Directors has determined that directors shall be
elected at such meeting, by a stockholder who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in the Bylaws.

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POSSIBLE ANTI-TAKEOVER EFFECT OF MATERIAL PROVISIONS OF MARYLAND LAW AND OF THE
ARTICLES OF AMENDMENT AND RESTATEMENT AND BYLAWS

The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Articles of Amendment and Restatement creating a staggered
board and the advance notice provisions of the Bylaws could delay, defer or
prevent a change in control of the Company or other transaction that might
involve a premium price for holders of Common Stock of the Company or otherwise
be in their best interest.

TRANSFER AGENT AND REGISTRAR

The Company intends to appoint a transfer agent and registrar for the Common
Stock.

REPORTS TO STOCKHOLDERS

The Company will furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as it may determine
to furnish or as may be required by law.

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UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to each of the underwriters named below (the
"Underwriters") and each of the Underwriters, for whom Friedman, Billings,
Ramsey & Co., Inc., Lehman Brothers Inc., and Prudential Securities Incorporated
are acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company, the number of shares of Common Stock offered hereby
set forth below opposite its name.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.......................................................... 5,633,334
Lehman Brothers Inc. 5,633,333
Prudential Securities Incorporated 5,633,333
A.G. Edwards & Sons, Inc....................................................................... 200,000
Advest, Inc.................................................................................... 100,000
BancAmerica Robertson Stephens................................................................. 200,000
Black & Company, Inc........................................................................... 100,000
Brean Murray & Co., Inc........................................................................ 100,000
CIBC Oppenheimer Corp.......................................................................... 200,000
Credit Suisse First Boston Corporation......................................................... 200,000
Dain Rauscher Incorporated..................................................................... 100,000
Dominick & Dominick, Incorporated.............................................................. 100,000
EVEREN Securities, Inc......................................................................... 100,000
Fahnestock & Co. Inc........................................................................... 100,000
Ferris, Baker Watts, Inc....................................................................... 100,000
Interstate/Johnson Lane Corporation............................................................ 100,000
Janney Montgomery Scott Inc.................................................................... 100,000
Jefferies & Company............................................................................ 100,000
NationsBanc Montgomery Securities LLC.......................................................... 200,000
PaineWebber Incorporated....................................................................... 200,000
Parker/Hunter Incorporated..................................................................... 100,000
Piper Jaffray Inc.............................................................................. 100,000
Sands Brothers & Co., Ltd...................................................................... 100,000
Scott & Stringfellow, Inc...................................................................... 100,000
Stifel, Nicolaus & Company, Incorporated....................................................... 100,000
Suntrust Equitable Securities Corporation...................................................... 100,000
The Ohio Company............................................................................... 100,000
Tucker Anthony Incorporated.................................................................... 100,000
-----------------
-----------------
Total.................................................................................. 20,000,000
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock offered
hereby if any are purchased. The Company has agreed to indemnify the several
Underwriters against certain civil liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.

The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $0.63 per share of Common Stock. The Underwriters may
allow and such dealers may reallow a concession not to exceed $0.10 per share of
Common Stock to certain other dealers. After the shares of Common Stock are
released for sale to the public, the initial public offering price and other
selling terms may be changed by the Underwriters.

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The Company has granted to the Underwriters an option exercisable during the
30-day period beginning after the date hereof to purchase, at the initial public
offering price net of any underwriting discounts and commissions, up to an
additional 3,000,000 shares of Common Stock for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to
purchase that number of additional shares of Common Stock that is proportionate
to such Underwriter's initial commitment.

PNC Bank indirectly owns 70% of the Manager's capital stock. PNC, the parent
company of PNC Bank, has agreed to purchase a number of shares of the Company's
Common Stock, such that, assuming that the Underwriters exercise their
over-allotment option in full, PNC will own 3% of the shares of Common Stock
outstanding. PNC has formed a strategic alliance with Friedman, Billings, Ramsey
Group, Inc. ("FBR Group"), pursuant to which PNC and FBR Group have agreed to
work together on an arm's-length basis to refer potential business to each
other. PNC owns 4.9% of the shares of common stock of FBR Group. Friedman,
Billings, Ramsey & Co., Inc., one of the Representatives, is an indirect,
wholly-owned subsidiary of FBR Group.

FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey
and Co., Inc., one of the Representatives, has agreed to acquire $10 million of
Common Stock in a private placement that will close concurrently with the
Offering at the initial public offering price, net of underwriting discounts and
commissions. The portfolio of FBR Asset Investment Corporation is, in part,
managed by the Manager of the Company.

The Common Stock has been approved for listing on the NYSE under the symbol
"AHR." In order to meet one of the requirements for listing, the Underwriters
have undertaken to sell (i) lots of 100 or more shares to a minimum of 2,000
beneficial holders, (ii) a minimum of 1.1 million shares and (iii) shares with a
minimum aggregate market value of $40.0 million.

Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
between the Company and the Representatives. Among the factors to be considered
in making such determination will be the history of, and the prospects for, the
industry in which the Company will compete, an assessment of the skills of the
Manager and the Company's prospects for future earnings, the general conditions
of the economy and the securities market and the prices of offerings by similar
issuers. There can, however, be no assurance that the price at which the shares
of Common Stock will sell in the public market after this Offering will not be
lower than the price at which they are sold by the Underwriters.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of the Common Stock to any accounts over which they
exercise discretionary authority.

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for or purchase the Common Stock. As an exception to these rules,
the Representatives may engage in transactions that stabilize, maintain, or
otherwise affect the price of the Common Stock. Specifically, the
Representatives may overallot this Offering, creating a syndicate short
position. In addition, the Representatives may bid for and purchase shares of
Common Stock in the open market to cover syndicate short positions or to
stabilize the price of the shares. Finally, the Representatives may impose a
penalty bid on syndicate members. This means that the Representatives may
reclaim selling concessions from syndicate members if the syndicate repurchases
previously distributed shares of Common Stock in syndicate covering
transactions, stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above independent
market levels. The imposition of a penalty bid also might affect the price of a
security in that it may discourage resales of the security. Neither the Company
nor any of the Underwriters makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Common Stock. In addition, neither the Company nor any
of

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the Underwriters makes any representation that the Representatives will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.

The Company, FBR Asset Investment Corporation and PNC have agreed not to,
directly or indirectly, offer, sell, contract to sell, or otherwise dispose of
any shares of Common Stock or any securities convertible or exchangeable for
shares of Common Stock for a period of 180 days from the date of this Prospectus
without the prior written consent of the Friedman, Billings, Ramsey & Co., Inc.,
on behalf of the Underwriters, except that the Company may, without such
consent, grant options or issue shares of Common Stock pursuant to the Company's
1998 Stock Option Plan. In addition to granting options under the 1998 Stock
Option Plan, the Company will issue options to acquire 246,544 shares of Common
Stock, at the initial public offering price net of underwriting discounts and
commissions, to certain directors, officers and employees of the Company and of
the Manager; provided that such options may not be exercised for 180 days after
the date of this Prospectus and shall expire one year from the date of this
Prospectus.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Miles & Stockbridge, a Professional Corporation,
Baltimore, Maryland and certain legal matters will be passed upon for the
Underwriters by Hunton & Williams, Richmond, Virginia. In addition, the
description of federal income tax consequences contained in this Prospectus
entitled "Federal Income Tax Consequences" is based upon the opinion of Skadden,
Arps, Slate, Meagher & Flom LLP.

EXPERTS

The balance sheet of Anthracite Capital, Inc., as of March 5, 1998, included
in this Prospectus has been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and is included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

ADDITIONAL INFORMATION

Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C., and may be obtained at rates prescribed by the Commission upon
request to the Commission and inspected, without charge, at the offices of the
Commission. The Company will be subject to the informational requirements of the
Exchange Act, and in accordance therewith, will periodically file reports and
other information with the Commission. Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048, and at 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respect by such reference. The Commission
maintains a Website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.

The Company intends to furnish the holders of Common Stock with annual
reports containing financial statements audited by its independent certified
public accountants and with quarterly reports containing unaudited financial
statements for each of the first three quarters of each year.

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GLOSSARY

There follows an abbreviated definition of certain capitalized terms used in
this Prospectus.

"Affiliate" means, when used with reference to a specified person, (i) any
person that directly or indirectly controls or is controlled by or is under
common control with the specified person, (ii) any person that is an officer of,
partner in or trustee of, or serves in a similar capacity with respect to, the
specified person or of which the specified person is an officer, partner or
trustee, or with respect to which the specified person serves in a similar
capacity, and (iii) any person that, directly or indirectly, is the beneficial
owner of 5% or more of any class of equity securities of the specified person or
of which the specified person is directly or indirectly the owner of 5% or more
of any class of equity securities; provided, however, that the Company and its
subsidiaries will not be treated as an Affiliate of the Manager and its
Affiliates.

"Agency Certificates" means GNMA Certificates, Fannie Mae Certificates and
FHLMC Certificates.

"ARM" means either a (i) a Mortgage Security as to which the underlying
mortgage loans feature adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an establish index or (ii) a
Mortgage Loan or any mortgage loan underlying a Mortgage Security that features
adjustments of the underlying interest rate at predetermined times based on an
agreed margin to an established index. An ARM is usually subject to periodic and
lifetime interest rate and/or payment caps.

"Articles of Amendment and Restatement" shall mean the Articles of Amendment
and Restatement of the Company.

"Average Invested Assets" means the average of the aggregate book value of
the assets (other than cash or cash equivalents) of the Company, including the
assets of all of its direct and indirect subsidiaries before reserves for
depreciation or bad debts or other similar noncash reserves, computed by taking
the daily average of such values during such period and shall be determined as
follows: (i) Average Invested Assets with a rating of less than BB- or not rated
means, for any quarter, the Average Invested Assets in such quarter that have
received a credit rating of less than BB- from Standard & Poor's Corporation
("S&P") or less than Ba3 from Moody's Investors Service, Inc. ("Moody's") or
have received an equivalent rating from an NRSRO or that have not been rated by
either Moody's, S&P or an NRSRO and are not guaranteed by the U.S. government or
any agency or instrumentality thereof, (ii) Average Invested Assets with a
rating of BB- to BB+ shall mean the Average Invested Assets that have received a
credit rating of BB- to BB+ from S&P or Ba3 to Ba1 from Moody's or have received
an equivalent rating from an NRSRO and that are not covered by clause (i) above,
and (iii) Average Invested Assets with a credit rating above BB+ shall mean the
Average Invested Assets that have received a credit rating above BB+ from S&P or
above Ba1 from Moody's or have received an equivalent rating from an NRSRO and
that are not covered by clause (i) or (ii) above or that are not rated but are
guaranteed by the U.S. government or any agency or instrumentality thereof.

"Average Net Worth" means for any period the arithmetic average of the sum
of the proceeds from the offerings of its equity securities by the Company,
before deducting any underwriting discounts and commissions and other expenses
and costs relating to the offerings, plus the Company's retained earnings
(without taking into account any losses incurred in prior periods) computed by
taking the average of such values at the end of each month during such period.

"Bankruptcy Code" means Title 11 of the United States Code, as amended.

"BlackRock" means BlackRock Financial Management, Inc., a Delaware
corporation.

"Board of Directors" and "Board" shall mean the Board of Directors of the
Company.

"Bridge Loans" means loans secured by real property and used for temporary
financing.

"Business Combinations" shall have the meaning specified in the MGCL.

"Bylaws" shall mean the Bylaws of the Company.

G-1
<PAGE>
"Capital and Leverage Policy" means the policy of the Company that limits
its ability to acquire additional Mortgage Assets during times when the capital
base of the Company is less than a required amount, as described in this
Prospectus.

"Certificate Balance" means the maximum amount that the holders of any Class
of Sequential Pay Certificates outstanding at any time are entitled to receive
as distributions allocable to principal from the cash flow on the Mortgage Loans
and other assets in the Trust Fund.

"Charitable Beneficiary" means a charitable beneficiary of a Trust.

"Closely Held" shall have the meaning specified in the MGCL.

"Closing Price" on any date shall mean the last sale price for such shares,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, for such shares, in either case
as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if such shares are not listed or admitted to trading on the New
York Stock Exchange, as reported on the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such shares are listed or admitted to trading or,
if such shares are not listed or admitted to trading on any national securities
exchange, the last quoted price, or, if transaction prices are not reported, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation Systems, or, if such system is no longer in use, the principal other
automated quotation system that may then be in use or, if such shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in such shares
selected by the Company's Board of Directors or, in the event that no trading
price is available for such shares, the fair market value of the shares, as
determined in good faith by the Company's Board of Directors.

"CMBS" shall mean commercial or multi-family MBS.

"CMOs" means debt obligations (bonds) that are collateralized by mortgage
loans or mortgage certificates other than Mortgage Derivative Securities and
Subordinated Interests. CMOs are structured so that principal and interest
payments received on the collateral are sufficient to make principal and
interest payments on the bonds. Such bonds may be issued by United States
government agencies or private issuers in one or more classes with fixed or
variable interest rates, maturities and degrees of subordination that are
characteristics designed for the investment objectives of different bond
purchasers.

"CMO Residuals" means derivative mortgage securities issued by agencies of
the U.S. Government or by private originators of, or investors in, Mortgage
Loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Commitments" means commitments issued by the Company that will obligate the
Company to purchase Mortgage Assets from or sell them to the holders of the
commitment for a specified period of time, in a specified aggregate principal
amount and at a specified price.

"Common Stock" means the Company's shares of Common Stock, $.001 par value
per share.

"Company" means Anthracite Capital, Inc., a Maryland corporation.

"Compensation Committee" means the committee of the Company's Board of
Directors, comprised entirely of Unaffiliated Directors, that will administer
the 1998 Stock Option Plan.

"Condemnation Proceeds" means all proceeds received in connection with the
condemnation of the taking by right of eminent domain of a Mortgaged Property,
collectively with any comparable amounts received with respect to an REO
Property.

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"Construction Loans" shall mean a loan, the proceeds of which are used to
finance the costs of construction or rehabilitation of real property.

"Control Shares" means voting shares of Stock which, if aggregated with all
other shares of Stock previously acquired by the acquirer or in respect of which
the acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more but
less than a majority or (iii) a majority or more of all voting power. Control
shares do not include shares if the acquiring person is then entitled to vote as
a result of having previously obtained stockholder approval.

"Control Share Acquisition" means the acquisition of control shares, subject
to certain exceptions.

"Conforming Mortgage Loans" means conventional Mortgage Loans that either
comply with requirements inclusion in credit support programs sponsored by
FHLMC, Fannie Mae or GNMA or are FHA or VA Loans, all of which are secured by
first mortgages or deeds of trust on single-family (one to four units)
residences.

"Counsel" means Skadden, Arps, Slate, Meagher & Flom LLP.

"Counterparty" means a third-party financial institution with which the
Company enters into an agreement.

"Dealer Property" means real property and real estate mortgages that
constitute stock in trade, inventory or property held primarily for sale to
customers in the ordinary course of the Company's trade or business.

"Disqualified Organization" means the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any other tax-exempt
organization (other than a farmer's cooperative described in Section 521 of the
Code) that is exempt from taxation under UBTI provisions of the Code, or any
rural, electrical or telephone cooperative.

"Distressed Mortgage Loans" shall mean Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.

"Distressed Real Properties" shall mean REO Properties and other
underperforming or otherwise distressed real property.

"Dollar-Roll Agreement" means an agreement to sell a security for delivery
on a specified future date and a simultaneous agreement to repurchase the same
or substantially similar security on a specified future date.

"Equity Stock" shall mean the capital stock of the Company.

"ERISA" means the Employee Retirement Income Security Act of 1974.

"ERISA Plan" means a pension, profit-sharing, retirement or other employee
benefit plan that is subject to ERISA.

"Excess Inclusion" shall have the meaning specified in Section 860E(c) of
the Code.

"Excess Shares" means the number of shares of capital stock held by any
person or group of persons in excess of 9.8% of the outstanding shares of the
Company.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exempt Organization" shall mean a Tax Exempt Entity.

"FASIT" means Financial Asset Securitization Investment Trust.

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<PAGE>
"FNMA" or "Fannie Mae" means the federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C., (S)1716 et seq.), formerly known as the
Federal National Mortgage Association.

"FNMA Certificates" or "Fannie Mae Certificates" means guaranteed mortgage
pass-through certificates issued by Fannie Mae either in certified or book-entry
form.

"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.

"FHA" means the United States Federal Housing Administration.

"FHA Loans" means Mortgage Loans insured by the FHA.

"FHLMC" means the Federal Home Loan Mortgage Corporation.

"FHLMC Certificates" means mortgage participation certificates issued by
FHLMC, either in certificated or book-entry form.

"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.

"Foreclosure Property" means property acquired at or in lieu of foreclosure
of the mortgage secured by such property or a result of a default under a lease
of such property.

"Funds From Operations" means net income (computed in accordance with GAAP)
excluding gains or losses from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets and after adjustments for
unconsolidated partnerships and joint ventures.

"GAAP" means generally accepted accounting principles.

"GNMA" means the Government National Mortgage Association.

"GNMA Certificates" means fully modified pass-through mortgage-backed
certificates guaranteed by GNMA and issued either in certificated or book-entry
form.

"Housing Act" means the National Housing Act of 1934, as amended.

"HUD" means the Department of Housing and Urban Development.

"Insurance Proceeds" means all proceeds received under any hazard, flood,
title or other insurance policy that provides coverage with respect to a
Mortgaged Property or the related Mortgage Loan, together with any comparable
amounts received with respect to any REO Property.

"Intended Transferee" means, with respect to any purported Transfer or
Non-Transfer Event, any Person who, but for any restrictions on the transfer or
ownership of Equity Stock, would own record title to shares of Equity Stock.

"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a corporation's shares or an affiliate of a corporation
who, at any time within the ten-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then outstanding
voting Stock of the corporation.

"Inverse IOs" means IOs that bear interest rate at a floating rate that
varies inversely with (and often at a multiple of) changes in a specific index.

"Investment Company Act" means the Investment Company Act of 1940, as
amended.

"IO" means Mortgage Derivative Securities representing the right to receive
interest only or a disproportionately large amount of interest in relation to
principal payments.

"IRAs" means Individual Retirement Accounts.

"IRS" means Internal Revenue Service.

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<PAGE>
"ISOs" means qualified incentive Stock options granted under the 1998 Stock
Option Plan that meet the requirements of Section 422 of the Code.

"Issuers" means those entities that issue mortgage securities, including
trusts or subsidiaries organized by the Company and Affiliates of the Manager.

"Keogh Plans" means H.R. 10 Plans.

"LIBOR" means London-Inter-Bank Offered Rate.

"MBS" shall mean CMBS and RMBS.

"MGCL" means the Maryland General Corporation Law, as amended from time to
time.

"Management Agreement" means the investment advisory agreement by and
between the Company and the Manager whereby the Manager agrees to perform
certain services for the Company in exchange for certain compensation.

"Manager" means BlackRock.

"Market Discount Bonds" means obligations with an adjusted issue price that
is greater than the Company's tax basis in such obligations.

"Market Price" on any date shall mean, with respect to a class or series of
outstanding shares of the Company's Stock, the Closing Price for such Stock on
such date.

"Mezzanine Loan" shall mean a loan that is subordinate to a lien on the
related real property.

"Mortgage Backed Securities" means debt obligations (bonds) that are secured
by Mortgage Loans or mortgage certificates.

"Mortgage Derivative Securities" means mortgage securities that provide for
the holder to receive interest only, principal only, or interest and principal
in amounts that are disproportionate to those payable on the underlying Mortgage
Loans and may include other derivative instruments.

"Mortgage Loans" means multifamily, residential and commercial term loans
secured by real property.

"Mortgage Warehouse Participations" means participations in lines of credit
to mortgage originators that are secured by recently originated Mortgage Loans
that are in the process of being either securitized or sold to permanent
investors.

"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.

"Net Cash Flow" means the "net cash flow" of a Mortgaged Property as set
forth in, or determined on the basis of, Mortgaged Property Operating
Statements, generally unaudited supplied by the related borrower and, in the
case of multifamily, retail, mobile home park, industrial warehouse,
self-storage and office properties, certified rent rolls (as applicable)
supplied by the related borrower.

"Net Income" means the taxable income of the Company.

"Net Leased Real Estate" means real estate that is net leased on a long-term
basis (ten years or more) to tenants who are customarily responsible for paying
all costs of owning, operating, and maintaining the leased property during the
term of the lease, in addition to the payment of a monthly net rent to the
landlord for the use and occupancy of the premises.

"1997 Act" means The Taxpayer Relief Act of 1997.

"95% of Income Test" means the income-based test that the Company must meet
to qualify as a REIT described in "Federal Income Tax Consequences--Requirements
for Qualification as a REIT--Gross Income Tests."

G-5
<PAGE>
"Non-Economic Residual" shall mean CMO Residuals that are required to report
taxable income or loss but receive no cash flow from the Mortgage Loans.

"Non-Investment Grade" means a credit rating from a Rating Agency of "BBB"
or less.

"Nonperforming Mortgage Loans" shall mean multifamily and commercial
mortgage loans for which the payment of Principal and interest is more than 90
days delinquent.

"Non-REMIC Residual Interests" shall mean the retained interest in a
securitization transaction for which no REMIC or FASIT election is made.

"Non-U.S. Stockholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.

"Offering" means the shares of Common Stock offered through the Underwriters
in connection with this Prospectus.

"Offering Price" shall mean the offering price of $15 per Common Share
offered hereby.

"OID" shall mean original issue discount.

"One-Year U.S. Treasury Rate" means average of weekly average yield to
maturity for U.S. Treasury securities (adjusted to a constant maturity of one
year) as published weekly by the Federal Reserve Board during a yearly period.

"Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinate Interests evidencing
undivided ownership interests in a pool of mortgage loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying mortgage loans in accordance with the holders, respective,
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family properties.

"PNC" means PNC Bank Corp., a Delaware corporation.

"PNC Bank" means PNC Bank, National Association, a national association
chartered by the OCC.

"PO" means Mortgage Derivative Securities representing the right to receive
principal only or a disproportionate amount of principal.

"Preferred Stock" shall mean the preferred stock of the Company.

"Privately Issued Certificates" means mortgage participation certificates
issued by certain private institutions. These securities entitle the holder to
receive a pass-through of principal and interest payments in the underlying pool
of Mortgage Loans and are issued or guaranteed by the private institution.

"Prohibited Transaction" means a transaction involving a sale of Dealer
Property, other than Foreclosure Property.

"Purchase Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.

"Qualified Hedges" means any interest rate swap or cap agreement, option,
futures contract, forward rate agreement, or similar financial instrument
entered into by the Company to reduce interest rate risk with respect to any
indebtedness incurred or to be incurred by the Company to acquire or carry Real
Estate Assets.

"Qualified REIT Real Estate Assets" means Pass-Through Certificates,
Mortgage Loans, Agency Certificates, real property and other assets of the type
described in Section 856(c)(6)(B) of the Code.

"Qualified REIT Subsidiary" means a corporation whose Stock is entirely
owned by the REIT.

G-6
<PAGE>
"Qualified Temporary Investment Income" means income attributable to stock
or debt instruments acquired with new capital of the Company (other than the
proceeds of debt obligations with a term of less than five years) received
during the one-year period beginning on the day such proceeds were received.

"Rating Agency" means, with respect to securities of U.S. issuers, any
nationally recognized statistical rating organization and, with respect to
non-U.S. issuers, any of the foregoing or any equivalent organization operating
in the jurisdiction where the issuer's principal operations are located either
Standard & Poor's and Moody's Investors Service, Inc.

"Real Estate Asset" shall mean interests in real property, mortgages on real
property to the extent the principal balance of the mortgage does not exceed the
fair market value of the associated real property, regular or residual interests
in a REMIC, (except that, if less than 95% of the assets of a REMIC consists of
"real estate assets" (determined as if the Company held such assets), the
Company will be treated as holding directly its proportionate share of the
assets of such REMIC), shares of other REITs and certain temporary investments.

"REIT" means a real estate investment trust as defined under Section 856 of
the Code.

"REIT Provisions of the Code" means Sections 856 through 860 of the Code.

"REMIC" means a real estate mortgage investment conduit.

"REMIC Residual Interests" shall mean a class of MBS that is designated as
the residual interest in one or more REMICS.

"Rent" shall mean the rent received by the Company from tenants of Real
Property owned by the Company.

"Rental Property" means multifamily, retail, mobile home park,
industrial/warehouse, self storage and office properties.

"REO Property" shall mean real property acquired at foreclosure or by deed
in lieu of foreclosure.

"Representatives" shall mean each Underwriter that is acting as a
representative for other Underwriters.

"Residual Interests" shall mean REMIC and non-REMIC Residual Interests
collectively.

"RMBS" shall mean a series of one- to four-family residential MBS.

"Securities Act" means the Securities Act of 1933, as amended.

"Servicers" means those entities that perform the servicing functions with
respect to Mortgage Loans or Excess Servicing Rights owned by the Company.

"75% of Income Test" means the income-based test that the Company must meet
to qualify as a REIT described in paragraph 1 of "Federal Income Tax
Consequences--Requirements for Qualification as a REIT--Gross Income Tests."

"Special Servicing" shall mean servicing of defaulted mortgage loans,
including oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.

"1998 Stock Option Plan" means the stock option plan adopted by the Company
in 1998.

"Sub IOs" shall mean an IO with characteristics of a Subordinated Interest.

"Subperforming Mortgage Loans" shall mean multifamily and commercial
mortgage loans for which default is likely or imminent or for which the borrower
is making monthly payments in accordance with a forbearance plan.

G-7
<PAGE>
"Suppliers of Mortgage Assets" means mortgage bankers, savings and loan
associations, investment banking firms, banks, home builders, insurance
companies and other concerns or lenders involved in mortgage finance or
originating and packaging mortgage loans, and their Affiliates.

"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, Keogh Plans, bank commingled trust funds for
such plans, and IRAs, and other similar entities intended to be exempt from
federal income taxation.

"Taxable Income" means for any year the taxable income of the Company for
such year (excluding any net income derived either from property held primarily
for sale to customers or from Foreclosure Property) subject to certain
adjustments provided in the REIT Provisions of the Code.

"Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the Company
determines in good faith that the Ten Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate shall be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
each business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less than
eight nor more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. government securities selected by the
Company.

"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.

"Trust" means a trust that is the transferee of that number of shares of
Common Stock the beneficial or constructive ownership of which otherwise would
cause a person to acquire or hold, directly or indirectly, shares of Common
Stock in an amount that violates the Company's Articles of Amendment and
Restatement, which trust shall be for the exclusive benefit of one or more
Charitable Beneficiaries.

"Trustee" means a trustee of a Trust for the exclusive benefit of a
Charitable Beneficiary.

"UBTI" means "unrelated trade or business income" as defined in Section 512
of the Code.

"UBTI Percentage" shall mean the gross income derived by the Company from
UBTI (determined as if the Company was a pension trust) divided by gross income
of the Company for the year in which the dividends are paid.

"Unaffiliated Directors" shall mean a director who (a) does not own greater
than a DE MINIMIS interest in the Manager or any of its Affiliates, and (b)
within the last two years, has not (i) directly or indirectly been employed by
the Manager or any of its Affiliates, (ii) been an officer or director of the
Manager or any of its Affiliates, (iii) performed services for the Manager or
any of its Affiliates, or (iv) had any material business or professional
relationship with the Manager or any of its Affiliates.

"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc., Lehman
Brothers Inc. and Prudential Securities Incorporated as well as others in the
future and each of the underwriters for whom they are acting as representatives.

"United States Stockholder" means an initial purchaser of the Common Stock
that, for United States income tax purposes, is a United States person (i.e., is
not a Foreign Holder).

"VA" means the United States Veterans Administration.

"VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended.

G-8
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholder of Anthracite Capital, Inc.:

We have audited the accompanying balance sheet of Anthracite Capital, Inc. (the
"Company") as of March 5, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of Anthracite Capital, Inc. as of March 5, 1998 in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
New York, New York
March 6, 1998

F-1
<PAGE>
ANTHRACITE CAPITAL, INC.

BALANCE SHEET

MARCH 5, 1998

<TABLE>
<S> <C>
ASSETS
Cash.............................................................................. $ 200,000
---------
---------
</TABLE>

<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's Equity
Preferred Stock, par value $0.001 per share;
100,000,000 shares authorized, no shares issued.............................
Common Stock, par value $0.001 per share;
400,000,000 shares authorized; 13,333 shares issued and outstanding......... $ 13
Additional Paid-in-Capital.................................................... 199,987
---------
Total Stockholder's Equity.................................................... $ 200,000
---------
---------
</TABLE>

See accompanying notes to balance sheet.

F-2
<PAGE>
ANTHRACITE CAPITAL, INC.

NOTES TO BALANCE SHEET

MARCH 5, 1998

NOTE 1--THE COMPANY

Anthracite Capital, Inc. (the "Company") was incorporated in Maryland in
November of 1997 and was initially capitalized through the sale of 13,333 shares
of Common Stock to its initial Stockholder for $200,000 on March 5, 1998. The
Company will seek to acquire primarily mortgage-backed securities and may also
invest in other real estate related assets, including mortgage loans.

The Company has had no operations to date other than matters relating to the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements. Actual
results may differ from those estimates.

NOTE 3--FEDERAL AND STATE INCOME TAXES

The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code of 1986, as amended, and generally will not be subject
to federal and state taxes on its income to the extent it distributes annually
95% of its predistribution taxable income to stockholders and maintains its
qualification as a real estate investment trust.

NOTE 4--TRANSACTIONS WITH AFFILIATES

The Company intends to enter into a Management Agreement (the "Management
Agreement") with BlackRock Financial Management, Inc. (the "Manager"), a
majority owned indirect subsidiary of PNC Bank Corp., under which the Manager
will manage the Company's day-to-day operations, subject to the direction and
oversight of the Company's Board of Directors. The Company will pay the Manager
an annual base management fee equal to a percentage of the Average Invested
Assets of the Company as further defined in the Management Agreement. The base
management fee is equal to 1% per annum of the Average Invested Assets rated
less than BB- or not rated, 0.75% of Average Invested Assets rated BB- to BB+,
and 0.35% of Average Invested Assets rated above BB+. The Company will also pay
the Manager, as incentive compensation, an amount equal to 25% of the Funds from
Operations of the Company plus gains (minus losses), before incentive
compensation, in excess of the amount that would produce an annualized Return on
Equity on the invested amount of Common Stock equal to 3.5% over the Ten-Year
U.S. Treasury Rate as further defined in the Management Agreement.

The Company intends to adopt a Stock Option Plan that provides for the grant
of qualified Stock Options, non-qualified Stock Options, Stock appreciation
rights and dividend equivalent rights ("Options") under which Options may be
granted to the Manager, directors, officers and any key employees of the Company
and to the directors, officers and key employees of the Manager.

In addition to options that may be granted pursuant to the 1998 Stock Option
Plan, on the Closing Date, the Company intends to grant options to acquire
246,544 shares of Common Stock to certain directors, officers and employees of
the Company and the Manager at the initial public offering price, net of
underwriting discounts and commissions.

NOTE 5--PUBLIC OFFERING OF COMMON STOCK

The Company is in the process of filing a Registration Statement for the
sale of its Common Stock. The Company will be liable for organization and
offering expenses in connection with the sale of the shares offered. The Company
intends to redeem 13,233 of the 13,333 shares held by the initial stockholder on
the date of the Offering for $198,500.

F-3
<PAGE>
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NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK BY ANYONE IN ANY JURISDICTION WHERE, OR TO ANY PERSON
TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

------------------------

<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary............................ 1
Risk Factors.................................. 12
Use of Proceeds............................... 25
Dividend and Distribution Policy.............. 25
Capitalization................................ 26
Certain Relationships, Conflicts of
Interest.................................... 26
The Company................................... 28
Description of Real Estate Related Assets..... 35
Management of the Company..................... 48
The Manager................................... 55
Federal Income Tax Consequences............... 61
ERISA Considerations.......................... 75
Description of Capital Stock.................. 76
Dividend Reinvestment Plan.................... 78
Material Provisions of Maryland Law and of the
Company's Articles of Amendment and
Restatement and ByLaws...................... 78
Underwriting.................................. 82
Legal Matters................................. 84
Experts....................................... 84
Additional Information........................ 84
Glossary...................................... G-1
Financial Statement........................... F-1
</TABLE>

------------------------

UNTIL APRIL 18, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

20,000,000 SHARES

ANTHRACITE CAPITAL, INC.

COMMON STOCK

---------------------

PROSPECTUS

---------------------

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

LEHMAN BROTHERS

PRUDENTIAL SECURITIES INCORPORATED

MARCH 24, 1998

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